-----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, WvlMQCBLc2buJRoiNlMhs9cJmOXR+XAR4VG9MzRk+pyxxtb7U/eWRz/4pAc8r6nx BEe1zh5E1tRbIkDtEWIUKg== 0000950148-98-000885.txt : 19980415 0000950148-98-000885.hdr.sgml : 19980415 ACCESSION NUMBER: 0000950148-98-000885 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 22 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980414 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOVE ENTERTAINMENT INC CENTRAL INDEX KEY: 0000930436 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 954015834 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-24984 FILM NUMBER: 98592700 BUSINESS ADDRESS: STREET 1: 8955 BEVERLY BLVD CITY: LOS ANGELES STATE: CA ZIP: 90048 BUSINESS PHONE: 3102737722 MAIL ADDRESS: STREET 1: 301 NORTH CANNON DR SUITE 207 STREET 2: 8955 BEVERLY BLVD CITY: WEST HOLLYWOOD STATE: CA ZIP: 90048 FORMER COMPANY: FORMER CONFORMED NAME: DOVE AUDIO INC DATE OF NAME CHANGE: 19941021 10KSB 1 FORM 10-KSB 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ----------- (MARK ONE) [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 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 ENTERTAINMENT, 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.) 8955 BEVERLY BOULEVARD LOS ANGELES, CALIFORNIA 90048 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (310) 786-1600. 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 ___ Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for the fiscal year ending December 31, 1997 were approximately $16,672,000. As of March 30, 1998, the aggregate market value of the voting stock held by non-affiliates of the issuer was approximately $13,401,000 based upon the average closing bid and asked price of such stock on such date. Transitional Small Business Disclosure format: Yes No X --- --- Shares of Common Stock outstanding as of March 30, 1998: 6,548,393 DOCUMENTS INCORPORATED BY REFERENCE Portions of the issuer's definitive proxy statement for its 1997 and 1998 annual meeting of shareholders to be filed pursuant to Regulation 14A not later than 120 days after the end of the issuer's fiscal year are incorporated by reference in Part III, Items 9, 10, 11 and 12 of this Form 10-KSB. ================================================================================ 2 PART I ITEM I. BUSINESS GENERAL Dove Entertainment, Inc. ("Dove" or the "Company") commenced business in 1985 as one of the pioneers of the audio book industry and has become one of the leading independent producers (i.e., unaffiliated with any single book publisher) of audio books in the United States. Through its audio division, the Company has produced and distributed an average of approximately 100 to 120 new audio titles annually since its inception and has built a library of over 1,000 audio titles currently offered for sale. Through Dove Four Point, Inc. ("Dove Television"), a wholly owned subsidiary of the Company, the Company is engaged in the production and development of television programming. During the second quarter of 1995, the Company formed a wholly-owned subsidiary, Dove International, Inc. ("Dove International"), which is engaged in the distribution of feature films and television programming. The Company's audio books generally consist of audio recordings of abridged and unabridged works from well-known authors such as Sidney Sheldon, Amy Tan, Jack Higgins and Dominick Dunne and read by the author or celebrity readers such as Linda Hamilton, Patrick Macnee and William Windom. In 1997, the Company received two Grammy nominations and in 1996, the Company received four Grammy nominations, and was awarded the Grammy for best spoken-word comedy category for Al Franken's "Rush Limbaugh is a Big Fat Idiot and Other Observations." The Company's audio books range from best-selling fiction and non-fiction to movie tie-in audios, classics, humor and foreign language product. The Company's most successful audio books to date have been "The Bridges of Madison County" read by its author Robert James Waller and "A Brief History of Time" read by Michael Jackson. The Company generally produces its own masters for its audio book products, the majority of which are recorded at the Company's own recording studios located at its principal offices. The Company's printed book operations, which were commenced in 1994, include the 1994 New York Times No. 1 bestseller "Nicole Brown Simpson: The Private Diary of a Life Interrupted" by Faye Resnick. Other notable books published during 1996 included Larry Flynt's "An Unseemly Man," Richard Hack's "When Money is King," "White Flame" by James Grady, "Red Mercury" by Max Barclay, Marva Collins' "Values," and two Mark McCormack business books, "On Managing" and "On Selling." The Company published approximately 35 titles in 1996. In that year the Company embarked on a major printed book publishing program with a scheduled 75 print titles for 1997. However, following disappointing results from the 1996 and early 1997 list, the Company substantially curtailed the printed book program. The Company is currently developing up to 24 books for potential publication in 1998. The Company has co-produced the theatrical feature film "Wilde," about the life of Oscar Wilde, starring Vanessa Redgrave and Stephen Fry, and owns the United States and English-speaking Canadian distribution rights to the film. In February 1998, the Company entered into a distribution agreement with Sony Pictures Classics and the film is scheduled to be released on May 1, 1998 after making its North American premiere at the San Francisco Film Festival in April 1998. The Company's television and theatrical films include the theatrical release "Morning Glory" (1993) and the television motion pictures "Home Song" (1996), "Memories of Midnight" (1991) and "Sands of Time" (1992). In April 1996, the Company significantly expanded its presence in television programming through the acquisition of Four Point Entertainment, Inc. ("Four Point Entertainment" now Dove Television). Dove Television develops and produces both episodic series and long-form television programming, including pilots, series, telefilms, mini-series, talkshows and gameshows for the major network, cable and syndicated markets. In addition, Dove Television owns and operates post-production and edit facilities for its own and third-party programming. Since its inception ten years ago, Four Point Entertainment has produced over 26 television shows (accounting