-----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, DFdW3gCon8meCERIfJ1Tmd+uVL1VLLl5+4XwoKo0KBH04fTulZuuO+w7hSQYOp7w 7Xt/kTU6VbrDBYCD8JBTOg== 0000950148-96-000819.txt : 19960724 0000950148-96-000819.hdr.sgml : 19960724 ACCESSION NUMBER: 0000950148-96-000819 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOVE AUDIO INC CENTRAL INDEX KEY: 0000930436 STANDARD INDUSTRIAL CLASSIFICATION: 3652 IRS NUMBER: 954015834 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24984 FILM NUMBER: 96564475 BUSINESS ADDRESS: STREET 1: 301 N CANON DR STE 207 CITY: BEVERLY HILLS STATE: CA ZIP: 90210 BUSINESS PHONE: 3102737722 MAIL ADDRESS: STREET 1: 301 NORTH CANNON DR SUITE 207 CITY: BEVERLY HILLS STATE: CA ZIP: 90210 10QSB 1 QUARTERLY REPORT FOR PERIOD ENDED 3/31/96 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-24984 DOVE AUDIO, INC. Exact name of registrant as specified in its charter) California 95-4015834 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 301 N. Canon Drive, Suite 207, Beverly Hills, California 90210 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (310) 273-7722 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS State the numbers of shares outstanding of each of the registrant's classes of common equity, as of the latest practicable date: 4,884,166 Transitional Small Business Disclosure Format (Check one): Yes No X --- --- 2 PART I FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS DOVE AUDIO, INC. Consolidated Balance Sheet March 31, 1996 ASSETS CURRENT ASSETS Cash and cash equivalents 5,052,000 Marketable securities 377,000 Accounts receivable, net of allowances of $2,181,000 2,356,000 Inventory 4,006,000 Prepaid expenses and other assets 150,000 Deferred tax asset - Note 5 223,000 ------------ Total current assets 12,174,000 PRODUCTION MASTERS - Note 3 3,055,000 FILM COSTS, net - Note 4 1,060,000 PROPERTY AND EQUIPMENT 2,767,000 ------------ Total assets $19,056,000 ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 1,927,000 Notes payable - Note 6 1,937,000 Royalties payable 301,000 Advances and deferred income 389,000 ------------ Total current liabilities 4,554,000 COMMITMENTS AND CONTINGENCIES - Note 8 - SHAREHOLDERS' EQUITY - Note 9 Preferred stock .01 par value; 2,000,000 shares authorized and 214,113 shares, Series A, issued and outstanding 856,000 Common stock .01 par value; 20,000,000 shares authorized and 4,884,166 issued and outstanding 49,000 Additional paid-in capital 14,761,000 Accumulated deficit (1,164,000) ------------ Total shareholders' equity 14,502,000 ----------- Total liabilities and shareholders' equity $19,056,000 ===========
See accompanying notes to consolidated financial statements. 1 3 DOVE AUDIO, INC. Consolidated Statements of Income
For the Quarters Ended March 31, -------------------------------- 1996 1995 ------------ ------------- REVENUES - Note 10 Publishing, Net $4,138,000 $2,190,000 Film 3,259,000 28,000 ---------- ---------- 7,397,000 2,218,000 COST OF SALES 2,886,000 1,335,000 FILM AMORTIZATION 2,435,000 - ---------- ---------- 2,076,000 883,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Note 7 1,292,000 811,000 ---------- ---------- Income from operations 784,000 72,000 NET INTEREST INCOME (EXPENSE) 48,000 (19,000) Income before income taxes 832,000 53,000 PROVISION FOR INCOME TAXES - Note 5 $ 331,000 20,000 Net income $ 501,000 $ 33,000 ========== ========== Net income per share $ .10 $ .01 ========== ========== Weighted average number of shares outstanding 5,263,000 3,934,000 ========== ==========
See accompanying notes to consolidated financial statements. 2 4 DOVE AUDIO, INC. Consolidated Statements of Cash Flows
For the Quarters Ended -------------------------------- March 31, -------------------------------- 1996 1995 ----------- ------------ OPERATING ACTIVITIES Net income $ 501,000 $ 33,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 56,000 15,000 Amortization of production masters 1,031,000 274,000 Amortization of film costs 2,435,000 - Changes in operating assets and liabilities Accounts receivable (749,000) 2,808,000 Deferred tax asset (3,000) 20,000 Inventory (301,000) (198,000) Film costs (344,000) (100,000) Expenditures for production masters (1,328,000) (537,000) Prepaid expenses and other assets 452,000 (8,000) Accounts payable and accrued expenses (210,000) (18,000) Royalties payable (40,000) (54,000) Income taxes - (162,000) Advances and deferred revenue (2,561,000) (328,000) ----------- ------------ Net cash provided by (used in) operating activities (1,061,000) 1,745,000 ----------- ------------ INVESTING ACTIVITIES Purchase of marketable securities (214,000) - Purchases of property and equipment (117,000) (58,000) ----------- ------------ Net cash used in investing activities (331,000) (58,000) FINANCING ACTIVITIES Proceeds from sale of common stock 1,498,000 729,000 Proceeds of bank borrowings - 500,000 Repayments of notes payable - (1,004,000) ----------- ------------ Net cash provided by financing activities 1,498,000 225,000 ----------- ------------ Net increase in cash and cash equivalent 106,000 1,912,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF QUARTER 4,946,000 503,000 ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF QUARTER $ 5,052,000 $ 2,415,000 =========== ============ SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest Cash paid for income taxes $ 7,000 $ 33,000 -- $ 245,000
See accompanying notes to consolidated financial statements. 3 5 DOVE AUDIO, INC. Notes to Consolidated Financial Statements NOTE 1 - BASIS OF PRESENTATION, ORGANIZATION AND BUSINESS The accompanying consolidated financial statements of Dove Audio, Inc. ("the Company") are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995. In the opinion of management, the accompanying consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation. The results of operations for the three month period ended March 31, 1996 are not necessarily indicative of results to be expected for the full fiscal year. Dove Audio, Inc. is engaged in the business of producing and distributing books on tape (audio books). The Company acquires audio publishing rights for specific titles or groups of titles on a worldwide basis, in perpetuity and often including interactive media applications. The Company is also engaged in the publication of printed books; the development and production of movies-for-television, mini-series and videos; and the acquisition and distribution of feature films. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES Production Masters Production masters are stated at cost net of accumulated amortization. Costs incurred for production masters, including non-refundable advances, royalties paid to authors and readers, as well as recording and design costs, are capitalized and amortized over a two-year period from the time a title is initially distributed, consistent with the estimated revenue for a title. For audio and printed book titles released prior to January 1, 1996, this has generally resulted in amortization of approximately 80% of a title's production master costs in the initial quarter of release, with the remaining 20% amortized in the fifth quarter of release. Based on management's current estimates with respect to the timing of revenues, audio titles released on or after January 1, 1996 are amortized on a quarter-by-quarter basis over a two year period. This will result in approximately 80% of such an audio title's production master cost being amortized in the initial year of release. The effect of this change on the first quarter of 1996 was to reduce the production master amortization component of Cost of Sales by approximately $236,000. The amortization of printed books remains unchanged. Any portion of production masters which are not estimated to be fully recoverable from future revenues are charged to amortization expense in the period in which the loss becomes evident. 4 6 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) NOTE 3 - PRODUCTION MASTERS Production masters, net of accumulated amortization of $7,419,000 at March 31, 1996 consisted of the following: Released titles $1,164,000 ---------- Unreleased titles 1,891,000 ---------- Total $3,055,000 ==========
NOTE 4 - FILM COSTS The following is an analysis of film costs as of March 31, 1996: Non Current: Television and theatrical films released less accumulated film amortization $2,058,000 ---------- $ (998,000) ---------- $1,060,000 ========== As of March 31, 1996 all net film costs will be amortized within the next three year period based upon the Company's current revenue estimates. NOTE 5 - INCOME TAXES Income taxes are computed in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The Company provides for income taxes during interim reporting periods based upon an estimate of its annual effective tax rate. This estimate includes all anticipated federal, state and foreign income taxes. 5 7 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) NOTE 6 - NOTES PAYABLE Notes payable at March 31, 1996 consist of the following: Mortgage Note $1,900,000 Other notes payable 37,000 ---------- $1,937,000 ==========
See "Liquidity and Capital Resources" NOTE 7 - RELATED PARTY TRANSACTIONS As of January 1, 1993, the Company entered employment agreements with two principal shareholders/officers which expire in December 1999. The agreements provide for aggregate compensation of no less than $275,000 each per year with certain provisions, including an indemnification and benefits such as health insurance and an automobile allowance. In addition, the majority shareholders/officers are entitled to an annual salary increase and bonus subject to certain limitations agreed upon with the underwriter of the Initial Public Offering at the discretion of the Company's Board of Directors. The Board of Directors approved an annual salary increase for the principal shareholders/officers to a combined total of $345,000 per year for 1995. Potential increases to the annual salary of the two principal shareholders/officers for 1996 are currently being reviewed for implementation. During 1995 the Company entered into two executive producer service agreements and an actor's television motion picture agreement with two principal shareholders/officers and a director. These agreements provide for aggregate compensation of $275,000 for acting and production services relating to the making of Home Song. The Company acquired audio book rights for fourteen titles which were written by a principal shareholder. The net audio sales (net returns) from these titles for the quarters ended March 31, 1996 and 1995 were ($63,000) and $37,000, respectively. 6 8 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) During the first quarter of 1996 the Company made payments totaling $6,000 to a principal shareholder/officer for the business rental of a condominium owned by the officer. During the first quarter of 1996 the Company made payments totaling $5,000 with respect to auto lease payments, auto allowance, and insurance on automobiles owned by two principal shareholders/officers. NOTE 8 - COMMITMENTS AND CONTINGENCIES Litigation The Company is party to certain litigation involving the film Morning Glory. In the first of such matters, captioned In the Matter of The Arbitration Between Dove Audio, Inc., Michael Viner and Jerry Leider v. Steven Stern and Sharmhill Productions (B.C.), Inc. (Los Angeles Superior court Case No. BS 019699) (the "Enforcement Action"), the Company sought to enforce a binding arbitration awarded issued to it in September 1992 in the approximate amount of $4.5 million (plus attorneys' fees and interest accruing from the date of such award) relating to certain rights in such film and contracts relating thereto. In August 1993, the trial court affirmed such award and granted to the plaintiffs in such action, including the Company, a money judgment in such amount. In March 1995, the trial court ruling was appealed by the defendants to the California Court of Appeals, and in June 1995, the California Court of appeals affirmed the judgment. The Company is currently attempting to collect such judgment. In a related matter, captioned Dove Audio, Inc., Michael Viner and Jerry Leider v. Steven Stern, Sharma Stern, Sharmhill Productions (B.C.), Inc. et al.(Los Angeles Superior Court Case No. BC 072892; filed in January 1993), the Company and other plaintiffs have brought a fraudulent conveyance action relating primarily to a marital settlement between certain defendants named therein. The purpose of such action is to restore certain assets to the defendants in the Enforcement Action against which to levy if ultimately successful therein. Such action is in discovery and no trial date has been set. There is no assurance that the Company ultimately will prevail in these actions, or as to if, when or in what amounts the Company will be able to levy on any judgments issued in its favor. 7 9 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company was served in February 1996 with a complaint in the action captioned Robert H. Tourtelot v. Dove Audio, Inc., Michael Viner and Stephen Singular (Los Angeles Superior Court Case No. SC040739) (the "Tourtelot Action"). The Tourtelot Action arises out of an alleged oral agreement between the Company and Tourtelot to prepare a book for publication by the Company. The First Amended Complaint (the"Tourtelot Complaint") alleges breach of oral contract, fraud and deceit, suppression, breach of an implied covenant and fair dealing, breach of fiduciary duty, infringement of common law copyright, conversion, conspiracy and seeks an accounting. The Company successfully removed the Tourtelot Action to the U.S. District Court for the central district of California and has filed a motion to dismiss all causes of action. The Tourtelot Complaint seeks relief of $1.0 Million in damages. The district court dismissed the copyright, breach of fiduciary duty, conversion, conspiracy and accounting causes of action and has remanded the breach of oral contract and fraud causes of action back to the state court. The Company intends to vigorously defend against the Tourtelot Complaint. While the Company believes it has good, meritorious defenses, there is no assurance that the Company will be able to successfully defend itself in the Tourtelot Action. The Company was served in February 1996 with a complaint in the action entitled Alexandra D. Datig v. Dove Audio (Los Angeles Superior Court Case No. BC145501) (the "Datig Action"). The Datig Action was brought by a contributor to, and relates to the writing of, the recently released book, You'll Never Make Love In This Town Again. Such complaint alleges breach of contract, breach of good faith and fair dealing, libel, fraud and deceit, intentional misrepresentation, negligent misrepresentation, interference with business opportunity, intentional infliction of emotional distress and negligent infliction of emotional distress. The complaint also alleges sexual harassment on the part of Michael Viner and the Company. The Datig Complaint prays for $1.0 Million in damages. The Company intends to vigorously defend against the Datig Complaint and has moved to strike all causes of action. While the Company believes it has good, meritorious defenses, there is no assurance that the Company will be able to successfully defend itself in the Datig Action. The Company has been and is currently involved in various litigation matters and claims in the normal course of business. Based in part upon 8 10 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) consultation with legal counsel, management believes that the outcome of the various actions will not result in any significant impact on the Company's financial position. Office Lease The Company leases office space under a noncancelable operating lease expiring December 1998. The Company's lease obligation is secured by a $15,000 irrevocable letter of credit. Rent expense was $63,000 and $62,000 in the first quarters of 1996 and 1995, respectively. The minimum future noncancelable lease expense under the lease is approximately $250,000 annually for the years 1996 through 1998, inclusive. The lease is subject to annual rent escalations and the pass-through of costs. NOTE 9 - CAPITAL ACTIVITIES Private Placements In December 1995 the Company received net proceeds of approximately $4,770,000 from the initial closings of a private placement ("Placement") of the Company's equity securities. Pursuant to the December closing of the Placement the Company issued 729,687 shares of common stock and common stock purchase warrants allowing the purchase of 729,687 shares of Common Stock at $12.00 per share exercisable for a period of 51 months beginning 9 months subsequent to the initial closing of the Placement. In January 1996 the Company received additional net proceeds of approximately $1,533,000 from the Placement of the Company's equity securities. Pursuant to the January 1996 closings of the Placement the Company issued 220,313 shares of common stock and common stock purchase warrants allowing the purchase of 220,313 shares of common stock at $12.00 per share exercisable for a period of 51 months beginning 9 months subsequent to the initial closing of the Placement. Preferred Stock In 1995, Mr. Viner exercised his option to acquire 214,113 shares of Series A Preferred Stock. The Series A Preferred Stock has a stated value of $4.00 per share. Dividends are cumulative and occur at a rate of 8% (based on $8.00 per share) per annum. Each 9 11 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) NOTE 9 - CAPITAL ACTIVITIES (CONTINUED) share of Series A Preferred Stock is convertible into one share common stock at the option of the holder. The Series A Preferred Stock has a liquidation preference equal to its stated value plus unpaid dividends. Stock Options And Warrants The Board of Directors of the Company adopted the 1994 Stock Incentive Plan (the "Plan"). The Plan provides for the grant of options to purchase up to an aggregate of 400,000 shares of the Common Stock of the Company (subject to an anti-dilution provision providing for adjustment in the event of certain changes in the Company's capitalization). The Plan authorizes the granting of stock incentive awards ("Awards") to qualified officers, employee directors, key employees, and third parties providing valuable services to the Company, e.g., independent contractors, consultants, and advisors to the Company. The Plan is administered by a committee appointed by the Company Board consisting of two or more members, each of whom must be disinterested (the "Committee"). The Committee determines the number of shares to be covered by an Award, the term and exercise price, if any, of the Award, and other terms and provisions of Awards; members of the Committee receive formula awards. Awards can be Stock Options, Stock Appreciation Rights, Performance Share Awards, and Restricted Stock Awards. The number and kind of shares available under the Plan are subject to adjustment in certain events. Options activity under the Plan during the first quarter of 1996 was as follows: Options outstanding at January 1, 1996 309,499 $6.00 - $9.75 Options outstanding at March 31, 1996 309,499 $6.00 - $9.75 --------
10 12 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) NOTE 9 - CAPITAL ACTIVITIES (CONTINUED) At March 31, 1996 options to acquire 23,331 shares of common stock under the Plan were exercisable. In addition to the above options issued under the Plan, the Company granted options to acquire 250,000 shares of Common Stock at an exercise price of $.01 per share in 1994 and 75,000 shares of Common Stock at an exercise price of $8.00 per share in 1995. At March 31, 1996 options covering the 250,000 shares noted above were exercisable.
Number of Shares of Number of Common Warrants Stock --------- ---------- Warrants outstanding at January 1, 1996 1,134,687 984,687 $ 6.00 - $12.00 Warrants issued 220,313 220,313 $12.00 --------- --------- Warrants outstanding at March 31, 1996 1,355,000 1,205,000 $6.00 - $12.00 ========= =========
At March 31, 1996 warrants to acquire 405,000 shares of common stock were exercisable. NOTE 10 - MAJOR CUSTOMERS AND SUPPLIERS For the quarters ended March 31, 1996 and 1995, revenues, net of returns, from the Company's three major customers approximated 37% and 51% of net revenues. A significant amount of audio inventory is supplied by one manufacturer. The Company is not dependent on the manufacturer as its sole source of product. 11 13 DOVE AUDIO, INC. Notes to Consolidated Financial Statements (Continued) NOTE 11 - SUBSEQUENT EVENTS On April 29, 1996, the Company acquired Four Point Entertainment, Inc. ("Four Point") for consideration of $2.5 million in cash and 427,273 shares of Dove Common Stock, with an earn-out provision of up to an additional 163,636 shares of Dove Common Stock. Four Point develops and produces various forms of television programming, including pilots, series, telefilms, mini-series, talk shows, game shows and infomercials for network, cable and syndicated markets. In addition, Four Point owns and operates post-production and edit facilities for its own and third-party programming. The former principal officers of Four Point, Shukri Ghalayini and Ronald Ziskin also entered into employment agreements with Dove dated April 29, 1996. Pursuant to these employment agreements, Shukri Ghalayini becomes President and Chief Executive Officer of Dove Four Point, Inc. ("Dove Four Point") and Ronald Ziskin becomes Chief Operating Officer of Dove Four Point. Shukri Ghalayini will also join the Board of Directors of the Company. Messrs. Ghalayini and Ziskin also each received options to purchase 300,000 shares of Dove Common Stock at an exercise price of $11.00 per share, such options to vest subject to continuous service for a period of approximately 10 years, or earlier in the event certain performance thresholds are met at Dove Four Point. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis below should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes to the Consolidated Financial Statements included elsewhere in this Report. OVERVIEW Dove commenced business in 1985 as one of the pioneers of the audio book industry and has become one of the leading independent producers of audio books in the United States. The Company produces and distributes over 100 new titles annually and has built a library of over 1000 titles. The Company is also engaged in the publication of printed books under the Dove imprint and the development and production of movies-for-television, mini-series, and videos and the acquisition and distribution of feature films. A significant portion of the Company's expenses are relatively fixed, and therefore reduced sales in any quarter relating from the timing of delivery of product or otherwise could adversely affect operating results for that quarter. To complement its audio book operations, the Company is increasing significantly its publication of printed books. The Company is developing up to 70 titles for potential publication in print in 1996. In addition, the Company intends to continue to diversify its 12 14 DOVE AUDIO, INC. operations through its theatrical feature film division. Subject to appropriate opportunities becoming available to the Company, the Company plans to acquire independent films for distribution in the U.S. and Canada on an all rights basis (including theatrical, home video and all forms of television). The Company recently completed a two year video output arrangement with Paramount Pictures wherein Paramount will market and distribute Dove product under the Dove Home Video label. The Company's catalog of 1996 audio releases includes Drink With the Devil by Jack Higgins, The Prince of Wales by Jonathan Dimbleby, and On Selling by Mark H. McCormack. The Company's catalog of 1996 printed book releases includes White Flame by James Grady, The Heidi Principle by Rick Montgomery and Legacy of Deception by Stephen Singular. The Company's television and theatrical films have been based principally upon novels written by two authors for which the Company has published audio books. Currently, the Company has several television projects in development including a follow-up to the Dove production of Home Song by LaVyrle Spencer which aired on CBS in March 1996. The Company generally seeks to limit its financial risk in the production of television movies and mini-series and feature films by pre-sales and licensing to third parties. The production of television and theatrical films has been sporadic over the last several years and significant variances in operating results from year-to-year and quarter-to-quarter can be expected for film revenues. On April 29, 1996, the Company acquired Four Point Entertainment, Inc. ("Four Point") for consideration of $2.5 million in cash and 427,273 shares of Dove Common Stock, with an earn-out provision of up to an additional 163,636 shares of Dove Common Stock. Four Point develops, and produces various forms of television programming, including pilots, series, telefilms, mini-series, talk shows, game shows and infomercials for network, cable and syndicated markets. In addition, Four Point owns and operates post-production and edit facilities for its own and third-party programming. The acquisition has been accounted for by the Company under purchase accounting from April 29, 1996. As a result of the Four Point acquisition, the Company's results of operations for future periods may not be comparable to prior periods. RESULTS OF OPERATIONS The following table sets forth (i) publishing and film revenues and (ii) cost of sales, film amortization, selling, general and administrative expenses as a percentage of total revenues for the periods indicated: QUARTERS ENDED MARCH 31,
1996 1995 ---- ---- REVENUES Publishing 55.9% 98.7% Film 44.1 1.3 ----- ----- Total 100% 100% ===== ===== OPERATING EXPENSES Cost of sales 39 % 60.2% Film amortization 32.9 --- Selling, general & administrative 17.5 36.6 ----- ----- Total 89.4% 96.8% ===== =====
13 15 DOVE AUDIO, INC. QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED MARCH 31, 1995 PUBLISHING Revenues. Net publishing revenues for the three months ended March 31, 1996 increased 89% to $4,138,000, compared with $2,190,000 for the three months ended March 31, 1995. The increase was primarily attributable to the successful release of the Company's New York Times bestselling printed book "You'll Never Make Love In This Town Again." The contribution from the Company's other audio and printed books was in line with historical performance. Net publishing revenues in the three month period ended March 31, 1995 primarily consisted of sales of audio books and revenues from the licensing of rights to the Company's products to third parties. Substantially all of the Company's sales of book products are and will continue to be subject to potential returns by distributors and retailers if not resold to the public. Although the Company makes allowances and reserves for returned product that it believes are adequate, significant increases in return rates could materially and adversely impact the Company's financial condition or results of operations. Titles currently scheduled for release in the second quarter of 1996 include "Bad As I Wanna Be" by Dennis Rodman on audio and "White Flame" by James Grady in print. Cost of Sales. Cost of sales for the three months ended March 31, 1996 increased 116% to $2,886,000, compared with $1,335,000 for the three months ended March 31, 1995. The increase was primarily attributable to an increase in the total number of audio and printed books sold compared to the equivalent period in 1995. Cost of sales as percentage of net publishing revenues increased from 61% in the period ended March 31, 1995 to 70% in the period ended March 31, 1996. The increase was primarily attributable to higher author and reader royalty advances. FILM Revenues. Film revenues for the three months ended March 31, 1996 increased to $3,259,000, compared with $28,000 for the three months ended March 31, 1995. The increase was attributable to the delivery by the Company of the television film Home Song which aired on CBS in March 1996. This production generated approximately $3,000,000 in revenues. The remaining film revenues in the first quarter of 1996 were generated by sales from the Company's theatrical feature film division. The Company is developing additional television and mini-series for CBS based on the novels of LaVyrle Spencer. In this respect, the Company has recently received a production commitment for a second television movie project, Family Blessing, which is scheduled to go into production in 1996. There is no assurance that projects in development ultimately will be produced, aired or distributed. Future film revenues will depend upon the development and success of film properties, as well as the timing of the release or licensing of such properties. The Company is also scheduled to release a theatrical project entitled "A Boy Called Hate" in the second quarter of 1996. Film Amortization. Film Amortization for the 3 months ended March 31, 1996 increased to $2,435,000, compared with $0 for the three months ended March 31, 1995. The increase was primarily due to the recent release of Home Song which aired on CBS in March 1996. Film amortization is generally incurred in proportion to the estimated revenues generated from the release or licensing of film properties. GENERAL Gross Profit. The Company's gross profit for the 3 months ended March 31, 1996 increased 135% to $2,076,000, compared with $883,000 for the three months ended March 31, 1995. Gross profit margin as a percentage of revenue decreased from 40% in the first quarter of 1995 to 28% in the first quarter of 1996. This decrease resulted primarily from the fact that $3,259,000 of the 1996 first quarter 14 16 DOVE AUDIO, INC. revenue was from film activities, which carry a lower profit margin than publishing activities. Selling, General and Administrative. Selling, general and administrative expenses ("SG&A) include costs associated with selling, marketing and promoting the Company's products, as well as general corporate expenses including salaries, occupancy costs, professional fees, travel and entertainment. SG&A increased 59% to $1,292,000 for the three months ended March 31, 1996, compared to $811,000 for the three months ended March 31, 1995. The increase in SG&A was primarily attributable to increased salary costs related to the Company's increase in headcount which will facilitate future growth. The Company expects SG&A costs to continue to increase as the Company grows further including as a result of the recent Four Point acquisition. Net Interest Income (Expense). Net Interest Income for the 3 months ended March 31,1996 was $48,000, compared to Net Interest Expense for the 3 months ended March 31, 1995 of $14,000 due to lower borrowings and the repayment and cancellation of the Company's line of credit with Bank of America. LIQUIDITY AND CAPITAL RESOURCES The Company's operations, in general, are typically capital intensive. The Company has experienced from time to time significant negative cash flows from operating activities which have been offset by equity and debt financings. As the Company expands its publishing, production and distribution activities, it expects to continue to experience negative cash flows from operating activities from time to time. In such circumstances, the Company will be required to fund at least a portion of production and distribution costs, pending receipt of anticipated future revenues, from working capital or from additional debt or equity financings from outside sources. There is no assurance that the Company will be able to obtain such financing or that such financing, if available, will be on terms satisfactory to the Company. The Company's film production activities can affect its capital needs in that the revenues from the initial licensing of television programming or films may be less than the associated production costs. The ability of the Company to cover the production costs of particular programming or films is dependent upon the availability, timing and the amount of fees obtained from distributors and other third parties, including revenues from foreign or ancillary markets where available. In any event, the Company from time to time is required to fund at least a portion of its production costs, pending receipt of film revenues, out of its working capital. Although the Company's strategy generally is not to commence principal photography without first obtaining commitments which cover all or substantially all of the budgeted production costs, from time to time the Company may commence principal photography without having obtained commitments equal to or in excess of such costs. In order to obtain rights to certain properties for the Company's publishing and film operations, the Company may be required to make advance cash payments to sources of such properties, including book authors and publishers. While the Company generally attempts to minimize the magnitude of such payments and to obtain advance commitments to offset such payments, the Company is not always able to do so. Since its inception, the Company has satisfied its liquidity needs principally through the sale of equity securities, loans from or guaranteed by certain of its shareholders, other debt, and cash generated from operations. In December 1995 and January 1996, the Company raised net proceeds of $6,303,000 from the sale of 76 Units in a private placement. Each Unit consisted 15 17 DOVE AUDIO, INC. of 12,500 shares of the Company's Common Stock and 12,500 warrants to purchase 12,500 shares of the Company's Common Stock at $12.00 (exercisable on or after September 14, 1996). The net proceeds are being used by the Company to fund increased working capital needs during 1996 and to finance strategic acquisitions of product and complementary business (i.e. the Four Point acquisition). The Company is obligated to register the shares and warrant shares underlying the Units on or prior to June 14, 1996. In connection with the acquisition of Four Point, which was completed on April 29, 1996, the Company guaranteed certain term debt (in the principal amount of $852,000 as of May 10, 1996) and a $1.0 million revolving line of credit ($573,000 principal amount outstanding as of May 10, 1996) of Four Point from Sanwa Bank California. The term loan and the line of credit mature on October 3, 1998 and June 3, 1996 respectively and are secured by substantially all of Four Point's assets. The Company is in discussions with the bank to consider a term-out of the line of credit when it expires on June 3, 1996. The credit documents contain various financial and other covenants to which Four Point must adhere. While Four Point was out of compliance with the net worth covenant as of March 31, 1996, the Company and the bank have agreed to discuss a mutually satisfactory adjustment to such covenant or other remedy in light of the change in control of Four Point (to which the bank consented) and the receipt by the bank of the Dove corporate guarantee. In April 1996 the Company refinanced its $1,900,000 mortgage note which the Company borrowed from the seller in conjunction with the acquisition of its new office building. The new loan from a bank is secured by a deed of trust and bears interest at a fixed rate of 8% per annum. The loan matures in April 2001 and provides for a 20 year monthly amortization payment rate. As of May 9, 1996 the Company had cash and short-term investments of approximately $2,000,000. The Company used $1,061,000 for operating activities during the three month period ended March 31, 1996, which was offset from the proceeds of the sale of common stock. See "Consolidated Financial Statements of the Company - Consolidated Statements of Cash 16 18 DOVE AUDIO, INC. Flows." The Company believes its existing working capital, together with borrowings under its line of credit, anticipated cash flows from operations and other funding sources, will be sufficient to meet the Company's working capital requirements with respect to its current commitments for at least the next twelve months. However, the Company intends to seek to augment its working capital through an increased bank line of credit, the issuance of equity or debt securities or otherwise, the availability or terms of which cannot be assured. The Company plans to expand its development, production and distribution activities, including the expansion of its printed book publishing and film operations (although there is no assurance that the Company will expand or that such expansion will be profitable). Such expansion may include future acquisitions of library product or other assets complementary to its current operations or acquisition of rights involving significantly greater outlays of capital than required in the business conducted to date by the Company. Expansion of the Company or acquisitions of particular properties or libraries, to a significant extent, would require capital resources beyond those available to the Company, in which case such expansion will be dependent upon the ability of the Company to obtain additional sources of working capital, whether through the issuance of additional equity or debt securities, additional bank financing or otherwise. INFLATION The Company does not believe its business and operations have been materially affected by inflation. 17 19 PART II OTHER INFORMATION Item 1. Legal Proceedings The Company was served in February 1996 with a complaint in the action captioned Robert H. Tourtelot v. Dove Audio, Inc., Michael Viner and Stephen Singular (Los Angeles Superior Court Case No. SC040739) (the "Tourtelot Action"). The Tourtelot Action arises out of an alleged oral agreement between the Company and Tourtelot to prepare a book for publication by the Company. The First Amended Complaint (the"Tourtelot Complaint") alleges breach of oral contract, fraud and deceit, suppression, breach of an implied covenant and fair dealing, breach of fiduciary duty, infringement of common law copyright, conversion, conspiracy and seeks an accounting. The Company successfully removed the Tourtelot Action to the U.S. District Court for the central district of California and has filed a motion to dismiss all causes of action. The Tourtelot Complaint seeks relief of $1.0 Million in damages. The district court dismissed the copyright, breach of fiduciary duty, conversion, conspiracy and accounting causes of action and has remanded the breach of oral contract and fraud causes of action back to the state court. The Company intends to vigorously defend against the Tourtelot Complaint. While the Company believes it has good, meritorious defenses, there is no assurance that the Company will be able to successfully defend itself in the Tourtelot Action. The Company was served in February 1996 with a complaint in the action entitled Alexandra D. Datig v. Dove Audio (Los Angeles Superior Court Case No. BC145501) (the "Datig Action"). The Datig Action was brought by a contributor to, and relates to the writing of, the recently released book, You'll Never Make Love In This Town Again. Such complaint alleges breach of contract, breach of good faith and fair dealing, libel, fraud and deceit, intentional misrepresentation, negligent misrepresentation, interference with business opportunity, intentional infliction of emotional distress and negligent infliction of emotional distress. The complaint also alleges sexual harassment on the part of Michael Viner and the Company. The Datig Complaint prays for $1.0 Million in damages. The Company intends to vigorously defend against the Datig Complaint and has moved to strike all causes of action. While the Company believes it has good, meritorious defenses, there is no assurance that the Company will be able to successfully defend itself in the Datig Action. Item 5. Other Information On April 29, 1996, the Company acquired Four Point Entertainment, Inc. ("Four Point") for consideration of $2.5 million in cash and 427,273 shares of Dove Common Stock, with an earn-out provision of up to an additional 163,636 shares of Dove Common Stock. Four Point develops and produces various forms of television programming, including pilots, series, telefilms, mini-series, talk shows, game shows and infomercials for network, cable and syndicated markets. In addition, Four Point owns and operates post-production and edit facilities for its own and third-party programming. The former principal officers of Four Point, Shukri Ghalayini and Ronald Ziskin also entered into employment agreements with Dove dated April 29, 1996. Pursuant to these employment agreements, Shukri Ghalayini becomes President and Chief Executive Officer of Dove Four Point, Inc. ("Dove Four Point") and Ronald Ziskin becomes Chief Operating Officer of Dove Four Point. Shukri Ghalayini will also join the Board of Directors of the Company. Messrs. Ghalayini and Ziskin also each received options to purchase 300,000 shares of Dove Common Stock at an exercise price of $11.00 per share, such options to vest subject to continuous service for a period of approximately 10 years, or earlier in the event certain performance thresholds are met at Dove Four Point. Item 6. Exhibits and Reports on Form 8-k (a) Exhibits
Exhibit Number - - ------- 2.1 Agreement and Plan of Merger by and among the Company, Dove Four Point, Inc., Four Point Entertainment, Inc. and holders of capital stock of Four Point Entertainment, Inc., dated as of April 12, 1996 4.1 Form of Registration Rights Agreement 10.1 Employment Agreement dated as of April 29, 1996 between Shukri Ghalayini and the Company, together with Stock Option Award Agreement between the Company and Mr. Ghalayini dated April 29, 1996 10.2 Employment Agreement dated as of April 29, 1996 between Ronald Ziskin and the Company, together with Stock Option Agreement between the Company and Mr. Ziskin dated April 29, 1996 10.3 Business Loan Agreement between Asahi Bank of California and Dove Audio, Inc. dated April 24, 1996 in the amount of $1,900,000. 27 Financial Data Schedule
(b) Reports on Form 8-K A Form 8-K/A was filed on March 8, 1996 submitting an unredacted exhibit previously filed as a redacted exhibit on the Company's Form 8-K filed July 17, 1995. 20 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 14, 1996 DOVE AUDIO, INC. By /s/ MICHAEL VINER --------------------------- Michael Viner, President and Chairman (Chief Executive Officer) Date: May 14, 1996 By /s/ SIMON BAKER --------------------------- Simon Baker, Chief Financial Officer 21 DOVE AUDIO, INC. INDEX TO EXHIBITS
