-----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, VnujB9myTM0TJtz/vKq+CCgfe+Kj7ibgCTKHWDmKm2TAaOxIclNV1938v4B+1JlB T7XQhTcEV9EbpJsIogxeZg== /in/edgar/work/0000897101-00-001111/0000897101-00-001111.txt : 20001116 0000897101-00-001111.hdr.sgml : 20001116 ACCESSION NUMBER: 0000897101-00-001111 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTELEFILM CORP CENTRAL INDEX KEY: 0000882160 STANDARD INDUSTRIAL CLASSIFICATION: [7812 ] IRS NUMBER: 411663712 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-21534 FILM NUMBER: 769037 BUSINESS ADDRESS: STREET 1: 5501 EXCELSIOR BLVD CITY: MINNEAPOLIS STATE: MN ZIP: 55416 BUSINESS PHONE: 6129258840 MAIL ADDRESS: STREET 1: 5501 EXCELSIOR BLVD CITY: MINNEAPOLIS STATE: MN ZIP: 55416 FORMER COMPANY: FORMER CONFORMED NAME: CHILDRENS BROADCASTING CORP DATE OF NAME CHANGE: 19951102 10QSB 1 0001.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarterly period ended September 30, 2000 or [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from _________ to _________ Commission File No. 0-21534 iNTELEFILM Corporation (Exact name of small business issuer as specified in its charter) Minnesota 41-1663712 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 5501 Excelsior Blvd., Minneapolis, MN 55416 (Address of principal executive office, including zip code) (612) 925-8840 (Issuer's telephone number, including area code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the 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 November 11, 2000, there were outstanding 6,511,366 shares of common stock, $.02 par value, of the registrant. INDEX iNTELEFILM CORPORATION PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets -- September 30, 2000 and December 31, 1999. Consolidated Statements of Operations - Three and nine months ended September 30, 2000 and 1999. Consolidated Statements of Cash Flows -- Nine months ended June 30, 2000 and 1999. Condensed Notes to Consolidated Financial Statements -- September 30, 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES EXHIBIT INDEX iNTELEFILM CORPORATION CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 DECEMBER 31, (UNAUDITED) 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 5,682,127 $ 15,986,385 Accounts receivable 3,137,156 8,965,467 Allowance for doubtful accounts (38,458) (199,164) Accounts receivable - affiliates 377,257 373,239 Other accounts receivable 1,039,198 502,024 Prepaid expenses 1,237,293 1,563,122 ------------ ------------ Total current assets 11,434,573 27,191,073 Property and equipment, net 4,373,024 2,957,455 Goodwill, net 6,872,460 6,730,446 Other Assets 1,540,207 738,878 ------------ ------------ Total assets $ 24,220,264 $ 37,617,852 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,660,577 $ 4,010,891 Accrued income taxes 253,244 1,032,520 Deferred revenue 12,590 2,392,785 Other accrued expenses 3,850,111 4,650,835 Line of credit 394,737 3,548,911 Short-term debt -- 1,500,000 Long-term debt - current portion 1,264,328 191,933 ------------ ------------ Total current liabilities 8,435,587 17,327,875 Long-term debt, less current maturities 640,404 679,885 ------------ ------------ Total liabilities 9,075,991 18,007,760 ------------ ------------ Commitments and Contingencies -- -- Minority interest 417,629 139,447 Shareholders' equity Common stock 130,227 125,772 Authorized shares - 50,000,000 Issued & outstanding shares - voting: 6,322,325 September 30, 2000 and 6,099,577 - December 31, 1999 Issued and outstanding shares - nonvoting: 189,041 - September 30, 2000 and December 31, 1999 Additional paid-in capital 46,720,253 45,625,300 Accumulated deficit (31,757,673) (25,952,927) Stock subscriptions receivable (366,163) (327,500) ------------ ------------ Total Shareholders' Equity 14,726,644 19,470,645 ------------ ------------ Total Liabilities & Shareholders' Equity $ 24,220,264 $ 37,617,852 ============ ============
See accompanying condensed notes to the consolidated financial statements iNTELEFILM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Production contract revenues $ 14,012,221 $ 21,492,732 $ 51,188,954 $ 45,732,020 Costs and expenses: Cost of production 11,865,234 18,024,181 42,730,649 38,317,499 General selling and administrative (exclusive of items shown below) 3,125,644 2,836,876 9,219,723 5,986,299 Stock option compensation 84,952 60,000 310,697 2,018,250 Corporate 906,895 893,382 3,263,830 2,278,010 Depreciation and amortization 557,567 440,140 1,597,866 902,193 ------------ ------------ ------------ ------------ Loss from continuing operations (2,528,071) (761,847) (5,933,811) (3,770,231) Gain (loss) on sale of subsidiary stock & assets (18,078) 149,964 (18,078) 149,964 Equity loss in Harmony -- -- -- (1,930,942) Interest income net of interest (expense) 23,731 296,150 198,501 165,182 ------------ ------------ ------------ ------------ Net loss from continuing operations before income taxes (2,522,418) (315,733) (5,753,388) (5,386,027) Income tax provision (benefit) 39,514 (40,000) 51,358 (698,108) ------------ ------------ ------------ ------------ Net loss from continuing operations (2,561,932) (275,733) (5,804,746) (4,687,919) Gain(loss) on the disposal of discontinued operations, net of income taxes of $40,000 (three months ended September 30, 1999) and $3,800,000 nine months ended September 30, 1999) -- (54,987) -- 12,520,119 ------------ ------------ ------------ ------------ Net income (loss) (2,561,932) (330,720) (5,804,746) 7,832,200 Accretion of preferred stock and minority interest -- (21,387) -- (21,387) ------------ ------------ ------------ ------------ Net income (loss) to common shareholders $ (2,561,932) $ (352,107) $ (5,804,746) $ 7,810,813 ============ ============ ============ ============ Basic and diluted net loss per share from continuing operations $ (0.40) $ (0.04) $ (0.91) $ (0.73) ============ ============ ============ ============ Basic and diluted net income (loss) per share $ (0.40) $ (0.05) $ (0.91) $ 1.21 ============ ============ ============ ============ Weighted average number of shares outstanding 6,484,000 6,410,305 6,412,000 6,463,852 ============ ============ ============ ============
See accompanying condensed notes to the consolidated financial statements iNTELEFILM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 ------------ ------------ Operating activities: Net income (loss) $ (5,804,746) $ 7,832,200 Adjustments to reconcile net income (loss) to net cash used in operating activities net of disposition and discontinued operations: Gain on disposal of discontinued operations, net of taxes -- (12,520,119) (Gain) loss on sale of subsidiary stock & assets 18,078 (149,964) Provision for doubtful accounts & director advances 731,475 96,947 Depreciation & amortization 1,597,866 902,193 Stock option compensation 310,697 2,018,250 Non cash income tax benefit -- (700,000) Amortization and write-off of deferred debt issue costs -- 742,737 Equity loss in Harmony -- 1,930,942 Non-cash interest payment related to sale of stations -- 92,008 Decrease (increase) in: -- Accounts receivable 5,853,105 (688,211) Other receivables (1,436,373) 75,753 Prepaid expenses 335,264 89,483 Increase (decrease) in: -- Accounts payable (1,354,887) (2,997,172) Deferred income (2,399,512) (352,078) Other accrued expenses (1,635,011) 4,156,992 ------------ ------------ Net cash provided by (used in) operating activities (3,784,044) 529,961 ------------ ------------ Investing activities: Sale/purchase of property & equipment (1,194,601) (494,577) Net investment in & notes receivable from Harmony -- (939,230) Other capital expenditures (891,353) (2,344,938) Proceeds from sale of radio stations -- 13,720,358 ------------ ------------ Net cash provided by (used in) investing activities (2,085,954) 9,941,613 ------------ ------------ Financing activities: Payment of line of credit (3,154,174) -- Payment of debt (1,776,270) (1,556,468) Proceeds from debt financings 221,454 -- Redemption of convertible preferred stock -- (2,450,002) Repurchase of common stock (32,223) (825,123) Proceeds from issuance of common stock 306,953 -- Proceeds from stock subscriptions receivable -- 21,500 ------------ ------------ Net cash used in financing activities (4,434,260) (4,810,093) ------------ ------------ Cash used in discontinued operations -- (3,391,127) ------------ ------------ Increase (decrease) in cash and cash equivalents (10,304,258) 2,270,354 Cash and cash equivalents at beginning of period 15,986,385 253,905 ------------ ------------ Cash and cash equivalents at end of period $ 5,682,127 $ 2,524,259 ============ ============
See accompanying condensed notes to the consolidated financial statements iNTELEFILM Corporation Condensed Notes to Consolidated Financial Statements (unaudited) September 30, 2000 Note 1 Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals with the exception of the adjustments discussed in Note 2) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2000, are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-KSB/A for the year ended December 31, 1999. In April 1999, iNTELEFILM ("the Company") acquired a majority interest in Harmony Holdings, Inc. ("Harmony"), thereby allowing the Company to consolidate Harmony, for financial statement purposes, beginning April 1, 1999, rather than accounting for the investment under the equity method as it had for all previous periods. Note 2 Significant Transactions and Subsequent Events The following significant transactions occurred during 2000 and are considered non-recurring: A. In January 2000, the Company formed webADTV.com, Inc. ("webADTV") under the laws of the state of Minnesota. The Company is the principal shareholder in webADTV. webADTV hosts a suite of web-based applications designed to increase productivity and communication between the advertising agency, the client, the production companies and the media channels. iNTELESOURCE, designed specifically for adverting agencies, is the first online tool of webADTV. iNTELESOURCE is a digital video archiving and retrieval service that uses a web enabled, video asset management system to provide agencies and production companies with the ability to digitize, encode, archive and stream television commercials from their desktop. B. In February 2000, webADTV adopted the 2000 Incentive Stock Option Plan and the 2000 Non-Qualified Stock Option Plan whereby 5,000,000 shares of the subsidiary's common stock have been reserved under each plan. The options can be either incentive stock options or non-statutory options as indicated by the plan name and are generally valued at the fair market value of the stock on the date of grant. The plans allow various vesting options and the ability for the employee to immediately exercise the options for consideration of cash or a subscription receivable. The subsidiary is able to repurchase stock issued on immediate exercises at the exercise price and/or at the fair market value of such stock if the employee does not meet certain service period requirements. As of October 30, 2000, approximately 4.5 million options had been granted under the plans of which approximately 2.9 million options had been exercised. Stock subscription receivable related to these exercises aggregated approximately $55,000. If all options were exercised, the Company's ownership in webADTV would be diluted to 79%. C. In March 2000, the Company proposed to commence an exchange offer to the shareholders of Harmony to acquire all of the outstanding shares of Harmony's common stock that it does not currently own, in exchange for shares of the Company's common stock. The Company proposes to offer one share of its common stock for every 13.75 shares of Harmony common stock and the offer is conditioned upon the Company obtaining at least 90% ownership of Harmony. If the Company is successful in its exchange offer, Harmony will become a wholly owned subsidiary of the Company. D. On March 23, 2000, the Company called its notes payable due from Harmony. As a result of Harmony's inability to repay the notes within the 30-day demand period, on May 1, 2000, the Company granted Harmony a forbearance for an indeterminate amount of time to allow the independent directors of Harmony to further consider and propose cure alternatives. E. During the nine months ended September 30, 2000, the Company recorded a valuation allowance associated with commercial director advances in excess of earnings totaling $895,000, of which $461,000 relates to advances paid in 1999. Such advances are regularly paid to established commercial directors on a monthly basis and are offset against the actual earnings from commercial directorial services. The Company accounts for these monthly payments as prepaid compensation and recognizes them as an expense in the period that they are offset against a commercial director's actual earnings. Capitalized amounts were evaluated for collectibility based on anticipated future commercial project awards for individual commercial directors and an allowance was established for capitalized amounts believed to be uncollectible. The valuation allowance was primarily necessitated by changes in the workflow and contractual relationships of the majority of the commercial directors at Harmony's wholly-owned subsidiary, The End, Inc. ("The End"). F. On May 1, 2000, members of the Screen Actors Guild ("SAG") began a strike against the advertising agencies that represent the Company's customer base. On October 28, 2000, this strike was settled. During this six-month strike, the Company's ability to produce television commercials domestically was limited. The Company attempted to reduce the effects the strike had on its operations by utilizing non-union talent and producing its commercials outside of the United States whenever possible. However, the Company did lose business as a result of the strike. No assurance can be given that the Company's operations and liquidity will not continue to be affected by the relations between such parties in the near future. G. In July 2000, the Company discontinued the operations of Populuxe Pictures, Inc. ("Populuxe"). There are no significant continuing obligations related to this subsidiary. H. In July 2000, webADTV entered into a software license agreement with Excalibur Technologies Corporation ("Excalibur"). Under the agreement, Excalibur received 200,000 shares of webADTV's common stock, valued at $2.50 per share, and $100,000 in cash. In addition, webADTV agreed to pay Excalibur $400,000 within 10 days of certain conditions being met. In return, webADTV received a three-year, pre-paid license for, and the right to exclusively market to advertising agencies through iNTELESOURCE, the Excalibur Screening Room(R) and RetrievalWare(R) product lines. webADTV believes that these products will provide the tools necessary to provide its web-based services to the advertising agencies. I. In August 2000, the Company signed an accounts receivable-based loan and security agreement with General Electric Capital Corporation ("GE Capital"). This loan and security agreement provides for borrowings for working capital under a revolving line of credit with maximum availability of $7.0 million based on acceptable accounts receivable. The line of credit bears interest at a variable rate (10.24% at September 30, 2000). The agreement requires the Company to comply with certain restrictive covenants and will provide financing for Curious Pictures Corporation ("Curious Pictures"), Chelsea Pictures, Inc. ("Chelsea") and The End. J. On September 1, 2000, webADTV completed its acquisition of Cosmic Inventions, LLC ("Cosmic Inventions") based on a letter of intent dated June 13, 2000. Consideration for the acquisition included 660,000 shares of webADTV common stock valued at $.10 per share, warrants to purchase 20,000 additional shares of webADTV common stock at $.10 per share, and a $650,000 promissory note due upon certain conditions being met, but not later than April 30, 2001. The valuation was based on the fair market value of the stock on the date the letter of intent was executed. This promissory note bears interest at a rate of 8% per annum. Cosmic Inventions' leading product, Spot Rocket, facilitates the transmittal of approval-quality video, CD-quality audio tracks, animatics, photographs, storyboards, animations and various multimedia components. Additionally, Cosmic Inventions has developed a product that enables simplified delivery and receiving of large files via standard e-mail addressing. These products provide high quality transmittal, eliminating costly production errors, travel expenses and last minute revisions. K. Currently, $750,000 of the Company's cash balance secures a line to be used to issue import letters of credit. As of November 11, 2000, the Company is not exposed to a significant credit risk as a result of these letters of credit. Note 3 Investment in Harmony The Company holds a majority interest in Harmony through the ownership of 4,139,562 shares of Harmony's common stock. Harmony's most recent reported fiscal year-end was December 31, 1999. Harmony's operations prior to the Company consolidating Harmony's financial statements, are summarized as follows for the quarter ended March 31, 1999: Three Months Ended 3/31/99 (in thousands) Contract revenues $ 16,275 Cost of production 13,889 -------- Gross profit 2,386 Production expenses 2,851 -------- Loss from productions (465) Corporate, depreciation & amortization 836 Restructuring cost & impairment of assets (175) --------- Loss from Operations (1,126) Interest expense (79) --------- Net loss $ (1,205) ---------- Harmony's results from operations are consolidated for the period beginning April 1, 1999 and all periods thereafter. Previous periods are accounted for under the equity method. No minority interest is currently shown related to Harmony, as the minority shareholders no longer have any equity basis in their investment. As of September 30, 2000, the Company had recognized losses in excess of its prorata share totaling $3.4 million. Note 4 Reclassifications Certain amounts in the 1999 financial statements have been reclassified to conform to the 2000 presentation. These reclassifications have no effect on the accumulated deficit or net income or loss previously reported. In accordance with Accounting Principles Board Opinion 30, "Reporting the Results of Operations - Discontinued Events and Extraordinary Items" (APB 30), certain reclassifications have been made to the previously reported 1999 financial statements to reflect the disposition of the radio stations as a discontinued operation. Note 5 Business Segments The Company classifies its operations into two major business segments: television commercial production and webADTV. The television and commercial production segment consists of the Company's production companies: Curious Pictures, Chelsea, and The End and its subsidiaries through Harmony. The webADTV segment is comprised of Cosmic Inventions, INTELESOURCE and other online digital tools designed to web-enable all aspects of the advertising campaign process. The Company evaluates performance of its segments based on several measurements. The primary financial measure use by the Company is production service income, which is defined as earnings before interest, taxes, stock- based compensation, corporate overhead, depreciation and amortization. Production service income measures the contribution margin generated by each of its segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in the Company's Annual Report on Form 10-KSB/A for the year ended December 31, 1999. Nine months ended September 30, 2000 (in thousands) Television Commercial Total Production webADTV Corporate iNTELEFILM ---------- ------- --------- ---------- Revenues from external sources $ 51,161 $ 28 $ -- $ 51,189 Inter-segment Revenues -- 137 700 837 Production service income/ (loss) $ (100) $ (1,361) $ 700 $ (761) Stock option compensation 255 -- 56 311 Depreciation and amortization 716 54 828 1,598 -------- -------- -------- -------- Income (loss) from operations $ (1,166) $ (1,415) $ (3,223) $ (5,804) -------- -------- -------- -------- Additions to long- lived assets $ 434 $ 1,515 $ 245 $ 2,194 -------- -------- -------- -------- Note 6 Discontinued Operations On January 6, 1998, the Company's shareholders approved the sale of all of the Company's owned and operated radio stations which represents the measurement date for the Company's exit from the children's entertainment and radio broadcasting industries. Accordingly, the operation and disposition of the radio stations has been classified as discontinued operations in the accompanying financial statements. During the nine months ended September 30, 1999, the Company recognized a gain on the disposal of discontinued operations of $12,520,000. This overall gain includes a $209,000 loss from discontinued operations on revenues of $100,000 and a tax provision of $3,800,000. The basic and diluted income per share related to the gain from the disposal of discontinued operations was $1.94 for the nine months ended September 30, 1999. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion and analysis contains certain non-historical forward-looking terminology such as "believes," "expects," "anticipates," and "intends," or comparable terminology. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Potential purchasers of the Company's securities are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety, by the cautions and risks described herein. General Overview On January 6, 1998, the Company's shareholders approved the sale of all of the Company's owned and operated radio stations which represents the measurement date for the Company's exit from the children's entertainment and radio broadcasting industries. Accordingly, the operation and disposition of the radio stations has been classified as discontinued operations in the accompanying financial statements. The transition was finalized with the completion of the sale of the Company's radio stations in January 1999 and with increases in the Company's ownership in Harmony to 55%, in Curious Pictures to 51%, and in Chelsea to 100%. The Company believes it is one of the leading sources of services for television commercial production within the entertainment industry, offering extensive production capability and the exclusive services of certain established industry talent. The Company intends to seek additional acquisitions to further broaden its offering of services with the objective of enhancing overall profit margins and leveraging its pool of talent and technical expertise to capitalize on the convergence of short-form video content and technologies of broadband internet delivery systems. The Company is also expanding services offered through its subsidiary, webADTV. webADTV is an online digital suite of tools designed to web-enable all aspects of the global advertising process. webADTV believes it will enhance and streamline the workflow process for advertising agencies and their clients. webADTV's first tool, iNTELESOURCE, is an internet based, video asset management system that provides agencies and production companies with the ability to digitize, encode, archive and stream television commercials that they produce. With the acquisition of Cosmic Inventions, webADTV has added more tools including Spot Rocket, a product which facilitates the transmittal of approval-quality video, CD-quality audio tracks, animatics, photographs, storyboards, animations and various multimedia components. Additionally, Cosmic Inventions has developed DigiExpress, a product that enables simplified delivery and receipt of large files via standard e-mail addressing. As a result of acquiring a majority interest in Harmony and Curious Pictures, the Company began consolidating these companies under the purchase method of accounting for the acquisition of majority-owned subsidiaries. Harmony and Curious Pictures' results from operations are consolidated for the period beginning April 1, 1999. Previous periods are accounted for under the equity method. Chelsea's operations are consolidated for the period beginning March 1, 1999. Because of this transition, a comparison of the changes in the revenue and expense categories from the first nine months of 1999 to the first nine months of 2000 would not be meaningful without including additional information related to Harmony's results of operations for the first quarter of 1999. Accordingly, information related to Harmony's first quarter 1999 performance has been provided. Results of Operations for the Three and Nine Months Ended September 30, 2000 Compared to the Three and Nine Months Ended September 30, 1999: The Company's total revenues decreased $7,481,000 from $21,493,000 in the third quarter of 1999 to $14,012,000 in the third quarter of 2000, while in the first nine months of 2000 revenues increased $5,457,000 or 12% from $45,732,000 in 1999 to $51,189,000 in 2000. During the third quarter of 2000, revenues at Chelsea increased $1.9 million while revenues at The End and Curious Pictures decreased $9.2 million. Compared to revenues of $490,000 in the third quarter of 1999, Populuxe had no revenues in the third quarter of 2000 as it shut down its operations in July 2000. webADTV produced revenues of $27,000 during the quarter ended September 30, 2000. The End and Curious Pictures produced revenues of $13.5 million in the first quarter of 1999, although those revenues were not consolidated in the Company's financial statements at that time. The Company believes that the decrease in revenues at The End resulted from the effects of the SAG strike, which began in May 2000. In reaction to the initial strike announcement, many agencies withheld production as they assessed the situation in an attempt to determine when a settlement might be reached. Although the agencies began gradually sending more jobs into production, there continued to be fewer jobs on which to bid through October 28, 2000 when the strike was settled. The strike had a lesser effect on Curious Pictures as Curious Pictures' productions primarily use animation and digigraphics. Although revenues at Curious Pictures decreased slightly during the third quarter of 2000 compared to the same period in 1999, year-to-date revenues increased $1.7 million as of September 30, 2000 compared to the same period in 1999. Chelsea was able to avoid much of the strike's impact by producing commercials outside of the United States. Additionally, a portion of the decrease in revenues at The End may be attributed to the commercial director and sales representative contracts that were not renewed and the signing of new commercial directors and sales representatives to replace them. Cost of production is directly related to revenues and includes all direct costs incurred in connection with the production of television commercials including film, crews, location fees, production insurance and commercial directors' fees. Cost of production as a percentage of revenues increased from 84% in the third quarter of 1999 to 85% in the third quarter of 2000, while it remained constant at 84% for the nine months ended September 30, 2000 and 1999. Included in the cost of production for the first nine months of 2000 was $895,000 in charges related to the Company's change in estimated valuation for the advances paid to its commercial directors (see Note 2E to the