for 1,415 episodes of national television programming), including "American Gladiators" and "Amazing America." In April 1997, Dove Television received an order from the ABC Television Network for a made for television motion picture entitled "Unwed Father" and entered into a distribution agreement with respect to the non-US network 2 3 rights with Bonneville Worldwide Entertainment. Unwed Father aired on ABC on October 12, 1997. Dove Television currently produces the syndicated series "Make Me Laugh" (distributed by Buena Vista in association with The Walt Disney Company). Dove Television is currently in production on the made-for-television motion picture "Futuresport" starring Wesley Snipes, Dean Cain and Vanessa L. Williams, which is scheduled for delivery to ABC in May of 1998. The Company generally seeks to limit its financial risk in the production of long-form television by presales and licensing to third parties. The Company's previous plans to produce projects for initial release in video format, including children's and business videos, has been discontinued. The Company has also discontinued the production of theatrical feature films. During the second quarter of 1995, the Company formed Dove International to engage in domestic distribution of feature films. In July 1995, the Company, through Dove International, acquired certain rights with respect to 48 films in the Skouras Pictures, Inc. library (plus certain other films). In July 1996, the Company embarked on a program to acquire independent films and videos for distribution in the United States and Canada on an all rights basis (including theatrical, home video and all forms of television and a video output arrangement), but following review in 1997, has discontinued the theatrical production and video distribution operations and has limited the film and television distribution operations to the existing film and future television library, and television programs provided by Dove Television. FORWARD LOOKING STATEMENTS Certain statements in this report, including those utilizing the phrases "will", "expects", "intends", "estimates", "contemplates", and similar phrases, are "forward-looking" statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended), including statements regarding, among other items, (i) the Company's growth strategy, (ii) the Company's intention to acquire or develop additional audio book, printed book and television product, (iii) the Company's intention to enter or broaden distribution markets, and (iv) the Company's ability to successfully implement its business strategy. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "will", "should", or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or be discussions of strategy that involve risks and uncertainties. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements of the Company and its subsidiaries to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: uncertainty as to future operating results; growth and acquisition risks; certain risks relating to the entertainment industry; dependence on a limited number of projects; possible need for additional financing; potential for liability claims; dependence on certain outlets for publishing product; competition and legal proceedings and claims. Other factors which may materially affect actual results include, among others, the following: general economic and business conditions, industry capacity, changes in political, social and economic conditions and various other factors beyond the Company's control. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. See the relevant discussions elsewhere herein, in the Company's registration statement on Form S-3 (Registration No. 333-43527) and in the Company's periodic reports and other documents filed with the Securities and Exchange Commission for further discussions of these and other risks and uncertainties applicable to the Company and its business. STRATEGY Dove's principal business strategies are to: (i) expand its library of audio books by acquiring and/or producing new titles licensed from established authors or classic literature in the public domain, (ii) increase distribution of its audio book library through outlets (such as record stores and video stores), direct marketing, distribution of foreign-language audio books in the United States and abroad and international sales, (iii) continue to diversify its operations through the production and distribution of television programming, (iv) continue the publication of printed books and (v) continue its feature film and television programming distribution operations. 3 4 The Company has focused its audio book development efforts on assembling a group of best-selling authors as source material for its audio books. The Company seeks to establish and expand its library of audio book titles by establishing long-term relationships directly with book authors. The Company believes that these types of arrangements are attractive to authors because the Company is willing to give authors a significant amount of input and, in many cases, control over the finished product. The Company plans to continue to expand its audio book library by licensing new titles from book authors, by publishing in audio format classic literature in the public domain, through strategic acquisitions of audio libraries currently owned by others and through strategic relationships. The Company continues to seek ways to enhance its customer base by establishing new products complementary to its audio book operations, including high-end language and business products, in response to the changing demands of its customers. The Company has also attempted to expand its customer base and the demographic appeal of its audio book products such as through foreign distribution (including licensing of foreign distribution rights to third parties) of its English language products and domestic and foreign distribution of foreign-language versions of its titles. The Company believes that its broad strategy of diversity in development for television programming has allowed Dove Television to take advantage of sales opportunities in emerging markets, while continuing to service mainstream distribution channels in network and syndication, allowing Dove Television to stay in production generally throughout the year. Dove Television plans to expand on its expertise from previous projects and to continue to utilize its existence as