Exhibit Page Number Number - - ------- ------ 2.1 Agreement and Plan of Merger by and among the Company, Dove Four Point, Inc., Four Point Entertainment, Inc. and holders of capital stock of Four Point Entertainment, Inc., dated as of April 12, 1996 4.1 Form of Registration Rights Agreement 10.1 Employment Agreement dated as of April 29, 1996 between Shukri Ghalayini and the Company, together with Stock Option Award Agreement between the Company and Mr. Ghalayini dated April 29, 1996 10.2 Employment Agreement dated as of April 29, 1996 between Ronald Ziskin and the Company, together with Stock Option Agreement between the Company and Mr. Ziskin dated April 29, 1996 10.3 Business Loan Agreement between Asahi Bank of California and Dove Audio, Inc. dated April 24, 1996 in the amount of $1,900,000. 27 Financial Data Schedule
EX-2.1 2 AGREEMENT & PLAN OF MERGER 1 EXHIBIT 2.1 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered into as of April 12, 1996 by and among Dove Audio, Inc., a California corporation ("Dove"), Dove Four Point, Inc., a Florida corporation and wholly-owned subsidiary of Dove ("Sub"), Four Point Entertainment, Inc., a Florida corporation ("Four Point") and each of the holders of capital stock of Four Point and the other Persons set forth under the heading "Sellers" on the signature pages hereof (individually, a "Seller" and, collectively, "Sellers"). R E C I T A L S A. Sellers own all of the issued and outstanding capital stock (the "Capital Stock") of Four Point. B. Pursuant to the Merger described below, Sellers desire to exchange all the shares of the Capital Stock of Four Point for the Dove Shares and cash consideration referred to below on the terms set forth herein. A G R E E M E N T NOW, THEREFORE, in consideration of the foregoing and the provisions set forth below, and subject to the terms and conditions set forth herein, the parties agree as follows: ARTICLE 1. DEFINITIONS As used in this Agreement, the following terms shall have the meanings indicated below: "Accounts Receivable" shall have the meaning set forth in Section 4.10. "Affiliate" shall mean, in respect of any specified Person, any other Person that, directly or indirectly, controls, is controlled by, or is under common control with, such specified 2 Person or if such specified Person bears a familial relationship with such other Person. "Agreement" shall have the meaning set forth in the Preamble. "Balance Sheets" shall have the meaning set forth in Section 4.7(a). "Dove" shall have the meaning set forth in the Preamble. "Capital Stock" shall have the meaning set forth in the Recitals. "Collection Period" shall have the meaning set forth in Section 6.1(a). "Code" shall mean the Internal Revenue Code of 1986, as amended. "Dove Shares" has the meaning set forth in Section 2.5(a). "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time. "Environmental Laws" shall mean any and all federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees or requirements of any governmental authority regulating, relating to or imposing liability or standards of conduct concerning any Hazardous Material or environmental protection or health and safety, as now or may at any time hereafter be in effect, including without limitation, the Clean Water Act also known as the Federal Water Pollution Control Act ("FWPCA"), 33 U.S.C. Section 1251 et seq., the Clean Air Act ("CAA"), 42 U.S.C. SectionSection 7401 et seq., the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"), 7 U.S.C. SectionSection 136 et seq., the Surface Mining Control and Reclamation Act ("SMCRA"), 30 U.S.C. SectionSection 1201 et seq., the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et seq., the Superfund Amendment and Reauthorization Act of 1986 ("SARA"), Public Law 99-499, 100 Stat. 1613, the Emergency Planning and Community Right to Know Act ("ECPCRKA"), 42 U.S.C. Section 11001 et seq., the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901 et seq., the Occupational Safety and 2 3 Health Act as amended ("OSHA"), 29 U.S.C. Section 655 and Section 657, together, in each case, with any amendment thereto, and the regulations adopted and the official publications promulgated thereunder and all substitutions thereof. "Financials" shall have the meaning set forth in Section 4.7. "GAAP" shall mean generally accepted accounting principles as in effect at the time in question. "Hazardous Materials" shall mean any flammable materials, explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances, or similar materials defined in any Environmental Law. "indemnified party" shall have the meaning set forth in Section 8.5. "indemnifying party" shall have the meaning set forth in Section 8.5. "Intangible Personal Property" shall have the meaning set forth in Section 4.12(a). "IRS" shall mean the Internal Revenue Service. "Lease" shall have the meaning set forth in Section 4.11. "Major Accounts Receivable" shall have the meaning set forth in Section 6.1(a). "Marks" shall mean trademarks, service marks, brand names, certification marks, trade dress, assumed names, slogans, trade names and other indications of origin owned by or licensed to Four Point or any of it Subsidiaries, whether or not registered; and to the extent any of the foregoing is owned, the associated goodwill and registrations and applications to register in any jurisdiction any of the foregoing, including any extension, modification or renewal of any such registration or application. "Material Contracts" shall have the meaning set forth in Section 4.15. 3 4 "Multiemployer Plan" shall mean a plan described in Section 3(37) of ERISA. "New Receivable" shall have the meaning set forth in Section 6.1(c). "PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor thereto. "Person" shall mean any natural person or any corporation, partnership, joint venture or other entity. "Personal Property" shall have the meaning set forth in Section 4.33. "Plan" shall mean an employee benefit plan within the meaning of Section 3(3) of ERISA. "Prime Rate" shall mean the prime rate as reported from time to time by Bank of America NT&SA. "Real Property" shall have the meaning set forth in Section 4.11. "Related Party" shall mean Four Point and each of its Subsidiaries and Affiliates, including but not limited to each of the Sellers and any member of the immediate family of any of the Sellers. "Relative Equity Interest" shall mean, with respect to any Seller, the percentage determined by dividing (i) the number of Four Point Shares set forth opposite such Seller's name on Schedule I hereto by (ii) 8,027,240. "Reportable Event" shall mean any reportable event as defined in Section 4043(b) of ERISA, other than a reportable event as to which provision for 30-day notice to the PBGC would be waived under applicable regulations had the regulations in effect on the Closing Date been in effect on the date of occurrence of such reportable event. "Sanwa Agreements" shall mean the Term Loan Agreement (the "Term Loan Agreement") dated as of November 3, 1995, as amended 4 5 to date, and the Line of Credit Agreement (the "Line of Credit Agreement") dated as of June 3, 1995, as amended to date, each between Four Point and Sanwa Bank California. "Seller" or "Sellers" shall have the meaning set forth in the Preamble. "Subsidiary" shall mean with respect to any Person, any corporation, association, joint venture, partnership or other business entity (whether now existing or hereafter organized) of which at least a majority of the voting stock or other ownership interests having ordinary voting power for the election of directors (or the equivalent) is, at the time as of which any determination is being made, owned or controlled by such Person or one or more subsidiaries of such Person or by such Person or one or more subsidiaries of such person. The parties hereby agree that for purposes hereof, Empire Burbank Studios, Inc. shall be considered to be a Subsidiary of Four Point. "Surviving Corporation" shall have the meaning set forth in Section 2.1. "Tangible Shareholders' Equity" shall mean, as of a given date, the shareholders' equity of Four Point as of such date, minus goodwill and intangibles of Four Point as of such date, in each case determined on a consolidated basis in accordance with GAAP applied consistently with prior periods. "Tax" or "Taxes" shall mean any and all taxes imposed or required to be collected by any federal, state or local taxing authority in the United States, or by any foreign taxing authority under any statute or regulation, including, without limitation, all income, gross receipts, sales, use, personal property, use and occupancy, business occupation, mercantile, ad valorem, transfer, license, withholding, payroll, employment, excise, real estate, environmental, capital stock, franchise, alternative or add-on minimum, estimated or other tax of any kind whatsoever, including any interest, penalties and other additions thereto. "Taxing Authority" shall mean any federal, state, local or foreign governmental authority, or any political subdivision, agency or instrumentality thereof with taxing jurisdiction over any of the Related Parties, Dove or the Surviving Corporation. 5 6 "Transactions" shall mean, in respect of any party, all transactions contemplated by this Agreement that involve, relate to or affect such party. ARTICLE 2. THE MERGER Section 2.1 The Merger. Upon the terms and subject to the conditions hereof, as promptly as practicable following the satisfaction or waiver of the conditions set forth in Article 7 hereof, but in no event later than two days thereafter, unless the parties shall otherwise agree, articles of merger ("Articles of Merger") providing for the merger of Four Point with and into Sub (the "Merger") shall be duly prepared, executed and filed by Sub, as the Surviving Corporation (the "Surviving Corporation") in accordance with the relevant provisions of the Florida General Corporations Act (the "GCA") and the parties hereto shall take any other actions required by law to make the Merger effective. Following the Merger, Sub shall continue as the Surviving Corporation and the separate corporate existence of Four Point shall cease. The time the Merger becomes effective is referred to herein as the "Effective Time," and the date on which the Effective Time occurs is referred to as the "Closing Date." Prior to the filing of the Articles of Merger, a closing shall take place at the offices of Kaye, Scholer, Fierman, Hays & Handler, LLP, 1999 Avenue of the Stars, Suite 1600, Los Angeles, California 90067. Section 2.2 Effects of the Merger. The Merger shall have the effects set forth in the GCA. As of the Effective Time, the Surviving Corporation shall be a wholly owned subsidiary of Dove. Section 2.3 Directors. The directors of Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation. Following the Effective Time, Dove will use its reasonable best efforts to cause Shukri Ghalayini to be nominated and elected to its Board of Directors at Dove's next annual meeting of shareholders. Thereafter, Dove will use its reasonable best efforts to cause such director to be nominated and elected to Dove's Board of Directors during each year of his employment contract as in effect at the Closing. The parties agree that Dove's reasonable best efforts will include obtaining the proxy of Michael Viner personally to vote any shares of Dove 6 7 Common Stock beneficially owned by him in favor of such nominations and elections. Section 2.4 Officers. The officers of Four Point immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation. Section 2.5 Conversion. At the Effective Time, by virtue of the Merger and without any action on the part of Dove, Sub, Four Point or the holders of any of the following securities: (a) The issued and outstanding shares of common stock, par value $.01 per share, of Four Point (each a "Four Point Share") (other than shares to be canceled in accordance with Section 2.5(b) hereof) all shall be converted into the right to receive the number of fully paid and nonassessable shares of common stock, par value $.01 per share, of Dove (the "Dove Shares"), the cash consideration and/or the earn-out payments described in Section 2.6, in such proportion and as allocated by such Sellers on Exhibit A hereto. (b) Each Four Point Share which is held in the treasury of Four Point, and each issued and outstanding share of Preferred Stock of Four Point, if any, shall be canceled and retired and cease to exist. (c) Each issued and outstanding share of the common stock of Sub shall represent one fully paid and nonassessable share of Common Stock of the Surviving Corporation and the Surviving Corporation shall be and remain a wholly-owned subsidiary of Dove. Section 2.6 Earn-Out. (a) In addition to the consideration paid to Sellers pursuant to Section 2.5, if, but only if, the net income of the Surviving Corporation after taxes equals or exceeds $1,800,000 during the twelve month period from May 1, 1996 to April 30, 1997 (the "Earn-Out Period"), Dove shall issue an additional 163,636 shares of Dove Common Stock (as adjusted for stock splits, combinations or mergers or consolidations in which Dove is not the Surviving Corporation after the date hereof) to the Sellers, pro-rated among the Sellers in accordance with their Relative Equity Interests. If such net income after tax of the Surviving Corporation during the Earn-Out Period is greater than $0, but 7 8 less than $1,800,000, Dove shall issue to the Sellers (pro-rated among the Sellers in accordance with their Relative Equity Interests) in lieu of such additional shares referred to in the next preceding sentence, the number of shares of Dove Common Stock determined by multiplying 163,636 (as adjusted for stock splits, combinations or mergers or consolidations in which Dove is not the Surviving Corporation after the date hereof), by a fraction, the numerator of which shall be the net income after tax of the Surviving Corporation during the Earn-Out Period and the denominator of which shall be $1,800,000. If the Surviving Corporation does not achieve any net income after tax during the Earn-Out Period, no additional shares of Dove Common Stock shall be issuable to Seller pursuant to this Section 2.6. (b) All determination under this Section 2.6 shall be made in accordance with the following provisions: (i) Changes in accounting procedures, practices or principles of the Surviving Corporation (including, without limitation, changes relating to accounting for employee benefit plans or programs) shall not affect net income during the EarnOut Period, provided that such accounting procedures, practices and principles of Four Point as of the date hereof are in accordance with GAAP and are consistent with those applied during the periods covered by the Financials. (ii) During the Earn-Out Period: (A) No profit or loss will be included in the calculation of net income by reason of the amortization of goodwill, or the payment of any amounts to Sellers under this Section 2.6; and (B) During the Earn-Out Period, without the prior consent of Shukri Ghalayini (or, in the event of his death or incapacity, Ronald M. Ziskin), which consent shall not be unreasonably withheld, the Surviving Corporation shall not (A) be liquidated, (B) sell or otherwise transfer, directly or indirectly, all or substantially all of its property or assets outside the ordinary course of business, or (C) consolidate with or merge into any other corporation or entity or permit another corporation or entity to consolidate with or merge into the Surviving Corporation. In the event that Dove, without such prior written consent, shall 8 9 merge or combine the business operations of the Surviving Corporation with or into any other operations of Dove, or any other company acquired by Dove, Dove shall continue to keep accounting records sufficient for the purpose of making the determinations required hereunder as though such merger or combination had not occurred. (c) All determinations under this Section 2.6 shall be made in accordance with the following provisions: (i) net income after taxes for the Surviving Corporation shall be determined by subtracting from net revenue all production costs, general and administrative expenses, interest, all applicable federal, state, local and foreign taxes and all other charges in accordance with generally accepted accounting principles, except allocations of Dove's corporate overhead, other than fair and appropriate charges for rent and for purchases made or services rendered by Dove and its accountants, counsel and other independent contractors in connection with the Surviving Corporation's business. (ii) The amount of shares of Dove Common Stock issuable to Sellers shall be allocated to each Seller based on each Seller's Relative Equity Interest. Except as expressly stated otherwise herein, all determinations for purposes of this Section 2.6 shall be made in accordance with GAAP, consistently applied with periods prior to the date hereof. Dove's determination of the shares, if any, due to Sellers, shall be furnished to Sellers together with issuance of such shares, not later than 90 days after conclusion of the Earn-Out Period; (iii) Shukri Ghalayini (or, in the event of his death or incapacity, Ronald M. Ziskin) on behalf of all other Sellers, shall have the right to review all accounting records reasonably related to the making of such determinations by Dove. In the event that such person (the "Representative") disagrees with any determination made by Dove, the Representative shall deliver to Dove, within 30 days after receipt of any such determination from Dove, a written statement specifying the amount of the additional payment to which he believes Sellers are entitled, and the nature and reasons for his disagreement with Dove's determination. If the Representative, on the one hand, and Dove, on the other hand, are unable to resolve any such 9 10 disagreement within thirty (30) days after receipt by Dove of the written statement from the Representative, the matter shall be submitted to an independent public accounting firm (the "Independent Accounting Firm") chosen by the Representative from a list of two public accounting firms submitted to him by Dove, each of which shall be among the "Big Six" accounting firms and neither of which shall be currently retained or engaged by Dove at the time of or during the six-month period prior to the date the list is submitted to the Representative. The Independent Accounting Firm shall follow such procedures as it deems appropriate for obtaining the necessary information in considering the positions of the Representative and Dove but shall not conduct an independent audit. The Independent Accounting Firm shall render its determination on the matter within 90 days of its submission by the Representative and Dove. Such determination shall be final, conclusive and binding upon Dove and all of Sellers. (iv) Fees and expenses for the Independent Accounting Firm (i) shall be paid by the Sellers if Dove's determination is affirmed by the Independent Accounting Firm, or (ii) shall be apportioned between Dove, on the one hand, and the Sellers, on the other hand, if the Independent Accounting Firm determines that an additional amount of shares is due Sellers over and above the amount determined by Dove; such apportionment shall be made so that Dove shall pay the percentage of the fees and expenses equal to the percentage determined by dividing (A) the additional amount to paid by Dove to Sellers by (B) the additional amount asserted by the Representative; provided, however, that in no event shall such percentage exceed 100%. (d) In the case of any work performed jointly, or on a subcontracting basis, by the Surviving Corporation and Dove or any other subsidiary of Dove, the overall profit or loss for such work shall be apportioned fairly among the Surviving Corporation and such other company to reflect as nearly as possible the apportionment that would result if they were dealing at arms length. In the case of any purchase or sale of products by the Surviving Corporation to or from Dove or any other subsidiary of Dove, the prices for such products shall be adjusted to those prices that would be applicable if the company were purchasing or selling such products to or from an independent third party. 10 11 (e) Dove agrees to maintain sufficient authorized and unissued shares of Dove Common Stock available to meet its obligations under this Section 2.6. Section 2.7 Tax Consequences. It is intended by the parties that the Merger shall constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and that this Agreement shall constitute a "plan of reorganization" for the purposes of Section 368 of the Code. Section 2.8 Exchange of Certificates. Promptly after the Effective Time, Dove shall effect the exchange for cash and certificates evidencing the Dove Shares of certificates which, prior to the Effective Time, represented the Four Point Shares. Upon the surrender and exchange by a Seller of the certificates which, prior to the Effective Time, represented the Four Point Shares held by such Seller, Dove shall provide the consideration to be paid to such Seller at such time in the manner set forth and in accordance with Exhibit A hereto. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF SELLERS INDIVIDUALLY Each Seller, severally and not jointly, hereby represents and grants to Dove that: Section 3.1 Authorization. Such Seller has full power and authority to enter into this Agreement and to perform its obligations under this Agreement and to consummate the Transactions. This Agreement and all agreements or instruments herein contemplated to be executed by such Seller are the valid and binding agreements of such Seller, enforceable against it in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights generally and to general principles of equity. Section 3.2 Ownership of Stock. Such Seller is the record owner of all of the Four Point Shares set forth below such Seller's name on Schedule I hereto, free and clear of any liens, encumbrances, pledges, security interests, restrictions, prior assignments and claims of any kind or nature whatsoever. Upon consummation of the Transactions, Dove shall be the owner, 11 12 beneficially and of record, of all of the outstanding shares of Capital Stock of Four Point, free and clear of any liens, encumbrances, pledges, security interests, restrictions, prior assignments and claims of any kind or nature whatsoever, except as otherwise created by Dove. Section 3.3 Consents and Approvals. Neither the execution and delivery of this Agreement by such Seller nor the consummation of the Transactions by such Seller will violate, result in a breach of any of the terms or provisions of, constitute a default (or any event that, with the giving of notice or the passage of time or both, would constitute a default) under, result in the acceleration of an indebtedness under or result in any right of termination of, increase any amounts payable under, or conflict with, the trust agreements, if any, relating to such Seller or any other agreement, indenture or other instrument to which such Seller is a party or by which any of its properties are bound, or any judgment, decree, order or award of any court, governmental body or arbitrator (domestic or foreign) applicable to such Seller. All consents, approvals and authorizations of, and declarations, filings and registrations with, and payments of all taxes, fees, fines, and penalties to, any governmental or regulatory authority (domestic or foreign) or any other Person (either governmental or private) required in connection with the execution and delivery by such Seller of this Agreement or the consummation of the Transactions by such Seller have been obtained, made and satisfied. Without limiting the generality of the foregoing, such Seller, in the case of Shukri Ghalayini, acknowledges and agrees that all rights hereunder relating to such Seller shall accrue solely in favor of The Shukri Ghalayini Family Trust and that such Seller shall jointly and severally be liable for each of the obligations of The Shukri Ghalayini Family Trust hereunder; and such Seller, in the case of Ronald M. Ziskin, acknowledges and agrees that all rights under relating to such Seller shall accrue solely in favor of the Wedner-Ziskin Family Trust and that such Seller shall jointly and severally be liable for each of the obligations of the WednerZiskin Family Trust hereunder. Section 3.4 Dove Shares. Such Seller acknowledges that the Dove Shares (including, for purposes of this Section, any shares of Dove Common Stock issuable or issued pursuant to Section 2.6 of this Agreement) to be received by such Seller in the Transactions have not been and will not be registered under (i) the Securities Act of 1933, as amended (the "Securities Act") inasmuch as they are being issued pursuant to an exemption from registration granted under Section 4(2) of the Securities Act 12 13 and/or Regulation D promulgated thereunder relating to transactions not involving any public offering, (ii) the California Corporate Securities Laws of 1968 (the "California Law") or (iii) any other applicable securities laws, and that Dove's reliance on such exemption or related exemptions is predicated in part on the following representations and agreements made to Dove by such Seller: (a) Such Seller is acquiring the Dove Shares to be issued to such Seller hereunder for investment for his or its own account and not with a view to or for sale in connection with any distribution and resale thereof, with no intention of distributing or reselling the same; and such Seller is not aware of any particular occasion, event or circumstance upon the occurrence or happening of which he or it intends to dispose of such shares; (b) Such Seller is an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act; such Seller is aware that such Dove Shares constitute "restricted," "letter" or "investment" securities and such Seller by reason of his business or financial experience has the capacity to protect his own interest in connection with the transactions; and (c) Such Seller agrees not to sell, transfer, assign, pledge, hypothecate or otherwise dispose of his or its shares received in this transaction without registration under the Securities Act and the California Law, and any other applicable securities laws, or without an opinion of counsel satisfactory to Dove that the transaction by which such shares are proposed to be disposed of is exempt from the Securities Act, the California Law and any other applicable securities laws, and acknowledges that Dove will place a legend on the certificate(s) representing such shares substantially to such effect concerning these restrictions. Section 3.5 Brokerage Fees. No Person is entitled to any brokerage or finder's fee or other commission from such Seller in respect of this Agreement or the Transactions. Section 3.6 Disclosure. The information provided by such Seller in this Agreement and in any other writing furnished pursuant hereto does not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated herein or therein or necessary to make the statements and facts contained herein or therein, in light of the circumstances under which they are made, not false or misleading. 13 14 Copies of all documents heretofore or hereafter delivered or made available by such Seller to Four Point or Dove pursuant hereto were or will be complete and accurate records of such documents. ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF SELLERS AND FOUR POINT Each of the Sellers and Four Point (as to Four Point, only prior to but not after the Closing), hereby jointly and severally represents and warrants to Dove that: Section 4.1 Authorization. Four Point has full corporate power and authority to enter into this Agreement and to perform its obligations under this Agreement and to consummate the Transactions. All necessary action, corporate or otherwise, required to have been taken by or on behalf of Four Point and its Subsidiaries by applicable law, each corporation's respective charter documents or otherwise to (i) authorize the approval, execution and delivery on behalf of Four Point of this Agreement and (ii) the performance by Four Point of its obligations under this Agreement and the consummation of the transactions has been taken and to (iii) ratify all actions taken by the Board of Directors since July 4, 1990. This Agreement and all agreements or instruments herein contemplated to be executed by Four Point are the valid and binding agreements of Four Point, enforceable against it in accordance with its respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights generally and to general principles of equity. Section 4.2 Consents and Approvals. Neither the execution and delivery of this Agreement by Four Point nor the consummation of the Transactions by Sellers or Four Point will violate, result in a breach of any of the terms or provisions of, constitute a default (or any event that, with the giving of notice or the passage of time or both, would constitute a default) under, result in the acceleration of an indebtedness under or result in any right of termination of, increase any amounts payable under, or conflict with, any agreement, indenture or other instrument to which Four Point (or any of its Subsidiaries) is a party or by which any of its properties are bound (other than the Sanwa Agreements, the assumption of which, satisfactory to Dove, is a condition to closing), the charter or by-laws of Four Point or its Subsidiaries, or any judgment, decree, order or award of any court, governmental body or 14 15 arbitrator (domestic or foreign) applicable to Four Point or its Subsidiaries. All consents, approvals and authorizations of, and declarations, filings and registrations with, and payments of all taxes, fees, fines, and penalties to, any governmental or regulatory authority (domestic or foreign) or any other Person (either governmental or private) required in connection with the execution and delivery by Four Point of this Agreement or the consummation of the Transactions by Four Point have been obtained, made and satisfied. Without limiting the generality of the foregoing, the Merger (and this Agreement) have been duly approved by the Board of Directors and shareholders of Four Point in accordance with the GCA. Section 4.3 Organization and Good Standing. Each of Four Point and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and each of Four Point and its Subsidiaries is duly qualified or authorized to do business in each jurisdiction in which it does or has done business, or owns or has owned property, or where such qualification or authorization is otherwise required by virtue of its presence or activities. Schedule 4.3 sets forth a complete and correct list of all jurisdictions in which Four Point or any of its Subsidiaries does business or is otherwise required to be qualified or authorized to transact business or own property. Section 4.4 Licenses and Permits. Each of Four Point and its Subsidiaries is, and at all times has been, duly licensed, with all requisite permits and qualifications, as required by applicable law for the purpose of conducting its business or owning its properties or both, in each jurisdiction in which it does business or owns property or in which such license, permit or qualification is otherwise required. Each of Four Point and its Subsidiaries is in compliance with all such licenses, permits and qualifications. Schedule 4.4 sets forth a list of all such licenses, permits and qualifications, and the expiration dates thereof. There are no proceedings pending or, to the knowledge of the Sellers, threatened, to revoke or terminate any such presently existing license, permit or qualification. Section 4.5 Capital Stock. All of the Four Point Shares have been duly and validly authorized and issued, are fully paid and nonassessable, and were issued in full compliance with all applicable laws, rules, regulations and ordinances. The Four Point Shares constitute all the issued and outstanding shares of Capital Stock and there exist no (a) outstanding options, warrants or rights to purchase or subscribe for any equity 15 16 securities or other ownership interests of Four Point, (b) outstanding options, warrants or rights to sell to Four Point or any other Person any equity securities or other ownership interests of any other business entity, (c) obligations of Four Point, whether absolute or contingent, to issue any shares of equity securities or other ownership interests or to share or make any payments based on its revenues, profits or net income, or (d) indebtedness or securities directly or indirectly convertible or exchangeable into any equity securities of Four Point. All previously issued shares of Preferred Stock of Four Point have been legally and validly redeemed or repurchased and duly canceled and retired. Section 4.6 Subsidiaries. Four Point does not have any Subsidiaries or any other equity interest in any corporation, partnership or similar entity other than those listed on Schedule 4.6 attached hereto. Section 4.7 Financial Statements. As of the Closing, Schedule 4.7 will contain the following consolidated financial statements of Four Point: (a) The consolidated balance sheets at January 31, 1996, January 31, 1995 and January 31, 1994 (the "Balance Sheets") and the consolidated statements of operations and retained earnings and statement of cash flows for the 12 months then ended and notes thereto (collectively, the "Financials"). The Financials (i) have been prepared from the books and records of Four Point in accordance with GAAP consistently applied with prior periods, (ii) are complete and correct and fairly present in all material respects the consolidated financial condition and results of operations of Four Point as of the dates and for the periods indicated thereon, and (iii) contain and reflect adequate reserves for all liabilities and obligations of Four Point and its Subsidiaries of any nature, whether absolute, contingent or otherwise. (b) The Financials have been reviewed by the independent accounting firm of Safer, Cain & Company, whose unqualified reports thereon are part of Schedule 4.7(b). The books of account of Four Point have been maintained in all material respects in accordance with sound business practices, and there have been no transactions involving Four Point that properly should have been set forth therein in accordance with generally accepted accounting principles that have not been accurately so set forth. 16 17 (c) The Tangible Shareholders' Equity of Four Point at January 31, 1996 was not less than $1,000,000, and the Tangible Shareholders' Equity of Four Point as of the Closing Date is not less than the sum of $1,000,000 plus (if positive) all the earnings of Four Point from February 1, 1996 to the Closing Date, in each case as determined on the same basis as in the Financials. (d) The summary of projected financial data of Four Point and its Subsidiaries for the years ending January 31, 1997 through 2000 provided by Sellers to Dove is based upon good faith estimates and assumptions believed by Sellers and Four Point to be reasonable. Schedule 4.7(d) sets forth a list on a project by project basis of the products or services contributing to the projected total revenue for the year ending April 30, 1997, including information as to the status of each project. Section 4.8 Absence of Certain Changes. Except as disclosed on Schedule 4.8, since January 31, 1995, there has not occurred: (a) Any adverse change in the assets, liabilities (whether absolute, accrued, contingent or otherwise), condition (financial or otherwise) results of operations, business or prospects of Four Point or any of its Subsidiaries; (b) Any increase in indebtedness of Four Point and its Subsidiaries over the level reflected on the January 31, 1996 Balance Sheet, any guarantee by Four Point (or any of its Subsidiaries) of any obligation, or any mortgage, pledge or encumbrance on any of the properties or assets of Four Point or its Subsidiaries (other than, in the latter case, encumbrances under the Sanwa Agreements); (c) Any amendment or modification of any Material Contract (as defined below), or any termination of any agreement that would have been a Material Contract were such agreement in existence on the date hereof; (d) Any entering into of any written or oral agreements, contracts, commitments or transactions that extend beyond the first anniversary hereof or have obligations thereunder in excess of $10,000; (e) Any increase in the compensation (including, without limitation, the rate of commissions) payable to, or any payment of a cash or other bonus to, any officer, director or 17 18 employee of, or consultant to, or any Related Person of, any of Four Point and its Subsidiaries; (f) Any transaction by Four Point (or any of its Subsidiaries), whether or not covered by the foregoing, not in the ordinary course of business, including, without limitation, any purchase, licensing or sale of any assets, provided that Four Point may transfer its rights to the Auction Channel (a/k/a Auction Network) to one or more of the Sellers who shall assume all liabilities of Four Point and its Subsidiaries in connection therewith; (g) Any alteration in the manner of keeping the books, accounts or records of Four Point (or any of its Subsidiaries), or in the accounting practices therein reflected; (h) Any declaration or payment of any dividends or distributions by Four Point, any acquisition or redemption by Four Point or any of its Subsidiaries of any of its or their equity securities or any loan by Four Point or any of its Subsidiaries to any of its security holders; (i) Any loss or threatened loss of a customer or customers or any cancellation or threatened cancellation of any Library Program or Programs; (j) Any damage or destruction to, or loss of, any assets or property owned, leased or used by Four Point or any of its Subsidiaries (whether or not covered by insurance); or (k) Any agreement to do any of the things described in the preceding subsections (a)-(h) of this Section 4.8. Section 4.9 Absence of Undisclosed Liabilities. There are no liabilities of Four Point (or any of its Subsidiaries), whether absolute, accrued, contingent or otherwise, and whether due or to become due, not reflected on or reserved for in the Financials, except for executory obligations under Material Contracts (as defined below) and immaterial contracts for the purchase of supplies or the sale of products incurred in the ordinary course of business. To the knowledge of Four Point and Sellers, there is no fact or circumstance that is likely to result in the loss of a customer or the cancellation of any Library Program or a reduction in revenues or any other loss to Four Point or its Subsidiaries. 18 19 Section 4.10 Accounts Receivable. Schedule 4.10 is an accurate aging of the accounts, notes and other receivables of Four Point and its consolidated Subsidiaries (the "Accounts Receivable") at January 31, 1996. The Accounts Receivable and any Accounts Receivable arising since January 31, 1996 are fully collectible, net of the reserves set forth in the January 31, 1996 Balance Sheet, all of which reserves are adequate. Section 4.11 Real Property. Schedule 4.11 sets forth a complete and correct description of each parcel of real property (collectively, the "Real Property") owned by or leased to Four Point (or any of its Subsidiaries) or otherwise used by Four Point or its Subsidiaries, which description consists of a legal description for each such parcel and an identification of each lease (a "Lease") of real property under which Four Point (or any of its Subsidiaries) is either a lessee, sublessee, lessor or sublessor. Except as set forth in Schedule 4.11: (a) Four Point (together with its Subsidiaries) does not own any Real Property; (b) Each Lease is a valid and binding obligation of Four Point (or its Subsidiaries), and neither Four Point nor the Sellers has any knowledge that any of such Leases are not valid and binding obligations of each of the other parties thereto; (c) Neither Four Point (nor any of its Subsidiaries) nor any other party to a Lease is in default with respect to any material term or condition thereof, and no event has occurred that, with the passage of time or the giving of notice or both, would constitute a default thereunder or would cause the acceleration of any obligation of any party thereto or the creation of a lien or encumbrance upon any asset of Four Point or its Subsidiaries; (d) All of the buildings, fixtures and other improvements located on the Real Property are in good operating condition and repair, and the operation thereof as presently conducted does not violate any applicable code, zoning ordinance, environmental law or regulation or other applicable law or regulation; and (e) Four Point (together with its Subsidiaries) holds all other permits and licenses required by applicable law relating to the operation and use of the Real Property. 