financial statements). The Company believes the cost of production, as a percentage of revenues, will continue to decrease as its production companies retain more commercial directors and are able to charge greater premiums for these commercial directors as the demand for their work increases. Additionally, the Company believes it will continue to realize greater cost benefits on a consolidated basis, such as vendor discounts, which may lower the overall cost of production. General selling and administrative expenses at the production companies consist of sales commissions, advertising and promotional expenses, travel and other expenses incurred in the securing of television commercial contracts, as well as overhead costs such as office rent and expenses, executive, general and administrative payroll, and related items. General selling and administrative expenses increased $289,000 from $2,837,000 during the third quarter of 1999 to $3,126,000 during the third quarter of 2000. These expenses increased $3,233,000 during the first nine months of 2000 compared to the same period in 1999, although The End and Curious Pictures incurred selling and administrative costs of $2.0 million in the first quarter of 1999, which were not consolidated in the Company's financial statements at that time. Increases at the commercial production divisions of approximately $700,000 were due primarily to the recent investment the Company made to its managerial infrastructure to allow for improvements in its sales representation and commercial director rosters. Additionally, during the first nine months of 2000, the Company's newest subsidiary, webADTV, incurred $546,000 in selling and administrative costs associated with iNTELESOURCE and Cosmic Inventions. Stock option compensation increased $25,000 during the third quarter of 2000 and decreased $1,708,000 during the first nine months of 2000 compared to the respective periods of 1999. Stock option compensation expense in the first nine months of 2000 and 1999 included expense related to options granted to members of the Company's Board of Directors in the amount of $56,000 and $50,000, respectively, and expense related to options granted to Curious Management of $255,000 and $2.3 million, respectively. Corporate charges incurred in the third quarter of 2000 were $907,000 and $893,000 in the third quarter of 1999. During the first nine months of 2000, corporate charges increased from $2,278,000 in 1999 to $3,264,000 in 2000. Corporate charges related to the Harmony divisions were $530,000 in the first quarter of 1999 and were not consolidated in the Company's financial statements for that period. Overall, the increase in corporate charges on a comparable basis was $456,000 from the first nine months of 1999 to the first nine months of 2000, due to an increase in activities related to the promotion of the Company, outside professional consultant fees, travel expenses and expense related to the production of the Company's newsletter. Depreciation and amortization increased to $558,000 in the third quarter of 2000 from $440,000 in the third quarter of 1999, and increased $696,000 during the first nine months of 2000 compared to the same period in 1999. Depreciation and amortization related to the Harmony divisions was $197,000 in the first quarter of 1999 and was not consolidated in the Company's financial statements for that period. This increase was related primarily to the excess of the investment cost over the value of the underlying net assets (goodwill) of Harmony. Prior to the Company obtaining a majority interest in Harmony, this expense was reported as a portion of the equity loss in Harmony. Net interest income was $24,000 in the third quarter of 2000 compared to $296,000 in the third quarter of 1999. Interest income of $199,000 was reported in the first nine months of 2000 compared to $165,000 in the same period of 1999. The interest income in 2000 was due primarily to interest earned on the Company's cash. Income tax benefits of $700,000 were recognized in the nine months ended September 30, 1999. These income tax benefits were derived primarily from the ability to offset the taxable loss from operations against the sale of discontinued operations. A net loss from continuing operations of $2,562,000 was recognized in the third quarter of 2000 compared to $276,000 during the same period of 1999. Net loss from continuing operations of $5,805,000 was recognized in the first nine months of 2000 compared to $4,688,000 during the first nine months of 1999. During the nine months ended September 30, 1999, the Company recognized a gain on the disposal of discontinued operations of $12,520,000. This overall gain included a $209,000 loss from discontinued operations on revenues of $100,000 and a tax provision of $3,800,000. This represented taxes estimated to be due as a result of the sale of the radio stations at the time. This estimate was subsequently reduced to approximately $1,802,000 in the fourth quarter of 1999 by employing certain income tax strategies not in place in the first three quarters of 1999. A net loss of $2,562,000 was recognized in the third quarter of 2000 compared to a net loss of $352,000 in the third quarter of 1999. A net loss of $5,805,000 was recognized in the first nine months of 2000, while net income of $7,811,000 was recognized in the first nine months of 1999. Liquidity and Capital Resources The Company's liquidity, as measured by its working capital, was $2,999,000 at September 30, 2000, compared to $9,863,000 at December 31, 1999. In January 2000, the Company organized webADTV as a subsidiary. webADTV is an online digital suite of tools designed to increase productivity and communication between the advertising agency, the client, the production companies and the media channels. One such tool is iNTELESOURCE, which was designed to give advertising agencies and production companies the opportunity to digitize, encode, archive, and stream television commercials from their desktop. webADTV intends to focus on the workflow needs critical to advertising agencies in the $250 billion advertising arena. webADTV believes the development of its tools for the advertising agency will generate revenues through a tiered subscription model, service income and commissions. WebADTV believes it will differentiate itself from competitors by applying the depth of its industry expertise, incorporating its various proprietary tools, and by increasing the range of its strategic relationships. On September 1, 2000, webADTV completed it acquisition of Cosmic Inventions based on a letter of intent dated June 13, 2000. Cosmic Inventions' leading product, Spot Rocket, facilitates the transmittal of approval-quality video, CD-quality audio tracks, animatics, photographs, storyboards, animations and various multimedia components. Additionally, Cosmic Inventions has developed DigiExpress, a product that enables simplified delivery and receiving of large files via standard e-mail addressing. These products are designed to provide high quality transmittal, eliminating costly production errors, travel expenses and last minute revisions. Consideration for the acquisition included 660,000 shares of webADTV common stock valued at $.10 per share, warrants to purchase 20,000 additional shares of webADTV common stock at $.10 per share, and a $650,000 promissory note due upon certain conditions being met, but not later than April 30, 2001. This promissory note bears interest at a rate of 8% per annum. The valuation was based on the fair market value of the stock on the date the letter of intent was executed. As of October 27, 2000, approximately 84% of the outstanding shares of common stock of webADTV were held by iNTELEFILM and approximately 16% of the outstanding shares of webADTV common stock had been issued directly to third parties and to employees and consultants pursuant to stock option plans. The Company is seeking separate financing for webADTV in order to expand and brand its infrastructure. If webADTV is unable to obtain such financing, the Company's efforts to enter into e-commerce with advertising agencies would be substantially impaired. However, no assurance can be given that webADTV will be able to obtain such financing or that such financing, if obtained, will be sufficient to fully implement its business plan. In that event, webADTV may have to seek alternative methods of financing, including the continued use of iNTELEFILM funds. Additionally, outside financing may result in the issuance of additional shares, thereby diluting the Company's investment. There can be no assurance that webADTV's business plan will be completed, or if completed, that the business plan will be successful. In March 2000, the Company proposed to commence an exchange offer to the shareholders of Harmony to acquire all of the remaining outstanding shares of Harmony's common stock in exchange for shares of the Company's common stock. The Company proposes to offer one share of its common stock for every 13.75 shares of Harmony common stock and the offer is conditioned upon the Company obtaining at least a 90% ownership in Harmony. If the exchange offer were fully completed according to these terms, the Company would exchange approximately 244,880 shares of its common stock for 3,367,098 shares of Harmony's common stock, thereby owning 100% of Harmony. Based on the stock prices of Harmony and the Company at November 11, 2000, and assuming approximately $200,000 in transaction costs, the Company would recognize approximately $475,000 of goodwill. No assurance can be given that the Harmony shareholders will accept the offer once it is made. If the exchange offer is unsuccessful, the Company currently does not intend to continue funding Harmony's operating losses. On March 23, 2000, the Company demanded payment on the notes payable from Harmony, aggregating approximately $3.2 million at March 31, 2000. On May 1, 2000, the Company granted Harmony a forbearance for an indeterminate amount of time to allow the independent directors of Harmony to consider and propose cure alternatives. In April 2000, all advances made through the credit facility established between Finova Capital Corporation ("Finova") and Harmony were paid in full as Finova terminated its relationship with Harmony. As a result, all of the Company's obligations as a guarantor of this facility have been fulfilled. On May 1, 2000, members of SAG began a strike against the advertising agencies that represent the Company's customer base. As of October 28, 2000, this strike was settled. During this six-month strike, the Company's ability to produce television commercials domestically was limited. Although the Company made an effort to reduce the effects the strike had on its operations by utilizing non-union talent and producing commercials outside of the United States whenever possible, the Company did lose business as a result of strike. No assurance can be given that the Company's operations and liquidity will not continue to be affected by the relations between such parties in the near future. It is possible that some of the Company's future business activities will be affected by the existence of collective bargaining agreements because many of the performing artists and technical personnel, such as cameramen and film editors, which the Company employs on a free-lance basis, are members of unions who are parties to collective bargaining agreements. During 2000, one operating division in particular, The End and its subsidiaries through Harmony, has been adversely affected as a result of a variety of factors including the SAG strike, the reorganization of its management, and the negotiations of commercial director and sales representation agreements. Given these circumstances, the Company has taken steps to reduce The End's ongoing operating expenses and has recently negotiated several commercial director and sales representative agreements. Management believes that with improved sales representation and the addition of commercial directors to its roster, the operating losses and the overall operating cash needs of The End may lessen. However, there can be no assurance that The End will reach profitability or that it will be able to retain its commercial directors and sales representatives or that its commercial directors and sales representatives will fulfill their obligations to The End, which in turn could adversely affect the Company's overall liquidity and acquisition strategy. The Company intends to further expand its television commercial production business and holdings through acquisitions and opportunities within its present divisions. The Company seeks to explore the consolidation of commercial production companies in an effort to increase its commercial director pool. In addition, the Company intends to acquire production service companies, such as rental, editing, design/marketing, post-production and music companies. The Company believes that gross revenues and profits can be increased through the acquisition of private production companies and related service companies. The availability of capital may limit the Company's ability to complete future acquisitions and the Company may have to seek additional financing in order to fully execute this business strategy. There can be no assurance that the Company will obtain such financing when required, or that such financing, if available, will be on terms acceptable or favorable to the Company. Additional financing could require the sale of equity securities, which could result in dilution to current shareholders. Management believes that with $2,999,000 of working capital, the Company should have adequate capital to meet its ongoing working capital needs and continue its business plan and acquisition strategy in the near term. Anticipated uses of cash in the near term include funding operating losses and funding costs incurred by webADTV, which is currently in its initial start-up phase. Additionally, the Company further replenished its acquisition capital in August 2000 by entering into an accounts receivable-based loan and security agreement with GE Capital. This loan and security agreement provides for borrowings for working capital under a revolving line of credit (see note 2I to the financial statements), thereby enabling the divisions to operate their business through a line of credit instead of depending on the Company to fund their operations. The line will provide working capital for all of the Company's existing divisions, excluding webADTV, which the Company currently finances internally. However, should a potential acquisition require greater capital than the Company's cash sources, the Company may need to obtain additional financing. If the Company is not able to obtain adequate financing, or financing on acceptable terms, it could possibly cause a delay in the full implementation of its business plan. Consolidated cash was $5,682,000 at September 30, 1999 and $15,986,000 at December 31, 1999, a decrease of $10,304,000. Cash used in operating activities during the first nine months of 2000 was $3,784,000. Accounts receivable at September 30, 2000 decreased $5,853,000 from December 31, 1999, other receivables at September 30, 2000 increased $1,436,000 from December 31, 1999 and prepaid expenses at September 30, 2000 decreased $335,000 during the same period. Accounts payable at September 30, 2000 decreased $1,355,000 from December 31, 1999, accrued expenses at September 30, 2000 decreased $2,400,000 from December 31, 1999, and deferred income decreased $1,635,000 during the same period. During the first nine months of 2000, net cash used in investing activities was $2,086,000 and was used for capital expenditures. Cash used in financing activities amounted to $4,434,000 during the first nine months of 2000. This represented primarily the payoff of the line of credit and the short-term note payable to the four principals of Curious Pictures, net of the proceeds from the exercise of options to purchase common stock. Seasonality and Inflation The Company does not believe that seasonality or inflation has affected the results of its operations, and does not anticipate that inflation will have an impact on its future operations. PART II - OTHER INFORMATION Item 1. Legal Proceedings On September 30, 1998, a jury in the United States District Court for the District of Minnesota (the "Court") ruled in favor of the Company in connection with litigation for breach of contract and misappropriation of trade secrets that the Company had commenced against ABC/Disney and awarded the Company $20 million for breach of contract against ABC Radio, $10 million for misappropriation of trade secret by ABC Radio and $10 million for misappropriation of trade secret against Disney. On January 15, 1999, the Court upheld the jury's findings that ABC Radio had breached its contract with the Company and that ABC/Disney both misappropriated the Company's trade secret information, the Court disagreed with the jury's conclusion that the evidence showed that those actions caused the Company's damages or that the amount of damages awarded by the jury was supported by the evidence, and set aside the jury's verdict. The Court further ruled that in the event that the decision is reversed or remanded on appeal, that the defendants be granted a new trial on the issues of causation and damages. The Company filed a Notice of Appeal in February 1999. On February 16, 2000, the Company presented its oral argument to the 8th Circuit Court of Appeals in St. Paul, Minnesota. To date, the 8th Circuit Court of Appeals had not yet ruled on the appeal. The Company intends to pursue its appeal of the judgment and, to this end, certain personnel and financial resources will be used. Item 2. Changes in Securities. Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Securities Holders Not applicable Item 5. Other Information. Not applicable Item 6. Exhibits and Reports on Form 8-K. a. Exhibits 27.1 Financial Data Schedule 99.1 Loan and Security Agreement with GE Capital Corporation effective as of July 31, 2000. b. Current Reports on Form 8-K The Company filed the following Current Reports on Form 8-K (File No. 0-21534) with the Commission during the quarter for which this report is filed: 1. The Company's Current Report on Form 8-K filed on July 10, 2000 relating to webADTV.com, Inc.'s worldwide iNTELESource test agreement with J. Walter Thompson, an international advertising agency. 2. The Company's Current Report on Form 8-K filed on September 11, 2000 regarding webADTV.com, Inc.'s completion of its acquisition of Cosmic Inventions, LLC. 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 hereunto duly authorized on November 14, 2000. iNTELEFILM CORPORATION BY: /s/ Steven C. Smith -------------------------------------- Steven C. Smith ITS: Chief Financial Officer EXHIBIT INDEX 27.1 Financial Data Schedule 99.1 Loan and Security Agreement with GE Capital Corporation effective as of July 31, 2000 EX-99.1 2 0002.txt LOAN AND SECURITY AGREEMENT LOAN AND SECURITY AGREEMENT DATED AS OF JULY 31, 2000 AMONG GENERAL ELECTRIC CAPITAL CORPORATION AS LENDER AND CURIOUS PICTURES CORPORATION AND CHELSEA PICTURES, INC. AND THE END, INC. AS BORROWERS INDEX OF EXHIBITS AND SCHEDULES Schedule A - Definitions Schedule B - Lender's and Borrowers' Addresses for Notices Schedule C - Letters of Credit Schedule D - Cash Management System Schedule E - Fees and Expenses Schedule F - Schedule of Documents Schedule G - Financial Covenants Disclosure Schedule (3.2) - Places of Business; Corporate Names Disclosure Schedule (3.6) - Real Estate Disclosure Schedule (3.7) - Stock; Affiliates Disclosure Schedule (3.9) - Taxes Disclosure Schedule (3.11) - ERISA Disclosure Schedule (3.12) - Litigation Disclosure Schedule (3.13) - Intellectual Property Disclosure Schedule (3.15) - Environmental Matters Disclosure Schedule (3.16) - Insurance Disclosure Schedule (3.18) - Contracts (Offset Risk) Disclosure Schedule (5(b)) - Indebtedness Disclosure Schedule (5(e)) - Liens Disclosure Schedule (6.1) - Actions to Perfect Liens Exhibit A - Form of Notice of Revolving Credit Advance Exhibit B - Other Reports and Information Exhibit C - Form of Borrowing Base Certificate Exhibit C-1 - Inventory Rollforward and Reconciliation Exhibit D - Form of Accounts Payable Analysis Exhibit E - Form of Accounts Receivable Rollforward Analysis Exhibit F - Form of Revolving Credit Note Exhibit G - Intentionally Omitted Exhibit H - Form of Secretarial Certificate Exhibit I - Form of Power of Attorney Exhibit J - Form of Certificate of Compliance Exhibit K - Form of Blocked Account Agreement Exhibit L - Form of Landlord's Waiver and Consent Exhibit M - Intentionally Omitted Exhibit N - Form of Guarantee Exhibit O - Form of Opinion of Counsel to Borrower Exhibit P - Form of Intercreditor Agreement Exhibit Q - Intentionally Omitted Exhibit R - Form of U.C.C. Schedule Exhibit S - Form of Payment of Proceeds Letter Exhibit T - Form of Pledge Agreement Exhibit U - Form of Intellectual Property Security Agreement GE CAPITAL TRANSACTION SUMMARY AS OF THE DATE OF THIS AGREEMENT - -------------------------------------------------------------------------------- REVOLVING CREDIT LOAN Maximum Amount: $7,000,000 -------------- Term: 3 years ---- Revolving Credit Rate: Index Rate plus 3.75% --------------------- Letter of Credit Subfacility: $500,000 ---------------------------- Borrowing Base: 85% of the value (as determined by Lender) -------------- of each Borrower's Eligible Accounts; provided, that Lender shall reduce the foregoing percentage by one percentage point for each percentage point that the dilution of such Borrower's Accounts (calculated by Lender as the average dilution over the most recent three months) exceeds 5 % plus 100% of the value (as determined by Lender) of each Borrower's Eligible Cash Collateral. FEES Closing Fee: $35,000 ----------- Unused Line Fee: .50% --------------- Letter of Credit Fee: 2% -------------------- Prepayment Fee: 2% in year one; 1% in year two; and 1% in -------------- year three. THE LOANS DESCRIBED GENERALLY HERE ARE ESTABLISHED AND GOVERNED BY THE TERMS AND CONDITIONS SET FORTH BELOW IN THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AND IF THERE IS ANY CONFLICT BETWEEN THIS GENERAL DESCRIPTION AND THE EXPRESS TERMS AND CONDITIONS BELOW OR ELSEWHERE IN THE LOAN DOCUMENTS, SUCH OTHER EXPRESS TERMS AN CONDITIONS SHALL CONTROL. This LOAN AND SECURITY AGREEMENT is dated as of July 31, 2000, and agreed to by and among CURIOUS PICTURES CORPORATION, a New York corporation, CHELSEA PICTURES, INC., a Massachusetts corporation, and THE END, INC., a California corporation (being collectively referred to as "Borrowers" and each a "Borrower"), any other Credit Party executing this Agreement, and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender"). RECITALS A. Borrowers desire to obtain the Loans and other financial accommodations from Lender and Lender is willing to provide the Loans and accommodations all in accordance with the terms of this Agreement. B. Capitalized terms used herein shall have the meanings assigned to them in Schedule A and, for purposes of this Agreement and the other Loan Documents, the rules of construction set forth in Schedule A shall govern. All Schedules, attachments, addenda and exhibits hereto, or expressly identified to this Agreement, are incorporated herein by reference, and taken together with this Agreement, constitute but a single agreement. AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, the parties hereto agree as follows: 1. AMOUNT AND TERMS OF CREDIT 1.1 Loans. (a) Subject to the terms and conditions of this Agreement, from the Closing Date and until the Commitment Termination Date (i) Lender agrees (A) to make available advances (each, a "Revolving Credit Advance") and (B) to incur Letter of Credit Obligations, in an aggregate outstanding amount for any Borrower not to exceed the Borrowing Availability of such Borrower, and (ii) any Borrower may from time to time borrow, repay and reborrow, and may cause Lender to incur Letter of Credit Obligations, under this Section 1.1. (b) Borrower shall request each Revolving Credit Advance by written notice to Lender substantially in the form of Exhibit A (each a "Notice of Revolving Credit Advance") given no later than 11:00 A.M. (Los Angeles time) on the Business Day of the proposed advance. Lender shall be fully protected under this Agreement in relying upon, and shall be entitled to rely upon, (i) any Notice of Revolving Credit Advance believed by Lender to be genuine, and (ii) the assumption that the Persons making electronic requests or executing and delivering a Notice of Revolving Credit Advance were duly authorized, unless the responsible individual acting thereon for Lender shall have actual knowledge to the contrary. As an accommodation to Borrowers, Lender may permit telephonic, electronic, or facsimile requests for a Revolving Credit Advance and electronic or facsimile transmittal of instructions, authorizations, agreements or reports to Lender by any Borrower. Unless each Borrower specifically directs Lender in writing not to accept or act upon telephonic, facsimile or electronic communications from any Borrower, Lender shall have no liability to any Borrower for any loss or damage suffered by any Borrower as a result of Lender's honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to it telephonically, by facsimile or electronically and purporting to have been sent to Lender by any Borrower and Lender shall have no duty to verify the origin of any such communication or the identity or authority of the Person sending it. The Revolving Credit Loan shall be evidenced by, and be repayable in accordance with the terms of, the Revolving Credit Note and this Agreement. (c) In making any Loan hereunder Lender shall be entitled to rely upon the most recent Borrowing Base Certificate delivered to Lender by such Borrower and other information available to Lender. Lender shall be under no obligation to make any further Revolving Credit Advance to any Borrower or incur any other Obligation if any Borrower shall have failed to deliver a Borrowing Base Certificate to Lender by the time specified in Section 4.1(b). (d) Letters of Credit. Subject to the terms and conditions of this Agreement, including Schedule C, each Borrower shall have the right to request, and Lender agrees to incur, the Letter of Credit Obligations for the account of such Borrower in accordance with Schedule C. 1.2 Term and Prepayment. (a) Upon the Commitment Termination Date the obligation of Lender to make Revolving Credit Advances and extend other credit hereunder shall immediately terminate and Borrowers shall pay to Lender in full, in cash: (i) all outstanding Revolving Credit Advances and all accrued but unpaid interest thereon, including Additional Interest referred to in Section 1.5(e); (ii) an amount sufficient to enable Lender to hold cash collateral as specified in Schedule C; and (iii) all other non-contingent Obligations due to or incurred by Lender. 