a vertically integrated production company. The Company from time to time also considers the acquisition of businesses complementary to its current operations. Along with its acquisition of Four Point Entertainment, the Company has from time to time entered into discussions or submitted bids to acquire other companies or assets in related entertainment fields. The Company's business is dependent on its ability to acquire rights to exploit new audio, book and television properties that will have broad market appeal. To the extent the Company is unable effectively to identify, acquire and exploit products and concepts that will achieve commercial success, or if the Company is unable to identify, acquire and exploit rights to the works of new popular authors and to obtain the services of popular readers, the Company's operating results will be adversely affected. Furthermore, if the Company is unable to renew contracts with current authors or enter into contracts with new authors, in either case on acceptable terms, or if there are shifts in consumer tastes or in the popularity of the Company's current or new authors, the Company's operating results also may be adversely affected. Ultimately, the future success of the Company's television and other operations will depend on the ability of the Company to exploit successfully existing opportunities and to establish new sources of product. There is no assurance that the Company will be able to maintain or expand its sources of audio, book, television and other product. AUDIO BOOKS Industry Overview "Audio books" consist of audio recordings of literary or other works read by one or more persons. The market is generally accepted to have started in the early 1950s, but it is really only in the past 15 years that the industry has developed into the broad-based and widely available sector of the publishing industry seen today. Industry statistics published by the Audio Publishers Association in 1995 value the market at $1.6 billion annually. The first audio book producers developed the market based mainly on sales of self-help and literary titles that were sold primarily through direct mail, but as the market evolved, the majority of sales were made through traditional book stores. Subsequently, the importance of direct marketing has grown again, and audio books are increasingly being sold through book clubs such as Columbia House, Doubleday Direct, and Audio Book Club. Today, audio books can also be found in discount stores, record stores, video stores, truck stops, and gas stations, and purchased on the internet. Retail outlets specializing in audio books expanded rapidly in the mid-1990s but this growth has now slowed considerably. Audio books compete for the consumer's attention, time, and discretionary dollars against an ever increasing array of entertainment, communication, and publishing products. Markets continue to fracture into niches, while sales channels consolidate into fewer national accounts. In addition, technology is constantly adding 4 5 new challenges and opportunities. From e-mail and the internet, to digital recording, editing, mastering and duplicating, and to new delivery systems like CDs and DVDs, internet download and transfer, and changes in playback equipment fitted in autos, the audio book industry is facing an unparalleled period of change. Although audio books have been available to the public for approximately ten years, the consumer market for audio books remains a niche market. Even given increases in the popularity of audio books, the ultimate growth of the industry is unclear. The Company believes success in the audio book industry depends mainly upon the creative efforts of authors, readers and producers. Public tastes are unpredictable and can shift rapidly. There is no assurance that the Company will be able to operate profitably in this line of business in the future. Dove Audio Book Operations The Company believes it is one of the leading independent (i.e. not affiliated with any major publisher) producers of abridged and unabridged books on audio with approximately 1000 titles in its audio book library currently offered for sale. The Company currently releases approximately 100 audio book titles each year. The Company's products historically have included numerous New York Times and Publishers Weekly best selling books. The Company is engaged in the simultaneous sale of abridged, unabridged and foreign language translation versions of its audio books and its audio products represent virtually all categories of books. Although historically the Company has published audio books primarily on cassette tape, the Company has also published new and existing titles in CD format on a selective basis. The Company typically acquires titles for publication by entering into exclusive agreements with book authors pursuant to which the Company obtains the rights to current works and obtains an option or right of first refusal as to one or more future works. Authors are typically compensated either by advances against royalties or through profit participations. The Company typically acquires audio publishing rights for specific titles or groups of titles on a world-wide basis, including foreign language rights. Dove uses an array of celebrity talent for its recordings. Books are read by celebrity readers or, in some cases, by the authors themselves. The Company believes that, by virtue of its Los Angeles base, it has an advantage in gaining access to highly recognizable celebrity reading talent. The Company seeks to maintain ongoing relationships with popular readers who are typically compensated on a flat-fee basis, though readers may also be compensated on a royalty basis. The Company currently employs two duplicators and so is not dependent on any one manufacturer as its sole source of physical product; the Company believes it would have access to alternate sources at competitive prices and quality in the event that the Company were to lose the services of any duplicator. In 1997, the Company commenced a plan to refocus its audio publishing program and making it more balanced. The market is moving towards longer abridgments and the Company's publishing program already reflects that shift, with over 80% of its new titles in the four cassette format. The Company is looking to acquire both abridged and unabridged rights, and to publish lead titles in both formats. The Company is also looking to strengthen its