19 20 Section 4.12 Intangible Personal Property. (a) Schedule 4.12 sets forth (i) a complete and correct list of each patent, patent application, copyright, copyright application, trademark, trademark application (in any such case, whether registered or to be registered in the United States of America or elsewhere), process, invention, trade secret, trade name, computer program, formula and customer list (collectively, the "Intangible Personal Property") of Four Point (and its Subsidiaries), and (ii) a complete and correct list of all material licenses or similar agreements or arrangements ("Licenses") to which Four Point (or any of its Subsidiaries) is a party either as licensee or licensor for each such item of Intangible Personal Property. (b) Except as set forth on Schedule 4.12(b): (i) There have been no actions or other judicial or adversary proceedings involving Four Point (or any of its Subsidiaries) concerning any item of Intangible Personal Property, and, to the knowledge of the Sellers, no such action or proceeding is threatened and no claim or other demand has been made by any Person relating to any item of Intangible Personal Property; (ii) Four Point (together with its Subsidiaries) has the right and authority to use each item of Intangible Personal Property in connection with the conduct of its businesses in the manner presently conducted and to convey such right and authority, and such use does not conflict with, infringe upon or violate any patent, trademark or registration of any other person or entity; (iii) There are no outstanding or, to the knowledge of the Sellers and Four Point, threatened disputes or disagreements with respect to any License; and (iv) The conduct by Four Point (together with its Subsidiaries) of its business does not conflict with the valid patents, copyrights, trademarks, trade secrets or trade names of others. Section 4.13 Labor and Employment Agreements. (a) Schedule 4.13 sets forth a complete and correct list of the following: 20 21 (i) Each collective bargaining agreement and other labor or employment agreement to which Four Point (or any of its Subsidiaries) is a party or by which it is bound; (ii) Each employment, profit sharing, deferred compensation, bonus, pension, retainer, consulting, retirement, health, welfare, or incentive plan or agreement to which Four Point (or any of its Subsidiaries) is a party or by which it is or may be bound; (iii) Each plan or agreement under which "fringe benefits" (including, without limitation, vacation plans or programs, sick leave plans or programs, dental or medical plans or programs, severance pay plans or programs and related or similar benefits) are afforded to employees of any of Four Point and its Subsidiaries; (iv) Each informal arrangement or understanding for the payment of post-retirement benefits; and (v) The name of each employee or agent of or consultant to each of Four Point or any of its Subsidiaries who since January 31, 1995 was or is being paid $25,000 or more per year or $2,500 or more per month. As used in this Section 4.13, the word "agreement" includes both oral and written contracts, understandings, arrangements and other agreements. (b) Four Point (together with its Subsidiaries) has complied in all material respects with all applicable laws, rules and regulations (domestic and foreign) relating to the employment of labor, including, without limitation, those related to wages, hours, collective bargaining and the payment and withholding of taxes and other sums as required by appropriate governmental authorities and has withheld and paid to the appropriate authorities, or is holding for payment not yet due to such authorities, all amounts required to be withheld from such employees and is not liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing. Four Point and its Subsidiaries do not and have not "leased" any employees except in full compliance with applicable law. (c) No unfair labor practice complaint is pending against Four Point or any of its Subsidiaries before the National Labor Relations Board or any federal, state or local agency 21 22 (domestic or foreign), and, to the knowledge of the Sellers and Four Point, no labor strike, grievance or other labor trouble affecting Four Point or any of its Subsidiaries is pending or threatened. (d) No material organization effort, no sex discrimination, racial discrimination, age discrimination or other employment-related allegation, claim, suit or proceeding, has been made or is pending with respect to the employees of Four Point or any of its Subsidiaries and no such effort, allegation, claim, suit or proceeding has been made, raised or brought within the three-year period prior to the date of this Agreement. (e) No arbitration proceeding arising out of or under any collective bargaining agreement is pending and, to the knowledge of the Sellers and Four Point, no basis for any such proceeding exists. (f) No Person who performs services for Four Point or any of its Subsidiaries who has not been classified or treated as an employee (whether for purposes of ERISA, the Code or other wise) should be treated as an employee for any such purpose. (g) All reasonably anticipated obligations of Four Point (together with its Subsidiaries), whether arising by operation of law, contract, past custom or otherwise, for unemployment compensation benefits, pension or profit sharing benefits, advances, salaries, bonuses, vacation and holiday pay, sick leave and other forms of compensation payable to the employees or agents of Four Point and its Subsidiaries in respect of the services rendered by any of them on or prior to the date of the Financials or the Interim Financials, as the case may be, have been paid or adequate accruals therefor have been made in the books and records of Four Point and its Subsidiaries and in the Financials or the Interim Financials, as the case may be. All such obligations in respect of services rendered on or prior to the date hereof have been paid as of the date hereof or adequate accruals therefor shall have been made. All accrued obligations of Four Point (together with its Subsidiaries) applicable to its employees, whether arising by operation of law, contract, past custom or otherwise, for payments to trusts or other funds or to any governmental agency, with respect to unemployment compensation benefits, social security benefits or any other benefits for employees, with respect to employment of said employees through the date of the Financials or the Interim Financials, as the case may be, have been paid or adequate accruals therefor have been made on the books and records of each 22 23 of Four Point and its Subsidiaries and in the Financials or in the Interim Financials, as the case may be. All such obligations with respect to employment of employees through the date hereof have been paid as of the date hereof or adequate accruals therefor shall have been made. Section 4.14 Compliance with ERISA. Four Point and each of its Subsidiaries is in compliance in all material respects with the provisions of ERISA and the Code applicable to Plans, and the regulations and published interpretations thereunder, if any, which are applicable to it. As of the date hereof, neither Four Point nor any of its Subsidiaries has, with respect to any Plan established or maintained by it, engaged in a prohibited transaction which would subject it to a material tax or penalty on prohibited transactions imposed by ERISA or Section 4975 of the Code. No liability to the PBGC has been or is expected to be incurred with respect to the Plans and there has been no Reportable Event and no other event or condition that presents a material risk of termination of a Plan by the PBGC. Neither Four Point nor any of its Subsidiaries has engaged in a transaction which would result in the incurrence by such Person of any liability under Section 4069 of ERISA. Neither Four Point nor any of its Subsidiaries has taken any action and no event has occurred with respect to any Multiemployer Plan which would subject Four Point or any of its Subsidiaries to liability under either Section 4201 or 4204 of ERISA. Section 4.15 Material Contracts and Relationships. (a) Except for agreements specifically identified on other Schedules, Schedule 4.15(a) sets forth a complete and correct list of the following: (i) All agreements (or groups of agreements with one or more related entities) between Four Point (or any of its Subsidiaries) and any customer or supplier in excess of $25,000 and all agreements extending beyond twelve months; (ii) All agreements that relate to the borrowing or lending by Four Point (or any of its Subsidiaries) of any money or that create or continue any material claim, lien, charge or encumbrance against, or right of any third party with respect to, any asset of Four Point or any of its Subsidiaries; 23 24 (iii) All agreements by which Four Point (or any of its Subsidiaries) leases any real property, has the right to lease any real property or leases capital equipment and all other leases involving Four Point or any of its Subsidiaries as lessee or lessor; (iv) All agreements to which Four Point (or any of its Subsidiaries) is a party not in the ordinary course of business; (v) All agreements to which Four Point (or any of its Subsidiaries), on the one hand, and any of Sellers or any of their respective Affiliates or Related Parties, on the other hand, are parties or by which they are bound; (vi) All contracts or commitments relating to the employment of any Person or any commission or finder's fee arrangements with others; (vii) All material license agreements, whether as licensor or licensee; (viii) All agreements between Four Point (or any of its Subsidiaries) and any major broadcast or cable networks, major talents, independent contractors, distributors or major studios; (ix) All other agreements to which Four Point (or any of its Subsidiaries) is a party or by which it is bound and that involve $25,000 or more or that extend for a period of one year or more; and (x) All other agreements to which Four Point or any of its Subsidiaries is a party or by which it is bound and that are or may be material to the assets, liabilities (whether absolute, accrued, contingent or otherwise), condition (financial or otherwise), results of operations, business or prospects of Four Point or any of its Subsidiaries. As used in this Section 4.15 the word "agreement" includes both oral and written contracts, leases, understandings, arrangements and all other agreements. The term "Material Contracts" means the agreements of Four Point (or any of its Subsidiaries) required to be disclosed on Schedule 4.15(a), including agreements specifically identified in other Schedules. 24 25 (b) All of the Material Contracts are in full force and effect, are valid and binding and are enforceable in accordance with their terms in favor of each of Four Point and its Subsidiaries. There are no material liabilities of any party to any Material Contract arising from any breach or default of any provision thereof and no event has occurred that, with the passage of time or the giving of notice or both, would constitute a breach or default by any party thereto. (c) Four Point (and each of its Subsidiaries) has fulfilled all material obligations required pursuant to each Material Contract to have been performed by Four Point or its Subsidiaries prior to the date hereof, and to the knowledge of the Sellers and Four Point, Four Point and each of its Subsidiaries will be able to fulfill, when due, all of its obligations under each of the Material Contracts that remain to be performed after the date hereof. (d) Schedules 4.15(c) and (d) set forth a complete and correct list of each (i) customer (or related group of customers) with whom Four Point (and/or any of its Subsidiaries) did $25,000 or more of business during the last fiscal year, (ii) supplier (or related group of suppliers) with whom Four Point (and/or any of its Subsidiaries) did $25,000 or more of business during the last fiscal year, and (iii) agent (or related group of agents) or representative (or related group of representatives) who was paid $25,000 or more by Four Point and its Subsidiaries during the last fiscal year, respectively, which lists itemize the actual dollar amounts. (e) Four Point (and each of its Subsidiaries) has maintained and continues to maintain good relations with its customers, suppliers and agents. Section 4.16 Absence of Certain Business Practices. Neither Four Point (nor any of its Subsidiaries) nor any employee, agent or other person acting on Four Point's or any of its Subsidiaries' behalf, including, but not limited to, any Seller, has, directly or indirectly, given or agreed to give any gift or similar benefit to any customer, supplier, competitor or governmental employee or official (domestic or foreign) (i) that would subject Four Point or its any of its Subsidiaries to any damage or penalty in any civil, criminal or governmental litigation or proceeding or (ii) that, if not given in the past, would have had a material adverse effect on the assets, liabilities (whether absolute, accrued, contingent or otherwise), 25 26 condition (financial or otherwise), results of operations, business or prospects of Four Point or any of its Subsidiaries. Section 4.17 Transactions with Related Parties. Except as set forth on Schedule 4.17, there have been no transactions, including purchases or sales of assets or entities, by or between Four Point (or any of its Subsidiaries) and any Seller or Related Party since January 31, 1993 and there are no agreements or understandings now in effect between Four Point and any Seller or Related Party. Schedule 4.17 also (i) states the amounts due from Four Point (or any of its Subsidiaries) to any Seller or Related Party and the amounts due from any Seller or Related Party to Four Point or any of its Subsidiaries, (ii) describes the transactions out of which such amounts due arose and (iii) describes any interest of any Seller or Related Party in any supplier or customer of, or any other entity that has had business dealings with, Four Point or any of its Subsidiaries since January 31, 1993. After the Closing, there will be no obligations or other liabilities between each of Four Point and any of its Subsidiaries, on the one hand, and any Seller or Related Party, on the other hand, other than pursuant to this Agreement and the Transactions contemplated hereby. The loans from Four Point to Messrs. Ghalayini and Ziskin set forth on the January 31, 1996 Balance Sheet will be forgiven at or prior to the Closing. Section 4.18 Compliance with Laws. Except as set forth on Schedule 4.18, the operation, conduct and ownership of the property or business of Four Point and its Subsidiaries are being, and at all times have been, conducted, in all material respects, in full compliance with all federal, state, local and other (domestic and foreign) laws, rules, regulations and ordinances (including without limitation, those relating to employment discrimination, occupational safety, environmental compliance, conservation or corrupt practices) and all judgments and orders of any court, arbitrator or governmental authority applicable to it. Neither Four Point nor the Sellers is aware of any proposed ordinance, order, judgment, decree, governmental taking, condemnation or other proceeding that would be applicable to the business, operations or properties of Four Point or its Subsidiaries and that could have a material adverse effect on the assets, liabilities (whether absolute, accrued, contingent or otherwise), condition (financial or otherwise), results of operations, business or prospects of Four Point or any of its Subsidiaries. 26 27 Section 4.19 Assets. Each of Four Point and its Subsidiaries has, and at the Closing will have good and marketable title to, or, to the extent Four Point's or its Subsidiaries' interest is limited to a leasehold, valid leasehold interests in, all the Assets (as hereinafter defined), free and clear of all liens and indebtedness except pursuant to the Sanwa Agreements (the assumption of which, satisfactory to Dove, is a condition to Closing). The Assets referred to herein include all of the assets owned by each of Four Point or any of its Subsidiaries necessary for or used or useful in the conduct of its business in the manner in which it is presently or is contemplated as being or has been conducted by Four Point and its Subsidiaries, including the assets shown in the January 31, 1996 Balance Sheet and its rights under the Material Contracts. Section 4.20 Library Physical Properties. (a) Except as set forth on Schedule 4.20(a), an original negative or master tape of each of the Library Physical Properties (i) has been properly stored, in each case in accordance with standards customarily applied by major theatrical, television and home video distributors, as applicable, in the United States, and (ii) may be used for the purpose of making a first class, fine grain print or broadcast quality master tape and a first class, fine grain or digital or one-inch production master. All masters and duplicate masters of any such original or elements thereof that currently exist are included in Schedule 4.20(a). For the purpose of this Agreement, Library Physical Properties shall include the audiovisual, audio and visual recordings and other materials produced by any technology, manner or means relating to Library Programs, including without limitation, prints, negatives, duplicating negatives, fine grains, music and sound effects tracks, master tapes and other duplicating materials of any kind, all various language dubbed and titled versions, prints and negatives of stills, trailers and television spots, all promos and other advertising and publicity materials, stock footage, trims, tabs outtakes, cells, drawings, storyboards, (ii) all physical properties relating to any Library Program, including without limitation sets, props, backdrops, costumes, models, sculptures, puppets, sketches, and continuities, in each case, including, without limitation, any of the foregoing in the possession, custody or control of Four Point or any Subsidiary or in the possession of its assigns or any film laboratories, storage facilities or other persons plus (iii) any and all reversionary rights either Four Point or any of its Subsidiaries has to the master and duplicate masters of any original negative or master 27 28 tape or elements thereof. For the purpose of this Agreement, "Library Program" shall mean each program which either Four Point or any of its Subsidiaries owns or has a right to exploit as of immediately prior to the Closing, including, without limitation, each program listed on Schedule 4.20(a). (b) Other than such Library Physical Properties that do not constitute master materials and which are currently in exhibit or distribution, or in the hands of third parties preparing Library Physical Properties for exhibition or distribution, the Library Physical Properties are stored and maintained directly by Four Point or any of its Subsidiaries or on their behalf by authorized distributors or licensees in storage or post-production facilities in accordance with recognized industry standards for the use and preservation of such materials. (c) Schedule 4.20(c) sets forth a list, which is true, accurate and complete in all material respects, of the physical location of the Library Physical Properties. There are no restrictions on the right to access or remove such materials except as set forth on such Schedule 4.20(c). Section 4.21 Library Rights. (a) Schedule 4.21(a) sets forth a list of all Library Programs, which is true, accurate and complete. Four Point (together with its consolidated Subsidiaries) owns, is licensed or otherwise possesses the necessary right, title and interest in the Library Rights, as defined herein, to permit the exploitation without restriction, except as expressly set forth herein, for the terms and in the media set forth in Schedule 4.21(a)(which schedule also includes third party costs with respect to each Library Program and Library Right). Since January 31, 1995 through the date hereof, none of the Library Programs has been canceled or discontinued nor have any existing licensees for any territory been changed except as set forth in Schedule 4.21(a). For the purpose of this Agreement, Library Rights shall include (i) all Library Programs, (ii) all contracts to which Four Point (or any of its Subsidiaries) is a party, whether written or oral, pertaining to the creation, development, production distribution or other exploitation of any Library Programs, and (iii) any and all of the following works and other properties: screenplays, teleplays, stories, adaptations, scripts, outlines, treatments, formats, Bibles, scenarios, characters, titles and any and all other literary, dramatic and other works and properties of any kind and any and all of the following rights in any and all of 28 29 the foregoing: remake, sequel, prequel, series, mini-series, spin offs, specials, character, legitimate stage, theme park, installation, live performance, print and electronic publication, interactive, computer-assisted media, merchandising and other subsidiary, derivative, compilation, ancillary, promotional, advertising and publicity rights (in or by any and all media, manner and means now known or hereafter developed), and all rights under any trademark, copyright, trade secret, patent or similar intellectual property rights including, without limitation, any applicable "author's rights", "neighboring rights" and any other rights provided by the law of any country or by industry protocol which provide for payment to rights holders for certain uses of their works; and any and all other rights of any kind in any of the foregoing, whether now known or hereafter recognized. (b) Except as set forth in 4.21(b), Four Point is the sole and exclusive owner of the Library Programs, and otherwise has the full right to exploit the Library Programs as set forth in Schedule 4.21(b). (c) Upon the Closing, Dove and its subsidiaries, will own, or be licensed or otherwise possess the necessary right, title and interest in the Library Rights to permit the exploitation of such Library Rights without restriction, except as expressly set forth on Schedule 4.21(c). (d) (i) Neither the Library Programs, nor any element thereof, as they currently exist, nor the exploitation thereof by Four Point or any of its Subsidiaries, nor the transfer thereof to Dove, libels, defames, violates the rights of privacy or publicity, or violates any copyright, patent, trademark, common law or other similar right, of any Person or violates any other applicable law. Four Point and its Subsidiaries have not received any notice of infringement or other violation of any of the foregoing rights, except as set forth on Schedule 4.21(d). Four Point and its Subsidiaries have (x) taken all reasonably prudent actions (in accordance with industry custom and practice with respect thereto) necessary to ensure that none of the Library Rights, nor any element thereof, as they currently exist, nor the exploitation thereof by Four Point and its Subsidiaries, nor the transfer thereof pursuant to this Agreement, libels, defames, violates the rights of privacy or publicity or violates any copyright, patent, trademark, common law or other similar right of any person or violates any other applicable law, and (y) complied with all requirements of their respective errors and omissions insurance policies necessary to ensure coverage 29 30 thereunder of any claims of the type described in the preceding clause (x) hereof; (ii) all material contained in the Library Rights is either (A) a wholly original "work made for hire" (as such term is construed under the United States Copyright Law) created by writer(s) duly employed by Four Point or any of its Subsidiaries and not copied, in whole or in part, from any other work, (B) duly licensed to, or otherwise acquired by, Four Point or its Subsidiaries, (C) in the public domain throughout the world, (D) permitted to be exploited by each of Four Point and its Subsidiaries pursuant to the provisions of 17 U.S.C. Section 107, as such provision is construed, for all uses to the full extent of the rights of Four Point (together with its Subsidiaries) with respect thereto or (E) a combination of any of the foregoing. (e) The credits that are contained in the Library Programs are complete and accurate in all material respects and include any information required by section 317 of the Federal Communications Act of 1934 (as amended) to be disclosed to the public. The Library Programs that were produced by Four Point or any of its Subsidiaries and to the Sellers' and Four Point's knowledge, the Library Programs that were produced by a third party, do not omit credit owed to any party or entity entitled to any credit for providing services or rights in connection with the Library Programs. No credit accorded in any Library Program that was produced by Four Point or its Subsidiaries, and to the Sellers' and Four Point's knowledge, no credit provided in any Library Program that was produced by a third party, is inaccurate, improper or insufficient under any applicable law, contract or otherwise. (f) Where required under the Copyright Law to preserve the copyright in such Library Programs, a valid copyright notice which conforms to the requirements of Copyright Law relating to the elements, placement and other requirements of such notice appears on each Library Program. Section 4.22 Copyrights, Etc. (a) Except as set forth in Schedule 4.22(a), (i) the copyrights in the Library Programs, and except for material in the public domain throughout the world, the elements thereof (collectively, the "Copyrights") that are, in each case, owned or controlled by a Four Point (or any of its Subsidiaries) are valid, existing, unexpired and enforceable in the United States and all countries party to the Universal Copyright Convention or the Berne Convention; and (ii) none of the copyrights owned or controlled by Four Point or any of its Subsidiaries is in the 30 31 public domain in the United States or, to the knowledge of the Sellers and Four Point, any country party to the Universal Copyright Convention or the Berne Convention. Each of Four Point and its Subsidiaries have received no notice to the effect that the validity of any Copyright is contested. (b) A registration for each Copyright set forth in Schedule 4.22(b) has been properly issued by the United States Copyright Office in Four Point's name or in the name set forth on Schedule 4.22(b)(and are owned in each case by Four Point or the persons set forth on said Schedule). The application to register each Copyright listed in Schedule 4.22(b) was duly and properly filed in the United States Copyright Office, and required materials have been deposited with the Library of Congress and the United States Copyright Office. Schedule 4.22(b) sets forth the registered title, registration number and registration date for each such registered Copyright. Section 4.23 Marks. (a) Schedule 4.23(a) lists (i) all Marks owned by Four Point (or any of its Subsidiaries), whether or not in its own name, including, where applicable, the registration number and date for each Mark for which a registration has been issued by, or the application number and date for each Mark for which an application for registration is pending in, the United States Patent and Trademark Office or other similar office in any foreign jurisdiction, and (ii) all Marks to which Four Point (or any of its Subsidiaries) has been granted a license to use. The information relating to the Marks presented in Schedule 4.23(a) is true, accurate and complete. Four Point and its consolidated Subsidiaries have all right, title and interest in and to the Marks listed in Schedule 4.23(a). Each Mark that is necessary or useful to the conduct of the business is valid, subsisting, unexpired, enforceable and has not been abandoned. Each application for the federal registration in the United States of a Mark (including, without limitation, any renewals thereof) has been duly and properly filed, and each registration has been properly issued. Each of Four Point and its consolidated Subsidiaries have all licenses or other rights to use all Marks necessary for the conduct of the business as presently conducted or contemplated by Four Point (together with its Subsidiaries) to be conducted. (b) Except as set forth on Schedule 4.23(b), there are no liens, administrative or other proceedings or lawsuits, whether pending or, to the Sellers' and Four Point's knowledge, 31 32 threatened, involving or against any of the Marks, and Dove and the Surviving Corporation shall have the same rights in and to the Marks used in connection with the business as Four Point (together with its Subsidiaries) have on the date of this Agreement and shall be able to use and exploit the Marks to the full extent provided by applicable law for the term and throughout the territories set forth in Schedule 4.23(b), without any material restriction on such use or exploitation. No holding, decision or judgment has been rendered by any govern mental authority which would limit, cancel or question the validity of any Mark. No action or proceeding is pending seeking to limit, cancel or question the validity of any Mark. (c) Except as set forth on Schedule 4.23(c), none of the Marks used in the conduct of the business, any element thereof as they currently exist, or the exploitation thereof by Four Point (or any of its Subsidiaries), or the transfer thereof pursuant to this Agreement, libels, defames, violates the rights of privacy or publicity, or violates any trademark or service mark, common law or other similar right of any person or violates any other applicable law. Each of Four Point and its Subsidiaries have not received any notice relating to any claim thereof. (d) To the Sellers' and Four Point's knowledge, except as set forth on Schedule 4.23(d), there are no Marks that conflict with or infringe on the Marks used in the conduct of the business, third party claims against such Marks, or potential infringements against such Marks. (e) To the Sellers' and Four Point's knowledge, except as set forth on Schedule 4.23(e), no other person uses, has the right to use or claims the right to use the Marks or any combination or derivation thereof. (f) Each of Four Point and its Subsidiaries have taken all reasonably necessary steps to secure, protect and maintain the Marks in the United States and has disclosed in a Schedule herein all infringements or potential infringements, known to the Sellers or Four Point. (g) Except as set forth in Schedule 4.23(g), there are no third party licensees of the Marks used in the conduct of the Business. Section 4.24 Library. 32 33 (a) The Library Agreements listed in Schedule 4.24(a) constitute (i) all contracts in effect as of the date hereof, whether written or oral, with writers, directors, producers, actors, artists, animators, voice talent or other parties relating to the exploitation of any of the Library Programs or other Library Rights, whether as licensor, licensee, grantor or grantee or otherwise, relating to the business, to which Four Point (or any of its Subsidiaries) is a party; and (ii) all contracts in effect as of the date hereof concerning the licensing, exhibition or other exploitation of the Library Programs or other Library Rights or the Library Physical Properties, whether as licensor, licensee, distributor, grantor or grantee or otherwise, relating to the business, to which Four Point (or any of its Subsidiaries) is a party (collectively, "Library Contracts"). (b) Each Library Contract has been duly executed and delivered by Four Point or its Subsidiaries (except in the case of oral contracts), is in full force and effect and is valid, binding and enforceable in accordance with its terms against Four Point or its Subsidiaries and, to Four Point's and Sellers' knowledge and, except for the Library Contracts specified on Schedule 4.24(b), and assuming the due authorization and execution of such Contract by the other party thereto, any other party thereto. Without limiting the generality of the foregoing, (i) all minimum and other payments required to be made or received by Four Point (or any of its Subsidiaries) or which are necessary to extend the term of any Library Contract have been fully made or received and all options and renewal rights have been duly exercised by Four Point or its Subsidiaries, (ii) all sublicenses and other material actions required to be approved by any person have been approved by such person and all material reports required to be provided to such persons have been timely provided, and (iii) to the Sellers' and Four Point's knowledge, and except for the Library Contracts specified on Schedule 4.24(b), there are no material disputes between Four Point (or any of its Subsidiaries), on the one hand, and any licensor or licensee, on the other hand. Section 4.25 Litigation. Schedule 4.25 sets forth a complete and correct list of all legal, administrative, arbitration or other proceedings, or governmental investigations, to which Four Point or any of its Subsidiaries was a party or was otherwise affected (or by which any of its properties were affected), or was otherwise affected during the past five years, together with a description of the nature and status thereof in reasonable detail. Except as set forth on Schedule 4.25,(i) 33 34 there is no legal, administrative, arbitration or other proceeding, or any governmental investigation, pending or, to the knowledge of the Sellers and Four Point, threatened against or each of their otherwise affecting Four Point or any of its Subsidiaries, or any of its or their assets, that, if determined against Four Point or any of its Subsidiaries, would have a material adverse effect on the assets, liabilities (whether absolute, accrued, contingent or otherwise), condition (financial or otherwise), results of operations, business or prospects of Four Point or any of its Subsidiaries; (ii) no claim not already fully discharged that involves or may involve $25,000 or more has been made against Four Point or any of its Subsidiaries; and (iii) all potential losses and liabilities of Four Point (or any of its Subsidiaries) that may result from the matters disclosed on Schedule 4.25 are fully covered by insurance policies of Four Point or its Subsidiaries, which policies are in full force and effect on and as of the date hereof, except for any applicable deductible amount that does not exceed $25,000, or any applicable self-insured retention that does not exceed $25,000, for any one claim or action. Four Point (together with its Subsidiaries) has given in a timely manner to its insurers all notices required to be given under its insurance policies with respect to all of the claims and actions disclosed on Schedule 4.25, and no insurer has denied coverage of any of such claims or actions or rejected any of the claims with respect thereto. Without limiting the generality of the foregoing, Four Point and its Subsidiaries have complied with all obligations to Varitel Video, Inc. prior to the Closing and upon the change of its facilities after the Closing shall not be subject to any limitation on performing post-production services to any Person. Section 4.26 Taxes. Except as set forth on Schedule 4.26: (a) Four Point (and each of its Subsidiaries) has timely filed all Tax returns and reports required to have been filed by it for all taxable periods ending on or prior to the date hereof (including, without limitation, in the State of Florida), and has paid all Taxes due to any taxing authority with respect to all taxable periods ending on or prior to the date hereof, or otherwise attributable to all periods prior to the date hereof. The Tax returns and reports filed are true and correct in all material respects. Neither Four Point (nor any of its Subsidiaries) has requested any extensions of time within which to file returns and reports in respect of any Taxes; (b) None of such returns contain, or will contain, a disclosure statement under Section 6662 of the Code (or any 34 35 predecessor statute) or any similar provision of state, local or foreign law; (c) Four Point (together with its consolidated Subsidiaries) has not received notice that the IRS or any other taxing authority has asserted against Four Point or its Subsidiaries any deficiency or claim for additional Taxes in connection therewith; (d) All Tax deficiencies asserted or assessed against Four Point or its Subsidiaries have been paid or finally settled; (e) There is not pending or, to the knowledge of the Sellers and Four Point, threatened any action, audit, proceeding, or investigation with respect to (i) the assessment or collection of Taxes or (ii) a claim for refund made by Four Point (or any of its Subsidiaries) with respect to Taxes previously paid and (iii) with respect to any such actions, audits, proceedings or investigation (whether or not identified in Schedule 4.26), Four Point and each of its Subsidiaries has and will have no liability in respect of or resulting therefrom; (f) All amounts that are required to be collected or withheld by Four Point (or any of its Subsidiaries), or with respect to Taxes of Four Point or any of its Subsidiaries, have been duly collected or withheld; all such amounts that are required to be remitted to any Taxing Authority have been duly remitted; (g) Neither the IRS nor any state, foreign or local Taxing Authority has examined any income tax return of Four Point or any of its Subsidiaries; (h) None of Four Point or any of its Subsidiaries has waived any statute of limitations with respect to the assessment of any Tax; (i) Four Point or any of its Subsidiaries has not taken any action not in accordance with past practice that would have the effect of deferring any Tax liability of Four Point or any of its Subsidiaries from any taxable period ending on or before the date hereof to any taxable period ending after such date; (j) No consent has been filed under Section 341(f) of the Code with respect to Four Point or any of its Subsidiaries; 35 36 (k) There are no liens for Taxes due and payable upon any assets of Four Point or any of its Subsidiaries; (l) None of Four Point or any of its Subsidiaries has participated in, or cooperated with, an international boycott within the meaning of Section 999 of the Code; (m) None of Four Point or any of its Subsidiaries is required to include in income any adjustment pursuant to Section 481(a) of the Code (or similar provisions of other law or regulations) by reason of a change in accounting method nor does any of Sellers or Four Point have any knowledge that the IRS (or other Taxing Authority) has proposed, or is considering, any such change in accounting method; (n) None of Four Point or any of its Subsidiaries is a party to any agreement, contract, arrangement or plan that would result in the payment of any "excess parachute payment" within the meaning of Section 280G of the Code; (o) None of the assets of Four Point or any of its Subsidiaries is property that is required to be treated as owned by any other person pursuant to the "safe harbor lease" provisions of former Section 168(f)(8) of the Code as in effect immediately prior to the enactment of the Tax Reform Act of 1986 and none of the assets of Four Point (together with is subsidiaries) is "tax exempt use property" within the meaning of Section 168(h) of the Code; (p) There are no currently binding elections with respect to Taxes affecting Four Point or any of its Subsidiaries for any period beginning on or after the Closing Date. Section 4.27 Insurance. Schedule 4.27 sets forth a complete and correct list of all insurance policies and of all claims made by each of Four Point or any of its Subsidiaries on any liability or other insurance policies during the past five years (other than worker's compensation claims). Four Point (together with its Subsidiaries) has adequate liability and other insurance policies insuring it against the risks of loss arising out of or related to its assets and business. Without limitation, as to the tangible real and personal property of Four Point and its Subsidiaries, such insurance is adequate to cover the full replacement cost, less deductible amounts, of such tangible real and personal property. Schedule 4.27 is a complete and correct list of all insurance currently in place and accurately sets forth the coverages, deductible amounts, carriers and expiration 36 37 dates thereof. Schedule 4.27 is a complete and correct list of all insurance with respect to which the policy period has expired, but for which certain of the coverage years are still subject to audit or retrospective adjustment by the carrier, and accurately sets forth such coverage years and the coverages, deductible amounts, carriers and expiration dates thereof. There are no outstanding requirements or recommendations by any insurance company that issued any policy of insurance to Four Point or any of its Subsidiaries or by any Board of or by any governmental authority exercising similar functions that require or recommend any changes in the conduct of the business of Four Point or its Subsidiaries or any repairs or other work to be done on or with respect to any of Four Point's or any of its Subsidiaries' assets. Except as set forth on Schedule 4.27, no notice or other communication has been received by Four Point or its Subsidiaries from any insurance company within the five years preceding the date hereof canceling or materially amending or materially increasing the annual or other premiums payable under any of its insurance policies, and, to the knowledge of the Sellers and Four Point, no such cancellation, amendment or increase of premiums is threatened. Section 4.28 No Powers of Attorney or Suretyships. Except as set forth on Schedule 4.28, (a) Four Point (together with its Subsidiaries) has not granted any general or special powers of attorney and (b) Four Point (together with its Subsidiaries) does not have any obligation or liability (whether actual, contingent or otherwise) as guarantor, surety, co-signer, endorser, co- maker, indemnitor, obligor on an asset or income maintenance agreement or otherwise in respect of the obligation of any Person. Section 4.29 Brokerage Fees. No Person is entitled to any brokerage or finder's fee or other commission from Four Point or any of its Subsidiaries or, insofar as the Sellers or Four Point are aware, from Dove or Sub in respect of this Agreement or the Transactions. Without limiting the generality of the foregoing, Four Point and its subsidiaries are not subject to any binding obligations or any restrictions with respect to the sale of Four Point and its Subsidiaries other than pursuant to this Agreement. Section 4.30 Banking Facilities. Schedule 4.30 sets forth a complete and correct list of: (a) Each bank, savings and loan or similar financial institution in which Four Point or any of its Subsidiaries has an 37 38 account or safety deposit box and the numbers of such accounts or safety deposit boxes maintained thereat; and (b) The names of all persons authorized to draw on each such account or to have access to any such safety deposit box, together with a description of the authority (and conditions thereto, if any) of each person with respect thereto. Section 4.31 Corporate Books. The corporate minute books of Four Point and each of its Subsidiaries are complete, each of the minutes contained therein accurately reflect the transactions that occurred at the meeting for which the minutes were taken, the meetings of directors or stockholders referred to in the minutes were duly called and held, and the signatures contained on all documents in the minute books are the true signatures of the persons purporting to have signed the same. Section 4.32 Environmental Liabilities. (a) Except as set forth on Schedule 4.32 hereto, neither Four Point nor any of its Subsidiaries has used, stored, treated, transported, manufactured, refined, handled, produced or disposed of any Hazardous Materials on, under, at, from, or in any way affecting, any of their properties or assets, or otherwise, in any manner which at the time of the action in question violated any Environmental Law, governing the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials and to the best of the Sellers' knowledge, no prior owner of such property or asset or any tenant, subtenant, prior tenant or prior subtenant thereof has used Hazardous Materials on or affecting such property or asset, or otherwise in any manner which at the time of the action in question violated any Environmental Law governing the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials. (b) To the best of the Sellers' knowledge (i) neither Four Point nor any of its Subsidiaries has any obligations or liabilities, known or unknown, matured or not matured, absolute or contingent, assessed or unassessed, where such would reasonably be expected to have a materially adverse effect on the business or condition (financial or otherwise) of Four Point or any of its Subsidiaries, and (ii) no claims have been made against Four Point or any of its Subsidiaries during the past five years and no presently outstanding citations or notices have been issued against Four Point or any of its Subsidiaries, where such could reasonably be expected to have a materially adverse 38 39 effect on the business or condition (financial or otherwise) of Four Point or any of its Subsidiaries, which in either case have been or are imposed by reason of or based upon any provision of any Environmental Law, including, without limitation, any such obligations or liabilities relating to or arising out of or attributable, in whole or in part, to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation or handling of any Hazardous Materials by Four Point or any of its Subsidiaries, or any of their employees, agents, representatives or predecessors in interest in connection with or in any way arising from or relating to Four Point or any of its Subsidiaries or any of their respective properties, or relating to or arising from or attributable, in whole or in part, to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation or handling of any such substance, by any other Person at or on or under any of the real properties owned or used by Four Point or any of its Subsidiaries or any other location where such could have a materially adverse effect on the business or condition (financial or otherwise) of Four Point (or any of its Subsidiaries). Section 4.33 Machinery, Equipment and Other Personal Property, etc. Except for the Real Property, Four Point (together with its consolidated Subsidiaries) owns or leases all of the machinery, equipment, vehicles, furniture, fixtures, leasehold improvements, repair parts, tools and other property (collectively, the "Personal Property") used by or relating to Four Point or its Subsidiaries. All such Personal Property is in good operating condition and sufficient to carry on the business of Four Point and its Subsidiaries in the normal course as it is presently conducted and is free from defects, whether patent or latent. Except as set forth in Schedule 4.33, it is not necessary for Four Point or any of its Subsidiaries to acquire or obtain the use of any additional personal property to carry on its business as presently and foreseeably to be conducted. Section 4.34 Disclosure. The information provided by the Sellers or Four Point, in connection with this Agreement, including, without limitation, the schedules hereto, and in any other writing pursuant hereto does not and will not contain any untrue statement of a material fact or, omit to state a material fact required to be stated herein or therein or necessary to make the statements and facts contained herein or therein, in light of the circumstances under which they are made, not false or misleading. Copies of all documents heretofore or hereafter delivered or made available by the Sellers or Four Point to Dove 39 40 pursuant hereto were or will prior to the Closing be complete and accurate records of such documents. ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF DOVE AND SUB Dove and Sub hereby jointly and severally represent and warrant to Sellers and Four Point that: Section 5.1 Organization and Corporate Authority. Dove and Sub are corporations duly organized, validly existing and in good standing under the laws of each such corporation's respective state of incorporation. Dove and Sub have all requisite corporate power and authority to enter into this Agreement and to consummate the Transactions. All necessary action, corporate or otherwise, required to have been taken by or on behalf of Dove and Sub by applicable law, each corporation's respective charter documents or otherwise to authorize (i) the approval, execution and delivery on behalf of Dove and Sub of this Agreement and (ii) the performance by Dove and Sub of their obligations under this Agreement and the consummation of the Transactions has been taken or will have been taken on or prior to the Closing. This Agreement and all agreements and instruments herein contemplated to be executed by Dove and Sub are the valid and binding agreements of Dove and Sub, enforceable against Dove and Sub in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors' rights generally and to general principles of equity. Section 5.2 Consents and Approvals. Neither the execution and delivery of this Agreement nor the consummation of the Transactions will violate, result in a breach of any of the terms or provisions of, constitute a default (or any event that, with the giving of notice or the passage of time or both, would constitute a default) under, result in the acceleration of any indebtedness under, result in any right of termination of, increase any amounts payable under, or conflict with, any agreement, indenture or other instrument to which Dove or Sub is a party or by which any of its property is bound, its charter or by-laws, or any judgment, decree, order or award of any court, governmental body or arbitrator (domestic or foreign) applicable to Dove or Sub. All consents, approvals and authorizations of, and declarations, filings and registrations with, any governmental or regulatory authority (domestic or foreign) or any 40 41 other Person (either governmental or private) required in connection with the execution and delivery by Dove and Sub of this Agreement or the consummation of the Transactions have been obtained, made and satisfied, except for any filings required to be made after the date hereof pursuant to the California Law or the Securities Exchange Act of 1934, as amended, and the regulations promulgated thereunder. Section 5.3 Dove Shares. The Dove Shares to be issued at the Closing (and the shares of Dove Common Stock, if any, to be issued pursuant to Section 2.6), when issued and delivered, will be duly authorized, validly issued, fully paid and nonassessable and free of any preemptive rights or any liens, charges, claims or encumbrances (other than pursuant to the Transactions or arising from the acts or omissions of Sellers). Dove makes no representation as to the market price which Sellers will realize upon the ultimate disposition of such shares, it being acknowledged by the Sellers that such shares will constitute "restricted securities" under applicable securities laws and market price of publicly traded securities will be affected by many factors which are outside the control of Dove and as to which Dove can offer no assurance. Section 5.4 Dove SEC Reports. Dove has furnished to the Sellers its report on Form 10-KSB for the 1995 fiscal year filed by Dove with the Securities and Exchange Commission ("SEC") (the "SEC Report"). The SEC Report did not, on its date of filing, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Except as set forth on Schedule 5.4, all financial statements included in the SEC Report, (i) were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods covered thereby (except as may be indicated therein), (ii) fairly present the consolidated financial position, results of operations and cash flows of Dove as of the respective dates thereof and for the periods referred to therein, and (iii) were consistent with the books and records of Dove and its subsidiaries. Except as contemplated in connection with the Transactions or as disclosed in or contemplated in the SEC Report, since the date of the SEC Report there has not occurred any material adverse change in the results of operations or financial position of Dove and its subsidiaries considered as a whole. 41 42 Section 5.5 Brokerage Fees. Except as set forth in Schedule 5.5, no Person is entitled to any brokerage or finder's fee or other commission from Dove or Sub in respect of this Agreement or the Transactions. Section 5.6 Form S-3 Eligibility. As of the date of Closing, Dove will be eligible to register Dove's Common Stock on Form S-3 with respect to secondary transactions. Section 5.7 Disclosure. The information provided by Dove and Sub in this Agreement and in any other writing furnished pursuant hereto does not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated herein or therein or necessary to make the statements and facts contained herein or therein, in light of the circumstances under which they are made, not false or misleading. ARTICLE 6. CERTAIN AGREEMENTS AND UNDERSTANDINGS Section 6.1 Collection and Purchase of Accounts Receivable. (a) Promptly after the Closing, Dove shall prepare and deliver to Sellers a list of all Accounts Receivable outstanding on the Closing Date that are in excess of $250,000 (the "Major Accounts Receivable"). For a period of six months after the Closing Date (the "Collection Period"), Dove and the Surviving Corporation shall use their reasonable efforts to collect the Major Accounts Receivable. Dove and the Surviving Corporation may, but shall not be obligated to, use a collection agency or commence legal actions in connection with such collection efforts. Upon the expiration of the Collection Period, Dove shall notify Sellers of those Major Accounts Receivable that have not been collected as of the end of the Collection Period. In the event that there are Major Accounts Receivable outstanding upon expiration of the Collection Period, Dove shall be entitled to notify Sellers to purchase the entire amount thereof. Within ten days of receipt of such notification from Dove, Sellers shall purchase (without recourse to Dove or the Surviving Corporation and without representation or warranty (other than a representation that Dove and the Surviving Corporation have not assigned their rights in the Major Accounts Receivable)) such designated Major Accounts Receivable then remaining unpaid for a purchase price equal to the face amount thereof. 42 43 (b) Upon Sellers' repurchase of the Major Accounts Receivable from the Surviving Corporation, (i) Dove shall promptly deliver to Sellers any tangible evidence of such Major Accounts Receivable then in the possession of Dove or under its control with appropriate documents of assignment and (ii) Sellers shall be entitled to take any and all actions that they may deem necessary or desirable in order to collect such Major Accounts Receivable. Dove and the Surviving Corporation will, from time to time after such repurchase, execute and deliver to Sellers such instruments and other documents as Sellers may reasonably request to assist Sellers in their collection efforts. (c) In the event that any payment received by Dove or the Surviving Corporation during the Collection Period is remitted by an account debtor that is indebted under both Major Accounts Receivable and an account receivable arising out of the sale of inventory in the ordinary course of business after the date hereof (a "New Receivable"), to the extent that such payment is identified by the relevant account debtor as being applicable to the Major Accounts Receivable, such payment shall first be applied to the Major Accounts Receivable due from such account debtor with any balance remaining after payment in full to be applied to the New Receivable; provided, however, that, to the extent that such payment is not so identified by the relevant account debtor, such payment may be applied to the New Receivable and the Major Accounts Receivable on a pro rata basis. (d) Dove will cooperate, at Sellers' expense, with Sellers in collecting any Major Accounts Receivable that are repurchased by Sellers; provided, however, that the foregoing shall not require Dove or the Surviving Corporation to be a party to any action brought by Sellers to collect such Major Accounts Receivable. (e) Sellers agree that they will forward promptly to Dove any monies, checks or instruments received by Sellers after the date hereof with respect to the Accounts Receivable except with respect to the Major Accounts Receivable repurchased by Sellers. Section 6.2 Post-Closing Audit. Within 120 days after the Closing, Dove shall retain KPMG Peat Marwick LLP or another nationally recognized firm of accountants to conduct an audit of the Financial Statements and the consolidated balance sheet of Four Point as of the Closing. 43 44 Section 6.3 Empire Studio. Four Point has entered into an agreement to sell the real property owned by Empire Burbank Studios, Inc. Sellers represent that the net proceeds of such sale to Four Point on an after tax basis to be realized within twelve months after the Closing will not be less than $640,000. Section 6.4 Agreement Not to Compete. (a) From the date hereof to and including the third anniversary of the Closing, each Seller hereby agrees that he or it shall not, for any reason, directly or indirectly, engage or be interested in any business that competes in any way with the Surviving Corporation (including Four Point) and its subsidiaries, and shall not, directly or indirectly, have any interest in, own, manage, operate, control, be connected with as a stockholder (other than as a stockholder of less than one percent (1%) of the issued and outstanding stock of a publicly-held corporation and other than as a passive owner of shares of the Auction Channel (a/k/a Auction Network) so long as such Seller is not engaged in any programming for the Auction Channel (a/k/a Auction Network) except through Dove and its subsidiaries), joint venturer, officer, partner, employee or consultant, or otherwise engage or invest or participate in, any business that shall compete in any way with any of the businesses conducted by the Surviving Corporation (including Four Point) or its subsidiaries, in any county or any other political subdivision of any state of the United States of America or of any other country in the world where Four Point or its Subsidiaries conducted any business at any time during the two (2) year period preceding the date hereof. All of the parties agree that the duration and area for which the covenant not to compete set forth in this Section 6.4 is to be effective are reasonable. In the event that any court determines that the time period or the geographical areas provided for in this Section 6.4, or both of them, are unreasonable and that such covenant is to that extent unenforceable, such covenant shall remain in full force and effect for the greatest time period and in the greatest geographical area that would not render it unenforceable. The parties intend that this covenant shall be deemed to be a series of separate covenants, one for each and every county of each and every state of the United States of America and for any other country in the world where this covenant is intended to be effective. (b) The parties agree that damages would be an inadequate remedy for Dove in the event of a breach or threatened 44 45 breach of this Agreement and thus, in any such event, Dove may, either with or without pursuing any potential damage remedies, immediately obtain and enforce an injunction prohibiting any Seller from violating this Agreement. 6.5 Automatic Registration. Pursuant to Article 3 of the Registration Rights Agreement, Dove shall prepare and file with the Securities and Exchange Commission, on or prior to June 30, 1996, at the sole expense of Dove, a Registration Statement so as to permit a public offering and sale of Dove Shares upon the effectiveness of such Registration Statement. Notwithstanding the foregoing, in the event that on or prior to June 30, 1996 Dove files or proposes to file a registration statement registering newly issued shares of Dove Common Stock or shares of Dove Common Stock held by or issuable to third parties, the provision of Article 2 of the Registration Rights Agreement shall apply in lieu of the provisions of this Section 6.5. ARTICLE 7. CONDITIONS Section 7.1 Closing Conditions to the Transactions. The respective obligations of each party to effect the Transactions shall be subject to the satisfaction at or prior to the Closing of the following conditions: (a) No statute, rule, regulation, executive order, degree or injunction shall be enacted, entered, promulgated or enforced by any court or governmental authority which prohibits the consummation of the Transactions and shall be in effect. (b) All authorizations, consents, orders or approvals of, or declarations of or filings with any governmental entity, and all required third party consents set forth on Schedule 7.1(b), the failure to obtain which would have a material adverse effect on Four Point or its Subsidiaries, shall have been filed, or been obtained. (c) The employment agreements between the Surviving Corporation and Shukri Ghalayini and between the Surviving Corporation and Ronald M. Ziskin, respectively (the "Employment Agreements") dated as of the date hereof, in the forms set forth on Exhibits B and C hereto respectively, shall have become effective in accordance with their respective terms as of the Closing. 45 46 Section 7.2 Conditions to The Obligations of Dove and Sub. The obligations of Dove and Sub to complete the Transactions are further subject to the satisfaction at or prior to the Closing of the following conditions, unless waived by Dove and Sub: (a) The representations and warranties of the Sellers and Four Point set forth in this Agreement shall be true and correct as of the date of this Agreement; (b) The Sellers and Four Point shall have performed all obligations required to be performed by them under this Agreement at or prior to the Closing; and (c) Without limiting the provisions of Section 7.2(a) and (b), as of the Closing Dove shall have assumed the Sanwa Agreements on terms satisfactory to Dove (to which Sanwa Bank California shall have consented), there shall be outstanding no more than $876,000 under the Term Loan Agreement and $375,000 under the Line of Credit Agreement and Four Point shall have duly and validly redeemed or repurchased all issued and outstanding shares of its Preferred Stock. (d) Delivery of an opinion of Heenan Blaikie, together with other counsel to the Sellers, in form and substance satisfactory to Dove. Section 7.3 Conditions to Obligations of the Sellers and Four Point. The obligations of the Sellers to consummate the Transactions are further subject to the satisfaction at or prior to the Closing the following conditions unless waived by each of the Sellers: (a) The representations and warranties of Dove and Sub set forth in this Agreement shall be true and correct as of the date of this Agreement; and (b) Dove and Sub shall have performed under this Agreement at or prior to the Closing. (c) The Surviving Corporation shall have entered into the Employment Agreements and Dove shall have entered into a Registration Rights Agreement in the form set forth in Exhibit D hereto. 46 47 (d) Delivery of an opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP, or other counsel to Dove, in form and substance satisfactory to Sellers. ARTICLE 8. INDEMNIFICATION Section 8.1 Indemnification by Sellers. Each Seller shall severally and not jointly, indemnify and hold harmless Dove and the Surviving Corporation and each of their affiliates, directors, officers, employees, attorneys, agents and representatives (collectively, the "Affiliated Parties") in respect of any and all claims, losses, damages, liabilities, declines in value, penalties, interest, costs and expenses (including, without limitation, any attorneys', accountants' and consultants' fees and other expenses) reasonably incurred by Dove or the Surviving Corporation or their respective Affiliated Parties, together with interest on cash disbursements in connection therewith, at an annual rate equal to the Prime Rate then in effect, from the date such cash disbursements were made by Dove or the Surviving Corporation or any of their Affiliated Parties until paid by such Seller, in connection with each and all of the following: (a) Any breach of any representation or warranty made by such Seller in Article 3 of this Agreement; (b) Any misrepresentation contained in any written statement or certificate furnished by such Seller individually pursuant to this Agreement or in connection with the Transactions; and (c) Any breach of any covenant, agreement or obligation of such Seller individually contained in this Agreement or any other instrument contemplated by this Agreement. No claim, demand, suit or cause of action shall be brought against such Seller under this Section 8.1 unless and until the aggregate amount of claims under Sections 8.1 and 8.2 exceeds $100,000, in which event Dove and the Surviving Corporation and their respective Affiliated Parties shall be entitled to indemnification from such Seller for all claims hereunder relating back to the first dollar. Section 8.2 Indemnification by Sellers. The Sellers shall, for a period of three years from the date hereof, jointly 47 48 and severally indemnify and hold harmless Dove and the Surviving Corporation and each of their respective Affiliated Parties in respect of any and all claims, losses, damages, liabilities, declines in value, penalties, interest, costs and expenses (including, without limitation, any attorneys, accountants' and consultants' fees and other expenses) reasonably incurred by Dove or the Surviving Corporation or their respective Affiliated Parties, together with interest on cash disbursements in connection therewith, at an annual rate equal to the Prime Rate then in effect, from the date such cash disbursements were made by Dove or the Surviving Corporation or any of their Affiliated Parties until paid by the Sellers, in connection with each and all of the following: (a) Any breach of any representation or warranty made by the Sellers or Four Point in Article 4 of this Agreement or pursuant hereto; (b) Any misrepresentation contained in any written statement or certificate furnished by Sellers and/or Four Point pursuant to this Agreement or in connection with the Transactions; or (c) Any breach of any covenant, agreement or obligation of Sellers and/or Four Point contained in this Agreement or any other instrument contemplated by this Agreement. No claim, demand, suit or cause of action shall be brought against the Sellers under this Section 8.2 unless and until the aggregate amount of claims under Sections 8.1 and 8.2 exceeds $100,000, in which event Dove and the Surviving Corporation and their respective Affiliated Parties shall be entitled to indemnification from the Sellers for all claims hereunder relating back to the first dollar. Section 8.3 Indemnification by Dove. Dove shall, for a period of three years from the Closing Date, indemnify and hold harmless each of Sellers in respect of any and all claims, losses, damages, liabilities, declines in value, penalties, interest, costs and expenses (including, without limitation, any attorneys', accountants' and consultants' fees and other expenses) reasonably incurred by Sellers, together with interest on cash disbursements in connection therewith, at an annual rate equal to the Prime Rate then in effect, from the date that such cash disbursements were made by Sellers until paid by Dove, in connection with each and all of the following: 48 49 (a) Any breach of any representation or warranty made by Dove in this Agreement or pursuant hereto; or (b) Any breach of any covenant, agreement or obligation of Dove contained in this Agreement or any other instrument contemplated by this Agreement; or (c) Any misrepresentation contained in any statement or certificate furnished by Dove pursuant to this Agreement or in connection with the Transactions. No claim, demand, suit or cause of action shall be brought against Dove under this Section 8.3 unless and until the aggregate amount of claims under this Section 8.3 exceeds $100,000, in which event, Sellers shall be entitled to indemnification from Dove for all claims hereunder relating back to the first dollar. Section 8.4 Indemnification by Sellers for Tax Liabilities. In addition to, and not by way of limitation on, the indemnities set forth in this Article 8, the Sellers shall jointly and severally indemnify and hold harmless on an after-tax basis Dove and the Surviving Corporation against all Taxes of Four Point (together with its consolidated Subsidiaries) for all taxable periods ending on or before the date hereof or otherwise attributable to the operations, transactions, assets, or income of Four Point or its subsidiaries prior to the date hereof or otherwise attributable to consummation of the Transactions, together with any expenses (including, without limitation, settlement costs and any legal, accounting and other expenses) incurred in connection with the contesting, collection or assessment of such Taxes, and together with interest at an annual rate equal to the Prime Rate then in effect. Notwithstanding Sections 8.1 and 8.2, the Sellers' obligation to indemnify Dove and the Surviving Corporation pursuant to this Section 8.4 shall continue until 90 days after all applicable statutes of limitations have expired. For purposes of this Section 8.4, the term "after-tax basis" means determined after giving effect to (i) the receipt by the indemnified party of such payment, if such receipt is taxable and (ii) any tax deduction available on account of the payment of such Taxes; and assuming that Taxes are payable at their combined marginal tax rate. The Sellers shall have the responsibility for, and the right to control, at the Sellers' expense, the audit (and disposition thereof) of any Tax return relating to periods ending on or prior to the Closing, to participate in the disposition of the audit of any tax return relating to the periods ending after the Closing if such audit or 49 50 disposition thereof could give rise to a claim for indemnification hereunder or impact the tax payable for the period ending on or prior to the Closing, and to approve, which approval shall not be unreasonably withheld, the disposition of any audit adjustment under such circumstances. Dove shall have the right directly or through its designated representatives, to review in advance and comment upon all submissions made in the course of audits or appeals thereof to any governmental entity relating to periods ending on or prior to the Closing and to approve, which approval shall not be unreasonably withheld, the Sellers' disposition of any audit adjustment with respect to such periods if such disposition will or might reasonably be expected to result in an increase in Taxes of the Surviving Corporation, any successor thereof or any consolidated group which includes the Surviving Corporation, for any period ending after the Closing. Section 8.5 Claims for Indemnification. Whenever any claim shall arise for indemnification hereunder, the party entitled to indemnification (the "indemnified party") shall promptly notify the party obligated to provide indemnification (the "indemnifying party") of the claim and, when known, the facts constituting the basis for such claim; provided, however, that the failure to so notify the indemnifying party shall not relieve the indemnifying party of its obligation hereunder to the extent such failure does not materially prejudice the indemnify ing party. In the event of any claim for indemnification here under resulting from or in connection with any claim or legal proceedings by a third party, the notice to the indemnifying party shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom. If any claims shall arise against Sellers hereunder, Dove may (but shall not be required to) set-off against any amount then or thereafter payable (but not yet paid) to such Seller. Section 8.6 Defense Claims. In connection with any claim giving rise to indemnity hereunder resulting from or arising out of any claim or legal proceeding by a person who is not a party to this Agreement, the indemnifying party at its sole cost and expense and with counsel reasonably satisfactory to the indemnified party may, upon written notice to the indemnified party, assume the defense of any such claim or legal proceeding if (a) the indemnifying party acknowledges to the indemnified party in writing, within fifteen (15) days after receipt of notice from the indemnifying party, its obligations to indemnify the indemnified party with respect to all elements of such claim, (b) the indemnifying party provides the indemnified party with 50 51 evidence reasonably acceptable to the indemnified party that the indemnifying party will have the financial resources to defend against such third-party claim and fulfill its indemnification obligations hereunder, (c) the third-party claim involves only money damages and does not seek an injunction or other equitable relief, and (d) settlement or an adverse judgment of the third party claim is not, in the good faith judgment of the indemnified party, likely to establish a pattern or practice adverse to the continuing business interests of the indemnified party. The indemnified party shall be entitled to participate in (but not control) the defense of any such action, with its counsel and at its own expense; provided, however, that if there are one or more legal defenses available to the indemnified party that conflict with those available to the indemnifying party, or if the indemnifying party fails to take reasonable steps necessary to defend diligently the claim after receiving notice from the indemnified party that it believes the indemnifying party has failed to do so, the indemnified party may assume the defense of such claim; provided, further, that the indemnified party may not settle such claim without the prior written consent of the indemnifying party, which consent may not be unreasonably withheld. If the indemnified party assumes the defense of the claim, the indemnifying party shall reimburse the indemnified party for the reasonable fees and expenses of counsel retained by the indemnified party and the indemnifying party shall be entitled to participate in (but not control) the defense of such claim, with its counsel and at its own expense. The parties agree to render, without compensation, to each other such assistance as they may reasonably require of each other in order to insure the proper and adequate defense of any action, suit or proceeding, whether or not subject to indemnification hereunder. Notwithstanding the foregoing, if any of Sellers assumes the defense of a claim for Taxes for which they are obligated to indemnify Dove or any of its subsidiaries, then such indemnifying party shall not settle or otherwise agree to a resolution of a dispute with respect to such claim if that settlement or resolution would have an adverse impact on the liability of Dove or any of its subsidiaries for any taxable period ending after the date hereof without the express written consent of Dove or such affected subsidiary, which consent will not be unreasonably withheld or delayed. Section 8.7 Manner of Indemnification. All indemnifica tion payments hereunder shall be effected by payment of cash or delivery of a certified or official bank check in the amount of the indemnification liability. 51 52 Section 8.8 Limitations on Indemnification. Notwith standing the provisions of Section 8.2 and 8.3 to the effect that an indemnifying party's obligation under such section shall expire on the third anniversary hereof, such obligation shall continue (i) as to any matter as to which a claim is submitted in writing to the indemnifying party prior to such third anniversary and identified as a claim for indemnification pursuant to this Agreement or (ii) as to any matter that is based upon willful fraud by the indemnifying party, until such time as such claims and matters are resolved. ARTICLE 9. DELIVERY OF CLOSING DOCUMENTS Section 9.1 Deliveries by Sellers and Four Point. Contemporaneously herewith, Sellers hereby deliver to Dove, and Dove acknowledges receipt of, the following: (a) Stock certificates evidencing all of the Four Point Shares, duly endorsed for transfer or accompanied by separate instruments of transfer, by each Seller who is the record owner thereof; (b) Letters from all of the officers and directors of Four Point, dated as of the Closing, resigning their positions as a director and/or officer of Four Point; (c) The original insurance policies listed on Schedule 4.27 (to the extent reasonably requested by Dove); (d) Opinion of Heenan Blaikie, together with other counsel to the Sellers, in form and substance satisfactory to Dove; (e) Evidence, satisfactory to Dove and its counsel, that Four Point has duly and validly redeemed all issued and outstanding shares of its Preferred Stock prior to the approval by Four Point's shareholders of the Merger, including a recent confirmation thereof by Raniere Caserta and Harvey Goldstein. Section 9.2 Delivery of Additional Documents. Contemporaneously herewith, the following agreements are being executed and delivered by the respective parties thereto: (a) The Employment Agreements of even date herewith; 52 53 (b) The Registration Rights Agreement of even date herewith between Dove and the Sellers receiving Dove Shares pursuant hereto in the form of Exhibit D. ARTICLE 10. MISCELLANEOUS Section 10.1 Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile transmission (with subsequent letter confirmation by mail) or three days after being mailed by certified or registered mail, postage prepaid, return receipt requested, to the parties, their successors in interest or their assignees at the following addresses, or at such other addresses as the parties may designate by written notice in the manner aforesaid: If to Dove or Sub Dove Audio, Inc. 301 North Canon Drive Suite 207 Beverly Hills, CA 90210 Attention: Michael Viner With a concurrent copy to: Kaye, Scholer, Fierman Hays & Handler, LLP 1999 Avenue of the Stars Suite 1600 Los Angeles, CA 90067 Attention: Barry L. Dastin If to any Seller: See Schedule 10.1 With a concurrent copy to: Heenan Blaikie 9401 Wilshire Blvd., Suite 1100 Beverly Hills, CA 90212 Attention: Daniel H. Black; and Bennett J. Yankowitz Section 10.2 Assignability and Parties in Interest. This Agreement shall not be assignable by any of the parties, except that Dove may assign its rights hereunder to, and have its obligations hereunder assumed by, a wholly-owned subsidiary of Dove; provided, however, that no such assignment shall release Dove from its obligations under this Agreement. This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. 53 54 Section 10.3 Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the internal law, and not the law pertaining to conflicts or choice of law, of the State of California. Section 10.4 Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. Section 10.5 Complete Agreement. This Agreement, the Exhibits and Schedules and the documents delivered or to be delivered pursuant to this Agreement contain or will contain the entire agreement among the parties with respect to the Transactions and shall supersede in its entirety all previous oral and written and all contemporaneous oral negotiations, commitments and understandings, including the letter of intent with respect to the Transactions. Section 10.6 Modifications, Amendments and Waivers. This Agreement may be modified, amended or otherwise supplemented by a writing signed by all of the parties. No waiver of any right or power hereunder shall be deemed effective unless and until a writing waiving such right or power is executed by the party waiving such right or power. Section 10.7 Due Diligence Investigation: Knowledge. All representations and warranties contained herein that are made to the knowledge of a party shall require that such party make reasonable investigation and inquiry with respect thereto to ascertain the correctness and validity thereof. Section 10.8 Expenses. Except as otherwise expressly provided elsewhere in this Agreement, each party (and not Four Point) shall pay all fees and expenses incurred by it in connection with the transactions contemplated by this Agreement. Section 10.9 Limit on Interest. Notwithstanding anything in this Agreement to the contrary, no party shall be obligated to pay interest at a rate higher than the maximum rate permitted by applicable law. In the event that an interest rate provided in this Agreement exceeds the maximum rate permitted by applicable law, such interest rate shall be deemed to be reduced to such maximum permissible rate. Section 10.10 Equitable Remedies. In addition to legal remedies, in recognition of the fact that remedies at law may not 54 55 be sufficient, the parties (and their permitted successors and assigns) shall be entitled to equitable remedies for breaches or defaults hereunder, including, without limitation, specific performance and injunction. Section 10.11 Attorneys, Fees and Costs. Should any party institute any action or proceeding in any court to enforce any provision of this Agreement, the prevailing party shall be entitled to receive from the losing party reasonable attorneys' fees and costs incurred in such action or proceeding, whether or not such action or proceeding is prosecuted to judgment. Section 10.12 Further Assurances. Each party shall execute and deliver such further instruments and take such further actions as any other party may reasonably request in order to carry out the intent of this Agreement and to consummate the Transactions. Section 10.13 Contract Interpretation: Construction of Agreement. (a) The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Article, section, exhibit, schedule, preamble, recital and party references are to this Agreement unless otherwise stated. (b) No party, nor its respective counsel, shall be deemed the drafter of this Agreement for purposes of construing the provisions of this Agreement, and all language in all parts of this Agreement shall be construed in accordance with its fair meaning, and not strictly for or against any party. 55 56 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. DOVE DOVE AUDIO, INC., a California corporation By:/s/Michael Viner ----------------------------- Name: Title: SUB DOVE FOUR POINT, INC., a Florida corporation By:/s/Michael Viner ----------------------------- Name: Title: SELLERS /s/Shukri Ghalayini --------------------------------- Shukri Ghalayini /s/ Ronald M. Ziskin --------------------------------- Ronald M. Ziskin /s/Shukri Ghalayini,as attorney in ---------------------------------- fact ---- Rafic Saadeh THE SHUKRI GHALAYINI FAMILY TRUST By:/s/Shukri Ghalayini ------------------------------ Shukri Ghalayini, Trustee WEDNER-ZISKIN FAMILY TRUST By:/s/Ronald M. Ziskin ------------------------------ Ronald M. Ziskin, Trustee 57 FOUR POINT FOUR POINT ENTERTAINMENT, INC., a Florida corporation By:/s/Shukri Ghalayini ------------------------------ Name: Title: 58 SCHEDULE I CAPITAL STOCK OF FOUR POINT COMMON STOCK, 8,027,240 shares issued and outstanding
Holder Number of Shares Held ------ ---------------------- The Shukri Ghalayini Family Trust 3,868,000 shares Wedner-Ziskin Family Trust 3,868,000 shares Rafic Saadeh 291,240 shares