1 (b) If the Revolving Credit Loan attributable to any Borrower shall at any time exceed such Borrower's Borrowing Availability, then such Borrower shall immediately repay the Revolving Credit Loan in the amount of such excess. (c) Each Borrower shall have the right, at any time upon 30 days prior written notice to Lender to (i) terminate voluntarily Borrowers' right to receive or benefit from, and Lender's obligation to make and to incur, Revolving Credit Advances and Letter of Credit Obligations and (ii) prepay all of the Obligations. The effective date of termination of the Revolving Credit Loan specified in such notice shall be the Commitment Termination Date. If any Borrower exercises the right of termination and prepayment, or if Lender's obligation to make Loans is terminated for any reason prior to the Stated Expiry Date then in effect (including as a result of the occurrence of a Default), Borrowers shall pay to Lender the applicable Prepayment Fee. 1.3 Use of Proceeds. Borrowers shall use the proceeds of the Loans for working capital and other general corporate purposes. 1.4 Single Loan. The Loans and all of the other Obligations of any Borrower to Lender shall constitute one general obligation of such Borrower secured by all of the Collateral. 1.5 Interest (a) Each Borrower shall pay interest to Lender on the aggregate outstanding Revolving Credit Advances attributable to such Borrower at a floating rate equal to the Index Rate plus three and seventy five hundredths percent (3.75 %) per annum (the "Revolving Credit Rate"). All computations of interest, and all calculations of the Letter of Credit Fee, shall be made by Lender on the basis of a three hundred sixty (360) day year, in each case for the actual number of days occurring in the period for which such interest or fee is payable. Each determination by Lender of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. In no event will Lender charge interest at a rate that exceeds the highest rate of interest permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. (b) Interest shall be payable on the outstanding Revolving Credit Advances (i) in arrears for the preceding calendar month on the first day of each calendar month, (ii) on the Commitment Termination Date, and (iii) if any interest accrues or remains payable after the Commitment Termination Date, upon demand by Lender. (c) Effective upon the occurrence of any Event of Default and for so long as any Event of Default shall be continuing, the Revolving Credit Rate and the Letter of Credit Fee shall automatically be increased by two percentage points (2%) per annum (such increased rate, the "Default Rate"), and all outstanding Obligations, including unpaid interest and Letter of Credit Fees, shall continue to accrue interest from the date of such Event of Default at the Default Rate applicable to such Obligations. (d) If any interest or any other payment (including Unused Line Fees) to Lender under this Agreement becomes due and payable on a day other than a Business Day, such payment date shall be extended to the next succeeding Business Day and interest thereon shall be payable at the then applicable rate during such extension. (e) On any day on which interest is payable by any Borrower to Lender, each Borrower shall make a payment to Lender of its "Pro Rata Share" of any "Additional Interest" due for such period. "Additional Interest" shall be due if the aggregate average balance of the outstanding Revolving Credit Advances during any period (the "Aggregate Average Balance") is less than the "Minimum Balance Amount" for such period. As used in this Section 1.5(e), the Minimum Balance Amount shall be (i) $2,000,000 from the Closing Date until the first anniversary date of this Agreement, (ii) $2,500,000 from the first anniversary date of this Agreement to the second anniversary date of this Agreement, and (iii) $3,000,000 at all times after the second anniversary date of this Agreement. If the Minimum Balance Amount exceeds the Aggregate Average Balance for any such period, then the amount of Additional Interest that is due to Lender shall be an amount derived by multiplying such excess by the blended Revolving Credit Rate for such period (as determined by Lender). Each Borrower's "Pro Rata Share" of any Additional Interest shall be determined by Lender based on the average relative borrowings of each Borrower. 1.6 Cash Management System. On or prior to the Closing Date and until the Termination Date, each Borrower will establish and maintain the cash management system described in Schedule D. All payments in respect of the Collateral shall be made to or deposited in the blocked accounts described in Schedule D in accordance with the terms thereof. 1.7 Fees. Each Borrower agrees to pay to Lender the Fees set forth in Schedule E. 1.8 Receipt of Payments. Each Borrower shall make each payment under this Agreement (not otherwise made pursuant to Section 1.9) without set-off, counterclaim or deduction and free and clear of all Taxes not later than 11:00 A.M. (Los Angeles time) on the day when due in lawful money of the United States of America in immediately available funds to the Collection Account. If any Borrower shall be required by law to deduct any Taxes from any payment to Lender under any Loan 2 Document, then the amount payable to Lender shall be increased so that, after making all required deductions, Lender receives an amount equal to that which it would have received had no such deductions been made. For purposes of computing interest and Fees, all payments shall be deemed received by Lender 2 Business Days following receipt of immediately available funds in the Collection Account. For purposes of determining the Borrowing Availability, payments shall be deemed received by Lender upon receipt of immediately available funds in the Collection Account. 1.9 Application and Allocation of Payments. Each Borrower irrevocably agrees that Lender shall have the continuing and exclusive right to apply any and all payments against the then due and payable Obligations in such order as Lender may deem advisable. Lender is authorized to, and at its option may (without prior notice or precondition and at any time or times), but shall not be obligated to, make or cause to be made Revolving Credit Advances on behalf of any Borrower for: (a) payment of all Fees, expenses, indemnities, charges, costs, principal, interest, or other Obligations owing by such Borrower under this Agreement or any of the other Loan Documents, (b) the payment, performance or satisfaction of any of such Borrower's obligations with respect to preservation of the Collateral, or (c) any premium in whole or in part required in respect of any of the policies of insurance required by this Agreement, even if the making of any such Revolving Credit Advance causes the outstanding balance of the Revolving Credit Loan attributable to any Borrower to exceed such Borrower's Borrowing Availability, and each Borrower agrees to repay immediately, in cash, any amount by which the Revolving Credit Loan attributable to such Borrower exceeds its Borrowing Availability. 1.10 Accounting. Lender is authorized to record on its books and records the date and amount of each Loan and each payment of principal thereof and such recordation shall constitute prima facie evidence of the accuracy of the information so recorded. Lender shall provide Borrowers on a monthly basis a statement and accounting of such recordations but any failure on the part of the Lender to keep any such recordation (or any errors therein) or to send a statement thereof to any Borrower shall not in any manner affect the obligation of any Borrower to repay any of the Obligations. Except to the extent that any Borrower shall, within 30 days after such statement and accounting is sent, notify Lender in writing of any objection such Borrower may have thereto (stating with particularity the basis for such objection), such statement and accounting shall be deemed final, binding and conclusive upon such Borrower, absent manifest error. 1.11 Indemnity. Each Borrower and each other Credit Party executing this Agreement jointly and severally agree to indemnify and hold Lender and its Affiliates, and their respective employees, attorneys and agents (each, an "Indemnified Person"), harmless from and against any and all suits, actions, proceedings, claims, damages, losses, liabilities and expenses of any kind or nature whatsoever (including attorneys' fees and disbursements and other costs of investigation or defense, including those incurred upon any appeal) which may be instituted or asserted against or incurred by any such Indemnified Person as the result of credit having been extended, suspended or terminated under this Agreement and the other Loan Documents or with respect to the execution, delivery, enforcement, performance and administration of, or in any other way arising out of or relating to, this Agreement and the other Loan Documents or any other documents or transactions contemplated by or referred to herein or therein and any actions or failures to act with respect to any of the foregoing, including any and all product liabilities, Environmental Liabilities, Taxes and legal costs and expenses arising out of or incurred in connection with disputes between or among any parties to any of the Loan Documents (collectively, "Indemnified Liabilities"), except to the extent that any such Indemnified Liability is finally determined by a court of competent jurisdiction to have resulted solely from such Indemnified Person's gross negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY CREDIT PARTY, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR ANY ACT OR FAILURE TO ACT UNDER ANY POWER OF ATTORNEY OR FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER. 1.12 Borrowing Base; Reserves. The Borrowing Base of each Borrower shall be determined by Lender (including the eligibility of Accounts and Eligible Cash Collateral) based on the most recent Borrowing Base Certificate delivered to Lender in accordance with Section 4.1(b) and such other information available to Lender. The Revolving Credit Loan shall be subject to Lender's continuing right to withhold from any Borrower's Borrowing Availability reserves, and to increase and decrease such reserves from time to time, if and to the extent that in Lender's good faith credit judgment such reserves are necessary, including to protect Lender's interest in the Collateral or to protect Lender against possible non-payment of Accounts for any reason by Account Debtors or possible diminution of the value of any Collateral or possible non-payment of any of the Obligations or for any Taxes or in respect of any state of facts which could constitute a Default. Lender may, at its option, implement reserves by designating as ineligible a sufficient amount of Accounts or cash which would otherwise be Eligible Accounts or Eligible Cash Collateral, as the case may be, so as to reduce any Borrower's Borrowing Base by the amount of the intended reserves. 2. CONDITIONS PRECEDENT 3 2.1 Conditions to the Initial Loans. Lender shall not be obligated to make any of the Loans or to perform any other action hereunder, until the following conditions have been satisfied in a manner satisfactory to Lender in its sole discretion, or waived in writing by Lender: (a) the Loan Documents to be delivered on or before the Closing Date shall have been duly executed and delivered by the appropriate parties, all as set forth in the Schedule of Documents (Schedule F); (b) the insurance policies provided for in Section 3.16 are in full force and effect and acceptable to Lender, together with appropriate evidence showing loss payable or additional insured clauses or endorsements in favor of Lender as required under such Section; (c) as of the Closing Date, Net Borrowing Availability for all Borrowers combined shall be not less than $1,200,000 after giving effect to the initial Revolving Credit Advance and Letter of Credit Obligations (on a pro forma basis, with trade payables being paid currently, and expenses and liabilities being paid in the ordinary course of business and without acceleration of sales); (d) Lender shall have received an opinion of counsel to the Borrowers with respect to the Loan Documents in form and substance satisfactory to Lender; (e) All intercompany loans and advances due from Borrowers to Parent or any Affiliate will be subordinated to the Obligations on terms satisfactory to Lender; (f) On a consolidated basis, Borrowers, Parent and all Affiliates shall have a minimum of $6,000,000 of cash on hand or available at closing; (g) Implementation of a satisfactory coding system for all invoices generated by Borrowers; (h) The corporate structure, capital structure, other debt instruments, material contracts and governing documents of Borrowers and their Affiliates must be acceptable to Lender; (i) Lender shall have obtained satisfactory background and reference checks on Borrowers, any guarantors and all other Credit Parties; and (j) Any necessary or appropriate waivers and consents of governmental entities or third parties shall have been obtained. 2.2 Further Conditions to the Loans. Lender shall not be obligated to fund any Loan (including the initial Loans), if, as of the date thereof: (a) any representation or warranty by any Credit Party contained herein or in any of the other Loan Documents shall be untrue or incorrect as of such date, except to the extent that any such representation or warranty is expressly stated to relate to a specific earlier date, in which case, such representation and warranty shall be true and correct as of such earlier date; or (b) any event or circumstance which has had or reasonably could be expected to have a Material Adverse Effect shall have occurred since the Closing Date; or (c) any Default shall have occurred and be continuing or would result after giving effect to such Loan; or (d) after giving effect to such Loan, the Revolving Credit Loan attributable to any Borrower would exceed the Borrowing Availability of such Borrower. 2.3 Agent. If Lender shall, in its sole discretion, permit Parent or any Borrower to request and/or accept the proceeds of any Loan or the incurrence by Lender of any Letter of Credit Obligations on behalf of or for the benefit of another Borrower, then such request and acceptance shall be considered made by such Borrower as the agent for such other Borrower and such request shall be deemed to constitute, as of the date of such request and the date of such acceptance, (i) a representation and warranty by each Borrower that the conditions in Section 2.2 have been satisfied and (ii) a restatement by each Borrower of each of the representations and warranties made by such Borrower in any Loan Document and a reaffirmation by each Borrower of the granting and continuance of Lender's Liens pursuant to the Loan Documents. 3. REPRESENTATIONS, WARRANTIES AND AFFIRMATIVE COVENANTS To induce Lender to enter into this Agreement and to make the Loans, each Borrower and each other Credit Party executing this Agreement represent and warrant to Lender (each of which representations and warranties shall survive the execution and delivery of this Agreement), and promise to and agree with Lender until the Termination Date as follows: 3.1 Corporate Existence; Compliance with Law. Each Corporate Credit Party: (a) is, as of the Closing Date, and will continue to be (i) a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation, (ii) duly qualified to do business and in good standing in each other jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect, and (iii) in compliance with all Requirements of Law and Contractual Obligations, except to the extent failure to comply therewith could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and (b) has and will continue to have (i) the requisite corporate power and 4 authority and the legal right to execute, deliver and perform its obligations under the Loan Documents, and to own, pledge, mortgage or otherwise encumber and operate its properties, to lease the property it operates under lease, and to conduct its business as now, heretofore or proposed to be conducted, and (ii) all licenses, permits, franchises, rights, powers, consents or approvals from or by all Persons or Governmental Authorities having jurisdiction over such Corporate Credit Party which are necessary or appropriate for the conduct of its business. 3.2 Executive Offices; Corporate or Other Names. The location of each Corporate Credit Party's chief executive office, corporate offices, warehouses, other locations of Collateral and locations where records with respect to Collateral are kept (including in each case the county of such locations) are as set forth in Disclosure Schedule (3.2) and, except as set forth in such Disclosure Schedule, such locations have not changed during the preceding twelve months. As of the Closing Date, during the prior five years, except as set forth in Disclosure Schedule (3.2), no Corporate Credit Party has been known as or conducted business in any other name (including trade names). 3.3 Corporate Power; Authorization; Enforceable Obligations. The execution, delivery and performance by each Credit Party of the Loan Documents to which it is a party, and the creation of all Liens provided for herein and therein: (a) are and will continue to be within such Credit Party's power and authority; (b) have been and will continue to be duly authorized by all necessary or proper action; (c) are not and will not be in violation of any Requirement of Law or Contractual Obligation of such Credit Party; (d) do not and will not result in the creation or imposition of any Lien (other than Permitted Encumbrances) upon any of the Collateral; and (e) do not and will not require the consent or approval of any Governmental Authority or any other Person. As of the Closing Date, each Loan Document shall have been duly executed and delivered on behalf of each Credit Party thereto, and each such Loan Document upon such execution and delivery shall be and will continue to be a legal, valid and binding obligation of such Credit Party, enforceable against it in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency and other similar laws affecting creditors' rights generally. 3.4 Financial Statements and Projections; Books and Records. (a) The Financial Statements delivered by each Borrower and any other Credit Party to Lender for its most recently ended Fiscal Year and Fiscal Month, are true, correct and complete and reflect fairly and accurately the financial condition of such Borrower as of the date of each such Financial Statement in accordance with GAAP. The Projections most recently delivered by any Borrower or any other Credit Party to Lender have been prepared in good faith, with care and diligence and use assumptions that are reasonable under the circumstances at the time such Projections were prepared and as of the date delivered to Lender and all such assumptions are disclosed in the Projections. (b) Each Borrower and each other Corporate Credit Party shall keep adequate Books and Records with respect to the Collateral and its business activities in which proper entries, reflecting all consolidated and consolidating financial transactions, and payments and credits received on, and all other dealings with, the Collateral, will be made in accordance with GAAP and all Requirements of Law and on a basis consistent with the Financial Statements. 3.5 Material Adverse Change. Between the date of each Borrower's most recently audited Financial Statements delivered to Lender and the Closing Date: (a) no Corporate Credit Party has incurred any obligations, contingent or non-contingent liabilities, or liabilities for Charges, long-term leases or unusual forward or long-term commitments which are not reflected in the Projections delivered on the Closing Date and which could, alone or in the aggregate, reasonably be expected to have a Material Adverse Effect; (b) there has been no material deviation from such Projections; and (c) no events have occurred which alone or in the aggregate has had or could reasonably be expected to have a Material Adverse Effect. No Requirement of Law or Contractual Obligation of any Credit Party has or have had or could reasonably be expected to have a Material Adverse Effect. No Credit Party is in default, and to such Credit Party's knowledge no third party is in default, under or with respect to any of its Contractual Obligations, which alone or in the aggregate has had or could reasonably be expected to have a Material Adverse Effect. 3.6 Real Estate; Property. The real estate listed in Disclosure Schedule (3.6) constitutes all of the real property owned, leased, or used by each Corporate Credit Party in its business, and such Credit Party will not execute any material agreement or contract in respect of such real estate after the date of this Agreement without giving Lender prompt prior written notice thereof. Each Corporate Credit Party holds and will continue to hold good and marketable fee simple title to all of its owned real estate, and good and marketable title to all of its other properties and assets, and valid and insurable leasehold interests in all of its leases (both as lessor and lessee, sublessee or assignee), and none of the properties and assets of any Corporate Credit Party are or will be subject to any Liens, except Permitted Encumbrances. With respect to each of the premises identified in Disclosure Schedule (3.2) on or prior to the Closing Date a bailee, landlord or mortgagee agreement acceptable to Lender has been obtained. 3.7 Ventures, Subsidiaries and Affiliates; Outstanding Stock and Indebtedness. Except as set forth in Disclosure Schedule (3.7), as of the Closing Date no Corporate Credit Party has any Subsidiaries, is engaged in any joint venture or partnership with 5 any other Person, or is an Affiliate of any other Person. Populuxe Pictures, Inc. is a subsidiary that has no assets whatsoever and will not, prior to the Commitment Termination Date, obtain any assets. All of the issued and outstanding Stock of each Corporate Credit Party (including all rights to purchase, options, warrants or similar rights or agreements pursuant to which any Corporate Credit Party may be required to issue, sell, repurchase or redeem any of its Stock) as of the Closing Date is owned by each of the Stockholders (and in the amounts) set forth on Disclosure Schedule (3.7). All outstanding Indebtedness of each Corporate Credit Party as of the Closing Date is described in Disclosure Schedule (5(b)). 3.8 Government Regulation; Margin Regulations. No Corporate Credit Party is subject to or regulated under any Federal or state statute, rule or regulation that restricts or limits such Person's ability to incur Indebtedness, pledge its assets, or to perform its obligations under the Loan Documents. The making of the Loans, the application of the proceeds and repayment thereof, and the consummation of the transactions contemplated by the Loan Documents do not and will not violate any requirement of Law. No Corporate Credit Party is engaged, nor will it engage in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin security" as such terms are defined in Regulation U the Federal Reserve Board as now and hereafter in effect (such securities being referred to herein as "Margin Stock"). No Corporate Credit Party owns any Margin Stock, and none of the proceeds of the Loans or other extensions of credit under this Agreement will be used, directly or indirectly, for the purpose of purchasing or carrying any Margin Stock or reducing or retiring any Indebtedness which was originally incurred to purchase or carry any Margin Stock. No Corporate Credit Party will take or permit to be taken any action which might cause any Loan Document to violate any regulation of the Federal Reserve Board. 3.9 Taxes; Charges. Except as disclosed on Disclosure Schedule (3.9) all tax returns, reports and statements required by any Governmental Authority to be filed by Borrower or any other Credit Party have, as of the Closing Date, been filed and will, until the Termination Date, be filed with the appropriate Governmental Authority and no tax Lien has been filed against any Credit Party or any Credit Party's property. Proper and accurate amounts have been and will be withheld by Borrower and each other Credit Party from their respective employees for all periods in complete compliance with all Requirements of Law and such withholdings have and will be timely paid to the appropriate Governmental Authorities. Disclosure Schedule (3.9) sets forth as of the Closing Date those taxable years for which any Credit Party's tax returns are currently being audited by the IRS or any other applicable Governmental Authority and any assessments or threatened assessments in connection with such audit, or otherwise currently outstanding. Except as described on Disclosure Schedule (3.9), none of the Credit Parties and their respective predecessors are liable for any Charges: (a) under any agreement (including any tax sharing agreements or agreement extending the period of assessment of any Charges) or (b) to each Credit Party's knowledge, as a transferee. As of the Closing Date, no Credit Party has agreed or been requested to make any adjustment under IRC Section 481(a), by reason of a change in accounting method or otherwise, which could reasonably be expected to have a Material Adverse Effect. 3.10 Payment of Obligations. Each Credit Party will pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all of its Charges and other obligations of whatever nature, 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 such Credit Party and none of the Collateral is or could reasonably be expected to become subject to any Lien or forfeiture or loss as a result of such contest. 3.11 ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other existing ERISA Events, could reasonably be expected to result in a liability of any Credit Party of more than the Minimum Actionable Amount. The present value of all accumulated benefit obligations of the Credit Parties under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent Financial Statements reflecting such amounts, exceed the fair market value of the assets of such Plan by more than the Minimum Actionable Amount, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Account Standards No. 87) did not, as of the date of the most recent Financial Statements reflecting such amounts, exceed the fair market value of the assets of such underfunded Plans by more than the Minimum Actionable Amount. No Credit Party or ERISA Affiliate has incurred or reasonably expects to incur any Withdrawal Liability in excess of the Minimum Actionable Amount. 3.12 Litigation. No Litigation is pending or, to the knowledge of any Credit Party, threatened by or against any Credit Party or against any Credit Party's properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or (b) which could reasonably be expected to have a Material Adverse Effect. Except as set forth on Disclosure Schedule (3.12), as of the Closing Date there is no Litigation pending or threatened against any Credit Party which seeks damages in excess of $50,000 or injunctive relief or alleges criminal misconduct of any Credit Party. Each Credit Party shall notify Lender promptly in writing upon learning of the existence, threat or commencement of any Litigation against any Credit Party, ERISA Affiliate or any Plan or any allegation of criminal misconduct against any Credit Party. 