frontlist program and has had some recent success with recent author signings including John Jakes, Harold Robbins, Stephen Coonts, Sharyn McCrumb, J.A. Jance, and Barry Lopez, all New York Times bestselling authors. At the same time, the Company is looking to increase its penetration into the self-help and spirituality areas, and reestablish its presence in the mystery and science fiction markets. Progress has been made, and author signings include Marianne Larned's "Stone Soup for the World," Sue Patten Thoele's "The Woman's Book of Soul," Judy Ford's "Wonderful Ways to Be a Family," Carole Nelson Douglas' "Cat on a Hyacinth Hunt," and Ben Bova's "City of Darkness." Dove Kids was the children's publishing and audio imprint of the Company. In late 1997, after experiencing very limited success with the program, the decision was taken to withdraw from the children's book market altogether, only publish children's audio titles on a highly selective basis, and concentrate the Company's resources on its adult titles. A notable exception in 1997 was the success of "The Owl and the Pussycat" by Eric Idle, which was nominated for a Grammy Award. 5 6 Distribution Agreements In January 1998 the Company entered into a distribution agreement with UAV Corporation, whereby UAV will duplicate, distribute and sell some of Dove's audio book products to mutually agreed upon specialty retailers, such as mass merchandisers, specialist music and video retailers, supermarket chains, drug store chains, truck stops, airports, and convenience stores. In February 1998 the Company entered into an agreement with Romance Alive Audio, under which the Company obtained the distribution rights to a 48 book romance library, including titles by such noted bestselling authors as Johanna Lindsey, Elizabeth Lowell, Jude Deveraux, and Kathleen E. Woodiwiss. Foreign Language and International The Company identified certain markets outside the United States which it believes may provide opportunities for sales growth and the expansion of international activities applies not only to the Company's publishing business, but also to its television and film activities, where the exploitation of overseas markets is a key component of the Company's strategy. The Company generally seeks to acquire audio publishing rights for specific titles or groups of titles on a world-wide basis. Such acquisitions enable the Company to exploit such titles in international markets. Production, Sales, Marketing and Distribution The Company typically produces its own masters for its audio book products, a majority of which are recorded at the recording studio located at the Company's Los Angeles offices. Virtually all recordings are produced under the supervision of the Company's in house staff. Once a master is produced, the Company contracts with one of several duplication contractors who then duplicate and assemble the tapes or CD's for distribution. The Company designs its own product packaging to help enhance the marketability of its audio books. The Company seeks to acquire and use original book art, when available. Dove makes use of foil and other design options to try to enhance mass marketing. Dove also designs alternative packaging using multi-packs, box sets and gift box designs to present its products more effectively by making the products easier to display and increasing consumer awareness of audio books as a gift option. The Company's audio books are sold, among other places, to book stores, several book clubs (including the three major book clubs), record stores and specialty audio book retail outlets. The Company currently sells to all major book retailers and distributors, including, Ingram Book Company ("Ingram"), Barnes & Noble/B. Dalton and Borders/Waldenbooks as well as to the emerging internet market such as through Amazon.com. While the Company does not believe there is any significant risk of losing any of these bookstore chains as outlets for its product, the level of the Company's sales of audio books through these and other outlets significantly depends on the amount of product ordered thereby and shelf space allocated to such products as to which there is no assurance. Dove also sells to rack jobbers and is represented in all major wholesale clubs, including Sam's Club, Price/Cosco and BJ's Wholesale Club. The Company has entered into an agreement with UAV Corporation pursuant to which UAV Corporation will distribute selected audio product of the Company to non-traditional retail outlets such as supermarket and drug store chains, truck stops, airports and convenience stores. Sales to retail and other outlets are effected through a combination of Dove's own sales force and third party distributors. Dove established its audio book sales operation in 1989 and has historically independently sold audio books primarily to book stores, retail chains and record and specialty stores. At present, the Company has an internal sales and marketing force of ten persons. In January 1995, the Company entered into an agreement with Penguin USA, Inc. ("Penguin") pursuant to which Penguin began serving as the Company's exclusive United States outside distributor of audio and printed book products (other than certain non-retail and remainder sales, as defined below). Under such agreement, Penguin was responsible for, among other things, billing, collections and issuance of credit to customers, order solicitation, order entry, invoicing, customer service, warehousing, handling and fulfillment of orders and for receiving returns; and the Company responsible for marketing, promotion, publicity and advertising. The Company and Penguin terminated this arrangement in December 1997. 