PREFERRED STOCK, no shares issued or outstanding Schedule I-1 59 EXHIBIT A Purchase Price Of the total consideration, $1,250,000 will be delivered to The Shukri Ghalayini Family Trust, $1,250,000 will be delivered to the Wedner-Ziskin Family Trust and $0 will be delivered to Rafic Saadeh pursuant to his agreement. Of the Dove Shares deliverable at closing, 201,757 shares will be issued in the name of The Shukri Ghalayini Family Trust, 201,757 shares will be issued in the name of the Wedner-Ziskin Family Trust and 23,760 shares will be issued in the name of Rafic Saadeh. A-1 EX-4.1 3 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4.1 REGISTRATION RIGHTS AGREEMENT AGREEMENT, dated as of the ___ day of April 1996, between the person whose name and address appears on the signature page hereto (individually, a "Holder" and collectively the "Holders") and Dove Audio, Inc., a California corporation having its principal executive office at 301 N. Canon Drive, Suite 207, Beverly Hills, California 90210 (the "Company"). WHEREAS, the Company, the Holders and certain other persons are party to an Agreement and Plan of Merger dated as of April 12, 1996 (the "Merger Agreement"; capitalized terms used herein without definition shall have the respective meanings set forth in the Merger Agreement); WHEREAS, simultaneously or in connection with the execution and delivery of this Agreement, the Holders are purchasing the Dove Shares from the Company in a private offering (the "Offering")pursuant to the Merger Agreement; WHEREAS, the Company desires to grant to the Holder the registration rights set forth herein with respect to the Dove Shares; NOW, THEREFORE, the parties hereto mutually agree as follows: 1. REGISTRABLE SECURITIES. As used herein the term "Registrable Security" means each of the Dove Shares issued, as of the date of determination thereof, pursuant to the Merger Agreement; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Securities Act") and disposed of pursuant thereto, (ii) registration under the Securities Act is no longer required for the immediate public distribution of such security, or (iii) it has ceased to be outstanding. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of "Registrable Security" as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. D-1 2 2. PIGGYBACK REGISTRATION. 2.1 If, at any time commencing June 30, 1996, (or, at the Company's option, at any earlier time) the Company proposes to prepare and file with the Securities and Exchange Commission (the "Commission") a registration statement covering equity or debt securities of the Company, or any such securities of the Company held by its shareholders (in any such case, other than in connection with a merger, acquisition or pursuant to Form S-4, Form S-8 or successor forms) (for purposes of this Article 2, collectively, a "Registration Statement"), it will give written notice of its intention to do so by registered mail ("Notice"), at least twenty (20) days prior to the filing of each such Registration Statement, to all holders of the Registrable Securities. Upon the written request of such a holder (a "Requesting Holder"), made within ten (10) days after receipt of the Notice, that the Company include any of the Requesting Holder's Registrable Securities in the proposed Registration Statement, the Company shall, as to each such Requesting Holder, use its reasonable best efforts to effect the registration under the Securities Act of the Registrable Securities which it has been so requested to register ("Piggyback Registration"), at the Company's sole cost and expense and at no cost or expense to the Requesting Holders (other than any commission, discounts or counsel fees payable by such Requesting Holder, as further provided in Section 3.1 hereof); provided, however, that if, the Piggyback Registration is in connection with an underwritten public offering and in the written opinion of the Company's managing underwriter, if any, for such offering, the inclusion of all or a portion of the Registrable Securities requested to be registered, when added to the securities being registered by the Company or the selling shareholder(s), will exceed the maximum amount of the Company's securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without otherwise adversely affecting the entire offering, then the Company may exclude from such offering all or a portion of the Registrable Securities which it has been requested to register, it being understood that in the initial such underwritten offering, the Company will use its reasonable best efforts to include at least 68,181 shares to be sold by each of Messrs. Ghalayini and Ziskin and at least 10,000 shares to be sold by Rafic Saadeh. Without limiting the generality of the foregoing, the managing underwriter may condition its consent to the inclusion of all or a portion of the Registrable Securities requested to be registered upon either (as an entirety or in a combination specified by the managing underwriter) of (x) the D-2 3 participation by the holders of such Registrable Securities in the underwritten public offering on the terms and conditions thereof and/or (y) upon the execution and delivery of a "lock-up" agreement by the Holder or Holders that they will not offer for sale, sell, distribute, grant any option for the sale of or otherwise encumber or dispose of, directly or indirectly, or exercise registration rights with respect to any Registrable Securities for a period of 180 days after the effective date of such Registration Statement. 2.2 If securities are proposed to be offered for sale pursuant to such Registration Statement by other security holders of the Company and the total number of securities to be offered by the Requesting Holders and such other selling security holders is required to be reduced pursuant to a request from the managing underwriter, the aggregate number of Registrable Securities to be offered by Requesting Holders pursuant to such Registration Statement shall equal the number which bears the same ratio to the maximum number of securities that the underwriter believes may be included for all the selling security holders (including the Requesting Holders) as the original number of Registrable Securities proposed to be sold by the Requesting Holders bears to the total original number of securities proposed to be offered by the Requesting Holders and the other selling security holders, except in the case of the initial such underwritten offering in which case the provisions of Section 2.1 shall apply (i.e., such formula need not be applied but Dove will use its reasonable best efforts to include the number of shares to be sold by Messrs. Ghalayini and Ziskin referred to above). 2.3 Notwithstanding the provisions of Article 2.1, the Company shall have the right at any time after it shall have given written notice pursuant to Section 2.1 (irrespective of whether any written request for inclusion of such securities shall have already been made) to elect not to file any proposed Registration Statement, or to withdraw the same after the filing but prior to the effective date thereof. 3. DEMAND REGISTRATION. At any time commencing on or after June 30, 1996, any "Majority Holder" (as such term is defined below) of the Registrable Securities shall have the right (which right is in addition to the piggyback registration rights provided for under Article 2 hereof), exercisable by written notice to the Company (the "Demand Registration Request"), to have the Company prepare and file with the Commission, on up to D-3 4 two occasions (the first of which shall be the registration contemplated in Section 6.5 of the Merger Agreement), at the sole expense of the Company, in respect of all holders of Registrable Securities making such demand and all Requesting Holders, a Registration Statement so as to permit a public offering and sale of the Registrable Securities provided that the Company shall not be required to file such registration statement if Form S-3 shall not be available. Notwithstanding the foregoing, in the event that on or prior to June 30, 1996 Dove files or proposes to file a registration statement registering newly issued shares of Dove Common Stock or shares of Dove Common Stock held by or issuable to third parties, the provisions of Article 2 of this Agreement shall apply in lieu of a "demand" under this Article 3. Once effective, the Company will be required to maintain the effectiveness of the Registration Statement until the earlier of (i) the date that all of the Registrable Securities have been sold, or (ii) the date that the Registrable Securities may be freely traded without registration under the Securities Act, under Rule 144 promulgated under the Securities Act or otherwise. If a Majority Holder shall give notice to the Company at any time of its or their desire to exercise the registration right granted pursuant to this Article 3, then within ten (10) days after the Company's receipt of such notice, the Company shall give notice to the other holders of Registrable Securities, advising them that the Company is proceeding with such registration and offering to include therein the Registrable Securities of such holders, provided they furnish the Company with such appropriate information in connection therewith as the Company shall reasonably request in writing. The term "Majority Holder" as used in this Agreement shall mean any holder or any combination of holders of Registrable Securities as would constitute a majority of the aggregate number of Registrable Securities, but excluding any such securities which are subject to an effective Registration Statement which was filed pursuant to Article 2 above) including all of the Registrable Securities. 4. COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. The Company covenants and agrees as follows: 4.1 The Company shall use its reasonable best efforts to cause the Registration Statement to become effective as promptly as possible and, if any stop order shall be issued by the Commission in connection therewith, to use its reasonable efforts to obtain the removal of such order. Following the D-4 5 effective date of a Registration Statement, the Company shall, upon the request of the Holder, forthwith supply such reasonable number of copies of the Registration Statement, preliminary prospectus and prospectus meeting the requirements of the Act. and other documents necessary or incidental to the public offering of the Registrable Securities, as shall be reasonably requested by the Holder to permit the Holder to make a public distribution of the Holder's Registrable Securities. The obligations of the Company hereunder with respect to the Holder's Registrable Securities are expressly conditioned on the Holder's furnishing to the Company such appropriate information concerning the Holder, the Holder's Registrable Securities and the terms of the Holder's offering of such Registrable Securities as the Company may reasonably request. 4.2 The Company shall pay all costs, fees and expenses in connection with all Registration Statements filed pursuant hereto including, without limitation, the Company's legal and accounting fees, printing expenses, and blue sky fees and expenses; provided, however, that the Holder shall be solely responsible for the fees of any counsel retained by the Holder in connection with such registration and any transfer taxes or underwriting discounts, commissions or fees applicable to the Registrable Securities sold by the Holder pursuant thereto. 4.3 The Company will use reasonable efforts to qualify or register the Registrable Securities included in a Registration Statement for offering and sale under the securities or blue sky laws of such states as are requested by the holders of such securities, provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. 5. ADDITIONAL TERMS. 5.1 The Company shall indemnify and hold harmless the Holder and each underwriter, within the meaning of the Securities Act, who may purchase from or sell for the Holder, any Registrable Securities, from and against any and all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in the Registration Statement, any other registration statement filed by the Company under the Securities Act or any prospectus included therein or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not D-5 6 misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission based upon information furnished or required to be furnished in writing to the Company by any Holder or underwriter expressly for use therein, which indemnification shall include each person, if any, who controls either the Holder or underwriter within the meaning of the Securities Act and each officer, director, employee and agent of the Holder and underwriter; provided, however, that the indemnification in this Section 5.1 with respect to any prospectus shall not inure to the benefit of the Holder or underwriter (or to the benefit of any person controlling the Holder or underwriter) on account of any such loss, claim, damage or liability arising from the sale of Registrable Securities by the Holder or underwriter, if a copy of a subsequent prospectus correcting the untrue statement or omission in such earlier prospectus was provided to the Holder or underwriter by the Company prior to the subject sale and the subsequent Prospectus was not delivered or sent by the Holder or underwriter to the purchaser prior to such sale; and provided further, that the Company shall not be obligated to so indemnify the Holder or any such underwriter or other person referred to above unless the Holder or underwriter or other person, as the case may be, shall at the same time indemnify the Company, its directors, each officer signing the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act, from and against any and all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in the Registration Statement, any registration statement or any prospectus required to be filed or furnished by reason of this Agreement or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission based upon information furnished in writing to the Company by the Holder or underwriter expressly for use therein. 5.2 If for any reason the indemnification provided for in the preceding section is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative D-6 7 benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations. 5.3 Neither the filing of a Registration Statement by the Company pursuant to this Agreement nor the making of any request for prospectuses by the Holder shall impose upon the Holder any obligation to sell the Holder's Registrable Securities, except as may be required in accordance with Section 2 hereof. 5.4 The Holder, upon receipt of notice from the Company that an event has occurred which requires a post effective amendment to the Registration Statement or a supplement to the prospectus included therein, shall promptly discontinue the sale of Registrable Securities until the Holder receives a copy of a supplemented or amended prospectus from the Company, which the Company shall provide as soon as practicable after such notice. 6. GOVERNING LAW. The Registrable Securities will be, if and when issued, delivered in California. This Agreement shall be deemed to have been made and delivered in the State of California and shall be governed as to validity, interpretation, construction, effect and in all other respects by the internal substantive laws of the State of California, without giving effect to the choice of law rules thereof. 7. AMENDMENT. This Agreement may only be amended by a written instrument executed by the Company and the Holder. 8. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. 9. EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. 10. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed duly given when delivered by hand or mailed by registered D-7 8 or certified mail, postage prepaid, return receipt requested, as follows: If to the Holder, to his or her address set forth on the signature page of this Agreement. If to the Company, to the address set forth on the first page of this Agreement. 11. BINDING EFFECT; BENEFITS. The Holder may not assign his or her rights hereunder. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives and successors. Nothing herein contained, express or implied, is intended to confer upon any person other than the parties hereto and their respective heirs, legal representatives and successors, any rights or remedies under or by reason of this Agreement. 12. HEADINGS. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement. 13. SEVERABILITY. Any provision of this Agreement which is held by a court of competent jurisdiction to be prohibited or unenforceable in any jurisdiction(s) shall be, as to such jurisdiction(s), ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. D-8 9 IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first above written. DOVE AUDIO, INC. By: /s/ SIMON BAKER -------------------------------- Name: Title: HOLDER: ----------------------------------- D-9 EX-10.1 4 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Employment Agreement is made and entered into this 29th day of April, 1996, by and between Dove Four Point, Inc., a Florida corporation (the "Company"), a wholly-owned subsidiary of Dove Audio, Inc., a California corporation ("Dove"), and Shukri Ghalayini ("Employee"). Whereas, the Company and Dove desire to assure that the Company retains the services of Employee, whose experience, knowledge and abilities with respect to the business and affairs of the Company are extremely valuable to the Company; Whereas, the entering into of this Agreement is a condition to the consummation of the acquisition by Dove of Four Point Entertainment, Inc. ("Four Point") pursuant to the Agreement and Plan of Merger dated as of April 12, 1996 (the "Merger Agreement"); Whereas, simultaneously herewith, Four Point has merged with and into the Company; Now, therefore, the Company and Employee agree as follows: 1. Positions and Duties. 1.1 The Company hereby employs Employee as President (or other mutually agreed-upon title) of the Company during the term of this Agreement, with powers and duties consistent with such position. Employee shall report to the Board of Directors of the Company and to the Chief Executive Officer of the Company or the President and/or the Chief Operating Officer of Dove, as determined from time to time by Dove. Employee shall, during the term of this Agreement, perform such additional or different duties, and accept the election or appointment to such other offices or positions, as may mutually be agreeable to Employee and Dove. 1.2 Employee shall devote his full working time to the promotion of the Company's business and welfare, and use his best efforts to promote the Company's products and services. During the term of his employment with the Company, Employee will not B-1 2 accept employment or engage in any manner, directly or indirectly, in any other business. Employee shall perform such duties and responsibilities incidental to his employment as may from time to time be requested by the Company and shall faithfully observe the Company's and Dove's policies and procedures. 2. Compensation and Benefits. 2.1 Generally; Base Salary. Beginning on the date of this Agreement, during the term of employment, for the services to be rendered by Employee hereunder, Employee shall receive the following compensation and benefits, payable as earned, in the intervals indicated, and prorated for any partial year: (a) An annual salary (the "Base Salary"), at the rate of two hundred thousand dollars ($200,000) payable from the period commencing as of the date of commencement of the Term. The Base Salary shall be payable no less frequently than monthly. The Company may deduct from each installment of the Base Salary an amount sufficient to cover applicable federal, state and/or local income tax withholdings, old age and survivors and other social security payments, state disability insurance premiums and any other amounts which the Company is required to withhold by applicable law; (b) an advance against producer fees on new programming initiated and developed after the date hereof calculated in accordance with Schedule I hereto (the "Fee Advance") payable monthly at the annual rate of one hundred thousand dollars ($100,000); and (c) a stock option grant as of or prior to the commencement of the Term of 300,000 shares (the "Option Shares") of Dove common stock, pursuant to the Stock Option Award Agreement dated as of April , 1996 between Dove and Employee substantially in the form of Schedule II hereto (the "Stock Option Agreement"). 2.2 Fringe Benefits. Employee shall receive the following fringe benefits from the Company during the Term: (a) four weeks of paid vacation during each fiscal year of the Company (as used in this Paragraph, a "fiscal year" shall be the date which is 12 months following the date of commencement of the Term under this Agreement and each 12-month B-2 3 period thereafter). Any such vacation shall be taken at times in accordance with the vacation policies of Dove, unless approved otherwise by Dove, or if accrued by Employee and not taken in any fiscal year shall be accrued and carried forward to the subsequent fiscal year; (b) payment of the premium payable (in an amount comparable to the premium historically paid by Four Point) with respect to the health insurance plan provided by Dove for its executive officers as from time to time in effect. In addition, Employee shall be permitted during the term hereof, if and to the extent eligible, to participate in any group life, hospitalization or disability insurance plan, health program, pension plan, similar benefit or other fringe benefits of Dove which may be available to executive officers of Dove; (c) continuation of the current automobile leased by Four Point through the term thereof (together with related automobile insurance and ordinary maintenance costs) and thereafter reimbursement of automobile expenses in accordance with the policy of Dove as from time to time in effect for a comparable automobile; and (d) reimbursement to Employee for all reasonable costs and expenses he incurs in connection with the performance of his duties and obligations under this Agreement, and which are consistent with the policies of Dove for executive officers. 2.3 Guarantee. Dove shall guarantee all compensation and benefits referred to in this Section 2 as fully as if it were a party hereto. 3.1 Term. The term of this Agreement (the "Term") shall commence on the date hereof and shall terminate upon the first to occur of the following events: (a) April 30, 1999; (b) The death or permanent disability of Employee as defined in Section 5.1(a) herein; (c) The discharge of Employee for cause or special cause as defined in Section 5.2(a) or 5.3 herein. 4.1 Covenant Not to Solicit or Hire Employees or Customers. Until April 30, 1999, Employee shall not, directly or B-3 4 indirectly, solicit or induce any of the Company's employees to terminate their employment with the Company, hire or cause any of the then current employees of the Company to be hired by any other company, or solicit or assist in soliciting any business from any of the then current customers or prospective customers of the Company on behalf of Employee or any other company. 5. Termination. 5.1 Termination Due to Disability, etc. The Company may, by written notice to Employee, terminate his employment under the Agreement as of the date of that notice if Employee shall fail or be unable to perform his duties as the result of any physical or mental disability for 180 consecutive days or during any 210 days in any 240-day period (a "Permanent Disability"); Employees's employment under this Agreement shall terminate automatically upon Employee's death or adjudication of incompetency. 5.2 Termination for Cause. By complying with the provisions of Section 5.2(b) hereof, the Company may terminate Employee's employment under this Agreement for "Cause." (a) For purposes of this agreement, "Cause" shall mean: (i) fraud, embezzlement or conviction of or the pleading of guilty or no contest to any felony or to any misdemeanor involving dishonesty, (ii) gross negligence or willful failure of Employee to perform his duties hereunder, (iii) any breach by Employee of his covenants or obligations under this Agreement, or (iv) the occurrence of any matter relating to Employee of the type set forth in Item 401(f) of Regulation S-K promulgated by the Securities and Exchange Commission. (b) If any one or more of the events enumerated under (i) above shall occur, the Company shall provide written notice (the "Warning Notice") to Employee of its intention to terminate this Agreement for Cause, the basis of such Cause, and the steps which the Company believes should be taken by the Employee to correct and cure the same. Unless Employee, within 30 days following receipt of the Warning Notice, substantially corrects and cures all matters delineated in the Warning Notice to Dove's reasonable satisfaction or if the matters set forth in the Warning Notice are not reasonably susceptible of being so cured or corrected within such 30-day period, the Company may terminate this Agreement so that the Company shall have no further obligation to Employee except as set forth in Section 5.4 B-4 5 herein, by delivering a notice of termination to Employee, which notice of termination shall be effective as of the date of delivery of such notice; provided however, that Employee shall not be entitled to any notice or opportunity to cure a termination arising as a result of the "Cause" set forth in Section 5.2(a)(i) hereof. 5.3 Termination for Special Cause. The Company may terminate Employee's employment under the Agreement for "Special Cause." (a) For purposes of this Agreement, "Special Cause" shall mean a failure by the Company to achieve at least $800,000 of pre-tax income for the period commencing May 1, 1996 through April 30, 1997. (b) Upon a determination by the Company that Special Cause has occurred, Employee may thereafter be terminated for Special Cause, provided, however, that the Company may continue his employment despite his failure to achieve the Plan objectives outlined above. Upon termination by the Company of Employee's employment for "Special Cause," Dove shall agree, so long as such termination is without "Cause," to shorten the term of such person's agreement not to compete pursuant to Section 6.4 of the Merger Agreement to the effective date of such termination. 5.4 Payments Upon Termination. (a) In the event Employee is terminated for any reason whatsoever, the Company shall pay to Employee all accrued and unpaid Base Salary, all accrued and unpaid vacation and other accrued and unpaid benefits set forth herein to the date of termination, reimbursement of expenses prior to the date of termination in accordance with the provisions of this Agreement; continued insurance benefits under such circumstances and for such periods of time as are mandated by applicable state or federal law; and such other benefits or entitlements that are deemed to be vested pursuant to the provisions of Employee Retirement Income Security Act of 1974, as from time to time amended, and any regulations promulgated pursuant thereto. Such benefits shall be payable in accordance with the provisions therefor in this Agreement, or with regard to benefits for which no provision is made, promptly following termination of employment. B-5 6 (b) In the event Employee is terminated by the Company (other than pursuant to Section 5.3) without Cause, then, in addition to the payments due to Employee under Section 5.4(a), and as Employee's sole and exclusive rights and remedies, the Company shall, for the remainder of the Term, be obligated to continue to provide to the Employee his Base Salary in accordance with the terms hereof (but no other payments or benefits except the Options vested in accordance with Section 8(d) of the Stock Option Agreement). (c) Employee shall have no duty to seek alternative employment in the event of termination. Notwithstanding the foregoing, the Company and Employee agree that if Employee enters into employment after termination by the Company hereunder without Cause or Special Cause, the total compensation earned by Employee together with any welfare or other benefits earned or received by Employee during any period that Employee continues to receive Base Salary shall be deducted from the amount, if any, which the Company would otherwise be required to pay or provide to Employee during such period hereunder. Employee agrees that he shall give written notice to the Company (promptly after accepting any engagement or employment or furnishing his services after termination of his employment with the Company) of any amounts earned (or to be earned) by Employee and any benefits provided (or to be provided) to Employee pursuant to his new engagement or employment arrangement. 6. Confidential Information. Employee acknowledges that the information, observations and data obtained by him while employed by the Company concerning the business or affairs of Dove, the Company or their Affiliates (the "Confidential Information") are the property of Dove, the Company or such Affiliate. Therefore, Employee agrees that Employee shall not disclose to any unauthorized person or use for Employee's own account any Confidential Information without the prior written consent of the Board, unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of Employee's acts or omissions to act or unless such information is required to be disclosed in connection with an administrative or judicial proceeding, provided that in such case, Employee agrees to notify the Company and Dove of the Confidential Information to be disclosed sufficiently in advance of such disclosure, and agrees, if requested, to use reasonable efforts to cooperate with Dove, the Company or an Affiliate in seeking a protective order for B-6 7 such information. Employee shall deliver to the Company at the termination of the Term, or at any other time Dove, the Company or an Affiliate may request, all "documents" and "writings", as defined in the California Evidence Code, and copies thereof, relating to the Confidential Information, work product or the business of Dove, the Company or any Affiliate which Employee may then possess or have under his control. In the event of the breach or a threatened breach by Employee of any of the provisions of this Section 6, Dove, the Company or any of its Affiliates, in addition and supplementary to other rights and remedies existing in its favor, may apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violations of the provisions hereof (without posting a bond or other security). Employee acknowledges and agrees that the covenant under this Section 6 shall apply during the Term and thereafter regardless of the reason for the termination of Employee's employment. 7. Right to Injunction. Employee acknowledges that any remedy at law for a breach by him of the provisions of Sections 4.1 or 6 hereof will be inadequate. Accordingly, in the event of the breach or threatened breach by Employee of Sections 4.1 or 6 hereof, the Company shall be entitled to injunctive relief in addition to any other remedy it may have. 8. Entire Agreement. This Agreement constitutes the entire agreement of the parties and supersedes all prior agreements of the parties with respect to the subject matter hereof. This Agreement may not changed or amended except in writing signed by the parties and approved by Dove. 9. Governing Law. This Agreement shall be subject to, and be governed by, the laws of the State of California. 10. Assignment. Employee may not assign, transfer or convey this Agreement or any interest therein. This Agreement and all of the Company's rights and obligations hereunder may be assigned or transferred by it, in whole but not in part, to and shall be binding upon and inure to the benefit of any successor of the Company, but any such assignment shall not relieve the Company of any of its obligations. The term "successor" shall mean only any corporation or other business entity which by merger, consolidation, purchase of assets or otherwise succeeds to or otherwise acquires all or substantially all of the assets of the Company. B-7 8 11. Severability. If any provision of this Agreement as applied to either party or to any circumstances shall be adjudged by a court of competent jurisdiction to be void or unenforceable, the same shall in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement. 12. Waiver. Waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 13. Counterparts. This Agreement shall be executed in a number of identical counterparts, each of which shall be construed as an original for all purposes, but all of which taken together shall constitute one and the same Agreement. 14. Notices. Any notice required or permitted to be given under this Agreement shall be in writing and delivered in person or sent by registered or certified Unites States mail, postage and fees prepaid, to the addresses of the parties set forth below, or such other address as shall be furnished by notice hereunder by any such party: THE COMPANY Dove Four Point, Inc. 301 North Canon Drive Suite 207 Beverly Hills, CA 90210 with copy to: DOVE AUDIO, INC. 301 North Canon, Suite 207 Beverly Hills, California 90210 Attn: President EMPLOYEE: Shukri Ghalayini 124 North Woodburn Brentwood, CA 90049 No failure or refusal to accept delivery of any envelope containing such notice shall affect the validity of such notice or the giving thereof. B-8 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. Dove FOUR POINT, INC. By: /s/ Simon Baker ---------------------------------- Title: --------------------------- /s/ Shukri Ghalayini ---------------------------------- Employee Agreed: DOVE AUDIO, INC. By: /s/ Simon Baker ---------------- B-9 10 SCHEDULE I CALCULATION OF PRODUCER'S FEES Employee shall receive a 30% allocation of generally accepted producer fees paid to the Surviving Corporation on new programming initiated and developed by Employee for the Surviving Corporation after the date hereof (but only after all advances against producer fees have been earned out) subject to mutually agreed-upon caps. Schedule I-1 11 STOCK OPTION AWARD AGREEMENT THIS AWARD AGREEMENT (this "Agreement") is entered into as of the 29th day of April 1996 (the "Grant Date"), by and between Dove Audio, Inc., a California corporation (the "Corporation"), and Shukri Ghalayini (the "Participant"). W I T N E S S E T H WHEREAS, the Participant has agreed to serve as the President of Dove Four Point, Inc.; WHEREAS, pursuant to the Agreement and Plan of Merger dated as of April 12, 1996 among the Corporation, the Participant and certain other parties (the "Merger Agreement"), the Corporation committed to grant to the Participant, effective as of the Grant Date, but subject to the Closing of the Merger Agreement, a non-qualified stock option (the "Option") to purchase all or any part of 300,000 shares of Common Stock, par value $0.01 per share, of the Corporation (the "Common Stock") upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Grant of Option. The Corporation has granted, subject to the Closing of the Merger Agreement, to the Participant as a matter of separate inducement and agreement in connection with the Participant's employment with, or other services provided by the Participant to, the Corporation, but not in lieu of any salary or other compensation for such employment or services, the right and option to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate of 300,000 shares (the "Shares") of Common Stock at a price per share of $11.00 (the "Exercise Price") exercisable from time to time subject to the provisions of this Agreement prior to the close of business on April , 2006 (the "Expiration Date"). The Option shall vest according to the performance criteria set forth in Exhibit A (Performance). This option is granted outside of the Corporation's 1994 Stock Incentive Plan (the "Plan") although certain provisions of the Plan are incorporated herein by reference. Schedule II-1 12 2. Exercisability of Option. Except as otherwise provided in this Agreement, the Option may be exercised from time to time as set forth on Exhibit A attached hereto; provided, however, the Option may not be exercised as to less than 100 shares at any one time unless the number of Shares purchased is the total number at the time available for purchase under an installment of the Option. The Option may be exercised only as to whole shares; fractional share interests shall be disregarded except that they may be accumulated. 3. Method of Exercise and Payment. Each exercise of the Option shall be by means of written notice of exercise in the form attached hereto as Exhibit B duly delivered to the Corporation, specifying the number of whole shares with respect to which the Option is being exercised, together with any written statements required hereunder and payment of the Price in full in cash or by check payable to the Corporation. 4. Continuance of Employment. Nothing contained in this Agreement shall confer upon the Participant any right to continue in the employ of, or to continue rendering services to, the Corporation or constitute any contract or agreement of engagement or employment. The Participant acknowledges that the Corporation has the right to terminate the Participant's employment or services at will except as may be otherwise provided by separate agreement. Nothing contained in this Agreement shall interfere in any way with the right of the Corporation to (i) terminate the employment or services of the Participant at any time for any reason whatsoever, with or without cause, or (ii) reduce the compensation received by the Participant from the rate in existence on the Grant Date. 5. Non-Assignability of Option. Other than by will or the laws of descent and distribution, or pursuant to a "qualified domestic relations order" as defined by the Internal Revenue Code, no benefit payable under, or interest in, any Grant shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, regardless of any community property or other interest therein of the Participant's spouse or such spouse's successor in interest, and any such attempted action shall be void and no such benefit or interest shall be, in any manner, liable for, or subject to, debts, contracts, liabilities, engagements or torts of any Person. In the event that the spouse of the Participant shall have acquired a community property interest in the Option, the Participant, or his or her permitted transferee, may exercise it Schedule II-2 13 on behalf of the spouse of the Participant or such spouse's successor in interest. Amounts payable pursuant to a Grant shall be paid only to the Participant or, in the event of the Participant's death, to the Participant's Beneficiary or, in the event of the Participant's Total Disability, to the Participant's Personal Representative or, if there is none, to the Participant. 6. Adjustments Upon Specified Changes. Upon the occurrence of certain Events (as defined in the Plan) relating to the Corporation's stock, such as stock splits, combinations, extraordinary cash dividends, or mergers in which the Corporation is not the Surviving Corporation as further set forth in the Plan, adjustments will be made in the number and kind of shares that may be issuable under, or in the consideration payable with respect to, the Option as if this Option were granted under the Plan. 7. Acceleration. Upon the occurrence of certain Events, as set forth in the Plan, the Option may become immediately exercisable as if this Option were granted under the Plan to the full extent theretofore not exercisable unless prior to an Event the Board of Directors of Dove determines otherwise. 8. Termination of Employment. (a) As provided in the Plan, which provisions are incorporated by reference herein, if the Participant's employment by the Corporation terminates for any reason other than Retirement, death or Total Disability, the Participant shall have, subject to earlier expiration thereof, three months from the date of termination of employment to exercise any Option to the extent that it shall have vested on that date, and any Option not vested on that date shall terminate. In the event the Participant is discharged for "Cause" (as defined in Participant's Employment Agreement), all Options that are not vested shall lapse immediately upon such termination of employment. For purposes of this Agreement, if termination occurs for "Special Cause" (as defined in the Employment Agreement) any Option not vested on that date shall terminate. (b) If the Participant's employment by the Corporation terminates as a result of Retirement or Total Disability, the Participant or Participant's Personal Representative, as the case may be, shall have, subject to earlier expiration thereof, 12 months from the date of termination of employment to the exercise Schedule II-3 14 any Option to the extent it shall have vested by that date, and any Option not vested on that date shall terminate. (c) If the Participant's employment by the Corporation terminates as a result of death while the Participant is employed by the Corporation or during the 12 month period referred to in subsection (b) above, the Participant's Option shall be exercisable by the Participant's Beneficiary, subject to earlier expiration thereof, during the 12-month period following the Participant's death, as to all or any part of the shares of Common Stock covered thereby to the extent vested on such date of death. (d) In the event Participant's employment by the Corporation is terminated without "cause" or "special cause" and such termination is in breach of any employment agreement entered into on or prior to the date hereof, any unvested Options shall accelerate and vest on the date of such termination and shall be exercisable for the period set forth in (a) above. 9. Application of Securities Laws. (a) No shares of Common Stock may be purchased pursuant to the Option unless and until any then applicable requirements of the Commission, and any other regulatory agencies, including any other state securities agencies having jurisdiction over the Corporation or such issuance, and any exchanges upon which the Common Stock may be listed, shall have been fully satisfied. The Participant represents, agrees and certifies that: (1) The Participant (A) can bear the economic risk of losing the Participant's entire investment in the Shares; and (B) has adequate means of providing for the Participant's current needs and possible personal contingencies. (2) The Participant has had an opportunity to ask questions of and receive answers from the Chief Financial Officer and President concerning the terms and conditions of this investment. The Participant has received and reviewed a copy of the Plan. (3) The Participant understands that the Option and the Shares issuable upon exercise of the Option have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities act, in reliance on Schedule II-4 15 available exemptions from registration or qualification thereunder, as the case may be, and that the Corporation is relying upon the Participant's representations and warranties herein in availing itself of said exemptions. (4) The Corporation agrees to register the purchase by the Participant of the Shares underlying the Option on Form S-8 under the Securities Act as promptly as is reasonably feasible following the vesting of all or any portion of the Option (provided that the Company shall not be obligated by the terms of this Section 9(a)(4) to file a registration statement with respect solely to the Shares). (5) The Option hereby granted to the Participant is being acquired solely for the Participant's own account for investment purposes, and is not being purchased with a view to or for the purposes of the resale, transfer or other distribution thereof; and the Participant has no present plans to enter into any contract, undertaking, agreement or arrangement for such resale, transfer or distribution, and the Participant further agrees that the Option and Common Stock acquired pursuant to the Option will not be transferred or distributed without (a) first having presented to the Corporation a written opinion of legal counsel in form and substance satisfactory to the Corporation's counsel indicating the proposed transfer will not be in violation of any of the provisions of the Securities Act and applicable state securities laws and the rules and regulations promulgated thereunder, or (b) a registration statement covering the resale of such Common Stock being effective. (6) The Participant either has a preexisting personal or business relationship with the Corporation or any of its officers, directors or controlling persons, or by reason of the Participant's business or financial experience reasonably can be assumed to have the capacity to protect his or her own interests in connection with acquisition of the Option and exercise thereof. The foregoing representations and warranties are and will be true and accurate as of both the Grant Date and the date of delivery of Common Stock acquired pursuant to the Option and shall survive such delivery. (b) The Board of Directors of Dove may impose such conditions on the Option or on its exercise or acceleration or on the payment of any withholding obligation (including, without Schedule II-5 16 limitation, restricting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements, including, without limitation, Rule 16b-3 (or any successor rule) promulgated by the Commission pursuant to the Securities Exchange Act of 1934, as amended; however, no representation is made that the provisions of Rule 16b-3 have been satisfied with respect to the Option. 10. Notices. Any notice to be given to the Corporation under the terms of this Agreement shall be in writing and addressed to the Secretary of the Corporation at its principal office and any notice to be given to the Participant shall be sent to the Participant at the address given beneath the Participant's signature hereto, or at such other address as either party may hereafter designate in writing to the other party. Any such notice shall be deemed to have been duly given on the date of delivery, if delivered by hand, or 3 days after deposit into U.S. mails of a notice sent by registered or certified mail (postage and registry or certification fee prepaid). 11. Effect of Agreement. This Agreement shall be assumed by, be binding upon and inure to the benefit of any successor or successors of the Corporation to the extent provided in the Plan which provisions are incorporated by reference herein. 12. Tax Withholding. The provisions of the Plan are hereby incorporated and shall govern any withholding that the Corporation is required to make with respect to an exercise of the Option as well as the Corporation's right to condition a transfer of Common Stock upon compliance with the applicable withholding requirements of federal, state and local authorities. No Common Stock acquired pursuant to an exercise of the Option may be transferred until the Corporation has withheld, or has received payment from the Participant of, all amounts the Corporation is required to withhold. 13. Terms of the Plan Govern. Except with respect to terms specifically set forth in this Agreement, the Option and this Agreement are subject to, and the Corporation and the Participant agree to be bound by, all of the terms and conditions of the Plan, as if the Option were granted pursuant to the Plan, which terms and conditions are hereby incorporated as though set forth at length. In the event of a conflict between this Agreement and the Plan, the terms of the Plan shall govern. The rights of the Participant are subject to limitations, adjustments, Schedule II-6 17 modifications, suspension and termination in certain circumstances and upon the occurrence of certain conditions as set forth in the Plan. 14. Liability of Corporation. The inability of the Corporation, after using reasonable efforts, to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to the Option shall relieve the Corporation of any liability in respect of the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. 15. Stockholder Rights. The Participant shall not have any rights of a stockholder with respect to any Shares covered by this Option unless such Shares have been issued to the Participant by the Corporation pursuant to the valid exercise of the Option and the full payment by the Participant of the Exercise Price in respect thereof. 16. Laws Applicable to Construction. The interpretation, performance and enforcement of the Participant's Grant and this Agreement shall be governed by the laws of the State of California. Schedule II-7 18 IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed on its behalf by a duly authorized officer and the Participant has hereunto set his or her hand as of the date and year first above written. Dove AUDIO, INC. By: /s/ Simon Baker -------------------------------- Title: PARTICIPANT /s/ Shukri Ghalayini ------------------------------------ ------------------------------------ (Print Name) ------------------------------------ (Address) ------------------------------------ (City, State, Zip Code) ------------------------------------ Schedule II-8 19 EXHIBIT A (Performance) Performance Options shall vest on the basis of the achievement of Pre-Tax Profit targets for Dove Four Point, Inc ("DFP") for each of the periods set forth below provided Participant remains in the Corporation's employ continuously during such period. All Performance Options shall vest if Participant remains in the Corporation's employ continuously until the date 30 days prior to the Expiration Date (i.e. ten years) regardless of meeting the Pre-Tax Profit targets. The performance vesting schedule shall be as follows with respect to that portion of a Performance Option eligible to vest in such year:
I. Period Commencing May 1, 1996 through Number of April 30, 1997 Options Vesting ------------------- --------------- (1) DFP pre-tax income 0 less than $1.0 million (2) DFP pre-tax income at 62,500 least $1.0 million but less than $1.5 million (3) DFP pre-tax income 79,167 at least $1.5 million
Schedule II-9 20
II. Period Commencing May 1, 1997 through Number of April 30, 1998 Options Vesting ------------------- --------------- (1) DFP pre-tax income 0 less than $2.0 million (2) DFP pre-tax income at 87,500 least $2.0 million but less than $3.0 million (3) DFP pre-tax income 104,166 at least $3.0 million
III. Period Commencing May 1, 1998 through Number of April 30, 1999 Options Vesting ------------------- --------------- (1) DFP pre-tax income 0 less than $2.5 million (2) DFP pre-tax income at 100,000 least $2.5 million but less than $3.0 million (3) DFP pre-tax income 116,667 at least $3.0 million
DFP's pre-tax income shall be based upon the results set forth in the Corporation's consolidated financial statements for the particular period. In determining the DFP's pre-tax income, extraordinary gains or losses shall be disregarded. No charges shall be made for allocations of Dove's corporate overhead, other than fair and appropriate charges for purchases made or services rendered by Dove and its accountants and other independent contractors in connection with DFP's business. In the case of any work performed jointly, or on a subcontracting basis, by DFP and Dove or any other subsidiary of Dove, the overall profit or loss for such work shall be apportioned fairly by Dove among DFP and such other company to reflect as nearly as possible the apportionment that would result if they were dealing at arm's length. Schedule II-10 21 EXHIBIT B Dove AUDIO, INC. 301 North Canon Drive Suite 207 Beverly Hills, California 90210 Gentlemen: I am the holder of an option (the "Option") granted by Dove Audio, Inc., a California corporation (the "Corporation"), on April __, 1996, to purchase up to an aggregate of 300,000 shares (subject to anti-dilution adjustments) of the Corporation's Common Stock, pursuant to the terms of a Stock Option Award Agreement ("Agreement") dated as of April __, 1996. I hereby exercise my Option with respect to __________ shares of Common Stock subject to the Option at the price of $____ per share as provided for in the Agreement, and I present herewith funds payable to the order of the Corporation in the amount of $__________, which represents the full purchase price for the number of shares purchased upon this exercise. I represent and warrant that I have received a copy of the Company's 1994 Stock Incentive Plan dated November 29, 1994 (portions of which are incorporated by reference by the Option). I understand that the Corporation may use the proceeds from the exercise of this Option for general corporate purposes. The certificates evidencing the shares purchased upon this exercise should be registered in my name and delivered to me. I further hereby understand and confirm that the sale, exchange or other disposition of the shares acquired hereby shall also be subject to any and all other requirements and restrictions set forth in said Agreement (including, without limitation, Paragraph 5 of said Agreement) and the Internal Revenue Code of 1986, as amended. Very truly yours, ________________________ Schedule II-11 EX-10.2 5 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.2 EMPLOYMENT AGREEMENT This Employment Agreement is made and entered into this 29th day of April, 1996, by and between Dove Four Point, Inc., a Florida corporation (the "Company"), a wholly-owned subsidiary of Dove Audio, Inc., a California corporation ("Dove"), and Ronald M. Ziskin ("Employee"). Whereas, the Company and Dove desire to assure that the Company retains the services of Employee, whose experience, knowledge and abilities with respect to the business and affairs of the Company are extremely valuable to the Company; Whereas, the entering into of this Agreement is a condition to the consummation of the acquisition by Dove of Four Point Entertainment, Inc. ("Four Point") pursuant to the Agreement and Plan of Merger dated as of April 12, 1996 (the "Merger Agreement"); Whereas, simultaneously herewith, Four Point has merged with and into the Company; Now, therefore, the Company and Employee agree as follows: 1. Positions and Duties. 1.1 The Company hereby employs Employee as Chief Operating Officer (or other mutually agreed-upon title) of the Company during the term of this Agreement, with powers and duties consistent with such position. Employee shall report to the Board of Directors of the Company and to the Chief Executive Officer of the Company or the President and/or the Chief Operating Officer of Dove, as determined from time to time by Dove. Employee shall, during the term of this Agreement, perform such additional or different duties, and accept the election or appointment to such other offices or positions, as may mutually be agreeable to Employee and Dove. 1.2 Employee shall devote his full working time to the promotion of the Company's business and welfare, and use his best efforts to promote the Company's products and services. During the term of his employment with the Company, Employee will not accept employment or engage in any manner, directly or indirectly, in any other business. Employee shall perform such C-1 2 duties and responsibilities incidental to his employment as may from time to time be requested by the Company and shall faithfully observe the Company's and Dove's policies and procedures. 2. Compensation and Benefits. 2.1 Generally; Base Salary. Beginning on the date of this Agreement, during the term of employment, for the services to be rendered by Employee hereunder, Employee shall receive the following compensation and benefits, payable as earned, in the intervals indicated, and prorated for any partial year: (a) An annual salary (the "Base Salary"), at the rate of two hundred thousand dollars ($200,000) payable from the period commencing as of the date of commencement of the Term. The Base Salary shall be payable no less frequently than monthly. The Company may deduct from each installment of the Base Salary an amount sufficient to cover applicable federal, state and/or local income tax withholdings, old age and survivors and other social security payments, state disability insurance premiums and any other amounts which the Company is required to withhold by applicable law; (b) an advance against producer fees on new programming initiated and developed after the date hereof calculated in accordance with Schedule I hereto (the "Fee Advance") payable monthly at the annual rate of one hundred thousand dollars ($100,000); and (c) a stock option grant as of or prior to the commencement of the Term of 300,000 shares (the "Option Shares") of Dove common stock, pursuant to the Stock Option Award Agreement dated as of April , 1996 between Dove and Employee substantially in the form of Schedule II hereto (the "Stock Option Agreement"). 2.2 Fringe Benefits. Employee shall receive the following fringe benefits from the Company during the Term: (a) four weeks of paid vacation during each fiscal year of the Company (as used in this Paragraph, a "fiscal year" shall be the date which is 12 months following the date of commencement of the Term under this Agreement and each 12-month period thereafter). Any such vacation shall be taken at times in accordance with the vacation policies of Dove, unless approved C-2 3 otherwise by Dove, or if accrued by Employee and not taken in any fiscal year shall be accrued and carried forward to the subsequent fiscal year; (b) payment of the premium payable (in an amount comparable to the premium historically paid by Four Point), with respect to the health insurance plan provided by Dove for its executive officers as from time to time in effect. In addition, Employee shall be permitted during the term hereof, if and to the extent eligible, to participate in any group life, hospitalization or disability insurance plan, health program, pension plan, similar benefit or other fringe benefits of Dove which may be available to executive officers of Dove; (c) continuation of the current automobile leased by Four Point through the term thereof (together with related automobile insurance and ordinary maintenance costs) and thereafter reimbursement of automobile expenses in accordance with the policy of Dove as from time to time in effect for a comparable automobile; and (d) reimbursement to Employee for all reasonable costs and expenses he incurs in connection with the performance of his duties and obligations under this Agreement, and which are consistent with the policies of Dove for executive officers. 2.3 Guarantee. Dove shall guarantee all compensation and benefits referred to in this Section 2 as fully as if it were a party hereto. 3.1 Term. The term of this Agreement (the "Term") shall commence on the date hereof and shall terminate upon the first to occur of the following events: (a) April 30, 1999; (b) The death or permanent disability of Employee as defined in Section 5.1(a) herein; (c) The discharge of Employee for cause or special cause as defined in Section 5.2(a) or 5.3 herein. 4.1 Covenant Not to Solicit or Hire Employees or Customers. Until April 30, 1999, Employee shall not, directly or indirectly, solicit or induce any of the Company's employees to terminate their employment with the Company, hire or cause any of C-3 4 the then current employees of the Company to be hired by any other company, or solicit or assist in soliciting any business from any of the then current customers or prospective customers of the Company on behalf of Employee or any other company. 5. Termination. 5.1 Termination Due to Disability, etc. The Company may, by written notice to Employee, terminate his employment under the Agreement as of the date of that notice if Employee shall fail or be unable to perform his duties as the result of any physical or mental disability for 180 consecutive days or during any 210 days in any 240-day period (a "Permanent Disability"); Employees's employment under this Agreement shall terminate automatically upon Employee's death or adjudication of incompetency. 5.2 Termination for Cause. By complying with the provisions of Section 5.2(b) hereof, the Company may terminate Employee's employment under this Agreement for "Cause." (a) For purposes of this agreement, "Cause" shall mean: (i) fraud, embezzlement or conviction of or the pleading of guilty or no contest to any felony or to any misdemeanor involving dishonesty, (ii) gross negligence or willful failure of Employee to perform his duties hereunder, (iii) any breach by Employee of his covenants or obligations under this Agreement, or (iv) the occurrence of any matter relating to Employee of the type set forth in Item 401(f) of Regulation S-K promulgated by the Securities and Exchange Commission. (b) If any one or more of the events enumerated under (i) above shall occur, the Company shall provide written notice (the "Warning Notice") to Employee of its intention to terminate this Agreement for Cause, the basis of such Cause, and the steps which the Company believes should be taken by the Employee to correct and cure the same. Unless Employee, within 30 days following receipt of the Warning Notice, substantially corrects and cures all matters delineated in the Warning Notice to Dove's reasonable satisfaction or if the matters set forth in the Warning Notice are not reasonably susceptible of being so cured or corrected within such 30-day period, the Company may terminate this Agreement so that the Company shall have no further obligation to Employee except as set forth in Section 5.4 herein, by delivering a notice of termination to Employee, which notice of termination shall be effective as of the date of C-4 5 delivery of such notice; provided however, that Employee shall not be entitled to any notice or opportunity to cure a termination arising as a result of the "Cause" set forth in Section 5.2(a)(i) hereof. 5.3 Termination for Special Cause. The Company may terminate Employee's employment under the Agreement for "Special Cause." (a) For purposes of this Agreement, "Special Cause" shall mean a failure by the Company to achieve at least $800,000 of pre-tax income for the period commencing May 1, 1996 through April 30, 1997. (b) Upon a determination by the Company that Special Cause has occurred, Employee may thereafter be terminated for Special Cause, provided, however, that the Company may continue his employment despite his failure to achieve the Plan objectives outlined above. Upon termination by the Company of Employee's employment for "Special Cause," Dove shall agree, so long as such termination is without "Cause," to shorten the term of such persons's agreement not to compete pursuant to Section 6.4 of the Merger Agreement to the effective date of such termination. 5.4 Payments Upon Termination. (a) In the event Employee is terminated for any reason whatsoever, the Company shall pay to Employee all accrued and unpaid Base Salary, all accrued and unpaid vacation and other accrued and unpaid benefits set forth herein to the date of termination, reimbursement of expenses prior to the date of termination in accordance with the provisions of this Agreement; continued insurance benefits under such circumstances and for such periods of time as are mandated by applicable state or federal law; and such other benefits or entitlements that are deemed to be vested pursuant to the provisions of Employee Retirement Income Security Act of 1974, as from time to time amended, and any regulations promulgated pursuant thereto. Such benefits shall be payable in accordance with the provisions therefor in this Agreement, or with regard to benefits for which no provision is made, promptly following termination of employment. (b) In the event Employee is terminated by the Company (other than pursuant to Section 5.3) without Cause, then, C-5 6 in addition to the payments due to Employee under Section 5.4(a), and as Employee's sole and exclusive rights and remedies, the Company shall, for the remainder of the Term, be obligated to continue to provide to the Employee his Base Salary in accordance with the terms hereof (but no other payments or benefits except the Options vested in accordance with Section 8(d) of the Stock Option Agreement). (c) Employee shall have no duty to seek alternative employment in the event of termination. Notwithstanding the foregoing, the Company and Employee agree that if Employee enters into employment after termination by the Company hereunder without Cause or Special Cause, the total compensation earned by Employee together with any welfare or other benefits earned or received by Employee during any period that Employee continues to receive Base Salary shall be deducted from the amount, if any, which the Company would otherwise be required to pay or provide to Employee during such period hereunder. Employee agrees that he shall give written notice to the Company (promptly after accepting any engagement or employment or furnishing his services after termination of his employment with the Company) of any amounts earned (or to be earned) by Employee and any benefits provided (or to be provided) to Employee pursuant to his new engagement or employment arrangement. 6. Confidential Information. Employee acknowledges that the information, observations and data obtained by him while employed by the Company concerning the business or affairs of Dove, the Company or their Affiliates (the "Confidential Information") are the property of Dove, the Company or such Affiliate. Therefore, Employee agrees that Employee shall not disclose to any unauthorized person or use for Employee's own account any Confidential Information without the prior written consent of the Board, unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of Employee's acts or omissions to act or unless such information is required to be disclosed in connection with an administrative or judicial proceeding, provided that in such case, Employee agrees to notify the Company and Dove of the Confidential Information to be disclosed sufficiently in advance of such disclosure, and agrees, if requested, to use reasonable efforts to cooperate with Dove, the Company or an Affiliate in seeking a protective order for such information. Employee shall deliver to the Company at the termination of the Term, or at any other time Dove, the Company C-6 7 or an Affiliate may request, all "documents" and "writings", as defined in the California Evidence Code, and copies thereof, relating to the Confidential Information, work product or the business of Dove, the Company or any Affiliate which Employee may then possess or have under his control. In the event of the breach or a threatened breach by Employee of any of the provisions of this Section 6, Dove, the Company or any of its Affiliates, in addition and supplementary to other rights and remedies existing in its favor, may apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violations of the provisions hereof (without posting a bond or other security). Employee acknowledges and agrees that the covenant under this Section 6 shall apply during the Term and thereafter regardless of the reason for the termination of Employee's employment. 7. Right to Injunction. Employee acknowledges that any remedy at law for a breach by him of the provisions of Sections 4.1 or 6 hereof will be inadequate. Accordingly, in the event of the breach or threatened breach by Employee of Sections 4.1 or 6 hereof, the Company shall be entitled to injunctive relief in addition to any other remedy it may have. 8. Entire Agreement. This Agreement constitutes the entire agreement of the parties and supersedes all prior agreements of the parties with respect to the subject matter hereof. This Agreement may not changed or amended except in writing signed by the parties and approved by Dove. 9. Governing Law. This Agreement shall be subject to, and be governed by, the laws of the State of California. 10. Assignment. Employee may not assign, transfer or convey this Agreement or any interest therein. This Agreement and all of the Company's rights and obligations hereunder may be assigned or transferred by it, in whole but not in part, to and shall be binding upon and inure to the benefit of any successor of the Company, but any such assignment shall not relieve the Company of any of its obligations. The term "successor" shall mean only any corporation or other business entity which by merger, consolidation, purchase of assets or otherwise succeeds to or otherwise acquires all or substantially all of the assets of the Company. C-7 8 11. Severability. If any provision of this Agreement as applied to either party or to any circumstances shall be adjudged by a court of competent jurisdiction to be void or unenforceable, the same shall in no way affect any other provision of this Agreement or the validity or enforceability of this Agreement. 12. Waiver. Waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 13. Counterparts. This Agreement shall be executed in a number of identical counterparts, each of which shall be construed as an original for all purposes, but all of which taken together shall constitute one and the same Agreement. 14. Notices. Any notice required or permitted to be given under this Agreement shall be in writing and delivered in person or sent by registered or certified Unites States mail, postage and fees prepaid, to the addresses of the parties set forth below, or such other address as shall be furnished by notice hereunder by any such party: THE COMPANY Dove Four Point, Inc. 301 North Canon Drive Suite 207 Beverly Hills, CA 90210 with copy to: DOVE AUDIO, INC. 301 North Canon, Suite 207 Beverly Hills, California 90210 Attn: President EMPLOYEE: Ronald M. Ziskin 4428 Arcola Avenue Toluca Lake, California 91602 No failure or refusal to accept delivery of any envelope containing such notice shall affect the validity of such notice or the giving thereof. C-8 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. Dove FOUR POINT, INC. By: /s/ Simon Baker ---------------------------- Title: ----------------------- /s/ Ronald Ziskin -------------------------------- Employee Agreed: DOVE AUDIO, INC. By: /s/ Simon Baker -------------------------- C-9 10 SCHEDULE I CALCULATION OF PRODUCER'S FEES Employee shall receive a 30% allocation of generally accepted producer fees paid to the Surviving Corporation on new programming initiated and developed by Employee for the Surviving Corporation after the date hereof (but only after all advances against producer fees have been earned out) subject to mutually agreed-upon caps. Schedule I-1 11 SCHEDULE II STOCK OPTION AWARD AGREEMENT THIS AWARD AGREEMENT (this "Agreement") is entered into as of the 29th day of April 1996 (the "Grant Date"), by and between Dove Audio, Inc., a California corporation (the "Corporation"), and Ronald M. Ziskin (the "Participant"). W I T N E S S E T H WHEREAS, the Participant has agreed to serve as the President of Dove Four Point, Inc.; WHEREAS, pursuant to the Agreement and Plan of Merger dated as of April 12, 1996 among the Corporation, the Participant and certain other parties (the "Merger Agreement"), the Corporation committed to grant to the Participant, effective as of the Grant Date, but subject to the Closing of the Merger Agreement, a non-qualified stock option (the "Option") to purchase all or any part of 300,000 shares of Common Stock, par value $0.01 per share, of the Corporation (the "Common Stock") upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Grant of Option. The Corporation has granted, subject to the Closing of the Merger Agreement, to the Participant as a matter of separate inducement and agreement in connection with the Participant's employment with, or other services provided by the Participant to, the Corporation, but not in lieu of any salary or other compensation for such employment or services, the right and option to purchase, on the terms and conditions hereinafter set forth, all or any part of an aggregate of 300,000 shares (the "Shares") of Common Stock at a price per share of $11.00 (the "Exercise Price") exercisable from time to time subject to the provisions of this Agreement prior to the close of business on April , 2006 (the "Expiration Date"). The Option shall vest according to the performance criteria set forth in Exhibit A (Performance). This option is granted outside of the Corporation's 1994 Stock Incentive Plan (the "Plan") although certain provisions of the Plan are incorporated herein by reference. Schedule II-1 12 2. Exercisability of Option. Except as otherwise provided in this Agreement, the Option may be exercised from time to time as set forth on Exhibit A attached hereto; provided, however, the Option may not be exercised as to less than 100 shares at any one time unless the number of Shares purchased is the total number at the time available for purchase under an installment of the Option. The Option may be exercised only as to whole shares; fractional share interests shall be disregarded except that they may be accumulated. 3. Method of Exercise and Payment. Each exercise of the Option shall be by means of written notice of exercise in the form attached hereto as Exhibit B duly delivered to the Corporation, specifying the number of whole shares with respect to which the Option is being exercised, together with any written statements required hereunder and payment of the Price in full in cash or by check payable to the Corporation. 4. Continuance of Employment. Nothing contained in this Agreement shall confer upon the Participant any right to continue in the employ of, or to continue rendering services to, the Corporation or constitute any contract or agreement of engagement or employment. The Participant acknowledges that the Corporation has the right to terminate the Participant's employment or services at will except as may be otherwise provided by separate agreement. Nothing contained in this Agreement shall interfere in any way with the right of the Corporation to (i) terminate the employment or services of the Participant at any time for any reason whatsoever, with or without cause, or (ii) reduce the compensation received by the Participant from the rate in existence on the Grant Date. 5. Non-Assignability of Option. Other than by will or the laws of descent and distribution, or pursuant to a "qualified domestic relations order" as defined by the Internal Revenue Code, no benefit payable under, or interest in, any Grant shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, regardless of any community property or other interest therein of the Participant's spouse or such spouse's successor in interest, and any such attempted action shall be void and no such benefit or interest shall be, in any manner, liable for, or subject to, debts, contracts, liabilities, engagements or torts of any Person. In the event that the spouse of the Participant shall have acquired a community property interest in the Option, the Participant, or his or her permitted transferee, may exercise it Schedule II-2 13 on behalf of the spouse of the Participant or such spouse's successor in interest. Amounts payable pursuant to a Grant shall be paid only to the Participant or, in the event of the Participant's death, to the Participant's Beneficiary or, in the event of the Participant's Total Disability, to the Participant's Personal Representative or, if there is none, to the Participant. 6. Adjustments Upon Specified Changes. Upon the occurrence of certain Events (as defined in the Plan) relating to the Corporation's stock, such as stock splits, combinations, extraordinary cash dividends, or mergers in which the Corporation is not the Surviving Corporation as further set forth in the Plan, adjustments will be made in the number and kind of shares that may be issuable under, or in the consideration payable with respect to, the Option as if this Option were granted under the Plan. 7. Acceleration. Upon the occurrence of certain Events, as set forth in the Plan, the Option may become immediately exercisable as if this Option were granted under the Plan to the full extent theretofore not exercisable unless prior to an Event the Board of Directors of Dove determines otherwise. 8. Termination of Employment. (a) As provided in the Plan, which provisions are incorporated by reference herein, if the Participant's employment by the Corporation terminates for any reason other than Retirement, death or Total Disability, the Participant shall have, subject to earlier expiration thereof, three months from the date of termination of employment to exercise any Option to the extent that it shall have vested on that date, and any Option not vested on that date shall terminate. In the event the Participant is discharged for "Cause" (as defined in Participant's Employment Agreement), all Options that are not vested shall lapse immediately upon such termination of employment. For purposes of this Agreement, if termination occurs for "Special Cause" (as defined in the Employment Agreement) any Option not vested on that date shall terminate. (b) If the Participant's employment by the Corporation terminates as a result of Retirement or Total Disability, the Participant or Participant's Personal Representative, as the case may be, shall have, subject to earlier expiration thereof, 12 months from the date of termination of employment to the exercise Schedule II-3 14 any Option to the extent it shall have vested by that date, and any Option not vested on that date shall terminate. (c) If the Participant's employment by the Corporation terminates as a result of death while the Participant is employed by the Corporation or during the 12 month period referred to in subsection (b) above, the Participant's Option shall be exercisable by the Participant's Beneficiary, subject to earlier expiration thereof, during the 12-month period following the Participant's death, as to all or any part of the shares of Common Stock covered thereby to the extent vested on such date of death. (d) In the event Participant's employment by the Corporation is terminated without "cause" or "special cause" and such termination is in breach of any employment agreement entered into on or prior to the date hereof, any unvested Options shall accelerate and vest on the date of such termination and shall be exercisable for the period set forth in (a) above. 9. Application of Securities Laws. (a) No shares of Common Stock may be purchased pursuant to the Option unless and until any then applicable requirements of the Commission, and any other regulatory agencies, including any other state securities agencies having jurisdiction over the Corporation or such issuance, and any exchanges upon which the Common Stock may be listed, shall have been fully satisfied. The Participant represents, agrees and certifies that: (1) The Participant (A) can bear the economic risk of losing the Participant's entire investment in the Shares; and (B) has adequate means of providing for the Participant's current needs and possible personal contingencies. (2) The Participant has had an opportunity to ask questions of and receive answers from the Chief Financial Officer and President concerning the terms and conditions of this investment. The Participant has received and reviewed a copy of the Plan. (3) The Participant understands that the Option and the Shares issuable upon exercise of the Option have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities act, in reliance on Schedule II-4 15 available exemptions from registration or qualification thereunder, as the case may be, and that the Corporation is relying upon the Participant's representations and warranties herein in availing itself of said exemptions. (4) The Corporation agrees to register the purchase by the Participant of the Shares underlying the Option on Form S-8 under the Securities Act as promptly as is reasonably feasible following the vesting of all or any portion of the Option (provided that the Company shall not be obligated by the terms of this Section 9(a)(4) to file a registration statement with respect solely to the Shares). (5) The Option hereby granted to the Participant is being acquired solely for the Participant's own account for investment purposes, and is not being purchased with a view to or for the purposes of the resale, transfer or other distribution thereof; and the Participant has no present plans to enter into any contract, undertaking, agreement or arrangement for such resale, transfer or distribution, and the Participant further agrees that the Option and Common Stock acquired pursuant to the Option will not be transferred or distributed without (a) first having presented to the Corporation a written opinion of legal counsel in form and substance satisfactory to the Corporation's counsel indicating the proposed transfer will not be in violation of any of the provisions of the Securities Act and applicable state securities laws and the rules and regulations promulgated thereunder, or (b) a registration statement covering the resale of such Common Stock being effective. (6) The Participant either has a preexisting personal or business relationship with the Corporation or any of its officers, directors or controlling persons, or by reason of the Participant's business or financial experience reasonably can be assumed to have the capacity to protect his or her own interests in connection with acquisition of the Option and exercise thereof. The foregoing representations and warranties are and will be true and accurate as of both the Grant Date and the date of delivery of Common Stock acquired pursuant to the Option and shall survive such delivery. (b) The Board of Directors of Dove may impose such conditions on the Option or on its exercise or acceleration or on the payment of any withholding obligation (including, without Schedule II-5 16 limitation, restricting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements, including, without limitation, Rule 16b-3 (or any successor rule) promulgated by the Commission pursuant to the Securities Exchange Act of 1934, as amended; however, no representation is made that the provisions of Rule 16b-3 have been satisfied with respect to the Option. 10. Notices. Any notice to be given to the Corporation under the terms of this Agreement shall be in writing and addressed to the Secretary of the Corporation at its principal office and any notice to be given to the Participant shall be sent to the Participant at the address given beneath the Participant's signature hereto, or at such other address as either party may hereafter designate in writing to the other party. Any such notice shall be deemed to have been duly given on the date of delivery, if delivered by hand, or 3 days after deposit into U.S. mails of a notice sent by registered or certified mail (postage and registry or certification fee prepaid). 11. Effect of Agreement. This Agreement shall be assumed by, be binding upon and inure to the benefit of any successor or successors of the Corporation to the extent provided in the Plan which provisions are incorporated by reference herein. 12. Tax Withholding. The provisions of the Plan are hereby incorporated and shall govern any withholding that the Corporation is required to make with respect to an exercise of the Option as well as the Corporation's right to condition a transfer of Common Stock upon compliance with the applicable withholding requirements of federal, state and local authorities. No Common Stock acquired pursuant to an exercise of the Option may be transferred until the Corporation has withheld, or has received payment from the Participant of, all amounts the Corporation is required to withhold. 13. Terms of the Plan Govern. Except with respect to terms specifically set forth in this Agreement, the Option and this Agreement are subject to, and the Corporation and the Participant agree to be bound by, all of the terms and conditions of the Plan, as if the Option were granted pursuant to the Plan, which terms and conditions are hereby incorporated as though set forth at length. In the event of a conflict between this Agreement and the Plan, the terms of the Plan shall govern. The rights of the Participant are subject to limitations, adjustments, Schedule II-6 17 modifications, suspension and termination in certain circumstances and upon the occurrence of certain conditions as set forth in the Plan. 14. Liability of Corporation. The inability of the Corporation, after using reasonable efforts, to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to the Option shall relieve the Corporation of any liability in respect of the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. 15. Stockholder Rights. The Participant shall not have any rights of a stockholder with respect to any Shares covered by this Option unless such Shares have been issued to the Participant by the Corporation pursuant to the valid exercise of the Option and the full payment by the Participant of the Exercise Price in respect thereof. 16. Laws Applicable to Construction. The interpretation, performance and enforcement of the Participant's Grant and this Agreement shall be governed by the laws of the State of California. Schedule II-7 18 IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed on its behalf by a duly authorized officer and the Participant has hereunto set his or her hand as of the date and year first above written. Dove AUDIO, INC. By: /s/ SIMON BAKER -------------------------------- Title: PARTICIPANT /s/ RONALD ZISKIN ----------------------------------- ----------------------------------- (Print Name) ----------------------------------- (Address) ----------------------------------- (City, State, Zip Code) ----------------------------------- Schedule II-8 19 EXHIBIT A (PERFORMANCE) Performance Options shall vest on the basis of the achievement of Pre-Tax Profit targets for Dove Four Point, Inc ("DFP") for each of the periods set forth below provided Participant remains in the Corporation's employ continuously during such period. All Performance Options shall vest if Participant remains in the Corporation's employ continuously until the date 30 days prior to the Expiration Date (i.e. ten years) regardless of meeting the Pre-Tax Profit targets. The performance vesting schedule shall be as follows with respect to that portion of a Performance Option eligible to vest in such year:
I. Period Commencing May 1, 1996 through Number of April 30, 1997 Options Vesting ------------------- --------------- (1) DFP pre-tax income 0 less than $1.0 million (2) DFP pre-tax income at 62,500 least $1.0 million but less than $1.5 million (3) DFP pre-tax income 79,167 at least $1.5 million
Schedule II-9 20
II. Period Commencing May 1, 1997 through Number of April 30, 1998 Options Vesting ------------------- --------------- (1) DFP pre-tax income 0 less than $2.0 million (2) DFP pre-tax income at 87,500 least $2.0 million but less than $3.0 million (3) DFP pre-tax income 104,166 at least $3.0 million
III. Period Commencing May 1, 1998 through Number of April 30, 1999 Options Vesting ------------------- --------------- (1) DFP pre-tax income 0 less than $2.5 million (2) DFP pre-tax income at 100,000 least $2.5 million but less than $3.0 million (3) DFP pre-tax income 116,667 at least $3.0 million
DFP's pre-tax income shall be based upon the results set forth in the Corporation's consolidated financial statements for the particular period. In determining the DFP's pre-tax income, extraordinary gains or losses shall be disregarded. No charges shall be made for allocations of Dove's corporate overhead, other than fair and appropriate charges for purchases made or services rendered by Dove and its accountants and other independent contractors in connection with DFP's business. In the case of any work performed jointly, or on a subcontracting basis, by DFP and Dove or any other subsidiary of Dove, the overall profit or loss for such work shall be apportioned fairly by Dove among DFP and such other company to reflect as nearly as possible the apportionment that would result if they were dealing at arm's length. Schedule II-10 21 EXHIBIT B Dove AUDIO, INC. 301 North Canon Drive Suite 207 Beverly Hills, California 90210 Gentlemen: I am the holder of an option (the "Option") granted by Dove Audio, Inc., a California corporation (the "Corporation"), on April __, 1996, to purchase up to an aggregate of 300,000 shares (subject to anti-dilution adjustments) of the Corporation's Common Stock, pursuant to the terms of a Stock Option Award Agreement ("Agreement") dated as of April __, 1996. I hereby exercise my Option with respect to __________ shares of Common Stock subject to the Option at the price of $____ per share as provided for in the Agreement, and I present herewith funds payable to the order of the Corporation in the amount of $__________, which represents the full purchase price for the number of shares purchased upon this exercise. I represent and warrant that I have received a copy of the Company's 1994 Stock Incentive Plan dated November 29, 1994 (portions of which are incorporated by reference by the Option). I understand that the Corporation may use the proceeds from the exercise of this Option for general corporate purposes. The certificates evidencing the shares purchased upon this exercise should be registered in my name and delivered to me. I further hereby understand and confirm that the sale, exchange or other disposition of the shares acquired hereby shall also be subject to any and all other requirements and restrictions set forth in said Agreement (including, without limitation, Paragraph 5 of said Agreement) and the Internal Revenue Code of 1986, as amended. Very truly yours, _________________________ Schedule II-11 EX-10.3 6 BUSINESS LOAN AGREEMENT 1 EXHIBIT 10.3 BUSINESS LOAN AGREEMENT.