3.13 Intellectual Property. As of the Closing Date, all material Intellectual Property owned or used by any Corporate Credit Party is listed, together with application or registration numbers, where applicable, in Disclosure Schedule (3.13). Each 6 Corporate Credit Party owns, or is licensed to use, all Intellectual Property necessary to conduct its business as currently conducted except for such Intellectual Property the failure of which to own or license could not reasonably be expected to have a Material Adverse Effect. Each Corporate Credit Party will maintain the patenting and registration of all Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office, or other appropriate Governmental Authority and each Corporate Credit Party will promptly patent or register, as the case may be, all new Intellectual Property and notify Lender in writing five (5) Business Days prior to filing any such new patent or registration. 3.14 Full Disclosure. No information contained in any Loan Document, the Financial Statements or any written statement furnished by or on behalf of any Credit Party under any Loan Document, or to induce Lender to execute the Loan Documents, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. 3.15 Hazardous Materials. Except as set forth on Disclosure Schedule (3.15), as of the Closing Date, (a) each real property location owned, leased or occupied by each Corporate Credit Party (the "Real Property") is maintained free of contamination from any Hazardous Material, (b) no Corporate Credit Party is subject to any Environmental Liabilities or, to any Credit Party's knowledge, potential Environmental Liabilities, in excess of $50,000 in the aggregate, (c) no notice has been received by any Corporate Credit Party identifying it as a "potentially responsible party" or requesting information under CERCLA or analogous state statutes, and to the knowledge of any Credit Party, there are no facts, circumstances or conditions that may result in any Corporate Credit Party being identified as a "potentially responsible party" under CERCLA or analogous state statutes; and (d) each Corporate Credit Party has provided to Lender copies of all existing environmental reports, reviews and audits and all written information pertaining to actual or potential Environmental Liabilities, in each case relating to any Corporate Credit Party. Each Corporate Credit Party: (i) shall comply in all material respects with all applicable Environmental Laws and environmental permits; (ii) shall notify Lender in writing within seven days if and when it becomes aware of any Release, on, at, in, under, above, to, from or about any of its Real Property; and (iii) shall promptly forward to Lender a copy of any order, notice, permit, application, or any communication or report received by it or any other Credit Party in connection with any such Release. 3.16 Insurance. As of the Closing Date, Disclosure Schedule (3.16) lists all insurance of any nature maintained for current occurrences by Borrowers and each other Corporate Credit Party, as well as a summary of the terms of such insurance. Each Corporate Credit Party shall deliver to Lender certified copies and endorsements to all of its and those of its Subsidiaries (a) "All Risk" and business interruption insurance policies naming Lender loss payee, and (b) general liability and other liability policies naming Lender as an additional insured. All policies of insurance on real and personal property will contain an endorsement, in form and substance acceptable to Lender, showing loss payable to Lender (Form 438 BFU or equivalent) and extra expense and business interruption endorsements. Such endorsement, or an independent instrument furnished to Lender, will provide that the insurance companies will give Lender at least 30 days prior written notice before any such policy or policies of insurance shall be altered or canceled and that no act or default of any Borrower or any other Person shall affect the right of Lender to recover under such policy or policies of insurance in case of loss or damage. Each Corporate Credit Party shall direct all present and future insurers under its "All Risk" policies of insurance to pay all proceeds payable thereunder directly to Lender. If any insurance proceeds are paid by check, draft or other instrument payable to any Credit Party and Lender jointly, Lender may endorse such Credit Party's name thereon and do such other things as Lender may deem advisable to reduce the same to cash. Lender reserves the right at any time, upon review of each Credit Party's risk profile, to require additional forms and limits of insurance. Each Corporate Credit Party shall, on each anniversary of the Closing Date and from time to time at Lender's request, deliver to Lender a report by a reputable insurance broker, satisfactory to Lender, with respect to such Person's insurance policies. 3.17 Deposit and Disbursement Accounts. Attachment I to Schedule D lists all banks and other financial institutions at which any Borrower or any other Corporate Credit Party, maintains deposits and/or other accounts, including the Disbursement Accounts, and such Attachment correctly identifies the name, address and telephone number of each such depository, the name in which the account is held, a description of the purpose of the account, and the complete account number. 3.18 Accounts and Cash Collateral. As of the date of each Borrowing Base Certificate delivered to Lender, each Account listed thereon as an Eligible Account shall be an Eligible Account and all cash collateral listed thereon as Eligible cash collateral shall be Eligible Cash Collateral. No Borrower has made, nor will any Borrower make, any agreement with any Account Debtor for any extension of time for the payment of any Account, any compromise or settlement for less than the full amount thereof, any release of any Account Debtor from liability therefor, or any deduction therefrom except a discount or allowance for prompt or early payment allowed by any Borrower in the ordinary course of its business consistent with historical practice and as previously disclosed to Lender in writing. Disclosure Schedule (3.18) sets forth each Contract of any Borrower with any Account Debtor which gives such Account Debtor the right (under such Contract, under common law or otherwise) to offset any Accounts for such Borrower's failure to perform under such Contract and each Borrower has obtained an offset waiver for each such contract in form and substance satisfactory to Lender. With respect to the Accounts pledged as collateral 7 pursuant to any Loan Document (a) the amounts shown on all invoices, statements and reports which may be delivered to the Lender with respect thereto are actually and absolutely owing to the relevant Credit Party as indicated thereon and are not in any way contingent; (b) no payments have been or shall be made thereon except payments immediately delivered to the applicable accounts described in paragraph 1 to Schedule D or the Lender as required hereunder; and (c) to each Borrower's knowledge all Account Debtors have the capacity to contract. Each Borrower shall notify Lender promptly of any event or circumstance which to such Borrower's knowledge would cause Lender to consider any then existing Account as no longer constituting an Eligible Account or any cash collateral no longer constituting Eligible Cash Collateral, as the case may be. 3.19 Conduct of Business. Each Corporate Credit Party (a) shall conduct its business substantially as now conducted or as otherwise permitted hereunder, and (b) shall at all times maintain, preserve and protect all of the Collateral and such Credit Party's other property, used or useful in the conduct of its business and keep the same in good repair, working order and condition and make, or cause to be made, all necessary or appropriate repairs, replacements and improvements thereto consistent with industry practices. 3.20 Further Assurances. At any time and from time to time, upon the written request of Lender and at the sole expense of Borrowers, Borrowers and each other Credit Party shall promptly and duly execute and deliver any and all such further instruments and documents and take such further action as Lender may reasonably deem desirable (a) to obtain the full benefits of this Agreement and the other Loan Documents, (b) to protect, preserve and maintain Lender's rights in any Collateral, or (c) to enable Lender to exercise all or any of the rights and powers herein granted. 4. FINANCIAL MATTERS; REPORTS 4.1 Reports and Notices. Each From the Closing Date until the Termination Date, each Borrower shall deliver to Lender: (a) within 15 days following the end of each Fiscal Month, an aged trial balance by Account Debtor and an Inventory Perpetual or Physical (as requested by Lender) and as soon as available but in no event later than 30 days following the end of each Fiscal Month, a reconciliation of the aged trial balance and the Inventory Perpetual or Physical (as the case may be) to such Borrower's general ledger and from the general ledger to the Financial Statements for such Fiscal Month accompanied by supporting detail and documentation as Lender may reasonably request; (b) as frequently as Lender may request and in any event no later than 3 days following the end of each week, a Borrowing Base Certificate in the form of Exhibit C as of the last day of the previous Fiscal Month detailing ineligible Accounts and cash collateral for adjustment to the Borrowing Base, certified as true and correct by the Chief Financial Officer of such Borrower or such other officer as is acceptable to Lender; (c) within 15 days following the end of each Fiscal Month, an Accounts Payable Analysis in the Form of Exhibit D (together with an accounts payable aging) and an Accounts Receivable Roll Forward Analysis in the Form of Exhibit E, each certified as true and correct by the Chief Financial Officer of such Borrower or such other officer as is acceptable to Lender; (d) within 30 days following the end of each Fiscal Month, the Financial Statements for such Fiscal Month, which shall provide comparisons to budget and actual results for the corresponding period during the prior Fiscal Year, both on a monthly and year-to-date basis, and accompanied by a certification in the form of Exhibit J by the Chief Executive Officer or Chief Financial Officer of such Borrower that such Financial Statements are complete and correct, that there was no Default (or specifying those Defaults of which he or she was aware), and showing in reasonable detail the calculations used in determining compliance with the financial covenants hereunder; (e) within 90 days following the close of each Fiscal Year, the Financial Statements for such Fiscal Year certified without qualification by an independent certified accounting firm reasonably acceptable to Lender, which shall provide comparisons to the prior Fiscal Year, and shall be accompanied by (i) a statement in reasonable detail showing the calculations used in determining compliance with the financial covenants hereunder, (ii) a report from such Borrower's accountants to the effect that in connection with their audit examination nothing has come to their attention to cause them to believe that a Default has occurred or specifying those Defaults of which they are aware, and (iii) any management letter that may be issued; (f) not less than 30 days prior to the close of each Fiscal Year, the Projections, which will be prepared by such Borrower in good faith, with care and diligence, and using assumptions which are reasonable under the circumstances at the time such Projections are delivered to Lender and disclosed therein when delivered; and (g) all the reports and other information set forth on Exhibit B in the time frames set forth therein. 8 4.2 Financial Covenants. Neither any Borrower nor any other Credit Party shall breach any of the financial covenants set forth in Schedule G. 4.3 Other Reports and Information. Each Borrower shall advise Lender promptly, in reasonable detail, of: (a) any Lien, other than Permitted Encumbrances, attaching to or asserted against any of the Collateral or any occurrence causing a material loss or decline in value of any Collateral and the estimated (or actual, if available) amount of such loss or decline; (b) any material change in the composition of the Collateral; and (c) the occurrence of any Default or other event which has had or could reasonably be expected to have a Material Adverse Effect. Each Borrower shall, upon request of Lender, furnish to Lender such other reports and information in connection with the affairs, business, financial condition, operations, prospects or management of such Borrower or any other Credit Party or the Collateral as Lender may reasonably request, all in reasonable detail. 5. NEGATIVE COVENANTS Each Borrower and each Credit Party executing this Agreement covenants and agrees (for itself and each other Credit Party) that, without Lender's prior written consent, from the Closing Date until the Termination Date, neither any Borrower nor any other Corporate Credit Party shall, directly or indirectly, by operation of law or otherwise: (a) form any Subsidiary or merge with, consolidate with, acquire all or substantially all of the assets or capital stock of, or otherwise combine with or make any investment in or, except as provided in clause 5(c) below, loan or advance to, any Person, except: (i) Parent may, at its discretion purchase additional Stock in, or merge with, Harmony; and (ii) the senior management team of Curious may receive additional Stock in Curious pursuant to that certain Purchase Agreement dated as of July 27, 1999 (the "Purchase Agreement"), provided such senior management team does not own or control more than 20% of such Stock; (b) cancel any debt owing to it or create, incur, assume or permit to exist any Indebtedness, except: (i) the Obligations, (ii) Indebtedness existing as of the Closing Date set forth on Disclosure Schedule 5(b), (iii) deferred taxes, (iv) by endorsement of instruments or items of payment for deposit to the general account of such Credit Party, (v) for Guaranteed Indebtedness incurred for the benefit of Borrower if the primary obligation is permitted by this Agreement; (vi) the conversion by Parent of all or any portion of the obligations, in the approximate amount of $3,200,000, of Harmony to Parent, into additional Stock of Harmony, provided such conversion is on terms acceptable to Lender; (vii) Indebtedness consisting of Capital Lease Obligations and Purchase Money Indebtedness for Capital Expenditures permitted under Schedule G; and (viii) additional Indebtedness (including Purchase Money Indebtedness) incurred after the Closing Date in an aggregate outstanding amount for all such Corporate Credit Parties combined not exceeding $100,000; (c) enter into any lending, borrowing or other commercial transaction with any of its employees, directors, Affiliates or any other Credit Party (including upstreaming and downstreaming of cash and intercompany advances and payments by a Credit Party on behalf of another Credit Party which are not otherwise permitted hereunder), except: (i) loans or advances to employees in the ordinary course of business in an aggregate outstanding amount not exceeding $50,000; (ii) loans by Parent to any Borrower, provided such loans are either (1) used by such Borrower for funding payroll, trade payables or other ordinary course expenses and are repaid in the ordinary course, or (2) not repaid; (iii) a loan or loans by Parent to webADTV.com, Inc. in the aggregate amount of $1,500,000, provided that (x) prior to and after giving effect to such loan or loans no Default or Event of Default has occurred and is continuing, (y) such loan or loans is advanced by Parent on or before July 31, 2001 and is evidenced by a promissory note that is pledged and delivered to Lender, and (z) immediately upon the advance of such loan or loans, the total cash on hand for Parent and all Borrowers is not less than the Revolving Credit Loan; and (iv) commercial transactions on an arm's length basis between or among any Credit Party and (A) Christopher T. Dahl, Bill Bednarczyk,, or any Person controlled by such individuals, or (B) webADTV.com, Inc. for internet services; (d) make any changes in any of its business objectives, purposes, or operations which could reasonably be expected to adversely affect repayment of the Obligations or could reasonably be expected to have a Material Adverse Effect or engage in any business other than that presently engaged in or proposed to be engaged in the Projections delivered to Lender on the Closing Date or amend its charter or by-laws or other organizational documents; (e) create or permit any Lien on any of its properties or assets, except for Permitted Encumbrances; 9 (f) sell, transfer, issue, convey, assign or otherwise dispose of any of its assets or properties, including its Accounts or any shares of its Stock or engage in any sale-leaseback, synthetic lease or similar transaction, except: (i) the sale of Inventory or obsolete or unnecessary Equipment in the ordinary course of its business; (ii) the issuance by Parent or Harmony of Stock; and (iii) the transfer of Stock of Curious to the senior management team of Curious pursuant to the Purchase Agreement. (g) change its name, chief executive office, corporate offices, warehouses or other Collateral locations, or location of its records concerning the Collateral, or acquire, lease or use any real estate after the Closing Date without such Person, in each instance, giving fifteen (15) days prior written notice thereof to Lender and taking all actions deemed necessary or appropriate by Lender to continuously protect and perfect Lender's Liens upon the Collateral; (h) establish any depository or other bank account of any kind with any financial institution (other than the accounts set forth on Attachment 1 to Schedule D) without Lender's prior written consent; or (i) make or permit any Restricted Payment. 6. SECURITY INTEREST 6.1 Grant of Security Interest. (a) As collateral security for the prompt and complete payment and performance of the Obligations, each of the Borrowers and each other Credit Party executing this Agreement hereby grants to the Lender a security interest in and Lien upon all of its personal property and assets, whether tangible or intangible, and whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title, or interest, including all of the following property in which it now has or at any time in the future may acquire any right, title or interest: all Accounts; all bank and deposit accounts and all funds on deposit therein; all cash and cash equivalents; all commodity contracts; all investments, Stock and Investment Property; all Inventory and Equipment; all Goods; all Chattel Paper, Documents and Instruments; all Books and Records; all General Intangibles; and to the extent not otherwise included, all Proceeds and products of all and any of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing, but excluding in all events Hazardous Waste (all of the foregoing, together with any other collateral pledged to the Lender pursuant to any other Loan Document, collectively, the "Collateral"). (b) Each Borrower, Lender and each other Credit Party executing this Agreement agree that this Agreement creates, and is intended to create, valid and continuing Liens upon the Collateral in favor of Lender. Each Borrower and each other Credit Party executing this Agreement represents, warrants and promises to Lender that: (i) each Borrower and each other Credit Party granting a Lien in Collateral is the sole owner of each item of the Collateral upon which it purports to grant a Lien pursuant to the Loan Documents, and has good and marketable title thereto free and clear of any and all Liens or claims of others, other than Permitted Encumbrances; (ii) the security interests granted pursuant to this Agreement, upon completion of the filings and other actions listed on Disclosure Schedule 6.1 (which, in the case of all filings and other documents referred to in said Schedule, have been delivered to the Lender in duly executed form) will constitute valid perfected security interests in all of the Collateral in favor of the Lender as security for the prompt and complete payment and performance of the Obligations, enforceable in accordance with the terms hereof against any and all creditors of and purchasers from any Credit Party (other than purchasers of Inventory in the ordinary course of business) and such security interests are prior to all other Liens on the Collateral in existence on the date hereof except for Permitted Encumbrances which have priority by operation of law; and (iii) no effective security agreement, financing statement, equivalent security or Lien instrument or continuation statement covering all or any part of the Collateral is or will be on file or of record in any public office, except those relating to Permitted Encumbrances. Each Borrower and each other Credit Party executing this Agreement promise to defend the right, title and interest of Lender in and to the Collateral against the claims and demands of all Persons whomsoever, and each shall take such actions, including (x) the prompt delivery of all original Instruments, Chattel Paper and certificated Stock owned by such Borrower and each other Credit Party granting a Lien on Collateral to Lender, (y) notification of Lender's interest in Collateral at Lender's request, and (z) the institution of litigation against third parties as shall be prudent in order to protect and preserve each Credit Party's and Lender's respective and several interests in the Collateral. Each Borrower (and any other Credit Party granting a Lien in Collateral) shall mark its Books and Records pertaining to the Collateral to evidence the Loan Documents and the Liens granted under the Loan Documents. All Chattel Paper shall be marked with the following legend: "This writing and the obligations evidenced or secured hereby are subject to the security interest of General Electric Capital Corporation." 6.2 Lender's Rights. (a) Lender may, (i) at any time in Lender's own name or in the name of any Borrower or any other Credit Party, communicate with Account Debtors, parties to Contracts, and obligors in respect of Instruments, Chattel Paper or other Collateral to verify to Lender's satisfaction, the existence, amount and terms of any such Accounts, Contracts, Instruments or Chattel Paper or other Collateral, and (ii) at any time and without prior notice to any Borrower or any other Credit Party, notify Account Debtors, parties to Contracts, and obligors in respect of Chattel Paper, Instruments, or other Collateral that the Collateral has been assigned to Lender and that payments shall be made directly to Lender. Upon the request of Lender, each Borrower and any other Credit Party shall so notify such Account Debtors, parties to Contracts, and obligors in respect of 10 Instruments, Chattel Paper or other Collateral. Each Borrower and each other Credit Party hereby constitutes Lender or Lender's designee as its attorney with power to endorse its name upon any notes, acceptance drafts, money orders or other evidences of payment or Collateral. (b) Borrower and each other Credit Party shall remain liable under each Contract, Instrument and License to observe and perform all the conditions and obligations to be observed and performed by it thereunder, and Lender shall have no obligation or liability whatsoever to any Person under any Contract, Instrument or License (between any Borrower or any other Credit Party and any Person other than Lender) by reason of or arising out of the execution, delivery or performance of this Agreement, and Lender shall not be required or obligated in any manner (i) to perform or fulfill any of the obligations of any Borrower or any other Credit Party, (ii) to make any payment or inquiry, or (iii) to take any action of any kind to collect, compromise or enforce any performance or the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times under or pursuant to any Contract, Instrument or License. (c) Each Borrower and each other Credit Party shall, with respect to each owned, leased, or controlled property, during normal business hours and upon reasonable advance notice (unless a Default shall have occurred and be continuing, in which event no notice shall be required and Lender shall have access at any and all times): (i) provide access to such property to Lender and any of its officers, employees and agents, as frequently as Lender determines to be appropriate; (ii) permit Lender and any of its officers, employees and agents to inspect, audit and make extracts and copies (or take originals if reasonably necessary) from all of such Borrower's and such Credit Party's Books and Records; and (iii) permit Lender to inspect, review, evaluate and make physical verifications and appraisals of the Inventory and other Collateral in any manner and through any medium that Lender considers advisable, and each Borrower and such Credit Party agree to render to Lender, at such Borrower's and such Credit Party's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. (d) After the occurrence and during the continuance of a Default, each Borrower at its own expense, shall cause the certified public accountant then engaged by such Borrower to prepare and deliver to Lender at any time and from time to time, promptly upon Lender's request, the following reports: (i) a reconciliation of all Accounts; (ii) an aging of all Accounts; (iii) trial balances; and (iv) test verifications of such Accounts as Lender may request. Each Borrower, at its own expense, shall cause its certified independent public accountants to deliver to Lender the results of any physical verifications of all or any portion of the Inventory made or observed by such accountants when and if such verification is conducted. Lender shall be permitted to observe and consult with each Borrower's accountants in the performance of these tasks. 