6 7 To replace the Penguin arrangement, the Company entered into an agreement in November 1997 with Mercedes Distribution Center ("Mercedes") under which Mercedes will perform storage and distribution services on the Company's behalf. The agreement has a term of five years and provides for Mercedes to receive, store, pack and ship the Company's products, and process returned shipments. Further, Mercedes will provide a computer inventory control and invoicing system. Under the agreement, the Company will be responsible for all order solicitation, order entry, invoicing and customer service, as well as marketing, promotion, publicity, and advertising. In March 1995, the Company entered into the Reader's Digest Agreement pursuant to which the Company granted to Reader's Digest certain non-retail distribution rights (including, direct mail marketing) to the Company's audio books, including the Company's existing audio library, on an exclusive world-wide basis. In addition, the Company will be permitted to create new audio titles under the Reader's Digest label and to publish works in Reader's Digest's printed book library in audio format under the Dove and/or Reader's Digest label, in each case with Reader's Digest's prior written consent on a title-by-title basis. The Reader's Digest Agreement expires in December 1998. In accordance with industry practice, substantially all of the Company's sales of audio and printed book products are and will continue to be subject to potential return by distributors and retailers if not resold to the public. Historically, the Company has experienced significant returns and there is no assurance that the Company will not experience returns of its audio and printed book products in excess of its historical returns, which in certain cases have been substantial. Although the Company makes allowances and reserves for returned products, significant increases in return rates could materially and adversely impact the Company's results of operations or financial condition. In addition, the Company from time to time makes price concessions or allowances or grants credits to distributors or retailers in order to minimize returns, and such concessions and allowances may adversely affect the Company's operating results. Certain of the Company's revenues are derived from sales at discount prices of excess inventory of audio and printed books, including returned audio book product, effected through warehouse, outlet and other stores. Such sales produce net revenues for the Company on a per-unit basis that typically have not exceeded the Company's per-unit costs on a fully-costed basis. The availability of such remainder product at discount prices also may have the collateral effect of reducing sales of audio books at full price, and thereby could adversely affect the Company's operating results. The Company advertises its products in various publishing trade publications. The Company also occasionally advertises its products through various print and television media. PRINTED BOOK PUBLISHING In 1997 the Company experienced extremely heavy returns from its book publishing program, partly as a result of the general shake-out in the marketplace, and partly as a result of the high risk nature of much of the Company's publishing program. Consequently, the Company has reevaluated its book publishing program and is now in the process of changing its focus from event-related/national interest topics to areas such as business, self-help, psychology, health & fitness, entertainment, and California interest. At the same time, the number of publications has been reduced to 20-25 titles per year. In the fall of 1996, the Company launched Dove Kids, a children's publishing program, but following disappointing results has discontinued the Dove Kids division. FILM AND TELEVISION PRODUCTION The Company had from time to time developed and produced long form programming made for television. In April 1996, the Company significantly expanded its presence in television programming through the acquisition of Dove Television. Dove Television develops and produces various forms of television programming, including pilots, series, telefilms, mini-series, talk shows and game shows for network, cable and syndicated markets. The Company's strategy is to develop and produce long form television programming substantially financed by third parties through pre-sale contracts with United States television networks, foreign distributors and other sources. Although the Company enters into such arrangements, there is no assurance that the Company's funding of such 7 8 productions will not be at risk, including the possibility that third party financing will not ultimately be paid when required and that the Company may have to fund any short fall, which funding may not be available. In 1997, under an agreement with Buena Vista Television, a division of the Walt Disney Company, Dove Television produced a total of 165 half hour episodes of the game show "Make Me Laugh" for the cable network Comedy Central. Dove Television also developed and produced the made for television movie "Unwed Father" which aired on ABC on October 12, 1997. The Company entered into a distribution agreement with Bonneville Worldwide Entertainment with respect to the non-US network rights to "Unwed Father". Dove Television is currently developing a two hour telefilm "Futuresport," starring Wesley Snipes, Dean Cain and Vanessa L. Williams, with Mr. Snipes' production company Amen-Ra Productions in conjunction with ABC. ABC is committed to pay at least a minimum amount in connection with such project. Dove Television has other television programming in development. There is no assurance that any programming in development or scheduled for production will be completed, or if completed, that the delivery terms will not be modified or that any such programming will be financially successful. The Company acquired the United States and English-speaking Canadian distributions rights to the theatrical feature film "Wilde," about the life of Oscar Wilde, starring Vanessa Redgrave and Stephen Fry, which was produced by Marc and Peter Samuelson in association with Dove International and others. In February 1998 the Company entered into a distribution agreement with Sony Pictures Classics, and the film is scheduled to be released in New York on May 1, 1998 after making its North American premiere at the San Francisco Film Festival in April 1998. "Wilde" has been a critical success in Australia, Italy, France and the United Kingdom and has won major awards in Britain and France. The Company does not plan to produce theatrical feature films in the future. The Company's television operations are dependent on a limited number of television projects. There is no assurance the Company will have any television projects or any significant revenues from television projects in any given quarterly or annual period. FILM LIBRARY AND DISTRIBUTION In conjunction with the formation of its distribution subsidiary, Dove International, the Company completed the purchase of certain rights to 48 films from the library of Skouras Pictures, Inc. Motion pictures acquired from Skouras Pictures, Inc., now in