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $1,900,000.00 04-24-1996 04-15-2001 20002816 FOON
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: DOVE AUDIO,INC. (TIN: 954015834) Lender: ASAHI BANK OF CALIFORNIA 8955 BEVERLY BOULEVARD 635 WEST 7TH STREET WEST HOLLYWOOD, CA 90048 LOS ANGELES, CA 90017
================================================================================ THIS BUSINESS LOAN AGREEMENT BETWEEN DOVE AUDIO,INC. ("BORROWER") AND ASAHI BANK OF CALIFORNIA ("LENDER") IS MADE AND EXECUTED ON THE FOLLOWING TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND financial ACCOMMODATIONS FROM LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN" AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT: (A) In GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH in THIS AGREEMENT; (B) THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS AGREEMENT. TERM. This Agreement shall be effective as of APRIL 24, 1996, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. BORROWER. The word "Borrower" means DOVE AUDIO,INC. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. COLLATERAL. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. EVENT OF DEFAULT. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." GRANTOR. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. GUARANTOR. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. INDEBTEDNESS. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. LENDER. The word "Lender" means ASAHI BANK OF CALIFORNIA, its successors and assigns. LOAN. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. NOTE. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. SECURITY AGREEMENT. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. SECURITY INTEREST. The words "Security interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. 2 BUSINESS LOAN AGREEMENT (CONTINUED) 04-24-1996 Page 2 Loan No 20002816 ================================================================================ SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Loan Advance and each subsequent Loan Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory to Lender the following documents for the Loan: (a) the Note, (b) Security Agreements granting to Lender security interests in the Collateral, (c) Financing Statements perfecting Lender's Security Interests; (d) evidence of insurance as required below; and (e) any other documents required under this Agreement or by Lender or its counsel. BORROWER'S AUTHORIZATION. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents, and such other authorizations and other documents and instruments as Lender or its counsel, in their sole discretion, may require. PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. NO EVENT OF DEFAULT. There shall not exist at the time of any advance a condition which would constitute an Event of Default under this Agreement. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: ORGANIZATION. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of California and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so quality would have a material adverse effect on its businesses or financial condition. AUTHORIZATION. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. FINANCIAL INFORMATION. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. PROPERTIES. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnity, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. TAXES. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of 3 BUSINESS LOAN AGREEMENT (CONTINUED) 04-24-1996 Page 3 Loan No 20002816 ================================================================================ Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. BINDING EFFECT. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, and (iii) no steps have been taken to terminate any such plan. LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 8955 Beverly Boulevard, West Hollywood, CA 90048. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. INFORMATION. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in making the above referenced Loan to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall BE terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: LITIGATION. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. FINANCIAL RECORDS. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, prepared by Borrower. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. ADDITIONAL INFORMATION. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. INSURANCE. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN FEES AND CHARGES. In addition to all other agreed upon fees and charges, pay the following: $19,000.00. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. PERFORMANCE. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. OPERATIONS. Maintain executive and management personnel with substantially the same qualifications and experience AS the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. 4 BUSINESS LOAN AGREEMENT (CONTINUED) 04-24-1996 Page 4 Loan No 20002816 ================================================================================ INSPECTION. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender at least annually and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any OF Borrower's accounts, except to Lender. CONTINUITY OF OPERATIONS. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on the Loans. OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit OF creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. This includes A garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor, as the case may be, as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding. and if Borrower or Grantor gives lender written notice of the creditor or forfeiture proceeding and furnishes reserves or a surety bond for the creditor or forfeiture proceeding satisfactory to Lender. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory 5 BUSINESS LOAN AGREEMENT (CONTINUED) 04-24-1996 Page 5 Loan No 20002816 ================================================================================ to Lender, and, in doing so, cure the Event of Default. CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment OR performance of the Indebtedness is impaired. RIGHT TO CURE. If any default, other than a Default on Indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice OF any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, the State of California. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. This Agreement shall be governed by and construed in accordance with the laws of the State of California. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. NOTICES. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimilie, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current addresses). SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. SURVIVAL. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. a waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver BY Lender, nor any course of dealing between Lender and Borrower, or 6 BUSINESS LOAN AGREEMENT (CONTINUED) 04-24-1996 Page 6 Loan No 20002816 ================================================================================ between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent Instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF APRIL 24,1996. BORROWER: DOVE AUDIO, INC. By: MICHAEL VINER -------------------------------------------------- MICHAEL VINER, CHAIRMAN OF THE BOARD AND PRESIDENT LENDER: ASAHI BANK OF CALIFORNIA By --------------------------------------------------- AUTHORIZED OFFICER LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.20b (c) 1996 CFI ProServices, Inc. All rights reserved. [CA-C40 E3.20 F3.20 P3.20 20002816.LN] 7 PROMISSORY NOTE
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $1,900,000.00 04-24-1996 04-15-2001 20002816 FOON
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: DOVE AUDIO,INC. (TIN: 954015834) Lender: ASAHI BANK OF CALIFORNIA 8955 BEVERLY BOULEVARD 635 WEST 7TH STREET WEST HOLLYWOOD, CA 90048 LOS ANGELES, CA 90017 ====================================================================================================================
PRINCIPAL AMOUNT: $1,900,000.00 INTEREST RATE: 8.000% DATE OF NOTE: APRIL 24, 1996
PROMISE TO PAY. DOVE AUDIO,INC. ("BORROWER") PROMISES LO PAY LO ASAHI BANK OF CALIFORNIA ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF ONE MILLION NINE HUNDRED THOUSAND & 00/100 DOLLARS ($1,900,000.00), TOGETHER WITH INTEREST AT THE RATE OF 8.000% PER ANNUM ON THE UNPAID PRINCIPAL BALANCE FROM APRIL 25, 1996, UNTIL PAID IN FULL. PAYMENT. BORROWER WILL PAY THIS LOAN ON DEMAND, OR IF NO DEMAND IS MADE, IN 59 REGULAR PAYMENTS OF $15,995.20 EACH AND ONE IRREGULAR LAST PAYMENT ESTIMATED AT $1,677,930.23. BORROWER'S FIRST PAYMENT IS DUE MAY 15, 1996, AND ALL SUBSEQUENT PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. BORROWER'S FINAL PAYMENT DUE APRIL 15, 2001, WILL BE FOR ALL PRINCIPAL AND ALL ACCRUED INTEREST NOT YET PAID. PAYMENTS INCLUDE PRINCIPAL AND INTEREST. Interest on this Note is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Except for the foregoing, Borrower may pay all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, they will reduce the principal balance due and may result in Borrower making fewer payments. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 2.000% OF THE UNPAID PORTION OF THE REGULARLY SCHEDULED PAYMENT. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, A receiver is appointed for any part OF Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any of the events described in this default section occurs with respect to any guarantor of this Note. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, or if this Note is not paid at final maturity, Lender, at its option, may add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid, at the rate provided in this Note. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF LOS ANGELES COUNTY, THE STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. COLLATERAL. Borrower acknowledges this Note is secured by 1st Deed of Trust on the property located at 8955 Beverly Boulevard, West Hollywood, California 90048. That agreement contains the following due on sale provision: Lender may, at its option, declare immediately due and payable all sums secured by this Deed of Trust upon the sale or transfer, without the Lender's prior written consent, of all or any part of the Real Property, or any interest in the Real Property. A "sale or transfer" means the conveyance of Real Property or any right, title or interest therein; whether legal, beneficial or equitable; whether voluntary or involuntary; whether by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest with a term greater than three (3) years, lease-option contract, or by sale, assignment, or transfer of any beneficial interest in or to any land trust holding title to the Real Property, or by any other method of conveyance of Real Property interest. If any Trustor is a corporation, partnership or limited liability company, transfer also includes any change in ownership of more than twenty-five percent (25%) of the voting stock, partnership interests or limited liability company interests, as the case may be, of Trustor. However, this option shall not be exercised by Lender if such exercise is prohibited by applicable law. 8 PROMISSORY NOTE (CONTINUED) 04-24-1996 Page 2 Loan No 20002816 ================================================================================ GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific default provisions or rights of Lender shall not preclude lender's right to declare payment of this Note on its demand. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: DOVE AUDIO,INC. BY: MICHAEL VINER --------------------------------------------------- MICHAEL VINER, CHAIRMAN OF THE BOARD AND PRESIDENT ================================================================================ Fixed Rate. Balloon. LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.20b (C) 1996 CFI ProServices, Inc. All rights reserved. [CA-020 E3.20 P3.20 2000281 S.LN] 9 RECORDATION REQUESTED BY: ASAHI BANK OF CALIFORNIA 635 WEST 7TH STREET LOS ANGELES, CA 90017 WHEN RECORDED MAIL TO: ASAHI BANK OF CALIFORNIA 635 WEST 7TH STREET LOS ANGELES, CA 90017 SEND TAX NOTICES TO: ASAHI BANK OF CALIFORNIA 635 WEST 7TH STREET LOS ANGELES, CA 90017 FOR RECORDER'S USE ONLY DEED OF TRUST THIS DEED OF TRUST IS DATED APRIL 24, 1996, AMONG DOVE AUDIO,INC., WHOSE ADDRESS IS 8955 BEVERLY BOULEVARD, WEST HOLLYWOOD, CA 90048 (REFERRED TO BELOW AS "TRUSTOR"); ASAHI BANK OF CALIFORNIA, WHOSE ADDRESS IS 635 WEST 7TH STREET, LOS ANGELES, CA 90017 (REFERRED TO BELOW SOMETIMES AS "LENDER" AND SOMETIMES AS "BENEFICIARY"); AND NORTH AMERICAN TITLE COMPANY, WHOSE ADDRESS IS 520 NORTH BRAND BOULEVARD, GLENDALE, CA 91203 (REFERRED TO BELOW AS "TRUSTEE"). CONVEYANCE AND GRANT. FOR VALUABLE CONSIDERATION, TRUSTOR IRREVOCABLY GRANTS, TRANSFERS AND ASSIGNS TO TRUSTEE in trust, WITH POWER OF SALE, FOR THE BENEFIT OF LENDER AS BENEFICIARY, all of Trustor's right, title, and interest in and to the following described real property, together with all existing or subsequently erected or affixed buildings, improvements and fixtures; all easements, rights of way, and appurtenances; all water, water rights and ditch rights (including stock in utilities with ditch or irrigation rights); and all other rights, royalties, and profits relating to the real property, including without limitation all minerals, oil, gas, geothermal and similar matters, LOCATED in LOS ANGELES COUNTY, STATE OF CALIFORNIA (THE "REAL PROPERTY"): PLEASE SEE EXHIBIT "A" ATTACHED HERETO AND BY THIS REFERENCE MADE A PART HEREOF. THE REAL PROPERTY OR ITS ADDRESS IS COMMONLY KNOWN AS 8955 BEVERLY BOULEVARD, WEST HOLLYWOOD, CA 90048. Trustor presently assigns to Lender (also known as Beneficiary in this Deed of Trust) all of Trustor's right, title, and interest in and to all present and future leases of the Property and all Rents from the Property. This is an absolute assignment in the Rents given as additional Security pursuant to California Civil Code Section 2938. In addition, Trustor grants Lender a Uniform Commercial Code security interest in the Rents and the Personal Property defined below. DEFINITIONS. The following words shall have the following meanings when used in this Deed of Trust. Terms not otherwise defined in this Deed of Trust shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. BENEFICIARY. The word "Beneficiary" means ASAHI BANK OF CALIFORNIA, its successors and assigns. ASAHI BANK OF CALIFORNIA also is referred to as "Lender" in this Deed of Trust. DEED OF TRUST. The words "Deed of Trust" mean this Deed of Trust among Trustor, Lender, and Trustee, and includes without limitation all assignment and security interest provisions relating to the Personal Property and Rents. GUARANTOR. The word "Guarantor" means and includes without limitation any and all guarantors, sureties, and accommodation parties in connection with the Indebtedness. IMPROVEMENTS. The word "Improvements" means and includes without limitation all existing and future improvements, fixtures, buildings, structures, mobile homes affixed on the Real Property, facilities, additions, replacements and other construction on the Real Property. 10 DEED OF TRUST (CONTINUED) 04-24-1996 Page 2 Loan No 20002816 INDEBTEDNESS. The word "Indebtedness" means all principal and interest payable under the Note and any amounts expended or advanced by Lender to discharge obligations of Trustor or expenses incurred by Trustee or Lender to enforce obligations of Trustor under this Deed of Trust, together with interest on such amounts as provided in this Deed of Trust. LENDER. The word "Lender" means ASAHI BANK OF CALIFORNIA, its successors and assigns. NOTE. THE WORD "NOTE" MEANS THE NOTE DATED APRIL 24, 1996, in THE PRINCIPAL AMOUNT OF $1,900,000.00 from Trustor to Lender, together with all renewals, extensions, modifications, refinancings, and substitutions for the Note. PERSONAL PROPERTY. The words "Personal Property" mean all equipment, fixtures, and other articles of personal property now or hereafter owned by Trustor, and now or hereafter attached or affixed to the Real Property; together with all accessions, parts, and additions to, all replacements of, and all substitutions for, any of such property; and together with all proceeds (including without limitation all insurance proceeds and refunds of premiums) from any sale or other disposition of the Property. PROPERTY. The word "Property" means collectively the Real Property and the Personal Property. REAL PROPERTY. The words "Real Property" mean the property, interests and rights described above in the "Conveyance and Grant" section. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. RENTS. The word "Rents" means all present and future rents, revenues, income, issues, royalties, profits, and other benefits derived from the Property. TRUSTEE. The word "Trustee" means North American Title Company and any substitute or successor trustees. TRUSTOR. The word "Trustor" means any and all persons and entities executing this Deed of Trust, including without limitation all Trustors named above. THIS DEED OF TRUST, INCLUDING THE ASSIGNMENT OF RENTS AND THE SECURITY INTEREST IN THE RENTS AND PERSONAL PROPERTY, IS GIVEN TO SECURE (1) PAYMENT OF THE INDEBTEDNESS AND (2) PERFORMANCE OF ANY AND ALL OBLIGATIONS OF TRUSTOR UNDER THE NOTE, THE RELATED DOCUMENTS, AND THIS DEED OF TRUST. THIS DEED OF TRUST IS GIVEN AND ACCEPTED ON THE FOLLOWING TERMS: PAYMENT AND PERFORMANCE. Except as otherwise provided in this Deed of Trust, Trustor shall pay to Lender all amounts secured by this Deed of Trust as they become due, and shall strictly and in a timely manner perform all of Trustor's obligations under the Note, this Deed of Trust, and the Related Documents. POSSESSION AND MAINTENANCE OF THE PROPERTY. Trustor agrees that Trustor's possession and use of the Property shall be governed by the following provisions: POSSESSION AND USE. Until the occurrence of an Event of Default, or until Lender exercises its right to collect Rents as provided for in the Assignment of Rents form executed by Grantor in connection with the Property, Trustor may (a) remain in possession and control of the Property, (b) use, operate or manage the Property, and (c) collect any Rents, from the Property. DUTY TO MAINTAIN. Trustor shall maintain the Property in tenantable condition and promptly perform all repairs, replacements, and maintenance necessary to preserve its value. HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Deed of Trust, shall have the same meanings as set forth in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., Chapter 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. The terms "hazardous waste" and "hazardous substance" shall also include, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. Trustor represents and warrants to Lender that: (a) During the period of Trustor's ownership of the Property, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from the Property; (b) Trustor has no knowledge of, or reason to believe that there has been, except as previously disclosed to 11 04-24-1995 DEED OF TRUST Page 3 Loan No 20002816 (Continued) ================================================================================ and acknowledged by Lender in writing, (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the Property by any prior owners or occupants of the Property or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters; and (c) Except as previously disclosed to and acknowledged by Lender in writing, (i) neither Trustor nor any tenant, contractor, agent or other authorized user of the Property shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from the Property and (ii) any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations and ordinances, including without limitation those laws, regulations, and ordinances described above. Trustor authorizes Lender and its agents to enter upon the Property to make such inspections and tests, at Trustor's expense, as Lender may deem appropriate to determine compliance of the Property with this section of the Deed of Trust. Any inspections or tests made by Lender shall be for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of the Lender to Trustor or to any other person. The representations and warranties contained herein are based on the Trustor's due diligence in investigating the Property for hazardous waste and hazardous substances. Trustor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Trustor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Deed of Trust or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Trustor's ownership or interest in the Property, whether or not the same was or should have been known to Trustor. The provisions of this section of the Deed of Trust, including the obligation to indemnify, shall survive the payment of the indebtedness and the satisfaction and reconveyance of the lien of this Deed of Trust and shall not be affected by Lender's acquisition of any interest in the Property, whether by foreclosure or otherwise. NUISANCE, WASTE. Trustor shall not cause, conduct or permit any nuisance nor commit, permit, or suffer any stripping of or waste on or to the Property or any portion of the Property. Without limiting the generality of the foregoing, Trustor will not remove, or grant to any other party the right to remove, any timber, minerals (including oil and gas), soil, gravel or rock products without the prior written consent of Lender. REMOVAL OF IMPROVEMENTS. Trustor shall not demolish or remove any improvements from the Real Property without the prior written consent of Lender. As a condition to the removal of any improvements, Lender may require Trustor to make arrangements satisfactory to Lender to replace such improvements with improvements of at least equal value. LENDER'S RIGHT TO ENTER. Lender and its agents and representatives may enter upon the Real Property at all reasonable times to attend to Lender's interests and to inspect the Property for purposes of Trustor's compliance with the terms and conditions of this Deed of Trust. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Trustor shall promptly comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the use or occupancy of the Property, including without limitation, the Americans With Disabilities Act. Trustor may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Trustor has notified Lender in writing prior to doing so and so long as, in Lender's sole opinion, Lender's interests in the Property are not jeopardized. Lender may require Trustor to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect the Lender's interest. DUTY TO PROTECT. Trustor agrees neither to abandon nor leave unattended the Property. Trustor shall do all other acts, in addition to those acts set forth above in this section, which from the character and use of the Property are reasonably necessary to protect and preserve the Property. DUE ON SALE - CONSENT BY LENDER. Lender may, at its option, declare immediately due and payable all sums secured by this Deed of Trust upon the sale or transfer, without the Lender's prior written consent, of all or any part of the Real Property, or any interest in the Real Property. A "sale or transfer" means the conveyance of Real Property or any right, title or interest therein; whether legal, beneficial or equitable; whether voluntary or involuntary; whether by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest with a term greater than three (3) years, lease-option contract, or by sale, assignment, or transfer of any beneficial interest in or to any land trust holding title to the Real Property, or by any other method of conveyance of Real Property interest. If any Trustor is a corporation, partnership or limited liability company, transfer also includes any change in ownership of more than twenty-five percent (25%) of the voting stock, partnership interests or limited liability company interests, as the case may be, of Trustor. However, this option shall not be exercised by Lender if such exercise is prohibited by applicable law. TAXES AND LIENS. The following provisions relating to the taxes and liens on the Property are a part of this Deed of Trust. PAYMENT. Trustor shall pay when due (and in all events at least ten (10) days prior to delinquency) all taxes, special taxes, assessments, charges (including water and sewer), fines and impositions levied against or on account of the Property, and shall pay when due all claims for work done on or for services rendered or material furnished to the Property. Trustor shall maintain the Property free of all liens having priority over or equal to the interest of Lender under this Deed of Trust, except for the lien of taxes and assessments not due and except as otherwise provided in this Deed of Trust. RIGHT TO CONTEST. Trustor may withhold payment of any tax, assessment, or claim in connection with a good faith dispute over the obligation to pay, so long as Lender's interest in the Property is not jeopardized. If a lien 12 04-24-1995 DEED OF TRUST Page 4 Loan No 20002816 (Continued) ================================================================================ arises or is filed as a result of nonpayment, Trustor shall within fifteen (15) days after the lien arises or, if a lien is filed, within fifteen (15) days after Trustor has notice of the filing, secure the discharge of the lien, or if requested by Lender, deposit with Lender cash or a sufficient corporate surety bond or other security satisfactory to Lender in an amount sufficient to discharge the lien plus any costs and attorneys' fees or other charges that could accrue as a result of a foreclosure or sale under the lien. In any contest, Trustor shall defend itself and Lender and shall satisfy any adverse judgment before enforcement against the Property. Trustor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. EVIDENCE OF PAYMENT. Trustor shall upon demand furnish to Lender satisfactory evidence of payment of the taxes or assessments and shall authorize the appropriate governmental official to deliver to Lender at any time a written statement of the taxes and assessments against the Property. NOTICE OF CONSTRUCTION. Trustor shall notify Lender at least fifteen (15) days before any work is commenced, any services are furnished, or any materials are supplied to the Property, if any mechanic's lien, materialmen's lien, or other lien could be asserted on account of the work, services, or materials. Trustor will upon request of Lender furnish to Lender advance assurances satisfactory to Lender that Trustor can and will pay the cost of such improvements. PROPERTY DAMAGE INSURANCE. The following provisions relating to insuring the Property are a part of this Deed of Trust. MAINTENANCE OF INSURANCE. Trustor shall procure and maintain policies of fire insurance with standard extended coverage endorsements on a replacement basis for the full insurable value covering all improvements on the Real Property in an amount sufficient to avoid application of any coinsurance clause, and with a standard mortgagee clause in favor of Lender. Grantor shall also procure and maintain comprehensive general liability insurance in such coverage amounts as Lender may request with trustee and Lender being named as additional insureds in such liability insurance policies. Additionally, Grantor shall maintain such other insurance, including but not limited to hazard, business interruption, and boiler insurance, as Lender may reasonably require. Notwithstanding the foregoing, in no event shall Trustor be required to provide hazard insurance in excess of the replacement value of the improvements on the Real Property. Policies shall be written in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Trustor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. Should the Real Property at any time become located in an area designated by the Director of the Federal Emergency Management Agency as a special flood hazard area, Trustor agrees to obtain and maintain Federal Flood insurance to the extent such insurance is required by Lender and is or becomes available, for the term of the loan and for the full unpaid balance of the loan, or the maximum limit of coverage that is available, whichever is less. APPLICATION OF PROCEEDS. Trustor shall promptly notify Lender of any loss or damage to the Property. Lender may make proof of loss if Trustor fails to do so within fifteen (15) days of the casualty. If in Lender's sole judgment Lender's security interest in the Property has been impaired, Lender may, at its election, receive and retain the proceeds of any insurance and apply the proceeds to the reduction of the indebtedness, payment of any lien affecting the Property, or the restoration and repair of the Property. If the proceeds are to be applied to restoration and repair, Trustor shall repair or replace the damaged or destroyed improvements in a manner satisfactory to Lender. Lender shall, upon satisfactory proof of such expenditure, pay or reimburse Trustor from the proceeds for the reasonable cost of repair or restoration if Trustor is not in default under this Deed of Trust. Any proceeds which have not been disbursed within 180 days after their receipt and which Lender has not committed to the repair or restoration of the Property shall be used first to pay any amount owing to Lender under this Deed of Trust, then to pay accrued interest, and the remainder, if any, shall be applied to the principal balance of the indebtedness. If Lender holds any proceeds after payment in full of the indebtedness, such proceeds shall be paid to Trustor as Trustor's interests may appear. UNEXPIRED INSURANCE AT SALE. Any unexpired insurance shall inure to the benefit of, and pass to, the purchaser of the Property covered by this Deed of Trust at any trustee's sale or other sale held under the provisions of this Deed of Trust, or at any foreclosure sale of such Property. TRUSTOR'S REPORT ON INSURANCE. Upon request of Lender, however, not more than once a year, Trustor shall furnish to Lender a report on each existing policy of insurance showing: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the property insured, the then current replacement value of such property, and the manner of determining that value; and (e) the expiration date of the policy. Trustor shall, upon request of Lender, have an independent appraiser satisfactory to Lender determine the cash value replacement cost of the Property. EXPENDITURES BY LENDER. If Trustor fails to comply with any provision of this Deed of Trust, or if any action or proceeding is commenced that would materially affect Lender's interests in the Property, Lender on Trustor's behalf may, but shall not be required to, take any action that Lender deems appropriate. Any amount that Lender expends in so doing will bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Trustor. All such expenses, at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (i) the term of any applicable insurance policy or (ii) the remaining term of the Note, or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. This Deed of Trust also will secure payment of these amounts. The rights provided for in this paragraph shall be in addition to any other rights or any remedies to which Lender may he entitled on account of the default. Any such action by Lender shall not be construed as curing the default so as to bar Lender from any remedy that it otherwise would have 13 04-24-1996 DEED OF TRUST Page 5 Loan No 20002816 (Continued) ================================================================================ had. WARRANTY; DEFENSE OF TITLE. The following provisions relating to ownership of the Property are a part of this Deed of Trust. TITLE. Trustor warrants that: (a) Trustor holds good and marketable title of record to the Property in fee simple, free and clear of all liens and encumbrances other than those set forth in the Real Property description or in any title insurance policy, title report, or final title opinion issued in favor of, and accepted by, Lender in connection with this Deed of Trust, and (b) Trustor has the full right, power, and authority to execute and deliver this Deed of Trust to Lender. DEFENSE OF TITLE. Subject to the exception in the paragraph above, Trustor warrants and will forever defend the title to the Property against the lawful claims of all persons. In the event any action or proceeding is commenced that questions Trustor's title or the interest of Trustee or Lender under this Deed of Trust, Trustor shall defend the action at Trustor's expense. Trustor may be the nominal party in such proceeding, but Lender shall be entitled to participate in the proceeding and to be represented in the proceeding by counsel of Lender's own choice, and Trustor will deliver, or cause to be delivered, to Lender such instruments as Lender may request from time to time to permit such participation. COMPLIANCE WITH LAWS. Trustor warrants that the Property and Trustor's use of the Property complies with all existing applicable laws, ordinances, and regulations of governmental authorities. CONDEMNATION. The following provisions relating to condemnation proceedings are a part of this Deed of Trust. APPLICATION OF NET PROCEEDS. If all or any part of the Property is condemned by eminent domain proceedings or by any proceeding or purchase in lieu of condemnation, Lender may at its election require that all or any portion of the net proceeds of the award be applied to the indebtedness or the repair or restoration of the Property. The net proceeds of the award shall mean the award after payment of all reasonable costs, expenses, and attorneys' fees incurred by Trustee or Lender in connection with the condemnation. PROCEEDINGS. If any proceeding in condemnation is filed, Trustor shall promptly notify Lender in writing, and Trustor shall promptly take such steps as may be necessary to defend the action and obtain the award. Trustor may be the nominal party in such proceeding, but Lender shall be entitled to participate in the proceeding and to be represented in the proceeding by counsel of its own choice, and Trustor will deliver or cause to be delivered to Lender such instruments as may be requested by it from time to time to permit such participation. IMPOSITION OF TAXES, FEES AND CHARGES BY GOVERNMENTAL AUTHORITIES. The following provisions relating to governmental taxes, fees and charges are a part of this Deed of Trust: CURRENT TAXES, FEES AND CHARGES. Upon request by Lender, Trustor shall execute such documents in addition to this Deed of Trust and take whatever other action is requested by Lender to perfect and continue Lender's lien on the Real Property. Trustor shall reimburse Lender for all taxes, as described below, together with all expenses incurred in recording, perfecting or continuing this Deed of Trust, including without limitation all taxes, fees, documentary stamps, and other charges for recording or registering this Deed of Trust. TAXES. The following shall constitute taxes to which this section applies: (a) a specific tax upon this type of Deed of Trust or upon all or any part of the indebtedness secured by this Deed of Trust; (b) a specific tax on Trustor which Trustor is authorized or required to deduct from payments on the indebtedness secured by this type of Deed of Trust; (c) a tax on this type of Deed of Trust chargeable against the Lender or the holder of the Note; and (d) a specific tax on all or any portion of the indebtedness or on payments of principal and interest made by Trustor. SUBSEQUENT TAXES. If any tax to which this section applies is enacted subsequent to the date of this Deed of Trust, this event shall have the same effect as an Event of Default (as defined below), and Lender may exercise any or all of its available remedies for an Event of Default as provided below unless Trustor either (a) pays the tax before it becomes delinquent, or (b) contests the tax as provided above in the Taxes and Liens section and deposits with Lender cash or a sufficient corporate surety bond or other security satisfactory to Lender. SECURITY AGREEMENT; FINANCING STATEMENTS. The following provisions relating to this Deed of Trust as a security agreement are a part of this Deed of Trust. SECURITY AGREEMENT. This instrument shall constitute a security agreement to the extent any of the Property constitutes fixtures or other personal property, and Lender shall have all of the rights of a secured party under the Uniform Commercial Code as amended from time to time. SECURITY INTEREST. Upon request by Lender, Trustor shall execute financing statements and take whatever other action is requested by Lender to perfect and continue Lender's security interest in the Rents and Personal Property. Trustor shall reimburse Lender for all expenses incurred in perfecting or continuing this security interest. Upon default, Trustor shall assemble the Personal Property in a manner and at a place reasonably convenient to Trustor and Lender and make it available to Lender within three (3) days after receipt of written demand from Lender. ADDRESSES. The mailing addresses of Trustor (debtor) and Lender (secured party), from which information concerning the security interest granted by this Deed of Trust may be obtained (each as required by the Uniform Commercial Code), are as stated on the first page of this Deed of Trust. FURTHER ASSURANCES; ATTORNEY-IN-FACT. The following provisions relating to further assurances and attorney-in-fact are a part of this Deed of Trust. FURTHER ASSURANCES. At any time, and from time to time, upon request of Lender, Trustor will make, execute and deliver, or will cause to be made, executed or delivered, to Lender or to Lender's designee, and when 14 04-24-1996 DEED OF TRUST Page 6 Loan No 20002816 (Continued) ================================================================================ requested by Lender, cause to be filed, recorded, refiled, or rerecorded, as the case may be, at such times and in such offices and places as Lender may deem appropriate, any and all such mortgages, deeds of trust, security deeds, security agreements, financing statements, continuation statements, instruments of further assurance, certificates, and other documents as may, in the sole opinion of Lender, be necessary or desirable in order to effectuate, complete, perfect, continue, or preserve (a) the obligations of Trustor under the Note, this Deed of Trust, and the Related Documents, and (b) the liens and security interests created by this Deed of Trust as first and prior liens on the Property, whether now owned or hereafter acquired by Trustor. Unless prohibited by law or agreed to the contrary by Lender in writing, Trustor shall reimburse Lender for all costs and expenses incurred in connection with the matters referred to in this paragraph. ATTORNEY-IN-FACT. If Trustor fails to do any of the things referred to in the preceding paragraph, Lender may do so for and in the name of Trustor and at Trustor's expense. For such purposes, Trustor hereby irrevocably appoints Lender as Trustor's attorney-in-fact for the purpose of making, executing, delivering, filing, recording, and doing all other things as may be necessary or desirable, in Lender's sole opinion, to accomplish the matters referred to in the preceding paragraph. FULL PERFORMANCE. If Trustor pays all the Indebtedness when due, and otherwise performs all the obligations imposed upon Trustor under this Deed of Trust, Lender shall execute and deliver to Trustee a request for full reconveyance and shall execute and deliver to Trustor suitable statements of termination of any financing statement on file evidencing Lender's security interest in the Rents and the Personal Property. Lender may charge Trustor a reasonable reconveyance fee at the time of reconveyance. DEFAULT. Each of the following, at the option of Lender, shall constitute an event of default ("Event of Default") under this Deed of Trust: DEFAULT OF INDEBTEDNESS. Failure of Trustor to make any payment when due on the Indebtedness. DEFAULT ON OTHER PAYMENTS. Failure of Trustor within the time required by this Deed of Trust to make any payment for taxes or insurance, or any other payment necessary to prevent filing of or to effect discharge of any lien. DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Deed of Trust or any of the Related Documents. COMPLIANCE DEFAULT. Failure to comply with any other term, obligation, covenant or condition contained in this Deed of Trust, the Note or in any of the Related Documents. If such a failure is curable and if Trustor has not been given a notice of a breach of the same provision of this Deed of Trust within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Trustor, after Lender sends written notice demanding cure of such failure: (a) cures the failure within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps sufficient to cure the failure and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by or on behalf of Trustor under this Deed of Trust, the Note or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished. INSOLVENCY. The dissolution or termination of Trustor's existence as a going business, the insolvency of Trustor, the appointment of a receiver for any part of Trustor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Trustor. FORECLOSURE, FORFEITURE, ETC. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Trustor or by any governmental agency against any of the Property. However, this subsection shall not apply in the event of a good faith dispute by Trustor as to the validity or reasonableness of the claim which is the basis of the foreclosure or forfeiture proceeding, provided that Trustor gives Lender written notice of such claim and furnishes reserves or a surety bond for the claim satisfactory to Lender. BREACH OF OTHER AGREEMENT. Any breach by Trustor under the terms of any other agreement between Trustor and Lender that is not remedied within any grace period provided therein, including without limitation any agreement concerning any indebtedness or other obligation of Trustor to Lender, whether existing now or later. EVENTS AFFECTING GUARANTOR. Any of the preceding events occur with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. ADVERSE CHANGE. A material adverse change occurs in Trustor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of any Event of Default and at any time thereafter, Trustee or Lender, at its option, may exercise any one or more of the following rights and remedies, in addition to any other rights or remedies provided by law: FORECLOSURE BY SALE. Upon an Event of Default under this Deed of Trust, Beneficiary may declare the entire Indebtedness secured by this Deed of Trust immediately due and payable by delivery to Trustee of written declaration of default and demand for sale and of written notice of default and of election to cause to be sold the Property, which notice Trustee shall cause to be filed for record. Beneficiary also shall deposit with 15 04-24-1996 DEED OF TRUST Page 7 Loan No 20002816 (Continued) =============================================================================== Trustee this Deed of Trust, the Note, other documents requested by Trustee, and all documents evidencing expenditures secured hereby. After the lapse of such time as may then be required by law following the recordation of the notice of default, and notice of sale having been given as then required by law, Trustee, without demand on Trustor, shall sell the Property at the time and place fixed by it in the notice of sale, either as a whole or in separate parcels, and in such order as it may determine, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. Trustee may postpone sale of all or any portion of the Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement in accordance with applicable law. Trustee shall deliver to such purchaser its deed conveying the Property so sold, but without any covenant or warranty, express or implied. The recitals in such deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Trustor, Trustee or Beneficiary may purchase at such sale. After deducting all costs, fees and expenses of Trustee and of this Trust, including cost of evidence of title in connection with sale, Trustee shall apply the proceeds of sale to payment of: all sums expended under the terms hereof, not then repaid, with accrued interest at the amount allowed by law in effect at the date hereof; all other sums then secured hereby; and the remainder, if any, to the person or persons legally entitled thereto. JUDICIAL FORECLOSURE. With respect to all or any part of the Personal Property, Lender shall have the right in lieu of foreclosure by power of sales to foreclose by judicial foreclosure in accordance with and to the full extent provided by California law. UCC REMEDIES. With respect to all or any part of the Personal Property, Lender shall have all the rights and remedies of a secured party under the Uniform Commercial Code, including without limitation the right to recover any deficiency in the manner and to the full extent provided by California law. COLLECT RENTS. Lender shall have the right, without notice to Trustor, to take possession of and manage the Property and collect the Rents, including amounts past due and unpaid, and apply the net proceeds, over and above Lender's costs, against the Indebtedness. In furtherance of this right, Lender may require any tenant or other user of the Property to make payments of rent or use fees directly to Lender. If the Rents are collected by Lender, then Trustor irrevocably designates Lender as Trustor's attorney-in-fact to endorse instruments received in payment thereof in the name of Trustor and to negotiate the same and collect the proceeds. Payments by tenants or other users to Lender in response to Lender's demand shall satisfy the obligations for which the payments are made, whether or not any proper grounds for the demand existed. Lender may exercise its rights under this subparagraph either in person, by agent, or through a receiver. APPOINT RECEIVER. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Property, with the power to protect and preserve the Property, to operate the Property, to operate the Property preceding foreclosure or sale, and to collect the Rents from the Property and apply the proceeds, over and above the cost of the receivership, against the Indebtedness. The receiver may serve without bond if permitted by law. Lender's right to the appointment of a receiver shall exist whether or not the apparent value of the Property exceeds the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver. TENANCY AT SUFFERANCE. If Trustor remains in possession of the Property after the Property is sold as provided above or Lender otherwise becomes entitled to possession of the Property upon default of Trustor, Trustor shall become a tenant at sufferance of Lender or the purchaser of the Property and shall, at Lender's option, either (a) pay a reasonable rental for the use of the Property, or (b) vacate the Property immediately upon the demand of Lender. OTHER REMEDIES. Trustee or Lender shall have any other right or remedy provided in this Deed of Trust or the Note or by law. NOTICE OF SALE. Lender shall give Trustor reasonable notice of the time and place of any public sale of the Personal Property or of the time after which any private sale or other intended disposition of the Personal Property is to be made. Reasonable notice shall mean notice given at least five (5) days before the time of the sale or disposition. Any sale of Personal Property may be made in conjunction with any sale of the Real Property. SALE OF THE PROPERTY. To the extent permitted by applicable law, Trustor hereby waives any and all rights to have the Property marshalled. In exercising its rights and remedies, the Trustee or Lender shall be free to sell all or any part of the Property together or separately, in one sale or by separate sales. Lender shall be entitled to bid at any public sale on all or any portion of the Property. WAIVER; ELECTION OF REMEDIES. A waiver by any party of a breach of a provision of this Deed of Trust shall not constitute a waiver of or prejudice the party's rights otherwise to demand strict compliance with that provision or any other provision. Election by Lender to pursue any remedy provided in this Deed of Trust, the Note, in any Related Document, or provided by law shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Trustor under this Deed of Trust after failure of Trustor to perform shall not affect Lender's right to declare a default and to exercise any of its remedies. ATTORNEY'S FEES; EXPENSES. If Lender institutes any suit or action to enforce any of the terms of this Deed of Trust, Lender shall be entitled to recover such sum as the court may adjudge reasonable as attorneys' fees at trial and on any appeal. Whether or not any court action is involved, all reasonable expenses incurred by Lender which in Lender's opinion are necessary at any time for the protection of its interest or the enforcement of its rights shall become a part of the Indebtedness payable on demand and shall bear interest at the Note rate from the date of expenditure until repaid. Expenses covered by this paragraph include, without limitation, however subject to any limits under applicable law, Lender's attorneys' fees whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay 16 04-24-1996 DEED OF TRUST Page 8 Loan No 20002816 (Continued) ================================================================================ or injunction), appeals and any anticipated post-judgment collection services, the cost of searching records, obtaining title reports (including foreclosure reports), surveyors' reports, appraisal fees, title insurance, and fees for the Trustee, to the extent permitted by applicable law. Trustor also will pay any court costs, in addition to all other sums provided by law. RIGHTS OF TRUSTEE. Trustee shall have all of the rights and duties of Lender as set forth in this section. POWERS AND OBLIGATIONS OF TRUSTEE. The following provisions relating to the powers and obligations of Trustee are part of this Deed of Trust. POWERS OF TRUSTEE. In addition to all powers of Trustee arising as a matter of law, Trustee shall have the power to take the following actions with respect to the Property upon the written request of Lender and Trustor: (a) join in preparing and filing a map or plat of the Real Property, including the dedication of streets or other rights to the public; (b) join in granting any easement or creating any restriction on the Real Property; and (c) join in any subordination or other agrement affecting this Deed of Trust or the interest of Lender under this Deed of Trust. OBLIGATIONS TO NOTIFY. Trustee shall not be obligated to notify any other party of a pending sale under any other trust deed or lien, or of any action or proceeding in which Trustor, Lender, or Trustee shall be a party, unless the action or proceeding is brought by Trustee. TRUSTEE. Trustee shall meet all qualifications required for Trustee under applicable law. In addition to the rights and remedies set forth above, with respect to all or any part of the Property, the Trustee shall have the right to foreclose by notice and sale, and Lender shall have the right to foreclose by judicial foreclosure, in either case in accordance with and to the full extent provided by applicable law. SUCCESSOR TRUSTEE. Lender, at Lender's option, may from time to time appoint a successor Trustee to any Trustee appointed hereunder by an instrument executed and acknowledged by Lender and recorded in the office of the recorder of Los Angeles County, California. The instrument shall contain, in addition to all other matters required by state law, the names of the original Lender, Trustee, and Trustor, the book and page where this Deed of Trust is recorded, and the name and address of the successor Trustee, and the instrument shall be executed and acknowledged by Lender or its successors in interest. The successor Trustee, without conveyance of the Property, shall succeed to all the title, power, and duties conferred upon the Trustee in this Deed of Trust and by applicable law. The procedure for substitution of trustee shall govern to the exclusion of all other provisions for substitution. NOTICES TO TRUSTOR AND OTHER PARTIES. Any notice under this Deed of Trust shall be in writing, may be sent by telefacsimile, and shall be effective when actually delivered, or when deposited with a nationally recognized overnight courier, or, if mailed, shall be deemed effective when deposited in the United States mail first class, registered mail, postage prepaid, directed to the addresses shown near the beginning of this Deed of Trust. Any party may change its address for notices under this Deed of Trust by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. All copies of notices of foreclosure from the holder of any lien which has priority over this Deed of Trust shall be sent to Lender's address, as shown near the beginning of this Deed of Trust. For notice purposes, Trustor agrees to keep Lender and Trustee informed at all times of Trustor's current address. Each Trustor requests that copies of any notices of default and sale be directed to Trustor's address shown near the beginning of this Deed of Trust. STATEMENT OF OBLIGATION. Lender may collect a fee, in an amount not to exceed the statutory maximum, for furnishing the statement of obligation as provided by Section 2943 of the Civil Code of California. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Deed of Trust: AMENDMENTS. This Deed of Trust, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Deed of Trust. No alteration of or amendment to this Deed of Trust shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. ANNUAL REPORTS. If the Property is used for purposes other than Trustor's residence, Trustor shall furnish to Lender, upon request, a certified statement of net operating income received from the Property during Trustor's previous fiscal year in such form and detail as Lender shall require. "Net operating income" shall mean all cash receipts from the Property less all cash expenditures made in connection with the operation of the Property. ACCEPTANCE BY TRUSTEE. Trustee accepts this Trust when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law. APPLICABLE LAW. THIS DEED OF TRUST HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. THIS DEED OF TRUST SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. CAPTION HEADINGS. Caption headings in this Deed of Trust are for convenience purposes only and are not to be used to interpret or define the provisions of this Deed of Trust. MERGER. There shall be no merger of the interest or estate created by this Deed of Trust with any other interest or estate in the Property at any time held by or for the benefit of Lender in any capacity, without the written consent of Lender. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Deed of Trust to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or 17 04-24-1996 DEED OF TRUST Page 9 Loan No 20002816 (Continued) =============================================================================== unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Deed of Trust in all other respects shall remain valid and enforceable. SUCCESSORS AND ASSIGNS. Subject to the limitations stated in this Deed of Trust on transfer of Trustor's interest, this Deed of Trust shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Property becomes vested in a person other than Trustor, Lender, without notice to Trustor, may deal with Trustor's successors with reference to this Deed or Trust and the Indebtedness by way of forbearance or extension without releasing Trustor from the obligations of this Deed of Trust or liability under the Indebtedness. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Deed of Trust. WAIVERS AND CONSENTS. Lender shall not be deemed to have waived any rights under this Deed of Trust (or under the Related Documents) unless such waiver is in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by any party of a provision of this Deed or Trust shall not constitute a waiver of or prejudice the party's right otherwise to demand strict compliance with that provision or any other provision. No prior waiver by Lender, nor any course of dealing between Lender and Trustor, shall constitute a waiver of any of Lender's rights or any of Trustor's obligations as to any future transactions. Whenever consent by Lender is required in this Deed of Trust, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required. EACH TRUSTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS DEED OF TRUST, AND EACH TRUSTOR AGREES TO ITS TERMS. TRUSTOR: DOVE AUDIO, INC. By: /s/ MICHAEL VINER -------------------------------------------------- Michael Viner, Chairman of the Board and President - - ------------------------------------------------------------------------------- CERTIFICATE OF ACKNOWLEDGMENT STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On APRIL 24, 1996, before me, A. WATANABE, personally appeared Michael Viner, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. A. WATANABE COMM. #989696 Notary Public - California LOS ANGELES COUNTY My Comm. Expires MAR 28, 1997 WITNESS my hand and official seal. Signature /s/ A. WATANABE (Seal) ------------------------------ 18 EXHIBIT "A" PARCEL 1: LOT 332 OF TRACT NO. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. EXCEPT THE SOUTHERLY 55 FEET THEREOF. PARCEL 2: LOT 331 AND THE SOUTHERLY 55 FEET OF LOT 332 OF TRACT NO. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. PARCEL 3: LOTS 284, 285, 286, 329 AND 330 OF TRACT 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. PARCEL 4: LOT 282 OF TRACT NO. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGE 39 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. PARCEL 5: LOT 283 OF TRACT NO. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. 19 RECORDATION REQUESTED BY: ASAHI BANK OF CALIFORNIA 635 WEST 7TH STREET LOS ANGELES, CA 90017 WHEN RECORDED MAIL TO: ASAHI BANK OF CALIFORNIA 635 WEST 7TH STREET LOS ANGELES, CA 90017 SEND TAX NOTICES TO: ASAHI BANK OF CALIFORNIA 635 WEST 7TH STREET LOS ANGELES, CA 90017 FOR RECORDER'S USE ONLY ASSIGNMENT OF RENTS THIS ASSIGNMENT OF RENTS IS DATED APRIL 24,1996, BETWEEN DOVE AUDIO, INC., WHOSE ADDRESS IS 8955 BEVERLY BOULEVARD, WEST HOLLYWOOD, CA 90048 (REFERRED TO BELOW AS "GRANTOR"); AND ASAHI BANK OF CALIFORNIA, WHOSE ADDRESS IS 635 WEST 7TH STREET, LOS ANGELES, CA 90017 (REFERRED TO BELOW AS "LENDER"). ASSIGNMENT. FOR VALUABLE CONSIDERATION, GRANTOR ASSIGNS AND CONVEYS TO LENDER ALL OF GRANTOR'S RIGHT, TITLE, AND INTEREST IN AND TO THE RENTS FROM THE FOLLOWING DESCRIBED PROPERTY LOCATED IN LOS ANGELES COUNTY, STATE OF CALIFORNIA: PLEASE SEE EXHIBIT "A" ATTACHED HERETO AND BY THIS REFERENCE MADE A PART HEREOF. THE REAL PROPERTY OR ITS ADDRESS IS COMMONLY KNOWN AS 8955 BEVERLY BOULEVARD, WEST HOLLYWOOD, CA 90048. THIS IS AN ABSOLUTE ASSIGNMENT IN THE RENTS GIVEN AS ADDITIONAL SECURITY PURSUANT TO CALIFORNIA CIVIL CODE SECTION 2938. DEFINITIONS. The following words shall have the following meanings when used in this Assignment. Terms not otherwise defined in this Assignment shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. ASSIGNMENT. The word "Assignment" means this Assignment of Rents between Grantor and Lender, and includes without limitation all assignments and security interest provisions relating to the Rents. EVENT OF DEFAULT. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "Events of Default." GRANTOR. The word "Grantor" means DOVE AUDIO INC.. INDEBTEDNESS. The word "Indebtedness" means all principal and interest payable under the Note and any amounts expended or advanced by Lender to discharge obligations of Grantor or expenses incurred by Lender to enforce obligations of Grantor under this Assignment, together with interest on such amounts as provided in this Assignment. LENDER. The word "Lender" means ASAHI BANK OF CALIFORNIA, its successors and assigns. NOTE. The word "Note" means the promissory note or credit agreement dated April 24, 1996, in the original principal amount of $1,900,000.00 from Grantor to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the promissory note or agreement. PROPERTY. The word "Property" means the real property, and all improvements thereon, described above in the "Assignment" section. REAL PROPERTY. The words "Real Property" mean the property, interests and rights described above in the "Property Definition" section. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, 20 04-24-1996 ASSIGNMENT OF RENTS Page 2 Loan No 20002816 (Continued) ================================================================================ mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. THIS ASSIGNMENT IS GIVEN TO SECURE (1) PAYMENT OF THE INDEBTEDNESS AND (2) PERFORMANCE OF ANY AND ALL OBLIGATIONS OF GRANTOR UNDER THE NOTE, THIS ASSIGNMENT, AND THE RELATED DOCUMENTS. THIS DOCUMENT IS GIVEN AND ACCEPTED ON THE FOLLOWING TERMS: PAYMENT AND PERFORMANCE. Except as otherwise provided in this Assignment, Grantor shall pay to Lender all amounts secured by this Assignment as they become due, and shall strictly perform all of Grantor's obligations under this Assignment. Unless and until Lender exercises its right to collect the Rents as provided below and so long as there is no default under this Assignment, Grantor may remain in possession and control of and operate and manage the Property and collect the Rents, provided that the granting of the right to collect the Rents shall not constitute Lender's consent to the use of cash collateral in a bankruptcy proceeding. GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE RENTS. With respect to the Rents, Grantor represents and warrants to Lender that: OWNERSHIP. Grantor is entitled to receive the Rents free and clear of all rights, loans, liens, encumbrances, and claims except as disclosed to and accepted by Lender in writing. NO PRIOR ASSIGNMENT. Grantor has not previously assigned or conveyed the Rents to any other person by any instrument now in force. NO FURTHER TRANSFER. Grantor will not sell, assign, encumber, or otherwise dispose of any Grantor's rights in the Rents except as provided in this Agreement. LENDER'S RIGHTS TO COLLECT RENTS. Lender shall have the right at any time, and even though no default shall have occurred under this Assignment, to collect and receive the Rents. For this purpose, Lender is hereby given and granted the following rights, powers and authority: NOTICE TO TENANTS. Lender may send notices to any and all tenants of the Property advising them of this Assignment and directing all Rents to be paid directly to Lender or Lender's agent. ENTER THE PROPERTY. Lender may enter upon and take possession of the Property; demand, collect and receive from the tenants or from any person liable therefor, all of the Rents; institute and carry on all legal proceedings necessary for the protection of the Property, including such proceedings as may be necessary to recover possession of the Property; collect the Rents and remove any tenant or tenants or other persons from the Property. MAINTAIN THE PROPERTY. Lender may enter upon the Property to maintain the Property and keep the same in repair; to pay the costs thereof and all of services of all employees, including their equipment, and of all continuing costs and expenses of maintaining the Property in proper repair and condition, and also to pay all taxes, assessments and water utilities, and the premiums on fire and other insurance effected by Lender on the Property. COMPLIANCE WITH LAWS. Lender may do any and all things to execute and comply with the laws of the State of California and also all other laws, rules, orders, ordinances and requirements of all other governmental agencies affecting the Property. LEASE THE PROPERTY. Lender may rent or lease the whole or any part of the Property for such term or terms and on such conditions as Lender may deem appropriate. EMPLOY AGENTS. Lender may engage such agent or agents as Lender may deem appropriate, either in Lender's name or in Grantor's name, to rent and manage the Property, including the collection and application of Rents. OTHER ACTS. Lender may do all such other things and acts with respect to the Property as Lender may deem appropriate and may act exclusively and solely in the place and stead of Grantor and to have all of the powers of Grantor for the purposes stated above. NO REQUIREMENT TO ACT. Lender shall not be required to do any of the foregoing acts or things, and the fact that Lender shall have performed one or more of the foregoing acts or things shall not require Lender to do any other specific act or thing. APPLICATION OF RENTS. All costs and expenses incurred by Lender in connection with the Property shall be for Grantor's account and Lender may pay such costs and expenses from the Rents. Lender, in its sole discretion, shall determine the application of any and all Rents received by it; however, any such Rents received by Lender which are not applied to such costs and expenses shall be applied to the Indebtedness. All expenditures made by Lender under this Assignment and not reimbursed from the Rents shall become a part of the Indebtedness secured by this Assignment, and shall be payable on demand, with respect at the Note rate from date of expenditure until paid. 21 04-24-1996 ASSIGNMENT OF RENTS Page 3 Loan No 20002816 (Continued) ================================================================================ FULL PERFORMANCE. If Grantor pays all of the indebtedness when due and otherwise performs all the obligations imposed upon Grantor under this Assignment, the Note, and the Related Documents, Lender shall execute and deliver to Grantor a suitable satisfaction of this Assignment and suitable statements of termination of any financing statement on file evidencing Lender's security interest in the Rents and the Property. Any termination fee required by law shall be paid by Grantor, if permitted by applicable law. EXPENDITURES BY LENDER. If Grantor fails to comply with any provision of this Assignment, or if any action or proceeding is commenced that would materially affect Lender's interests in the Property, Lender on Grantor's behalf may, but shall not be required to, take any action that Lender deems appropriate. Any amount that Lender expends in so doing will bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses, at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (i) the term of any applicable insurance policy or (ii) the remaining term of the Note, or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. This Assignment also will secure payment of these amounts. The rights provided for in this paragraph shall be in addition to any other rights or any remedies to which Lender may be entitled on account of the default. Any such action by Lender shall not be construed as curing the default so as to bar Lender from any remedy that it otherwise would have had. DEFAULT. Each of the following, at the option of Lender, shall constitute an event of default ("Event of Default") under this Assignment: DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due on the Indebtedness. COMPLIANCE DEFAULT. Failure to comply with any other term, obligation, covenant or condition contained in this Assignment, the Note or in any of the Related Documents. If such a failure is curable and if Grantor has not been given a notice of a breach of the same provision of this Assignment within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Grantor, after Lender sends written notice demanding cure of such failure: (a) cures the failure within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps sufficient to cure the failure and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Assignment or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by or on behalf of Grantor under this Assignment, the Note or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished. OTHER DEFAULTS. Failure of Grantor to comply with any term, obligation, covenant, or condition contained in any other agreement between Grantor and Lender. INSOLVENCY. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor. FORECLOSURE, FORFEITURE, ETC. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against any of the Property. However, this subsection shall not apply in the event of a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the foreclosure or forfeiture proceeding,provided that Grantor gives Lender written notice of such claim and furnishes reserves or a surety bond for the claim satisfactory to Lender. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. ADVERSE CHANGE. A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of any Event of Default and at any time thereafter, Lender may exercise any one or more of the following rights and remedies, in addition to any other rights or remedies provided by law: ACCELERATE INDEBTEDNESS. Lender shall have the right at its option without notice to Grantor to declare the entire indebtedness immediately due and payable, including any prepayment penalty which Grantor would be required to pay. COLLECT RENTS. Lender shall have the right, without notice to Grantor, to take possession of the Property and collect the Rents, including amounts past due and unpaid, and apply the net proceeds, over and above Lender's costs, against the Indebtedness. In furtherance of this right, Lender shall have all the rights provided for in the Lender's Right to Collect Section, above. If the Rents are collected by Lender, then Grantor irrevocably designates Lender as Grantor's attorney-in-fact to endorse instruments received in payment thereof in the name of Grantor and to negotiate the same and collect the proceeds. Payments by tenants or other users to Lender in response to Lender's demand shall satisfy the obligations for which the payments are 22 04-24-1996 ASSIGNMENT OF RENTS Page 4 Loan No 20002816 (Continued) ================================================================================ made, whether or not any proper grounds for the demand existed. Lender may exercise its rights under this subparagraph either in person, by agent, or through a receiver. APPOINTMENT RECEIVER. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Property, with the power to protect and preserve the Property, to operate the Property preceding foreclosure or sale, and to collect the Rents from the Property and apply the proceeds, over and above the cost of the receivership, against the indebtedness. The receiver may serve without bond if permitted by law. Lender's right to the appointment of a receiver shall exist whether or not the apparent value of the Property exceeds the indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver. OTHER REMEDIES. Lender shall have all other rights and remedies provided in this Assignment or the Note or by law. WAIVER; ELECTION OF REMEDIES. A waiver by any party of a breach of a provision of this Assignment shall not constitute a waiver of or prejudice the party's rights otherwise to demand strict compliance with that provision or any other provision. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or take action to perform an obligation of Grantor under this Assignment after failure of Grantor to perform shall not affect Lender's right to declare a default and exercise its remedies under this Assignment. ATTORNEYS' FEES; EXPENSES. If Lender institutes any suit or action to enforce any of the terms of this Assignment, Lender shall be entitled to recover such sum as the court may adjudge reasonable as attorneys' fees at trial and on any appeal. Whether or not any court action is involved, all reasonable expenses incurred by Lender that in Lender's opinion are necessary at any time for the protection of its interest or the enforcement of its rights shall become a part of the indebtedness payable on demand and shall bear interest from the date of expenditure until repaid at the rate provided for in the Note. Expenses covered by this paragraph include, without limitation, however subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals and any anticipated post-judgment collection services, the cost of searching records, obtaining title reports (including foreclosure reports), surveyors' reports, and appraisal fees, and title insurance, to the extent permitted by applicable law. Grantor also will pay any court costs, in addition to all other sums provided by law. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Assignment: AMENDMENTS. This Assignment, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Assignment. No alteration of or amendment to this Assignment shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. THIS ASSIGNMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. THIS ASSIGNMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. NO MODIFICATION. Grantor shall not enter into any agreement with the holder of any mortgage, deed of trust, or other security agreement which has priority over this Assignment by which that agreement is modified, amended, extended, or renewed without the prior written consent of Lender. Grantor shall neither request nor accept any future advances under any such security agreement without the prior written consent of Lender. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Assignment to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Assignment in all other respects shall remain valid and enforceable. SUCCESSORS AND ASSIGNS. Subject to the limitations stated in this Assignment on transfer of Grantor's interest, this Assignment shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Property becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor's successors with reference to this Assignment and the indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Assignment or liability under the indebtedness. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Assignment. WAIVER OF HOMESTEAD EXEMPTION. Grantor hereby releases and waives all rights and benefits of the homestead exemption laws of the State of California as to all indebtedness secured by this Assignment. WAIVERS AND CONSENTS. Lender shall not be deemed to have waived any rights under this Assignment (or under the Related Documents) unless such waiver is in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by any party of a provision of this Assignment shall not constitute a waiver of or prejudice the party's right otherwise to demand strict compliance with that provision or any other provision. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or any of Grantor's obligations as to any future transactions. Whenever consent by Lender is required in this Assignment, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required. 23 EXHIBIT "A" PARCEL 1: LOT 332 OF TRACT NO. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. EXCEPT THE SOUTHERLY 55 FEET THEREOF. PARCEL 2: LOT 331 AND THE SOUTHERLY 55 FEET OF LOT 332 OF TRACT NO. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. PARCEL 3: LOTS 284, 285, 286, 329 AND 330 OF TRACT 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. PARCEL 4: LOT 282 OF TRACT NO. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGE 39 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. PARCEL 5: LOT 283 OF TRACT NO. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY. 24 04-24-1996 ASSIGNMENT OF RENTS Page 5 Loan No. 20002816 Continued =============================================================================== GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS ASSIGNMENT OF RENTS, AND GRANTOR AGREES TO ITS TERMS. GRANTOR: DOVE AUDIO, INC. By: /s/ MICHAEL VINER --------------------------------------------------------- Michael Viner, Chairman of the Board and President - - -------------------------------------------------------------------------------- CERTIFICATE OF ACKNOWLEDGMENT STATE OF CALIFORNIA ---------------- ) ) ss COUNTY OF LOS ANGELES --------------- ) On APRIL 24, 1996 before me, A. WATANABE, personally appeared MICHAEL VINER, -------------- ----------- personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. [NOTARY SEAL A. WATANABE COMM. #989696 Notary Public-California LOS ANGELES COUNTY My Comm. Expires MAR 28, 1997] WITNESS my hand and official seal. Signature /s/ A. WATANABE ----------------------- =============================================================================== 25 AGREEMENT TO PROVIDE INSURANCE
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials - - --------- --------- -------- -------- ---- ---------- ------- ------- -------- $1,900,000.00 04-24-1996 04-15-2001 20002816 Foon /s/
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - - -------------------------------------------------------------------------------- BORROWER: DOVE AUDIO, INC. (TIN: 954015834) LENDER: ASAHI BANK OF CALIFORNIA 8955 BEVERLY BOULEVARD 635 WEST 7TH STREET WEST HOLLYWOOD, CA 90048 LOS ANGELES, CA 90017 ================================================================================
INSURANCE REQUIREMENTS. DOVE AUDIO, INC. ("Grantor) understands that insurance coverage is required in connection with the extending of a loan or the providing of other financial accommodations to Grantor by Lender. These requirements are set forth in the security documents. The following minimum insurance coverages must be provided on the following described collateral (the "Collateral"): COLLATERAL: REAL ESTATE AT 8955 BEVERLY BOULEVARD, WEST HOLLYWOOD, CA 90048. TYPE. Fire and extended coverage. AMOUNT. $1,900,000.00; however in no event greater than the value of the replacement cost of the improvements. BASIS. Replacement value. ENDORSEMENTS. Standard mortgagee's clause with stipulation that coverage will not be cancelled or diminished without a minimum of ten (10) days' prior written notice to Lender, and without disclaimer of the insurer's liability for failure to give such notice. INSURANCE COMPANY. Grantor may obtain insurance from any insurance company Grantor may choose that is reasonably acceptable to Lender. Grantor understands that credit may not be denied solely because insurance was not purchased through Lender. FLOOD INSURANCE. Flood Insurance for property given as security for this loan is described as follows: REAL ESTATE AT 8955 BEVERLY BOULEVARD, WEST HOLLYWOOD, CA 90048. Should the Collateral at any time be deemed to be located in an area designated by the Director of the Federal Emergency Management Agency as a special flood hazard area and should Federal Flood Insurance covering the Collateral ever become available, Grantor agrees to obtain and maintain Federal Flood Insurance, to the extent such insurance is required by Lender, for the term of the loan and for the full unpaid principal balance of the loan, or the maximum limit of coverage that is available, whichever is less. FAILURE TO PROVIDE INSURANCE. Grantor agrees to purchase and maintain any required flood insurance within 45 days following notice given by Lender. Additionally, Grantor agrees to deliver to Lender, forty five (45) days from the date of this Agreement, evidence of all other required insurance as provided above, with an effective date of April 24, 1996, or earlier. Grantor acknowledges and agrees that if Grantor fails to provide any required insurance or fails to continue such insurance in force, Lender may do so at Grantor's expense as provided in the applicable security document. The cost of any such insurance, at the option of Lender, shall be payable on demand or shall be added to the indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES THAT IF LENDER SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS. AUTHORIZATION. For purposes of insurance coverage on the Collateral, Grantor authorizes Lender to provide to any person (including any insurance agent or company) all information Lender deems appropriate, whether regarding the Collateral, the loan or other financial accommodations, or both. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED APRIL 24, 1996. GRANTOR: DOVE AUDIO, INC. By: /s/ MICHAEL VINER -------------------------------------------------- Michael Viner, Chairman of the Board and President - - -------------------------------------------------------------------------------- FOR LENDER USE ONLY INSURANCE VERIFICATION DATE: PHONE: ------------------------------------- ---------------------- AGENT'S NAME: -------------------------------------- INSURANCE COMPANY: -------------------------------------- POLICY NUMBER: -------------------------------------- EFFECTIVE DATES: -------------------------------------- COMMENTS: -------------------------------------- - - --------------------------------------------------------------------------------
================================================================================ 26 DISBURSEMENT REQUEST AND AUTHORIZATION
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials - - --------- --------- -------- -------- ---- ---------- ------- ------- -------- $1,900,000.00 04-24-1996 04-15-2001 20002816 Foon /s/
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - - -------------------------------------------------------------------------------- BORROWER: DOVE AUDIO, INC. (TIN: 954015834) LENDER: ASAHI BANK OF CALIFORNIA 8955 BEVERLY BOULEVARD 635 WEST 7TH STREET WEST HOLLYWOOD, CA 90048 LOS ANGELES, CA 90017 ================================================================================
LOAN TYPE. This is a Fixed Rate (8.000%), Balloon Loan to a Corporation for $1,900,000.00 due on April 15, 2001. PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for: [ ] Personal, Family, or Household Purposes or Personal Investment. [X] Business (including Real Estate Investment). SPECIFIC PURPOSE. The specific purpose of this loan is: Provide funds to refinance purchase of building to be used as company's now headquarters. FLOOD INSURANCE. As reflected on Flood Map No. 0005-A dated 06-18-1987, for the community of 060720, the property that will secure the loan is not located in an area that has been identified by the Director of the Federal Emergency Management Agency as an area having special flood hazards. Therefore, although flood insurance may be available for the property, no special flood hazard insurance is required by law for this loan. DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Lender's conditions for making the loan have been satisfied. Please disburse the loan proceeds of $1,900,000.00 as follows: AMOUNT PAID TO OTHERS ON BORROWER'S BEHALF: $1,900,000.00 $1,900,000.00 to North American Title Company ------------- NOTE PRINCIPAL: $1,900,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the following charges: PREPAID FINANCE CHARGES PAID IN CASH: $19,199.50 $19,000.00 Loan Fees $199.50 Flood Certificate OTHER CHARGES PAID IN CASH: $7,637.50 $75.00 Sub Escrow fee $3,562.50 Title Insurance $4,000.00 Appraisal ---------- TOTAL CHARGES PAID IN CASH: $26,837.00
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS AUTHORIZATION IS DATED APRIL 24, 1996. BORROWER: DOVE AUDIO, INC. By: /s/ MICHAEL VINER -------------------------------------------------- Michael Viner, Chairman of the Board and President ================================================================================ 27 NOTICE OF FINAL AGREEMENT
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials - - --------- --------- -------- -------- ---- ---------- ------- ------- -------- $1,900,000.00 04-24-1996 04-15-2001 20002816 Foon /s/
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - - -------------------------------------------------------------------------------- BORROWER: DOVE AUDIO, INC. (TIN: 954015834) LENDER: ASAHI BANK OF CALIFORNIA 8955 BEVERLY BOULEVARD 635 WEST 7TH STREET WEST HOLLYWOOD, CA 90048 LOS ANGELES, CA 90017 ================================================================================
BY SIGNING THIS DOCUMENT EACH PARTY REPRESENTS AND AGREES THAT: (A) THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES, (B) THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES, AND (C) THE WRITTEN LOAN AGREEMENT MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR UNDERSTANDINGS OF THE PARTIES. - - -------------------------------------------------------------------------------- As used in this Notice, the following terms have the following meanings: LOAN. The term "Loan" means the following described loan: a Fixed Rate (8.000%) Nondisclosable Balloon Loan to a Corporation for $1,900,000.00 due on April 15, 2001. PARTIES. The term "Parties" means ASAHI BANK OF CALIFORNIA and any and all entities or individuals who are obligated to repay the loan or have pledged property as security for the Loan, including without limitation the following: BORROWER: DOVE AUDIO, INC. LOAN AGREEMENT. The term "Loan Agreement" mans one or more promises, promissory notes, agreements, undertakings, security agreements, deeds of trust or other documents, or commitments, or any combination of those actions or documents, relating to the Loan, including without limitation the following: NECESSARY FORMS Corporate Resolution to Borrow Loan Agreement/Negative Pledge Promissory Note/Change in Terms Agr. Deed of Trust Assignment of Rents Agreement to Provide Insurance Disbursement Request and Authorization Notice of Final Agreement OPTIONAL FORMS - - -------------------------------------------------------------------------------- Each Party who signs below, other than ASAHI BANK OF CALIFORNIA, acknowledges, represents, and warrants to ASAHI BANK OF CALIFORNIA that it has received, read and understood this Notice of Final Agreement. This Notice is dated April 24, 1996. BORROWER: DOVE AUDIO, INC. By: /s/ MICHAEL VINER ---------------------------------------------------- Michael Viner, Chairman of the Board and President LENDER: ASAHI BANK OF CALIFORNIA By: /s/ [UNKNOWN] ------------------------------------------------------ Authorized Officer ================================================================================ EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT MARCH 31, 1996 AND THE CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 5,052 377 4,537 2,181 150 12,174 3,033 266 19,056 4,554 0 0 856 49 13,597 19,056 4,138 7,397 2,886 6,613 0 0 (48) 832 331 501 0 0 0 501 0.10 0.10
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