6.3 Lender's Appointment as Attorney-in-fact. On the Closing Date, each Borrower and each other Credit Party executing this Agreement shall execute and deliver a Power of Attorney in the form attached as Exhibit I. The power of attorney granted pursuant to the Power of Attorney and all powers granted under any Loan Document are powers coupled with an interest and shall be irrevocable until the Termination Date. The powers conferred on Lender under the Power of Attorney are solely to protect Lender's interests in the Collateral and shall not impose any duty upon it to exercise any such powers. Lender agrees not to exercise any power or authority granted under the Power of Attorney unless an Event of Default has occurred and is continuing. Each Borrower and each other Credit Party executing this Agreement authorizes Lender to file any financing or continuation statement without the signature of such Borrower or such Credit Party to the extent permitted by applicable law. 6.4 Grant of License to Use Intellectual Property Collateral. Each Borrower and each other Credit Party executing this Agreement hereby grants to Lender an irrevocable, non-exclusive license (exercisable upon the occurrence and during the continuance of an Event of Default without payment of royalty or other compensation to any Borrower or such Credit Party) to use, transfer, license or sublicense any Intellectual Property now owned, licensed to, or hereafter acquired by such Borrower or such Credit Party, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer and automatic machinery software and programs used for the compilation or printout thereof, and represents, promises and agrees that any such license or sublicense is not and will not be in conflict with the contractual or commercial rights of any third Person; provided, that such license will terminate on the Termination Date. 7. EVENTS OF DEFAULT: RIGHTS AND REMEDIES 7.1 Events of Default. The occurrence of any one or more of the following events (regardless of the reason therefor) shall constitute an "Event of Default" hereunder which shall be deemed to be continuing until waived in writing by Lender in accordance with Section 10.3: (a) any Borrower shall fail to make any payment in respect of any Obligations when due and payable or declared due and payable; or 11 (b) (i) Borrower or any other Credit Party shall fail or neglect to perform, keep or observe any of the covenants, promises, agreements, requirements, conditions or other terms or provisions contained in Section 1, Sections 3.1, 3.2, 3.17, 3.18, 3.19, 3.20, 4.2 or Section 5 of this Agreement; or (ii) Borrower or any other Credit Party shall fail or neglect to perform, keep or observe any of the other covenants, promises, agreements, requirements, conditions or other terms or provisions contained in this Agreement (other than those set forth in the Sections referred to in clause (i) immediately above) or any of the other Loan Documents, regardless of whether such breach involves a covenant, promise, agreement, condition, requirement, term or provision with respect to a Credit Party that has not signed this Agreement, and such breach is not remediable or, if remediable, continues unremedied for a period of five (5) Business Days after the earlier to occur of (x) the date on which such breach is known or reasonably should have become known to any officer of the Borrower or such Credit Party and (y) the date on which Lender shall have notified the Borrower or such other Credit Party of such breach; or (c) an event of default shall occur under any Contractual Obligation of any Borrower or any other Credit Party (other than this Agreement and the other Loan Documents), and such event of default (i) involves the failure to make any payment (whether or not such payment is blocked pursuant to the terms of an intercreditor agreement or otherwise), whether of principal, interest or otherwise, and whether due by scheduled maturity, required prepayment, acceleration, demand or otherwise, in respect of any Indebtedness (other than the Obligations) of such Person in an aggregate amount exceeding the Minimum Actionable Amount, or (ii) causes (or permits any holder of such Indebtedness or a trustee to cause) such Indebtedness, or a portion thereof, in an aggregate amount exceeding the Minimum Actionable Amount to become due prior to its stated maturity or prior to its regularly scheduled date of payment; or (d) any information contained in any Borrowing Base Certificate is untrue or incorrect in any respect, or any representation or warranty in this Agreement or any other Loan Document, or in any written statement pursuant hereto or thereto, or in any report, financial statement or certificate made or delivered to Lender by any Borrower or any other Credit Party shall be untrue or incorrect in any material respect as of the date when made or deemed made; or (e) there shall be commenced against any Borrower or any other Credit Party any Litigation 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 remains unstayed or undismissed for thirty (30) consecutive days; or any Borrower or any other Credit Party shall have concealed, removed or permitted to be concealed or removed, any part of its property with intent to hinder, delay or defraud any of its creditors or made or suffered a transfer of any of its property or the incurring of an obligation which may be fraudulent under any bankruptcy, fraudulent transfer or other similar law; or (f) a case or proceeding shall have been commenced involuntarily against any Borrower or any other Credit Party in a court having competent jurisdiction seeking a decree or order: (i) under the United States Bankruptcy Code or any other applicable Federal, state or foreign bankruptcy or other similar law, and seeking either (x) the appointment of a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) for such Person or of any substantial part of its properties, or (y) the reorganization or winding up or liquidation of the affairs of any such Person, and such case or proceeding shall remain undismissed or unstayed for sixty (60) consecutive days or such court shall enter a decree or order granting the relief sought in such case or proceeding; or (ii) invalidating or denying any Person's right, power, or competence to enter into or perform any of its obligations under any Loan Document or invalidating or denying the validity or enforceability of this Agreement or any other Loan Document or any action taken hereunder or thereunder; or (g) any Borrower or any other Credit Party shall (i) commence any case, proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, conservatorship or relief of debtors, seeking to have an order for relief entered with respect to it or seeking appointment of a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) for it or any substantial part of its properties, (ii) make a general assignment for the benefit of creditors, (iii) consent to or take any action in furtherance of, or, indicating its consent to, approval of, or acquiescence in, any of the acts set forth in paragraphs (e) or (f) of this Section 7.1 or clauses (i) and (ii) of this paragraph (g), or (iv) shall admit in writing its inability to, or shall be generally unable to, pay its debts as such debts become due; or (h) a final judgment or judgments for the payment of money in excess of the Minimum Actionable Amount in the aggregate shall be rendered against any Borrower or any other Credit Party, unless the same shall be (i) fully covered by insurance and the issuer(s) of the applicable policies shall have acknowledged full coverage in writing within fifteen (15) days of judgment, or (ii) vacated, stayed, bonded, paid or discharged within a period of fifteen (15) days from the date of such judgment; or (i) any other event shall have occurred which has had or could reasonably be expected to have a Material Adverse Effect; or (j) any provision of any Loan Document shall for any reason cease to be valid, binding and enforceable in accordance with its terms, or any Lien granted, or intended by the Loan Documents to be granted, to Lender shall cease to be a valid and perfected Lien having the first priority (or a lesser priority if expressly permitted in the Loan Documents) in any of the Collateral (or any Credit Party shall so assert any of the foregoing); or (k) a Change of Control shall have occurred with respect to any Corporate Credit Party; or (l) an ERISA Event shall have occurred that, in the opinion of the Lender, when taken together with all other ERISA Events that have occurred and are then continuing, could reasonably be expected to result in liability of any Credit Party in an aggregate amount exceeding the Minimum Actionable Amount. 12 7.2 Remedies. (a) If any Default shall have occurred and be continuing, then Lender may terminate or suspend its obligation to make further Revolving Credit Advances and to incur additional Letter of Credit Obligations. In addition, if any Event of Default shall have occurred and be continuing, Lender may, without notice, take any one or more of the following actions: (i) declare all or any portion of the Obligations to be forthwith due and payable, including contingent liabilities with respect to Letter of Credit Obligations, whereupon such Obligations shall become and be due and payable; (ii) require that all Letter of Credit Obligations be fully cash collateralized pursuant to Schedule C; or (iii) exercise any rights and remedies provided to Lender under the Loan Documents or at law or equity, including all remedies provided under the Code; provided, that upon the occurrence of any Event of Default specified in Sections 7.1 (e), (f) or (g), the Obligations shall become immediately due and payable (and any obligation of Lender to make further Loans, if not previously terminated, shall immediately be terminated) without declaration, notice or demand by Lender. (b) Without limiting the generality of the foregoing, each Borrower and each other Credit Party executing this Agreement expressly agrees that upon the occurrence and during the continuance of any Event of Default, Lender may collect, receive, assemble, process, appropriate and realize upon the Collateral, or any part thereof, and may forthwith sell, lease, assign, give an option or options to purchase or otherwise dispose of and deliver said Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale or sales, at any exchange at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Lender shall have the right upon any such public sale, to the extent permitted by law, to purchase for the benefit of Lender the whole or any part of said Collateral so sold, free of any right of equity of redemption, which right each Borrower and each other Credit Party executing this Agreement hereby releases. Such sales may be adjourned or continued from time to time with or without notice. Lender shall have the right to conduct such sales on any Credit Party's premises or elsewhere and shall have the right to use any Credit Party's premises without rent or other charge for such sales or other action with respect to the Collateral for such time as Lender deems necessary or advisable. (c) Upon the occurrence and during the continuance of an Event of Default and at Lender's request, each Borrower and each other Credit Party executing this Agreement further agrees to assemble the Collateral and make it available to Lender at places which Lender shall reasonably select, whether at its premises or elsewhere. Until Lender is able to effect a sale, lease, or other disposition of the Collateral, Lender shall have the right to complete, assemble, use or operate the Collateral or any part thereof, to the extent that Lender deems appropriate, for the purpose of preserving such Collateral or its value or for any other purpose. Lender shall have no obligation to any Credit Party to maintain or preserve the rights of such Credit Party as against third parties with respect to any Collateral while such Collateral is in the possession of Lender. Lender may, if it so elects, seek the appointment of a receiver or keeper to take possession of any Collateral and to enforce any of Lender's remedies with respect thereto without prior notice or hearing. To the maximum extent permitted by applicable law, each Borrower and each other Credit Party executing this Agreement waives all claims, damages, and demands against Lender, its Affiliates, agents, and the officers and employees of any of them arising out of the repossession, retention or sale of any Collateral except such as are determined in a final judgment by a court of competent jurisdiction to have arisen solely out of the gross negligence or willful misconduct of such Person. Each Borrower and each other Credit Party executing this Agreement agrees that ten (10) days prior notice by Lender to such Credit Party of the time and place of any public sale or of the time after which a private sale may take place is reasonable notification of such matters. Each Borrower and each other Credit Party shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which Lender is entitled. (d) Lender's rights and remedies under this Agreement shall be cumulative and nonexclusive of any other rights and remedies which Lender may have under any Loan Document or at law or in equity. Recourse to the Collateral shall not be required. All provisions of this Agreement are intended to be subject to all applicable mandatory provisions of law that may be controlling and to be limited, to the extent necessary, so that they do not render this Agreement invalid or unenforceable, in whole or in part. 7.3 Waivers by Credit Parties. Except as otherwise provided for in this Agreement and to the fullest extent permitted by applicable law, each Borrower and each other Credit Party executing this Agreement waives: (a) presentment, demand and protest, and notice of presentment, dishonor, intent to accelerate, acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all Loan Documents, the Notes or any other notes, commercial paper, Accounts, Contracts, Documents, Instruments, Chattel Paper and guaranties at any time held by Lender on which such Credit Party may in any way be liable, and hereby ratifies and confirms whatever Lender may do in this regard; (b) all rights to notice and a hearing prior to Lender's taking possession or control of, or to Lender's replevy, attachment or levy upon, any Collateral or any bond or security which might be required by any court prior to allowing Lender to exercise any of its remedies; and (c) the benefit of all valuation, appraisal and exemption laws. Each Borrower and each other Credit Party executing this Agreement acknowledges that it has been advised by counsel of its choices and decisions with respect to this Agreement, the other Loan Documents and the transactions evidenced hereby and thereby. 13 7.4 Proceeds. The Proceeds of any sale, disposition or other realization upon any Collateral shall be applied by Lender upon receipt to the Obligations in such order as Lender may deem advisable in its sole discretion (including the cash collateralization of any Letter of Credit Obligations), and after the indefeasible payment and satisfaction in full in cash of all of the Obligations, and after the payment by Lender of any other amount required by any provision of law, including Section 9-504(1)(c) of the Code (but only after Lender has received what Lender considers reasonable proof of a subordinate party's security interest), the surplus, if any, shall be paid to Borrowers or their representatives or to whomsoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct. 8. SUCCESSORS AND ASSIGNS Each Loan Document shall be binding on and shall inure to the benefit of each Borrower and each other Credit Party executing such Loan Document, Lender, and their respective successors and assigns, except as otherwise provided herein or therein. Neither any Borrower nor any other Credit Party may assign, transfer, hypothecate, delegate or otherwise convey its rights, benefits, obligations or duties under any Loan Document without the prior express written consent of Lender. Any such purported conveyance by such Borrower or such Credit Party without the prior express written consent of Lender shall be void. There shall be no third party beneficiaries of any of the terms and provisions of any of the Loan Documents. Lender reserves the right at any time to create and sell participations in the Loans and the Loan Documents and to sell, transfer or assign any or all of its rights in the Loans and under the Loan Documents. 9. GUARANTOR WAIVERS BY BORROWERS IF AND TO THE EXTENT THAT ANY OBLIGATION OF ANY BORROWER TO LENDER SHALL BE CONSIDERED AN OBLIGATION OF GUARANTY OR SURETYSHIP, THEN THE FOLLOWING PROVISIONS OF THIS SECTION 9 SHALL APPLY WITH RESPECT TO EACH SUCH BORROWER SOLELY TO THE EXTENT THAT SUCH BORROWER IS DEEMED TO ACT IN THE CAPACITY OF A GUARANTOR AND SHALL NOT EFFECT A WAIVER OF RIGHTS IN SUCH PERSON'S CAPACITY AS A BORROWER: (A) SUCH BORROWER EXPRESSLY WAIVES THE RIGHT TO REQUIRE LENDER FIRST TO PURSUE ANY OTHER PERSON, THE COLLATERAL, OR ANY OTHER SECURITY OR GUARANTY THAT MAY BE HELD FOR THE OBLIGATIONS, OR TO APPLY ANY SUCH SECURITY OR GUARANTY TO THE OBLIGATIONS BEFORE SEEKING FROM SUCH BORROWER PAYMENT IN FULL OF ITS LIABILITIES TO LENDER OR PROCEEDING AGAINST SUCH BORROWER FOR SAME. (B) SUCH BORROWER ACKNOWLEDGES THAT IF LENDER MAY, UNDER APPLICABLE LAW, PROCEED TO REALIZE ITS BENEFITS UNDER ANY OF THE LOAN DOCUMENTS GIVING LENDER A LIEN UPON ANY COLLATERAL, WHETHER OWNED BY ANY BORROWER OR BY ANY OTHER PERSON, EITHER BY JUDICIAL FORECLOSURE OR BY NON-JUDICIAL SALE OR ENFORCEMENT, LENDER MAY, AT ITS SOLE OPTION, DETERMINE WHICH OF ITS REMEDIES OR RIGHTS IT MAY PURSUE WITHOUT AFFECTING ANY OF ITS RIGHTS AND REMEDIES. IF, IN THE EXERCISE OF ANY OF ITS RIGHTS AND REMEDIES, LENDER SHALL FORFEIT ANY OF ITS RIGHTS OR REMEDIES, INCLUDING ITS RIGHT TO ENTER A DEFICIENCY JUDGMENT AGAINST ANY BORROWER OR ANY OTHER PERSON, WHETHER BECAUSE OF ANY APPLICABLE LAWS PERTAINING TO "ELECTION OF REMEDIES" OR THE LIKE, SUCH BORROWER HEREBY CONSENTS TO SUCH ACTION BY LENDER AND WAIVES ANY CLAIM BASED UPON SUCH ACTION, EVEN IF SUCH ACTION BY LENDER SHALL RESULT IN A FULL OR PARTIAL LOSS OF ANY RIGHTS OF SUBROGATION WHICH SUCH BORROWER MIGHT OTHERWISE HAVE HAD BUT FOR SUCH ACTION BY LENDER. ANY ELECTION OF REMEDIES WHICH RESULTS IN THE DENIAL OR IMPAIRMENT OF THE RIGHT OF LENDER TO SEEK A DEFICIENCY JUDGMENT AGAINST ANY BORROWER SHALL NOT IMPAIR ANY OTHER BORROWER'S OBLIGATION TO PAY THE FULL AMOUNT OF THE OBLIGATIONS. IN THE EVENT LENDER SHALL BID AT ANY FORECLOSURE OR TRUSTEE'S SALE OR AT ANY PRIVATE SALE PERMITTED BY LAW OR THE LOAN DOCUMENTS, LENDER MAY BID ALL OR LESS THAN THE AMOUNT OF THE OBLIGATIONS AND THE AMOUNT OF SUCH BID NEED NOT BE PAID BY LENDER BUT SHALL BE CREDITED AGAINST THE OBLIGATIONS. THE AMOUNT OF THE SUCCESSFUL BID AT ANY SUCH SALE, WHETHER LENDER OR ANY OTHER PARTY IS THE SUCCESSFUL BIDDER, SHALL BE CONCLUSIVELY DEEMED TO BE THE FAIR MARKET VALUE OF THE COLLATERAL AND THE DIFFERENCE BETWEEN SUCH BID AMOUNT AND THE REMAINING BALANCE OF THE OBLIGATIONS SHALL BE CONCLUSIVELY DEEMED TO BE THE AMOUNT OF THE OBLIGATIONS GUARANTEED BY SUCH BORROWER, NOTWITHSTANDING THAT ANY PRESENT OR FUTURE LAW OR COURT DECISION OR RULING MAY HAVE THE EFFECT OF REDUCING THE AMOUNT OF ANY DEFICIENCY CLAIM TO WHICH LENDER MIGHT OTHERWISE BE ENTITLED BUT FOR SUCH BIDDING AT ANY SUCH SALE. 14 (C) SUCH BORROWER AGREES THAT LENDER SHALL BE UNDER NO OBLIGATION TO (I) MARSHAL ANY ASSETS IN FAVOR OF SUCH BORROWER, (II) PROCEED FIRST AGAINST ANY OTHER BORROWER OR PERSON OR ANY PROPERTY OF ANY OTHER BORROWER OR PERSON OR AGAINST ANY COLLATERAL, (III) ENFORCE FIRST ANY OTHER GUARANTY OBLIGATIONS WITH RESPECT TO, OR SECURITY FOR, THE OBLIGATIONS, OR (IV) PURSUE ANY OTHER REMEDY IN LENDER'S POWER THAT SUCH BORROWER MAY NOT BE ABLE TO PURSUE ITSELF AND THAT MAY LIGHTEN SUCH BORROWER'S BURDEN, ANY RIGHT TO WHICH SUCH BORROWER HEREBY EXPRESSLY WAIVES. (D) EACH BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH SUCH BORROWER. EACH BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 10. MISCELLANEOUS 10.1 Complete Agreement; Modification of Agreement. This Agreement and the other Loan Documents constitute the complete agreement between the parties with respect to the subject matter hereof and thereof, supersede all prior agreements, commitments, understandings or inducements (oral or written, expressed or implied). No Loan Document may be modified, altered or amended except by a written agreement signed by Lender, and each other Credit Party a party to such Loan Document. Each Borrower and each other Credit Party executing this Agreement or any other Loan Document shall have all duties and obligations under this Agreement and such other Loan Document from the date of its execution and delivery, regardless of whether the initial Loan has been funded at that time. 10.2 Expenses. Each Borrower agrees to pay or reimburse Lender for all costs and expenses (including the fees and expenses of all counsel, advisors, consultants (including environmental and management consultants) and auditors retained in connection therewith), incurred in connection with: (a) the preparation, negotiation, execution, delivery, performance and enforcement of the Loan Documents and the preservation of any rights thereunder; (b) collection, including deficiency collections; (c) the forwarding to Borrower or any other Person on behalf of Borrower by Lender of the proceeds of any Loan (including a wire transfer fee of $25 per wire transfer); (d) any amendment, waiver or other modification with respect to any Loan Document or advice in connection with the administration of the Loans or the rights thereunder; (e) any litigation, dispute, suit, proceeding or action (whether instituted by or between any combination of Lender, Borrower or any other Person), and an appeal or review thereof, in any way relating to the Collateral, any Loan Document, or any action taken or any other agreements to be executed or delivered in connection therewith, whether as a party, witness or otherwise; and (f) any effort (i) to monitor the Loans, (ii) to evaluate, observe or assess Borrower or any other Credit Party or the affairs of such Person, and (iii) to verify, protect, evaluate, assess, appraise, collect, sell, liquidate or otherwise dispose of the Collateral. 10.3 No Waiver. Neither Lender's failure, at any time, to require strict performance by any Borrower or any other Credit Party of any provision of any Loan Document, nor Lender's failure to exercise, nor any delay in exercising, any right, power or privilege hereunder, shall operate as a waiver thereof or waive, affect or diminish any right of Lender thereafter to demand strict compliance and performance therewith. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or future exercise thereof or the exercise of any other right, power or privilege. Any suspension or waiver of a Default or other provision under the Loan Documents shall not suspend, waive or affect any other Default or other provision under any Loan Document, and shall not be construed as a bar to any right or remedy which Lender would otherwise have had on any future occasion. None of the undertakings, indemnities, agreements, warranties, covenants and representations of any Borrower or any other Credit Party to Lender contained in any Loan Document and no Default by any Borrower or any other Credit Party under any Loan Document shall be deemed to have been suspended or waived by Lender, unless such waiver or suspension is by an instrument in writing signed by an officer or other authorized employee of Lender and directed to such Borrower specifying such suspension or waiver (and then such waiver shall be effective only to the extent therein expressly set forth), and Lender shall not, by any act (other than execution of a formal written waiver), delay, omission or otherwise, be deemed to have waived any of its rights or remedies hereunder. 10.4 Severability; Section Titles. Wherever possible, each provision of the Loan Documents shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of any Loan Document shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of such Loan Document. Except as otherwise expressly provided for in the Loan Documents, no termination or cancellation (regardless of cause or procedure) of any financing arrangement under the Loan Documents shall in any way affect or impair the Obligations, duties, covenants, representations and warranties, indemnities, and liabilities of any Borrower or any other Credit Party or the rights of Lender 15 relating to any unpaid Obligation (due or not due, liquidated, contingent or unliquidated), or any transaction or event occurring prior to such termination, or any transaction or event, the performance of which is not required until after the Commitment Termination Date, all of which shall not terminate or expire, but rather shall survive such termination or cancellation and shall continue in full force and effect until the Termination Date; provided, that all indemnity obligations of the Credit Parties under the Loan Documents shall survive the Termination Date. The Section titles contained in any Loan Document are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 10.5 Authorized Signature. Until Lender shall be notified in writing by any Borrower or any other Credit Party to the contrary, the signature upon any document or instrument delivered pursuant hereto and believed by Lender or any of Lender's officers, agents, or employees to be that of an officer of such Borrower or such other Credit Party shall bind such Borrower and such other Credit Party and be deemed to be the act of such Borrower or such other Credit Party affixed pursuant to and in accordance with resolutions duly adopted by such Borrower's or such other Credit Party's Board of Directors, and Lender shall be entitled to assume the authority of each signature and authority of the person whose signature it is or appears to be unless the person acting in reliance thereon shall have actual knowledge to the contrary. 10.6 Notices. Except as otherwise provided herein, whenever any notice, demand, request or other communication shall or may be given to or served upon any party by any other party, or whenever any party desires to give or serve upon any other party any communication with respect to this Agreement, each such communication shall be in writing and shall be deemed to have been validly served, given or delivered (a) upon the earlier of (i) actual receipt or (ii) three (3) days after deposit in the United States Mail, registered or certified mail, return receipt requested, with proper postage prepaid, (b) upon transmission, when sent by telecopy or other similar facsimile transmission upon receipt of confirmation that such transmission has been received (with such telecopy or facsimile promptly confirmed by delivery of a copy by personal delivery or United States Mail as otherwise provided in this Section 10.6), (c) one (1) Business Day after deposit with a reputable overnight courier with all charges prepaid or (d) when hand-delivered, all of which shall be addressed to the party to be notified and sent to the address or facsimile number indicated in Schedule B or to such other address (or facsimile number) as may be substituted by notice given as herein provided. Failure or delay in delivering copies of such communication to any Person (other than any Borrower or Lender) designated in Schedule B to receive copies shall in no way adversely affect the effectiveness of such communication. 10.7 Counterparts. Any Loan Document may be executed in any number of separate counterparts by one or more of the parties thereto, and all of said counterparts taken together shall constitute one and the same instrument. 10.8 Time of the Essence. Time is of the essence for performance of the Obligations under the Loan Documents. 