the Company's film library, includes films with stars such as F. Murray Abraham, Dyan Cannon, Ben Cross, Bruce Dern, Peter Gallagher, Jon Heard, Anthony Hopkins, Kris Kristofferson, Sam Neill, Natasha Richardson, Martin Sheen, Talisa Soto, George Takai and Shannon Tweed. The library includes certain distribution rights to "My Life As A Dog," which received several "Best Foreign Film" awards in 1987, and more recent films such as "A Boy Called Hate" and "Watch It." The Company had embarked on a program to acquire independent films and videos for distribution in the United States and Canada on an all rights basis (including theatrical, home video and all forms of television) and a video output arrangement with Paramount Pictures (which commenced in July 1996), but following review in 1997, the Company has discontinued the video distribution operations and has limited the film and television distribution operations to the existing film and future television library, and television programs produced by Dove Television. COMPETITION Competition is intense within the publishing, television and motion picture industries and between each of these industries and other entertainment media. Many major publishing houses now have audio book operations, and the Company anticipates increased competition in the future from major record companies. Most of the competitors of the Company have substantially greater financial, personnel, technological, marketing and other resources than the Company. The cost of obtaining audio publishing rights from popular authors is escalating and, in certain cases, obtaining such rights is or may become beyond the Company's capital resources. The Company expects this trend to continue. As a result of this trend, it may become more difficult to acquire rights to "blockbuster" works by authors with past successes. The capitalization and financial resources of publishing houses enable such entities to expend considerably greater amounts to obtain the rights to such works than the Company is able to expend given its resources. In addition, major publishing houses may have the ability to require authors to include audio rights in any publishing deal with such publishers. Such ability may preclude the Company and other audio book 8 9 publishers from having the opportunity to publish in audio format the works of such authors. In addition, increased competition within the audio book industry could result in greater price competition in the sale of audio books. Reductions in prices of audio books, as a result of competition or otherwise, will adversely affect the Company's margins. There is no assurance that the Company will be able to compete successfully with major publishing houses and other competitors in the future. Competition in the television and motion picture industry is extremely intense. The Company competes with the major motion picture studios, numerous independent producers of television programming and feature films and the major United States networks for the services of actors, other creative and technical personnel and creative material. Many of the entities against which the Company competes have substantially greater financial, distribution, technical and creative resources than the Company. There is no assurance that the Company will be able to successfully compete in the various businesses in which it operates. EMPLOYEES; LABOR RELATIONS At March 30, 1998, the Company had 51 employees. On occasion, the Company employs temporary workers on a short-term basis to meet particular clerical and other needs. The Company believes employee relations are satisfactory. In the film production segment, in accordance with industry practice, the Company meets a substantial part of its personnel needs by retaining temporary employees, directors, actors, technicians and other specialized personnel on a per production, weekly or per-diem basis. GOVERNMENT REGULATION The Federal Communications Commission ("FCC") repealed its financial interest and syndication rules effective as of September 21, 1995. Those FCC rules, which were adopted in 1970 to limit television network control over television programming and thereby foster the development of diverse programming sources, had restricted the ability of the three established major United States networks (i.e. ABC, CBS and NBC), to own and syndicate television programming. The impact of the repeal of the FCC's financial interest and syndication rules on the Company's operations cannot be predicted at the present time, although it is expected that there will be an increase in in-house productions of television programming for the networks' own use. It is possible that this change will have a negative impact on the Company's business. Additionally, in international markets, the Company may be subject to local content and quota requirements which effectively prohibit or limit access to particular markets. The FCC repealed the Prime Time Access Rule, effective August 30, 1996. The Prime Time Access Rule generally prohibited network-affiliated television stations in the top 50 television markets from broadcasting more than three hours of network programs, or programs previously aired on a network during the four prime time viewing hours (i.e., 7:00 p.m. - 11:00 p.m. Eastern and Pacific times, and 6:00 p.m. - 10:00 p.m. Central and Mountain times). Due to the Prime Time Access Rule, network affiliated television stations often acquired a certain amount of programming (typically including game shows) for exhibition during prime time from independent television producers and syndicators. While the Company's sale of syndicated programming during prime time is primarily to independent television stations and network-affiliated stations, it is possible that the repeal of the Prime Time Access Rule may constrict the market for the Company's television programming product and that the Company might be subject to increased competition. The impact on the Company of the changes in the communications laws brought about by the Telecommunications Act of 1996 and by accompanying changes in FCC Rules cannot be predicted at the present time, although it is expected that there will be an increase in the demand for video programming product as a result of the likelihood that these regulatory changes will facilitate the advent of additional exhibition sources for such programming. However, it is possible that recent alliances of certain program producers and television station group owners, coupled with the recent FCC rule revisions allowing a single television station licensee to own television stations reaching up to 35% of the nation's television households, may place additional competitive pressures on program suppliers who are unaligned with any television station group owners. 9 10 In foreign markets, the Company's ability to distribute its film productions may be subject to local content and quota requirements which prohibit or limit the amount of programming produced outside of the local market. Although the Company believes these requirements have not affected the Company's licensing of its programs in foreign markets to date, such restrictions, or new or different restrictions, could have an adverse impact on the Company's operations in the future as a result of their impact on third-party distributors with whom the Company contracts for foreign distribution. NATURE OF ACCOUNTING PRINCIPLES APPLICABLE TO THE PUBLISHING AND ENTERTAINMENT INDUSTRIES The Company recognizes revenues from the sale of audio and printed books, including the licensing of audio and printed book rights to third parties, net of estimated returns and allowances, upon shipment of the product or upon availability of the rights pursuant to the Company's licensing arrangements. To allow for returns, the Company establishes a reserve against revenues from audio and printed book sales, the magnitude of which is based on management's estimate of returns. The Company's future reported revenues will be negatively impacted if the Company's actual return experience exceeds its established reserves. There is no assurance that the Company's actual return experience will not exceed its reserves. Audio and printed book inventory is valued at the lower of cost or market using estimated average cost, determined using the first-in, first-out method. If the Company's reserves for excess inventory are not adequate at any time, the Company will be required, under generally accepted accounting principles, to write down audio and printed book inventory, which will increase cost of sales. Any such write-downs would have an adverse impact on the Company's operating results. Excess inventory may arise as a result of, among other things, customer returns. The extent of any write-downs will depend on, among other things, the quantity of actual returns received and the level of production and sales activity and the state and volatility of the remainder market. The Company establishes reserves against such write-downs based on past experience with similar products. There is no assurance that the Company's reserve for excess inventory at any time will be adequate and that additional write-downs will not be necessary. Film costs, which include development, production and acquisition costs of television programming and feature films, are capitalized and amortized, and participations and royalties are accrued, in accordance with the individual film forecast method in the proportion that current quarter's revenue bears to the estimated total revenues from all sources. These costs are stated at the lower of unamortized costs or estimated realizable value on an individual film basis. Revenue forecasts for films are periodically reviewed by management, and the Company's results of operations may be adversely affected as a result of a write-down of carrying value of particular films in the event management's estimate of ultimate revenues is materially decreased. There is no assurance that the Company will not incur write-downs in the future in respect of its film and television operations; any such write-downs would have an adverse impact on operating results. POSSIBLE NEED FOR ADDITIONAL FINANCING; LIQUIDITY. The Company's operations in general, and its publishing and television operations in particular, are capital intensive. The Company anticipates, based on currently proposed plans and assumptions relating to its operations and anticipated outcomes of current litigation, that the projected cash flow from operations and available cash resources, including its existing financing arrangements, will be sufficient to satisfy its anticipated cash requirements for the fiscal year ending December 31, 1998. In the event that the Company's plans change, its assumptions change or prove to be inaccurate or the cash flow proves to be insufficient to fund operations (due to unanticipated expenses, delays, problems, difficulties or otherwise), the Company would be required to seek additional financing sooner than anticipated or to curtail its activities. The Company has experienced from time to time significant negative cash flows from operating activities which have been offset by equity and debt financings. The Company plans to expand its audio publishing, television production and television distribution activities and it may 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, 10 11 from additional debt or equity financings from outside sources, or from other financing arrangements. 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. To the extent the Company obtains financing through sales of equity securities, any such issuance of equity securities would result in dilution to the interests of the Company's shareholders. Additionally, to the extent that the Company incurs indebtedness or issues debt securities in connection with any acquisition or otherwise, the Company will be subject to risks associated with incurring substantial indebtedness, including the risks that interest rates may fluctuate and cash flow may be insufficient to pay principal and interest on any such indebtedness. The Company's television production activities can affect its capital needs in that the revenues from the initial licensing of television programming may be less than the associated production costs. The ability of the Company to cover the production costs of particular television programming is dependent upon the availability, timing and 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 revenues, out of its working capital or financing facilities. In order to obtain rights to certain properties for the Company's publishing and television 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. PROPRIETARY RIGHTS Copyrights in the Company's audio book recordings and the underlying works from which such recordings are derived are separate and distinct rights. The Company generally