10.9 GOVERNING LAW. THE LOAN DOCUMENTS AND THE OBLIGATIONS ARISING UNDER THE LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICTS OF LAWS. 10.10 SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. (A) EACH BORROWER AND EACH OTHER CREDIT PARTY EXECUTING THIS AGREEMENT HEREBY CONSENT AND AGREE THAT THE STATE OR FEDERAL COURTS LOCATED IN CALIFORNIA SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN SUCH BORROWER AND SUCH CREDIT PARTY AND LENDER PERTAINING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT LENDER, SUCH BORROWER AND SUCH CREDIT PARTY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF CALIFORNIA; AND FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER. SUCH BORROWER AND EACH OTHER CREDIT PARTY EXECUTING THIS AGREEMENT EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND SUCH BORROWER AND SUCH CREDIT PARTY HEREBY WAIVE ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. Each BORROWER AND EACH OTHER CREDIT PARTY EXECUTING THIS AGREEMENT HEREBY WAIVE PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH BORROWER OR SUCH CREDIT PARTY AT THE ADDRESS SET FORTH IN SCHEDULE B OF THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF SUCH BORROWER'S OR SUCH CREDIT PARTY'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID. 16 (B) THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN LENDER, any BORROWER AND ANY CREDIT PARTY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO. 10.11 Press Releases. Neither any Credit Party nor any of its Affiliates will in the future issue any press release or other public disclosure using the name of General Electric Capital Corporation or its affiliates or referring to this Agreement or the other Loan Documents without at least two (2) Business Days' prior notice to Lender and without the prior written consent of Lender unless (and only to the extent that) such Credit Party or Affiliate is required to do so under law and then, in any event, such Credit Party or Affiliate will consult with Lender before issuing such press release or other public disclosure, other than required SEC filings. 10.12 Reinstatement. This Agreement shall continue to be effective, or be reinstated, as the case may be, if at any time payment of all or any part of the Obligations is rescinded or must otherwise be returned or restored by Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Borrower or any other Credit Party, or otherwise, all as though such payments had not been made. 11. CROSS-GUARANTY 11.1 Cross-Guaranty. Each Borrower hereby absolutely and unconditionally guarantees to Lender and its successors and assigns the full and prompt payment (whether at stated maturity, by acceleration or otherwise) and performance of all Obligations owed or hereafter owing to Lender by each other Borrower, including that portion of the Revolving Credit Loan attributable to each other Borrower. Each Borrower agrees that its guaranty obligation hereunder is a continuing guaranty of payment and performance and not of collection, and that its obligations under this Section 11 shall be absolute and unconditional, irrespective of, and unaffected by: (a) the genuineness, validity, regularity, enforceability or any future amendment of, or change in, this Agreement, any other Loan Document or any other agreement, document or instrument to which any Borrower is or may become a party; (b) the absence of any action to enforce this Agreement (including this Section 11) or any other Loan Document or the waiver or consent by Lender with respect to any of the provisions hereof or thereof; (c) the existence, value or condition of, or failure to perfect its Lien against, any security for the Obligations or any action, or the absence of any action, by Lender in respect thereof (including the release of any such security); (d) the insolvency of any Credit Party; or (e) any other action or circumstances which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being agreed by each Borrower that its obligations under this Section 11 shall not be discharged until the payment and performance, in full, of the Obligations has occurred. Each Borrower shall be regarded, and shall be in the same position, as principal debtor with respect to the Obligations guaranteed hereunder. 11.2 Waivers by Borrowers. Each Borrower expressly waives all rights it may have now or in the future under any statute, or at common law, or at law or in equity, or otherwise, to compel Lender to marshall assets or to proceed in respect of the Obligations guaranteed hereunder against any other Credit Party, any other party or against any security for the payment and performance of the Obligations before proceeding against, or as a condition to proceeding against, such Borrower. It is agreed among each Borrower and Lender that the foregoing waivers are of the essence of the transactions contemplated by this Agreement and the other Loan Documents and that, but for the provisions of this Section 11 and such waivers, Lender would decline to enter into this Agreement. 11.3 Benefit of Guaranty. Each Borrower agrees that the provisions of this Section 11 are for the benefit of Lender and its successors, transferees, endorsees and assigns, and nothing herein contained shall impair, as between any other Borrower and Lender, the obligations of such other Borrower under the Loan Documents. 11.4 Subordination of Subrogation. Notwithstanding anything to the contrary in this Agreement or in any other Loan Document, and except as set forth in Section 11.7, each Borrower hereby expressly and irrevocably subordinates to payment of the Obligations any and all rights at law or in equity to subrogation, reimbursement, exoneration, contribution, indemnification or set off and any and all defenses available to a surety, guarantor or accommodation co-obligor until the Obligations are indefeasibly paid in full in cash. Each Borrower acknowledges and agrees that this waiver is intended to benefit Lender and 17 shall not limit or otherwise affect such Borrower's liability hereunder or the enforceability of this Section 11, and that Lender and its successors and assigns are intended third party beneficiaries of the waivers and agreements set forth in this Section 11.4. 11.5 Election of Remedies. (a) If Lender may, under applicable law, proceed to realize its benefits under any of the Loan Documents giving Lender a Lien upon any Collateral, whether owned by any Borrower or by any other Person, either by judicial foreclosure or by non-judicial sale or enforcement, Lender may, at its sole option, determine which of its remedies or rights it may pursue without affecting any of its rights and remedies under this Section 11. If, in the exercise of any of its rights and remedies, Lender shall forfeit any of its rights or remedies, including its right to enter a deficiency judgment against any Borrower or any other Person, whether because of any applicable laws pertaining to "election of remedies" or the like, each Borrower hereby consents to such action by Lender and waives any claim based upon such action, even if such action by Lender shall result in a full or partial loss of any rights of subrogation which such Borrower might otherwise have had but for such action by Lender. Any election of remedies which results in the denial or impairment of the right of Lender to seek a deficiency judgment against any Borrower shall not impair any other Borrower's obligation to pay the full amount of the Obligations. In the event Lender shall bid at any foreclosure or trustee's sale or at any private sale permitted by law or the Loan Documents, Lender may bid all or less than the amount of the Obligations and the amount of such bid need not be paid by Lender but may be credited against the Obligations. The amount of the successful bid at any such sale, whether Lender or any other party is the successful bidder, shall be conclusively deemed to be the fair market value of the Collateral and the difference between such bid amount and the remaining balance of the Obligations shall be conclusively deemed to be the amount of the Obligations guaranteed under this Section 11, notwithstanding that any present or future law or court decision or ruling may have the effect of reducing the amount of any deficiency claim to which Lender might otherwise be entitled but for such bidding at any such sale. In addition, each Borrower waives all rights and defenses arising out of an election of remedies by Lender, even though the election of remedies, such as a non-judicial foreclosure with respect to security for the Obligations, has destroyed any Borrower's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the California Code of Civil Procedure or otherwise. Without limiting the generality of the foregoing, each Borrower waives any defenses or rights under or of the kind described in California Civil Code sections 2795, 2808, 2809, 2810, 2815, 2819 through 2825 (inclusive), 2832, 2839, and 2845 through 2850 (inclusive) and similar laws in other jurisdictions. (b) Each Borrower waives all rights and defenses that it may have if the Obligations are secured by real property. This means, among other things: (i) Lender may collect from such Borrower without first foreclosing on any real or personal property collateral pledged by any other Credit Party; and (ii) if Lender forecloses on any real property collateral pledged by any Credit Party (A) the amount of the Obligations may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (B) Lender may collect from such Borrower even if Lender, by foreclosing on the real property collateral, has destroyed any right such Borrower may have to collect from any other Credit Party. This is an unconditional and irrevocable waiver of any rights and defenses each Borrower may have because the Obligations are secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure. 11.6 Limitation. Notwithstanding any provision herein contained to the contrary, each Borrower's liability under this Section 11 (which liability is in any event in addition to amounts for which such Borrower is primarily liable under Section 1) shall be limited to an amount not to exceed as of any date of determination the greater of: (a) the net amount of all Loans advanced to any other Borrower under this Agreement and then re-loaned or otherwise transferred to, or for the benefit of, such Borrower; and (b) the amount which could be claimed by Lender from such Borrower under this Section 11 without rendering such claim voidable or avoidable under Section 548 of Chapter 11 of the United States Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common law after taking into account, among other things, such Borrower's right of contribution and indemnification from each other Borrower under Section 11.7. 11.7 Contribution with Respect to Guaranty Obligations. (a) To the extent that any Borrower shall make a payment under this Section 11 of all or any of the Obligations (other than Loans made to that Borrower for which it is primarily liable) (a "Guarantor Payment") which, taking into account all other Guarantor Payments then previously or concurrently made by any other Borrower, exceeds the amount which such Borrower would otherwise have paid if each Borrower had paid the aggregate Obligations satisfied by such Guarantor Payment in the same proportion that such Borrower's "Allocable Amount" (as defined below) (as determined immediately prior to such Guarantor Payment) bore to the aggregate Allocable Amounts of each of the Borrowers as determined immediately prior to the making of such Guarantor Payment, then, following indefeasible payment in full in cash of the Obligations and termination of the Commitments, such Borrower shall be entitled to receive contribution and indemnification payments from, and be reimbursed by, each other Borrower for the amount of such excess, pro rata based upon their respective Allocable Amounts in effect immediately prior to such Guarantor Payment. 18 (b) As of any date of determination, the "Allocable Amount" of any Borrower shall be equal to the maximum amount of the claim which could then be recovered from such Borrower under this Section 11 without rendering such claim voidable or avoidable under Section 548 of Chapter 11 of the United States Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common law. (c) This Section 11.7 is intended only to define the relative rights of Borrowers and nothing set forth in this Section 11.7 is intended to or shall impair the obligations of each Borrower to pay any amounts as and when the same shall become due and payable in accordance with the terms of this Agreement, including Section 11.1. Nothing contained in this Section 11.7 shall limit the liability of any Borrower to pay the Loans made directly or indirectly to that Borrower and accrued interest, Fees and expenses with respect thereto for which such Borrower shall be primarily liable. (d) The parties hereto acknowledge that the rights of contribution and indemnification hereunder shall constitute assets of Borrower to which such contribution and indemnification is owing. (e) The rights of the indemnifying Borrowers against other Credit Parties under this Section 11.7 shall be exercisable upon the full and indefeasible payment of the Obligations and the termination of Lender's obligation to extend any credit under this Agreement. 11.8 Liability Cumulative. The liability of Borrowers under this Section 11 is in addition to and shall be cumulative with all liabilities of each Borrower to Lender under this Agreement and the other Loan Documents to which such Borrower is a party or in respect of any Obligations or obligation of the other Borrower, without any limitation as to amount, unless the instrument or agreement evidencing or creating such other liability specifically provides to the contrary. 19 IN WITNESS WHEREOF, this Loan and Security Agreement has been duly executed as of the date first written above. LENDER: GENERAL ELECTRIC CAPITAL CORPORATION By_____/s/ David Klages_____________ Name: David Klages Title: Duly Authorized Signatory BORROWERS: CURIOUS PICTURES CORPORATION - --------- CHELSEA PICTURES, INC. THE END, INC. By:____/s/ James G. Gilbertson___________ Name: James G. Gilbertson Title: Chief Operating Officer of Curious Pictures, Inc. Chief Operating Officer of Chelsea Pictures, Inc. Chief Operating Officer of The End, Inc. OTHER CREDIT PARTIES: INTELEFILM CORPORATION - -------------------- DCODE, INC. HARMONY HOLDINGS, INC., FURIOUS PICTURES CORPORATION DELIRIOUS PICTURES CORPORATION THE BEGINNING ENTERTAINMENT, INC. UNSCENTED, INC. GIGANTIC ENTERTAINMENT, INC., THE MOMENT FILMS, INC. By: /s/ James G. Gilbertson Name: James G. Gilbertson Title: Chief Operating Officer of iNTELEFILM Corporation Chief Operating Officer of DCODE, Inc. Chief Operating Officer of Harmony Holdings, Inc. Chief Operating Officer of Furious Pictures Corporation Chief Operating Officer of Delirious Pictures Corporation Chief Operating Officer of The Beginning Entertainment, Inc. Chief Operating Officer of Unscented, Inc. Chief Opertating Officer of Gigantic Entertainment, Inc. Chief Operating Officer of The Moment Films, Inc. 20 SCHEDULE A DEFINITIONS Capitalized terms used in this Agreement and the other Loan Documents shall have (unless otherwise provided elsewhere in this Agreement or in the other Loan Documents) the following respective meanings: "Account Debtor" shall mean any Person who is or may become obligated with respect to, or on account of, an Account. "Accounts" shall mean all "accounts," as such term is defined in the Code, now owned or hereafter acquired by any Person, including: (i) all accounts receivable, other receivables, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper, Documents or Instruments), whether arising out of goods sold or services rendered or from any other transaction (including any such obligations which may be characterized as an account or contract right under the Code); (ii) all of such Person's rights in, to and under all purchase orders or receipts for goods or services; (iii) all of such Person's rights to any goods 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); (iv) all moneys due or to become due to such Person under all purchase orders and contracts for the sale of goods or the performance of services or both by such Person or in connection with any other transaction (whether or not yet earned by performance on the part of such Person), including the right to receive the proceeds of said purchase orders and contracts; and (v) all collateral security and guarantees of any kind given by any other Person with respect to any of the foregoing. "Accounts Payable Analysis" shall mean a certificate in the form of Exhibit D "Accounts Receivable Roll Forward Analysis" shall mean a certificate in the form of Exhibit E. "Affiliate" shall mean, with respect to any Person: (i) each other Person that, directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, ten percent (10%) or more of the Stock having ordinary voting power for the election of directors of such Person; (ii) each other Person that controls, is controlled by or is under common control with such Person or any Affiliate of such Person; or (iii) each of such Person's officers, directors, joint venturers and partners. For the purpose of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise. "Agreement" shall mean this Agreement including all appendices, exhibits or schedules attached or otherwise identified thereto, restatements and modifications and supplements thereto, and any appendices, exhibits or schedules to any of the foregoing, each as in effect at the time such reference becomes operative; provided, that except as specifically set forth in this Agreement, any reference to the Disclosure Schedules to this Agreement shall be deemed a reference to the Disclosure Schedules as in effect on the Closing Date or in a written amendment thereto executed by Borrower and Lender. "Blocked Account" and "Blocked Account Agreement" shall have the meanings assigned to such terms in Schedule D. "Books and Records" shall mean all books, records, board minutes, contracts, licenses, insurance policies, environmental audits, business plans, files, computer files, computer discs and other data and software storage and media devices, accounting books and records, financial statements (actual and pro forma), filings with Governmental Authorities and any and all records and instruments relating to the Collateral or any Borrower's business. "Borrower" and "Borrowers" shall have the meanings assigned to them in the preamble of this Agreement. "Borrowing Availability" shall mean, at any time with respect to any Borrower, the lesser of (i) the Maximum Amount less the sum of the aggregate Revolving Credit Loans attributable to the other Borrowers or (ii) such Borrower's Borrowing Base, in each case less reserves established by Lender from time to time. "Borrowing Base" shall mean at any time with respect to any Borrower, an amount equal to the sum at such time of: (a) eighty five percent (85%) of the value (as determined by Lender) of such Borrower's Eligible Accounts; provided that Lender shall reduce the foregoing percentage by one percentage point for each percentage point that the dilution of such Borrower's Accounts (calculated by Lender as the average dilution over the most recent 3 months) exceeds 5%; plus (b) one hundred percent (100%) of the value of such Borrower's Eligible Cash Collateral. "Borrowing Base Certificate" shall mean a certificate in the form of Exhibit C. 1 "Business Day" shall mean any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the State of New York. "Capital Expenditures" shall mean all payments or accruals (including Capital Lease Obligations) for any fixed assets or improvements or for replacements, substitutions or additions thereto, that have a useful life of more than one year and that are required to be capitalized under GAAP. "Capital Lease" shall mean, with respect to any Person, any lease of any property (whether real, personal or mixed) by such Person as lessee that, in accordance with GAAP, either would be required to be classified and accounted for as a capital lease on a balance sheet of such Person or otherwise would be disclosed as such in a note to such balance sheet, other than, in the case of any Borrower, any such lease under which such Borrower is the lessor. "Capital Lease Obligation" shall mean, with respect to any Capital Lease, the amount of the obligation of the lessee thereunder that, in accordance with GAAP, would appear on a balance sheet of such lessee in respect of such Capital Lease or otherwise be disclosed in a note to such balance sheet. "Cash Collateral Account" shall have the meaning assigned to it in Schedule C. "Change of Control" shall mean, with respect to any Person on or after the Closing Date, that any change in the composition of such Person's stockholders as of the Closing Date shall occur which would result in any stockholder or group acquiring 49.9% or more of any class of Stock of such Person, or that any Person (or group of Persons acting in concert) shall otherwise acquire, directly or indirectly (including through Affiliates), the power to elect a majority of the Board of Directors of such Person or otherwise direct the management or affairs of such Person by obtaining proxies, entering into voting agreements or trusts, acquiring securities or otherwise. "Charges" shall mean all Federal, state, county, city, municipal, local, foreign or other governmental taxes (including taxes owed to PBGC at the time due and payable), levies, customs or other duties, assessments, charges, liens, and all additional charges, interest, penalties, expenses, claims or encumbrances upon or relating to (i) the Collateral, (ii) the Obligations, (iii) the employees, payroll, income or gross receipts of any Credit Party, (iv) the ownership or use of any assets by any Credit Party, or (v) any other aspect of any Credit Party's business. "Chattel Paper" shall mean all "chattel paper," as such term is defined in the Code, now owned or hereafter acquired by any Person, wherever located. "Closing Date" shall mean the Business Day on which the conditions precedent set forth in Section 2 have been satisfied or specifically waived in writing by Lender, and the initial Loan has been made. "Closing Fee" shall have the meaning assigned to it in Schedule E. "Code" shall mean the Uniform Commercial Code as the same may, from time to time, be in effect in the State of California; provided, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of Lender's security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of California, the term "Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions of this Agreement relating to such attachment, perfection or priority and for purposes of definitions related to such provisions. "Collateral" shall have the meaning assigned to it in Section 6.1. "Collection Account" shall mean that certain account of Lender, account number 50-232-854 (reference number CFB 7005), in the name of GECC CAF Depository at Bankers Trust Company, 1 Bankers Trust Plaza, New York, New York, ABA number 021-001-033. "Commitment Termination Date" shall mean the earliest of (i) the Stated Expiry Date, (ii) the date Lender's obligation to advance funds is terminated pursuant to Section 7.2, or (iii) the date of indefeasible prepayment in full by Borrowers of the Obligations in accordance with the provisions of Section 1.2(c). "Contracts" shall mean all the contracts, undertakings, or agreements (other than rights evidenced by Chattel Paper, Documents or Instruments) in or under which any Person may now or hereafter have any right, title or interest, including any agreement relating to the terms of payment or the terms of performance of any Account. 2 "Contractual Obligation" shall mean 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. "Copyright License" shall mean rights under any written agreement now owned or hereafter acquired by any Person granting the right to use any Copyright or Copyright registration. "Copyrights" shall mean all of the following now owned or hereafter acquired by any Person: (i) all copyrights in any original work of authorship fixed in any tangible medium of expression, now known or later developed, all registrations and applications for registration of any such copyrights in the United States or any other country, including registrations, recordings and applications, and supplemental registrations, recordings, and applications in the United States Copyright Office; and (ii) all Proceeds of the foregoing, including license royalties and proceeds of infringement suits, the right to sue for past, present and future infringements, all rights corresponding thereto throughout the world and all renewals and extensions thereof. "Corporate Credit Party" shall mean any Credit Party that is a corporation, partnership or limited liability company. "Credit Party" shall mean each Borrower, and each other Person (other than Lender) that is or may become a party to this Agreement or any other Loan Document. "Curious" shall mean Curious Pictures Corporation, a New York corporation and a Borrower. "Default" shall mean any Event of Default or any event which, with the passage of time or notice or both, would, unless cured or waived, become an Event of Default. "Default Rate" shall have the meaning assigned to it in Section 1.5(c). "Documents" shall mean all "documents," as such term is defined in the Code, now owned or hereafter acquired by any Person, wherever located, including all bills of lading, dock warrants, dock receipts, warehouse receipts, and other documents of title, whether negotiable or non-negotiable. "Eligible Accounts" shall mean as at the date of determination with respect to any Borrower, all Accounts of such Borrower except any Account: (a) that does not arise from the sale of goods or the performance of services by such Borrower in the ordinary course of such Borrower's business; (b) upon which (i) such Borrower's right to receive payment is not absolute or is contingent upon the fulfillment of any condition whatsoever or (ii) such Borrower is not able to bring suit or otherwise enforce its remedies against the Account Debtor through judicial process; (c) against which any defense, counterclaim or setoff, whether well-founded or otherwise, is asserted or which is a "contra" Account; (d) that is not a true and correct statement of a bona fide indebtedness incurred in the amount of the Account for merchandise sold or services performed and accepted by the Account Debtor obligated upon such Account; (e) with respect to which an invoice, acceptable to Lender in form and substance, has not been sent; (f) that is not owned by such Borrower or is subject to any right, claim, or interest of another Person, other than the Lien in favor of Lender; (g) that arises from a sale to or performance of services for an employee, Affiliate, Subsidiary or Stockholder of any Borrower or any other Credit Party, or an entity which has common officers or directors with any Borrower or any other Credit Party; (h) that is the obligation of an Account Debtor that is the Federal (or local) government or a political subdivision thereof, unless Lender has agreed to the contrary in writing and such Borrower has complied with the Federal Assignment of Claims Act of 1940 (or the state equivalent thereof, if any) with respect to such obligation; (i) that is the obligation of an Account Debtor located in a foreign country unless such Account is supported by a letter of credit in which Lender has a first priority perfected security interest by possession or credit insurance acceptable to Lender (and naming Lender as loss payee); (j) that is the obligation of an Account Debtor to whom any Borrower is or may become liable for goods sold or services rendered by the Account Debtor to any Borrower, to the extent of any Borrower's liability to such Account Debtor; (k) that arises with respect to goods which are delivered on a cash-on-delivery basis or placed on consignment, guaranteed sale or other terms by reason of which the payment by the Account Debtor may be conditional; (l) that is an obligation for which the total unpaid Accounts of the Account Debtor exceed 25% of the aggregate of all Accounts, to the extent of such excess; (m) that is not paid within 60 days from its due date or 90 days from its invoice date or that are Accounts of an Account Debtor if 50% or more of the Accounts owing from such Account Debtor remain unpaid within such time periods; 3 (n) is an obligation of an Account Debtor that has suspended business, made a general assignment for the benefit of creditors, is unable to pay its debts as they become due or as to which a petition has been filed (voluntary or involuntary) under any law relating to bankruptcy, insolvency, reorganization or relief of debtors; (o) that arises from any bill-and-hold or other sale of goods which remain in any Borrower's possession or under any Borrower's control; (p) as to which Lender's interest therein is not a first priority perfected security interest; (q) to the extent that such Account exceeds any credit limit established by Lender in Lender's good faith credit judgement; (r) as to which any of such Borrower's representations or warranties pertaining to Accounts are untrue; (s) that represents interest payments, late or finance charges, or service charges owing to such Borrower; (t) that is not represented by an invoice for "final" delivered product or "overage" invoices that has, in each case, been approved by the Account Debtor; or (u) that is not otherwise acceptable in the good faith discretion of Lender, provided, that Lender shall have the right to create and adjust eligibility standards and related reserves from time to time in its good faith credit judgment. "Eligible Cash Collateral" shall mean as at the date of determination with respect to any Borrower, any cash or cash equivalents that Lender shall determine is eligible for advances, but only if such cash or cash or cash equivalents are subject to a first priority security interest in favor of Lender and under the dominion and control of Lender or in the name of Lender pursuant to such control agreements with third parties as Lender shall consider appropriate. "Environmental Laws" shall mean all Federal, state and local laws, statutes, ordinances and regulations, now or hereafter in effect, and in each case as amended or supplemented from time to time, and any applicable judicial or administrative interpretation thereof relating to the regulation and protection of human health, safety, the environment and natural resources (including ambient air, surface water, groundwater, wetlands, land surface or subsurface strata, wildlife, aquatic species and vegetation). "Environmental Liabilities" shall mean all liabilities, obligations, responsibilities, remedial actions, removal costs, losses, damages of whatever nature, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts and consultants and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim, suit, action or demand of whatever nature by any Person, and which relate to any health or safety condition regulated under any Environmental Law, environmental permits or in connection with any Release, threatened Release, or the presence of a Hazardous Material. "Equipment" shall mean all "equipment" as such term is defined in the Code, now owned or hereafter acquired by any Person, wherever located, including any and all machinery, apparatus, equipment, fittings, furniture, fixtures, motor vehicles and other tangible personal property (other than Inventory) of every kind and description which may be now or hereafter used in such Person's operations or which are owned by such Person or in which such Person may have an interest, and all parts, accessories and accessions thereto and substitutions and replacements therefor. "ERISA" shall mean the Employee Retirement Income Security Act of 1974 (or any successor legislation thereto), as amended from time to time, and any regulations promulgated thereunder. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) that, together with any Credit Party, is treated as a single employer under Section 414(b), (c), (m) or (o) of the IRC, or, solely for the purposes of Section 302 of ERISA and Section 412 of the IRC, is treated as a single employer under Section 414 of the IRC. "ERISA Event" shall mean (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the IRC or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(b) of the IRC or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by any Credit Party or any ERISA Affiliate of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by any Credit Party or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or to appoint a trustee to administer any Plan; (f) the incurrence by any Credit Party or any ERISA Affiliate of any liability with respect to any withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by any Credit Party or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from any Credit Party or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Event of Default" shall have the meaning assigned to it in Section 7.1. 4 "Fees" shall mean the fees due to Lender as set forth in Schedule E. "Financial Statements" shall mean the consolidated and consolidating income statement, balance sheet and statement of cash flows of Parent, each Borrower, and each of their Subsidiaries, internally prepared for each Fiscal Month, and audited for each Fiscal Year, prepared in accordance with GAAP. "Fiscal Month" shall mean any of the monthly accounting periods of Borrowers. "Fiscal Quarter" shall mean any of the quarterly accounting periods of Borrowers. "Fiscal Year" shall mean the 12 month period of Borrowers ending December 31 of each year. Subsequent changes of the fiscal year of Borrowers shall not change the term "Fiscal Year" unless Lender shall consent in writing to such change. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time, consistently applied. "General Intangibles" shall mean all "general intangibles," as such term is defined in the Code, now owned or hereafter acquired by any Person, including all right, title and interest which such Person may now or hereafter have in or under any Contract, Intellectual Property, interests in partnerships, joint ventures and other business associations, permits, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials, Books and Records, Goodwill (including the Goodwill associated with any Intellectual Property), all rights and claims in or under insurance policies (including insurance for fire, damage, loss, and casualty, whether covering personal property, real property, tangible rights or intangible rights, all liability, life, key-person, and business interruption insurance, and all unearned premiums), uncertificated securities, choses in action, deposit accounts, rights to receive tax refunds and other payments and rights of indemnification. "Goods" shall mean all "goods," as such term is defined in the Code, now owned or hereafter acquired by any Person, wherever located, including movables, fixtures, equipment, inventory, or other tangible personal property. "Goodwill" shall mean all goodwill, trade secrets, proprietary or confidential information, technical information, procedures, formulae, quality control standards, designs, operating and training manuals, customer lists, and distribution agreements now owned or hereafter acquired by any Person. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, and any agency, department or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranteed Indebtedness" shall mean, as to any Person, any obligation of such Person guaranteeing any indebtedness, lease, dividend, or other obligation ("primary obligations") of any other Person (the "primary obligor") in any manner, including any obligation or arrangement of such guaranteeing Person (whether or not contingent): (i) to purchase or repurchase any such primary obligation; (ii) to advance or supply funds (a) for the purchase or payment of any such primary obligation or (b) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet condition 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) to indemnify the owner of such primary obligation against loss in respect thereof. "Guarantor" shall mean each Person which executes a guaranty or a support, put or other similar agreement in favor of Lender in connection with the transactions contemplated by this Agreement. "Guaranty" shall mean any agreement to perform all or any portion of the Obligations on behalf of Borrower or any other Credit Party, in favor of, and in form and substance satisfactory to, Lender, together with all amendments, modifications and supplements thereto, and shall refer to such Guaranty as the same may be in effect at the time such reference becomes operative. "Harmony" shall mean Harmony Holdings, Inc., a Delaware corporation, and an Affiliate of Borrowers. "Hazardous Material" shall mean any substance, material or waste which is regulated by or forms the basis of liability now or hereafter under, any Environmental Laws, including any material or substance which is (a) defined as a "solid waste," "hazardous waste," "hazardous material," "hazardous substance," "extremely hazardous waste," "restricted hazardous waste," 5 "pollutant," "contaminant," "hazardous constituent," "special waste," "toxic substance" or other similar term or phrase under any Environmental Laws, (b) petroleum or any fraction or by-product thereof, asbestos, polychlorinated biphenyls (PCB's), or any radioactive substance. "Hazardous Waste" shall have the meaning ascribed to such term in the Resource Conservation and Recovery Act (42 U.S.C. ss.ss. 6901 et. seq.). "Indebtedness" of any Person shall mean: (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (including reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured, but not including obligations to trade creditors incurred in the ordinary course of business and not more than 45 days past due); (ii) all obligations evidenced by notes, bonds, debentures or similar instruments; (iii) all indebtedness created or arising under any conditional sale or other title retention agreements with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property); (iv) all Capital Lease Obligations; (v) all Guaranteed Indebtedness; (vi) all Indebtedness referred to in clauses (i), (ii), (iii), (iv) or (v) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; (vii) the Obligations; and (viii) all liabilities under Title IV of ERISA. "Indemnified Liabilities" and "Indemnified Person" shall have the meaning assigned to such terms in Section 1.11. "Index Rate" shall mean the latest rate for 30-day dealer placed commercial paper (which for purposes hereof shall mean high grade unsecured notes sold through dealers by major corporations in multiples of $1,000), which normally is published in the "Money Rates" section of The Wall Street Journal (or if such rate ceases to be so published, as quoted from such other generally available and recognizable source as Lender may select). The Index Rate shall be determined (i) on the first Business Day immediately prior to the Closing Date and (ii) thereafter, on the last Business Day of each calendar month for calculation of interest for the following month. "Instruments" shall mean all "instruments," as such term is defined in the Code, now owned or hereafter acquired by any Person, wherever located, including all certificated securities and all notes and other evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper. "Intellectual Property" shall mean any and all Licenses, Patents, Copyrights, Trademarks, trade secrets and customer lists. "Inventory" shall mean all "inventory," as such term is defined in the Code, now or hereafter owned or acquired by any Person, wherever located, including all inventory, merchandise, goods and other personal property which are held by or on behalf of such Person for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in such Person's business or in the processing, production, packaging, promotion, delivery or shipping of the same, including other supplies. "Investment Property" shall mean all "investment property," as such term is defined in the Code, now or hereafter acquired by any Person, wherever located. "IRC" and "IRS" shall mean respectively, the Internal Revenue Code of 1986 and the Internal Revenue Service, and any successors thereto. "Lender" shall mean General Electric Capital Corporation and, if at any time Lender shall decide to assign or syndicate all or any of the Obligations, such term shall include such assignee or such other members of the syndicate. "Letters of Credit" shall mean any and all commercial or standby letters of credit issued at the request and for the account of any Borrower for which Lender has incurred Letter of Credit Obligations. "Letter of Credit Fee" shall have the meaning assigned to it in Schedule E. "Letter of Credit Obligations" shall mean all outstanding obligations (including all duty, freight, taxes, costs, insurance and any other charges and expenses) incurred by Lender, whether direct or indirect, contingent or otherwise, due or not due, in connection with the issuance or guarantee, by Lender or another, of Letters of Credit, all as further set forth in Schedule C. "License" shall mean any Copyright License, Patent License, Trademark License or other license of rights or interests now held or hereafter acquired by any Person. 6 "Lien" shall mean any mortgage, security deed or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, security title, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Code or comparable law of any jurisdiction). "Litigation" shall mean any claim, lawsuit, litigation, investigation or proceeding of or before any arbitrator or Governmental Authority. "Loan Documents" shall mean this Agreement, the Notes, the Financial Statements, each Guaranty, the Power of Attorney, any lockbox or blocked account agreements, and the other documents and instruments listed in Schedule F, and all security agreements, mortgages and all other documents, instruments, certificates, and notices at any time delivered by any Person (other than Lender) in connection with any of the foregoing. "Loans" shall mean the Revolving Credit Loan including the Letter of Credit Obligations. "Material Adverse Effect" shall mean: (i) a material adverse effect on (a) the business, assets, operations, prospects or financial or other condition of any Borrower or any other Credit Party or the industry within which such Borrower or any other Credit Party operates, (b) any Borrower's or any other Credit Party's ability to pay or perform the Obligations under the Loan Documents to which such Credit Party is a party in accordance with the terms thereof, (c) the Collateral or Lender's Liens on the Collateral or the priority of any such Lien, or (d) Lender's rights and remedies under this Agreement and the other Loan Documents. "Maximum Amount" shall mean $ 7,000,000. "Minimum Actionable Amount" shall mean $100,000. "Multiemployer Plan" shall mean a "multiemployer plan," as defined in Section 4001(a) (3) of ERISA, to which Borrower, any other Credit Party or any ERISA Affiliate is making, is obligated to make, has made or been obligated to make, contributions on behalf of participants who are or were employed by any of them. "Net Borrowing Availability" shall mean at any time with respect to any Borrower, such Borrower's Borrowing Availability less the Revolving Credit Loan attributable to such Borrower. "Notes" shall mean the Revolving Credit Note and any other note delivered by any Borrower to Lender to evidence the Obligations. "Notice of Revolving Credit Advance" shall have the meaning assigned to it in Section 1.1(b). "Obligations" shall mean all loans, advances, debts, expense reimbursement, fees, liabilities, and obligations for the performance of covenants, tasks or duties or for payment of monetary amounts (whether or not such performance is then required or contingent, or amounts are liquidated or determinable) owing by any Borrower and any other Credit Party to Lender, of any kind or nature, present or future, whether or not evidenced by any note, agreement or other instrument, whether arising under any of the Loan Documents or under any other agreement between such Borrower, such Credit Party and Lender, and all covenants and duties regarding such amounts. This term includes all principal, interest (including interest accruing at the then applicable rate provided in this Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in this Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), Fees, Charges, expenses, attorneys' fees and any other sum chargeable to any Borrower under any of the Loan Documents, and all principal and interest due in respect of the Loans and all obligations and liabilities of any Guarantor under any Guaranty. "Parent" shall mean iNTELEFILM Corporation, a Minnesota corporation. "Patent License" shall mean rights under any written agreement now owned or hereafter acquired by any Person granting any right with respect to any invention on which a Patent is in existence. "Patents" shall mean all of the following in which any Person now holds or hereafter acquires any interest: (i) all letters patent of the United States or any other country, all registrations and recordings thereof, and all applications for letters patent of the United States or any other country, including registrations, recordings and applications in the United States Patent and 7 Trademark Office or in any similar office or agency of the United States, any State or Territory thereof, or any other country; and (ii) all reissues, continuations, continuations-in-part or extensions thereof. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor thereto. "Permitted Encumbrances" shall mean the following encumbrances: (i) Liens for taxes or assessments or other governmental Charges or levies, either not yet due and payable or to the extent that nonpayment thereof is permitted by the terms of Section 3.10; (ii) pledges or deposits securing obligations under worker's compensation, unemployment insurance, social security or public liability laws or similar legislation; (iii) pledges or deposits securing bids, tenders, contracts (other than contracts for the payment of money) or leases to which any Credit Party is a party as lessee made in the ordinary course of business; (iv) deposits securing public or statutory obligations of any Credit Party; (v) inchoate and unperfected workers', mechanics', or similar liens arising in the ordinary course of business so long as such Liens attach only to Equipment, fixtures or real estate; (vi) carriers', warehousemen's, suppliers' or other similar possessory liens arising in the ordinary course of business and securing indebtedness not yet due and payable in an outstanding aggregate amount not in excess of $25,000 at any time so long as such Liens attach only to Inventory; (vii) deposits of money securing, or in lieu of, surety, appeal or customs bonds in proceedings to which any Credit Party is a party; (viii) zoning restrictions, easements, licenses, or other restrictions on the use of real property or other minor irregularities in title (including leasehold title) thereto, so long as the same do not materially impair the use, value, or marketability of such real estate; (ix) Purchase Money Liens securing Purchase Money Indebtedness (or rent) to the extent permitted under Section 5(b)(vi); (x) Liens in existence on the Closing Date as disclosed on Disclosure Schedule 5(e) provided that no such Lien is spread to cover additional property after the Closing Date and the amount of Indebtedness secured thereby is not increased.; and (xi) Liens in favor of Lender securing the Obligations. "Person" shall mean any individual, sole proprietorship, partnership, limited liability partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, public benefit corporation, entity or government (whether Federal, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof), and shall include such Person's successors and assigns. "Plan" shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the IRC or Section 302 of ERISA, and in respect of which any Credit Party or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Prepayment Fee" shall mean the prepayment fee specified in Schedule E. "Proceeds" shall mean "proceeds," as such term is defined in the Code and, in any event, shall include: (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to any Borrower or any other Credit Party from time to time with respect to any Collateral; (ii) any and all payments (in any form whatsoever) made or due and payable to any Borrower or any other Credit Party from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any Collateral by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority); (iii) any claim of any Borrower or any other Credit Party against third parties (a) for past, present or future infringement of any Intellectual Property or (b) for past, present or future infringement or dilution of any Trademark or Trademark License or for injury to the goodwill associated with any Trademark, Trademark registration or Trademark licensed under any Trademark License; (iv) any recoveries by any Borrower or any other Credit Party against third parties with respect to any litigation or dispute concerning any Collateral; and (v) any and all other amounts from time to time paid or payable under or in connection with any Collateral, upon disposition or otherwise. "Projections" shall mean as of any date the consolidated and consolidating balance sheet, statements of income and cash flow for each Borrower and its Subsidiaries (including forecasted Capital Expenditures and Net Borrowing Availability) (i) by month for the next Fiscal Year, and (ii) by year for the following three Fiscal Years, in each case prepared in a manner consistent with GAAP and accompanied by senior management's discussion and analysis of such plan. "Purchase Money Indebtedness" shall mean (i) any Indebtedness incurred for the payment of all or any part of the purchase price of any fixed asset, (ii) any Indebtedness incurred for the sole purpose of financing or refinancing all or any part of the purchase price of any fixed asset, and (iii) any renewals, extensions or refinancings thereof (but not any increases in the principal amounts thereof outstanding at that time). "Purchase Money Lien" shall mean any Lien upon any fixed assets which secures the Purchase Money Indebtedness related thereto but only if such Lien shall at all times be confined solely to the asset the purchase price of which was financed or refinanced through the incurrence of the Purchase Money Indebtedness secured by such Lien and only if such Lien secures only such Purchase Money Indebtedness. 8 "Real Property" shall have the meaning assigned to it in Section 3.15. "Release" shall mean, as to any Person, any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials in the indoor or outdoor environment by such Person, including the movement of Hazardous Materials through or in the air, soil, surface water, ground water or property. "Requirement of Law" shall mean as to any Person, the Certificate or Articles of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case binding upon such Person or any of its property or to which such Person or any of its property is subject. "Restricted Payment" shall mean: (i) the declaration or payment of any dividend or the incurrence of any liability to make any other payment or distribution of cash or other property or assets on or in respect of any Borrower's or any other Credit Party's Stock; (ii) any payment or distribution made in respect of any subordinated Indebtedness of any Borrower or any other Credit Party in violation of any subordination or other agreement made in favor of Lender; (iii) any payment on account of the purchase, redemption, defeasance or other retirement of any Borrower's or any other Credit Party's Stock or Indebtedness or any other payment or distribution made in respect of any thereof, either directly or indirectly; other than (a) that arising under this Agreement or (b) interest and principal, when due without acceleration or modification of the amortization as in effect on the Closing Date, under Indebtedness (not including subordinated Indebtedness, payments of which shall be permitted only in accordance with the terms of the relevant subordination agreement made in favor of Lender) described in Disclosure Schedule (5(b)) or otherwise permitted under Section 5(b)(vi); or (iv) any payment, loan, contribution, or other transfer of funds or other property to any other Borrower or to any Stockholder or Affiliate of such Person, which is not expressly and specifically permitted in this Agreement; provided, that no payment to Lender shall constitute a Restricted Payment. "Revolving Credit Advance" shall have the meaning assigned to it in Section 1.1(a). "Revolving Credit Loan" shall mean at any time the sum of (i) the aggregate amount of Revolving Credit Advances then outstanding, plus (ii) the total Letter of Credit Obligations incurred by Lender and outstanding at such time, plus (iii) the amount of accrued but unpaid interest thereon and Letter of Credit Fees with respect thereto. "Revolving Credit Note" shall mean each promissory note dated the Closing Date, executed by a Borrower substantially in the form of Exhibit F. "Revolving Credit Rate" shall have the meaning assigned to it in Section 1.5(a). "Stated Expiry Date" shall mean July, 2003; provided that the Stated Expiry Date shall automatically be extended for two (2) consecutive one (1) year periods, the first of which shall commence on the third (3rd) anniversary of the date of this Agreement and, if so extended for such first one year period, the second of which shall commence on the fourth (4th) anniversary of the date of this Agreement, unless, in each case, prior to the then-current Stated Expiry Date (a) Borrowers provide written notice to Lender not less than ninety (90) days prior to the then current Stated Expiry Date that Borrowers have elected not to extend the then current Stated Expiry Date, or (b) Lender provides written notice to any Borrower not less than ninety (90) days prior to the then current Stated Expiry Date that Lender has elected not to extend the then current Stated Expiry Date. The foregoing notwithstanding, the Sated Expiry Date shall not be extended if, as of the then current Stated Expiry Date, a Default shall have occurred and is continuing. Nothing contained herein shall be deemed to be a commitment by Lender to extend the Stated Expiry Date at any time in effect. The Stated Expiry Date shall in no event be later than the fifth (5th) anniversary of the date of this Agreement. "Stock" shall mean all certificated and uncertificated shares, options, warrants, membership interests, general or limited partnership interests, participation or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934). "Stockholder" shall mean each holder of Stock of any Borrower or any other Credit Party. "Subsidiary" shall mean, with respect to any Person, (i) any corporation of which an aggregate of more than 50% of the outstanding Stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, Stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned legally or beneficially by such Person and/or one 9 or more Subsidiaries of such Person, or with respect to which any such Person has the right to vote or designate the vote of 50% or more of such Stock whether by proxy, agreement, operation of law or otherwise, and (ii) any partnership or limited liability company in which such Person or one or more Subsidiaries of such Person has an equity interest (whether in the form of voting or participation in profits or capital contribution) of more than 50% or of which any such Person is a general partner or manager or may exercise the powers of a general partner or manager. "Taxes" shall mean taxes, levies, imposts, deductions, Charges or withholdings, and all liabilities with respect thereto, excluding taxes imposed on or measured by the net income of Lender. "Termination Date" shall mean the date on which all Obligations under this Agreement are indefeasibly paid in full, in cash (other than amounts in respect of Letter of Credit Obligations if any, then outstanding, provided that Borrowers shall have funded such amounts in cash in full into the Cash Collateral Account), and Borrowers shall have no further right to borrow any moneys or obtain other credit extensions or financial accommodations under this Agreement. "Trademark License" shall mean rights under any written agreement now owned or hereafter acquired by any Person granting any right to use any Trademark or Trademark registration. "Trademarks" shall mean all of the following now owned or hereafter acquired by any Person: (i) all trademarks, trade names, corporate names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, including all registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State or Territory thereof, or any other country or any political subdivision thereof, and (ii) all reissues, extensions or renewals thereof. "Unused Line Fee" shall have the meaning assigned to it in Schedule E. "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. Any accounting term used in this Agreement or the other Loan Documents shall have, unless otherwise specifically provided therein, the meaning customarily given such term in accordance with GAAP, and all financial computations thereunder shall be computed, unless otherwise specifically provided therein, in accordance with GAAP consistently applied; provided, that all financial covenants and calculations in the Loan Documents shall be made in accordance with GAAP as in effect on the Closing Date unless Borrower and Lender shall otherwise specifically agree in writing. That certain items or computations are explicitly modified by the phrase "in accordance with GAAP" shall in no way be construed to limit the foregoing. All other undefined terms contained in this Agreement or the other Loan Documents shall, unless the context indicates otherwise, have the meanings provided for by the Code. The words "herein," "hereof" and "hereunder" or other words of similar import refer to this Agreement as a whole, including the exhibits and schedules thereto, as the same may from time to time be amended, modified or supplemented, and not to any particular section, subsection or clause contained in this Agreement. For purposes of this Agreement and the other Loan Documents, the following additional rules of construction shall apply, unless specifically indicated to the contrary: (a) wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural,; (d) all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations; and (e) all references to any instruments or agreements, including references to any of the Loan Documents, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. 10 SCHEDULE B ADDRESSES FOR NOTICES Lender's Address: - ---------------- Name: General Electric Capital Corporation Address: 6701 Center Drive West, Suite 520 Los Angeles, CA 90045 Att'n: iNTELEFILM Corporation - Account Manager Telephone: (310) 417-7651 Facsimile: (310) 417-7673 Borrowers' Address: - ------------------ Name: Curious Pictures Corporation Chelsea Pictures, Inc. The End, Inc. Address: 5501 Excelsior Blvd. Minneapolis, MN 55416 Att'n: Christopher T. Dahl, Chief Executive Officer Telephone: 612-925-8888 Facsimile: 612-926-7946 Other Credit Parties' Address: - ----------------------------- Name: iNTELEFILM Corporation DCODE, Inc. Harmony Holdings, Inc. Furious Pictures Corporation Delirious Pictures Corporation The Beginning Entertainment, Inc. Unscented, Inc. Gigantic Entertainment, Inc. The Moment Films, Inc. Address: 5501 Excelsior Blvd. Minneapolis, MN 55416 Att'n: Christopher T. Dahl, Chief Executive Officer Telephone: 612-925-8888 Facsimile: 612-926-7946 1 SCHEDULE C LETTERS OF CREDIT 1. Lender agrees, subject to the terms and conditions hereinafter set forth, to incur Letter of Credit Obligations in respect of the issuance of Letters of Credit issued on terms acceptable to Lender and supporting obligations of each Borrower incurred in the ordinary course of such Borrower's business, in order to support the payment of such Borrower's inventory purchase obligations, insurance premiums, or utility or other operating expenses and obligations, as requested by such Borrower by written notice to Lender that is received by Lender not less than five Business Days prior to the requested date of issuance of any such Letter of Credit; provided, that: (a) that the aggregate amount of all Letter of Credit Obligations in favor of the Borrowers at any one time outstanding (whether or not then due and payable) shall not exceed $500,000; (b) no Letter of Credit shall have an expiry date which is later than the Stated Expiry Date or one year following the date of issuance thereof; and (c) Lender shall be under no obligation to incur any Letter of Credit Obligation for the account of any Borrower if after giving effect to the incurrence of such Letter of Credit Obligation, the Net Borrowing Availability of such Borrower would be less than zero. The maximum amount payable in respect of each Letter of Credit requested by any Borrower will be guaranteed by Lender in favor of the issuing bank under terms of a separate agreement between Lender and the issuing bank. Each Borrower will enter into an application and agreement for such Letter of Credit with the issuing bank selected by Lender (which may be an Affiliate of Lender). The bank that issues any Letter of Credit pursuant to this Agreement shall be determined by Lender in its sole discretion. 2. The notice to be provided to Lender requesting that Lender incur Letter of Credit Obligations shall be in the form of a Letter of Credit application in the form customarily employed by the issuing bank, together with a written request by the applicable Borrower and the bank that Lender approve such Borrower's application. Upon receipt of such notice Lender shall establish a reserve against such Borrower's Borrowing Availability in the amount of 100% of the face amount of the Letter of Credit Obligation to be incurred. Approval by Lender in the written form agreed upon between Lender and the issuing bank (a) will authorize the bank to issue the requested Letter of Credit, and (b) will conclusively establish the existence of the Letter of Credit Obligation as of the date of such approval. 3. In the event that Lender shall make any payment on or pursuant to any Letter of Credit Obligation, Borrowers shall be unconditionally obligated to reimburse Lender therefor, and such payment shall then be deemed to constitute a Revolving Credit Advance in favor of such Borrower. For purposes of computing interest under Section 1.5, a Revolving Credit Advance made in satisfaction of a Letter of Credit Obligation shall be deemed to have been made as of the date on which the issuer or endorser makes the related payment under the underlying Letter of Credit. 4. In the event that any Letter of Credit Obligations, whether or not then due or payable, shall for any reason be outstanding on the Commitment Termination Date, the applicable Borrower will either (a) cause the underlying Letter of Credit to be returned and canceled and each corresponding Letter of Credit Obligation to be terminated, or (b) pay to Lender, in immediately available funds, an amount equal to 105% of the maximum amount then available to be drawn under all Letters of Credit in favor of such Borrower not so returned and canceled to be held by Lender as cash collateral in an account under the exclusive dominion and control of Lender (the "Cash Collateral Account"). 5. In the event that Lender shall incur any Letter of Credit Obligations in favor of any Borrower, such Borrower agrees to pay the Letter of Credit Fee to Lender as compensation to Lender for incurring such Letter of Credit Obligations. In addition, such Borrower shall reimburse Lender for all fees and charges paid by Lender on account of any such Letters of Credit or Letter of Credit Obligations to the issuing bank. 6. Each Borrower's Obligations to lender with respect to any Letter of Credit or Letter of Credit Obligation shall be evidenced by Lender's records and shall be absolute, unconditional and irrevocable and shall not be affected, modified or impaired by (a) any lack of validity or enforceability of the transactions contemplated by or related to such Letter of Credit or Letter of Credit Obligation; (b) any amendment or waiver of or consent to depart from all or any of the terms of the transactions contemplated by or related to such Letter of Credit or Letter of Credit Obligation; (c) the existence of any claim, set-off, defense or other right which any Borrower or any other Credit Party may have against Lender, the issuer or beneficiary of such Letter of Credit, or any other Person, whether in connection with this Agreement, any other Loan Document or such Letter of Credit or the transactions contemplated thereby or any unrelated transactions; or (d) the fact that any draft, affidavit, letter, certificate, invoice, bill of lading or other document presented under or delivered in connection with such Letter of Credit or any other Letter of Credit proves to have been forged, fraudulent, invalid or insufficient in any respect or any statement therein proves to have been untrue or incorrect in any respect. 1 7. In addition to any other indemnity obligations which any Borrower may have to Lender under this Agreement and without limiting such other indemnification provisions, Each Borrower hereby agrees to indemnify Lender from and to hold Lender harmless against any and all claims, liabilities, losses, costs and expenses (including, attorneys' fees and expenses) which Lender may (other than as a result of its own gross negligence or willful misconduct) incur or be subject to as a consequence, directly or indirectly, of (a) the issuance of or payment of or failure to pay under any Letter of Credit or Letter of Credit Obligation or (b) any suit, investigation or proceeding as to which Lender is or may become a party as a consequence, directly or indirectly, of the issuance of any Letter of Credit, the incurring of any Letter of Credit Obligation or any payment of or failure to pay under any Letter of Credit or Letter of Credit Obligation. The obligations of each Borrower under this paragraph shall survive any termination of this Agreement and the payment in full of the Obligations. 8. Each Borrower hereby assumes all risks of the acts, omissions or misuse of each Letter of Credit by the beneficiary or issuer thereof and, in connection therewith, Lender shall not be responsible (a) for the validity, sufficiency, genuineness or legal effect of any document submitted in connection with any drawing under any Letter of Credit even if it should in fact prove in any respect to be invalid, insufficient, inaccurate, untrue, fraudulent or forged; (b) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or any rights or benefits thereunder or any proceeds thereof, in whole or in part, even if it should prove to be invalid or ineffective for any reason; (c) for the failure of any issuer or beneficiary of any Letter of Credit to comply fully with the terms thereof, including the conditions required in order to effect or pay a drawing thereunder; (d) for any errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, telecopy, telex or otherwise; (e) for any loss or delay in the transmission or otherwise of any document or draft required in order to make a drawing under any Letter of Credit; or (f) for any consequences arising from causes beyond the direct control of Lender. 2 SCHEDULE D CASH MANAGEMENT Borrowers agree to establish, and to maintain, until the Termination Date, the cash management system described below: 1. No Corporate Credit Party: (i) shall (nor shall it permit any of its Subsidiaries, other than webADTV and its Subsidiaries, to) open or maintain any deposit, checking, operating or other bank account, or similar money handling account, with any bank or other financial institution except for those accounts identified in Attachment I hereto (to include a petty cash account not to exceed $100,000 during any Fiscal Month, and a payroll account not to exceed an amount equal to one regular payroll at any time); and (ii) shall close or permit to be closed any of the accounts listed in Attachment I hereto, in each case without Lender's prior written consent, and then only after such Credit Party has implemented agreements with such bank or financial institution and Lender acceptable to Lender. 2. Commencing on the Closing Date and until the Termination Date, each Corporate Credit Party shall cause to be deposited directly all cash, checks, notes, drafts or other similar items relating to or constituting proceeds of or payments made in respect of any and all Collateral into the blocked account in such Credit Party's name (collectively, the "Blocked Accounts") set forth in paragraph 1 of Attachment I hereto. 3. On or before the Closing Date, each bank at which the Blocked Accounts are held shall have entered into tri-party blocked account agreements (the "Blocked Account Agreements") with Lender and the applicable Credit Party, in form and substance acceptable to Lender. Each such Blocked Account Agreement shall provide, among other things, that (a) such bank executing such agreement has no rights of setoff or recoupment or any other claim against such Blocked Account, other than for payment of its service fees and other charges directly related to the administration of such account, and (b) such bank agrees to sweep on a daily basis all amounts in the Blocked Account to the Collection Account. 4. On the Closing Date, (a) the blocked account arrangements shall immediately become operative at the banks at which the Blocked Accounts are maintained, and (b) amounts outstanding under the Revolving Credit Loan (for purposes of the Borrowing Availability) shall be reduced through daily sweeps, by wire transfer, of the Blocked Accounts into the Collection Account. Borrowers acknowledge that they shall have no right to gain access to any of the moneys in the Blocked Accounts until after the Termination Date. 5. Each Borrower may maintain, in its name, accounts (the "Disbursement Accounts") at a bank or banks acceptable to Lender into which Lender shall, from time to time, deposit proceeds of Revolving Credit Advances made pursuant to Section 1.1 for use solely in accordance with the provisions of Section 1.3. All of the Disbursement Accounts as of the Closing Date are listed in paragraph 2 of Attachment I hereto. 6. Upon the request of Lender, each Corporate Credit Party shall forward to Lender, on a daily basis, evidence of the deposit of all items of payment received by such Credit Party into the Blocked Accounts and copies of all such checks and other items, together with a statement showing the application of those items relating to payments on Accounts to outstanding Accounts and a collection report with regard thereto in form and substance satisfactory to Lender. 1 ATTACHMENT TO SCHEDULE D LIST OF BANK ACCOUNTS (Note: The name of the Borrower holding the particular account must be listed.) 1. Blocked Accounts. ---------------- See attached. 2. Disbursement Accounts. ---------------------- See attached. 3. Petty Cash Account. (not to exceed $100,000). ------------------- See attached. 4. Payroll Account (not to exceed one regular payroll). --------------- See attached. 2 SCHEDULE E FEES 1. UNUSED LINE FEE: For each day from the Closing Date, and through and including the Termination Date, an amount equal to the Maximum Amount less the Revolving Credit Loan for such day multiplied by .50%, the product of which is then divided by 360. The Unused Line Fee for each month (except for the month in which the Termination Date occurs) is payable on the first day of each calendar month following the Closing Date; the final monthly installment of the Unused Line Fee is payable on the Termination Date. Notwithstanding the foregoing, any unpaid Unused Line Fee is immediately due and payable on the Commitment Termination Date. 2. LETTER OF CREDIT FEE: For each day for which Lender maintains Letter of Credit Obligations outstanding, an amount equal to the amount of the Letter of Credit Obligations outstanding on such day, multiplied by 2%, the product of which is then divided by 360. The Letter of Credit Fee incurred for each month is payable at the same time each payment of the Unused Line Fee is due. Notwithstanding the foregoing, any unpaid Letter of Credit Fee is immediately due and payable on the Commitment Termination Date. 3. CLOSING FEE: A non-refundable closing fee of $35,000, payable and fully earned at closing (the "Closing Fee"). 4. PREPAYMENT FEE: For the Revolving Credit Loan, an amount equal to the each Borrower's Maximum Amount multiplied by: 2% if Lender's obligation to make further Revolving Credit Advances or incur additional Letter of Credit Obligations is terminated (voluntarily by Borrowers, upon Default or otherwise) on or after the Closing Date and on or before the first anniversary of the Closing Date, payable on the Commitment Termination Date; 1% if Lender's obligation to make further Revolving Credit Advances or incur additional Letter of Credit Obligations is terminated (voluntarily by Borrowers, upon Default or otherwise) after the first anniversary of the Closing Date and on or before the second anniversary of the Closing Date, payable on the Commitment Termination Date; or 1% if Lender's obligation to make further Revolving Credit Advances or incur additional Letter of Credit Obligations is terminated (voluntarily by Borrowers, upon Default or otherwise) after the second anniversary of the Closing Date and on or before the Stated Expiry Date then in effect, payable on the Commitment Termination Date. Each Borrower acknowledges and agrees that (i) it would be difficult or impractical to calculate Lender's actual damages from early termination of Lender's obligation to make further Revolving Credit Advances and incur additional Letter of Credit Obligations for any reason pursuant to Section 1.2(c) or Section 7.2, (ii) the Prepayment Fees provided above are intended to be fair and reasonable approximations of such damages, and (iii) the Prepayment Fees are not intended to be penalties. 5. AUDIT FEES: Borrowers jointly and severally agree to reimburse Lender at the rate of $750 per person per day, plus out of pocket expenses, for the audit reviews, field examinations and collateral examinations conducted by Lender. 1 SCHEDULE F SCHEDULE OF DOCUMENTS The obligation of Lender to make the initial Revolving Credit Advances and extended other credit is subject to satisfaction of the condition precedent that Lender shall have received the following, each, unless otherwise specified below or the context otherwise requires, dated the Closing Date, in form and substance satisfactory to Lender and its counsel: A. PRINCIPAL LOAN DOCUMENTS 1. Agreement. The Loan and Security Agreement duly executed by each Credit Party. 2. Revolving Credit Note. Duly executed Revolving Credit Note to the order of Lender evidencing the Loan duly executed by each Borrower. 3. Borrowing Base Certificates. Original Borrowing Base Certificates for each Borrower duly executed by a responsible officer of such Borrower. 4. Notice of Revolving Credit Advance. An original Notice of Revolving Credit Advance for each Borrower duly executed by a responsible officer of such Borrower. B. COLLATERAL DOCUMENTS. 1. Acknowledgment Copies of Financing Statements. Acknowledgment copies of proper Financing Statements (Form UCC-l) (the "Financing Statements") duly filed under the Code in all jurisdictions as may be necessary or, in the opinion of Lender, desirable to perfect Lender's Lien on the Collateral. 2. UCC Searches. Certified copies of UCC Searches, or other evidence satisfactory to Lender, listing all effective financing statements which name any Credit Party (under present name, any previous name or any trade or doing business name) as debtor and covering all jurisdictions referred to in paragraph (1) immediately above, together with copies of such other financing statements. 3. Intellectual Property Documents if Required by Lender. Intellectual Property Security Agreement executed by each Credit Party, in the form attached hereto as Exhibit U, or in a form suitable for filing with the appropriate Federal filing office. 4. Other Recordings and Filings. Evidence of the completion of all other recordings and filings (including UCC-3 termination statements and other Lien release documentation) as may be necessary or, in the opinion of and at the request of Lender, desirable to perfect Lender's Lien on the Collateral and ensure such Collateral is free and clear of other Liens. 5. Power of Attorney. Powers of Attorney duly executed by each Credit Party executing the Agreement C. THIRD PARTY AGREEMENTS. 1. Landlord Consents. Unless otherwise agreed to in writing by Lender, duly executed landlord waivers and consents from the landlords of each Credit Party's leased locations where Collateral is held, in each case, in the form attached here to as Exhibit L or in a form and substance satisfactory to Lender. 2. Cash Management System. Duly executed Blocked Account Agreements and Pledged Account Agreements for each Credit Party. 3. Guarantees. Guarantee executed by each non-Borrower Credit Party in the form attached hereto as Exhibit N. 4 Intercreditor Agreements. Intercreditor and Subordination Agreements in the form attached hereto as Exhibit P executed by such Persons as may be required by Lender. 5. Opinion Letter. Opinion letter of counsel to Borrowers and each other Credit Party. 6. Stock Pledge Agreement. Stock Pledge Agreement, in the form attached hereto as Exhibit T, together with the original stock certificates endorsed in blank or by separate stock power for each Credit Party other than Parent. [to be added after review of corporate chart] D. OTHER DOCUMENTS. 1. Secretary Certificate. A Secretary Certificate in the form of Exhibit H to the Agreement duly completed and executed by the Secretary of each Credit Party, together with all attachments thereto. 2. Environmental Audit. Copies of all existing environmental reviews and audits and other information pertaining to actual or potential environmental claims relating to the Collateral and Borrowers or other Credit Parties, as Lender may require. 3. Financial Statements and Projections. Copies of the Financial Statements and Projections, which Projections shall include a capital expenditures budget for Parent and its Subsidiaries and for each Borrower, in form and substance satisfactory to Lender. 4. Insurance Policies. Certified copies of insurance policies described in Section 3.16, together with evidence showing loss payable or additional insured clauses or endorsements in favor of Lender. 5. Existing Lease Agreements. Copies of any existing real property leases and equipment leases to which any Borrower is a party and any other document or instrument evidencing or relating to existing Indebtedness of any Borrower, together with 1 all certificates, opinions, instruments, security documents and other documents relating thereto, all of which shall be satisfactory in form and substance to Lender, certified by an authorized officer of each Borrower as true, correct and complete copies thereof. 6. Consent Letter. A Consent Letter between Lender and Credit Parties. 7. Payment of Proceeds Letter. Payment of Proceeds letter in the form attached hereto as Exhibit O. 8. Open Items Agreement. An Open Items Agreement regarding any matters left for resolution after the Closing Date. 2 SCHEDULE G FINANCIAL COVENANTS 1. Minimum EBITDA. The aggregate cumulative negative EBITDA of Parent and its Subsidiaries, commencing with the period beginning January 1, 2000 and ending on December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003, or December 31, 2004 shall not exceed six million dollars ($6,000,000). For purposes of this covenant in this Schedule G, the following terms shall have the following meanings: "EBITDA" shall mean, for any period, the Net Income (Loss) of Borrowers and their Subsidiaries, excluding webADTV.com, Inc. and its Subsidiaries, on a consolidated basis for such period, plus interest expense, income tax expense, amortization expense, depreciation expense, non-cash stock option compensation, and extraordinary losses, and minus extraordinary gains, in each case, of Borrowers and their Subsidiaries on a consolidated basis for such period determined in accordance with GAAP to the extent included in the determination of such Net Income (Loss). "Net Income (Loss)" shall mean with respect to any Person and for any period, the aggregate net income (or loss) after taxes of such Person for such period, determined in accordance with GAAP. 2. Minimum Tangible Net Worth. Parent shall maintain, as at the end of each Fiscal Quarter, Tangible Net Worth of Parent and its Subsidiaries on a consolidated basis for such Fiscal Quarter of not less than $4,000,000. For purpose of this covenant in this Schedule G the following terms shall have the meanings set forth below: "Tangible Net Worth" shall mean, with respect to any Person, at any date, the total assets (excluding any assets attributable to any issuances by such Person of any Stock after the Closing Date and excluding any intangible assets) minus the total liabilities, in each case, of such Person at such date determined in accordance with GAAP. 3. Capital Expenditures. Parent and its Subsidiaries on a consolidated basis (a) shall not make aggregate Capital Expenditures for the period from August 1, 2000 through December 31, 2000 in excess of $ 1,750,000, (b) shall not make aggregate Capital Expenditures in any Fiscal Year in excess of $ 1,750,000 and (c) from and after the Closing Date, shall finance not less than 70% of their aggregate Capital Expenditures in any Fiscal Year through the incurrence of Indebtedness (other than the Revolving Credit Loan); provided, that, for purposes of this covenant in this Schedule G, "Subsidiaries" shall not include webADTV.com, Inc. and its Subsidiaries. 1 EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-2000 SEP-30-2000 5,682,127 0 3,137,156 (38,458) 0 11,434,573 7,281,902 (2,906,532) 24,220,264 8,435,587 1,904,732 0 0 130,227 14,596,417 24,220,264 51,188,954 51,188,954 42,730,649 51,950,372 5,172,393 (38,458) 513,276 (5,753,388) 51,358 (5,804,746) 0 0 0 (5,804,746) (0.91) (0.91)
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