obtains a license to use (as opposed to a proprietary copyright interest in) the works underlying its audio books from the owner of the copyright thereon. Such licenses may in certain cases be subject to restrictions, such as limiting distribution to particular markets, duration of term, method of sale and use of recordings; however, the Company acquires world-wide rights in perpetuity in most cases. The Company copyrights all audio works it produces. In those limited instances in which the Company acquires pre-recorded audio product (rather than the underlying work), the Company's rights are limited to the terms of the Company's agreement with respect to such product. ITEM 2. PROPERTIES During 1996 the Company purchased an office building and the underlying land (collectively, the "Property") in Los Angeles, California for $2,500,000. The purchase price was paid $600,000 in cash and $1,900,000 pursuant to a seller carryback note, payable to the seller, the Writers' Guild of America, West, Inc. (the "Guild"). In April 1996 the Company refinanced the $1,900,000 note to the Guild with a new loan from a bank which loan is secured by a deed of trust on the Property 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 with a balloon payment at maturity. The office building contains approximately 22,000 square feet. The Company moved its corporate headquarters to the new site in April 1996. In connection with the acquisition of the Property, the Company made improvements to the Property of approximately $220,000. In 1997, the Company made additional improvements of approximately $121,000 to relocate its video post production and audio recording facilities to the Property. The federal tax basis of the Property (including the Company's equipment) is $2,650,000. Depreciation is based on the straight-line method at a rate of 2.56%, with a claimed life of 39 years. The annual realty taxes are approximately $35,000, based upon a tax rate of 1.8759%. In the opinion of management, the property is adequately covered by insurance. The Company continues to lease property at its old headquarters at 301 N. Canon, Beverly Hills, CA, but has subleased all of such space. Under the lease, the monthly rent payable by the Company is approximately $21,000 and the lease expires January 31, 1999. Under the sublease arrangement, which also terminates on January 31, 1999, the sublessee's monthly rent payments to the Company are approximately $16,250. The Company does not intend to renew the lease when it terminates in January 1999. 11 12 ITEM 3. LEGAL PROCEEDINGS In August 1993, the trial court confirmed an arbitration award in favor of the Company, Michael Viner and Gerald J. Leider and against Steven Stern and Sharmhill Productions in the approximate amount of $4.5 million (plus interest accruing thereon from September 1992 and attorney's fees) relating to the film "Morning Glory" ("Stern Judgment"). In March 1995, defendants appealed the judgment to the California Court of Appeals. In June 1995, the Court of Appeals affirmed the judgment, and that judgment is now final. In a related matter, the Company sought to restore certain fraudulent conveyances that Mr. Stern had made. In August 1995, Mr. Stern filed for bankruptcy protection. The United States Trustee is pursuing the fraudulent conveyance action on behalf of the bankruptcy estate, of which the Company comprises approximately 80%, and the Company, Mr. Viner and Mr. Leider are separately pursuing their own adversary proceeding for conspiracy against Mr. Stern and others in the bankruptcy case. There is no assurance that the Company will ultimately prevail, or as to if, when or in what amount the Company will be able to recover the amount of the original judgment in its favor. In February 1993, Mr. Stern filed a complaint against the Company, Mr. Viner and Mr. Leider entitled Steven A. Stern and Steven A. Stern as assignee of the claims of Sharmhill Productions (B.C.), Inc., a bankrupt company v. Dove Audio, Inc. et al. (British Columbia Supreme Court, Vancouver Registry No. C930935) (the "Canadian Stern Action") claiming that he had been fraudulently induced to enter into the agreement underlying the arbitration award and seeking as damages the amount of the judgment. The Company believes that it has good and meritorious defenses to the Canadian Stern Action. Nevertheless, there is no assurance that the Company will prevail in the Canadian Stern Action. In February 1996, the Company was served with a complaint in an action entitled Robert H. Tourtelot v. Dove Audio, Inc. etc. et al. (Los Angeles Superior Court Case No. SC040739) (the "Tourtelot Action"). Mr. Tourtelot seeks in excess of a million dollars in damages claiming that he had an oral agreement with the Company to write a book that the Company would publish, and that information he provided to the Company was used in another book published by the Company, "Legacy of Deception." Mr. Tourtelot alleged causes of action for breach of oral contract, fraud, suppression of fact, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, infringement of common law copyright, conversion, conspiracy and accounting. The Company successfully removed the action to the United States District Court for the Central District of California, and successfully moved to have the claims for infringement of common law copyright, breach of fiduciary duty, conversion, conspiracy and accounting dismissed. The Tourtelot Action was then remanded to the Los Angeles Superior Court, which permitted Mr. Tourtelot to pursue claims for breach of oral contract, fraud, suppression of fact, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, conversion, conspiracy and quantum meruit. In March 1998, the Company prevailed on summary judgment and obtained a dismissal of the infringement of common law copyright, conversion, conspiracy and breach of duty claims. Such claims were dismissed with prejudice by the trial court. While the Company believes that it has good and meritorious defenses to the Tourtelot Action, there is no assurance that the Company will prevail in the Tourtelot Action. In March 1996, the Company was served with a complaint in an action entitled Alexandra D. Datig v. Dove Audio, et al. (Los Angeles Superior Court Case No. BC145501) (the "Datig Action"). The Datig Action was brought by a contributor to, and relates to, the book "You'll Never Make Love In This Town Again." The Datig complaint sought in excess of a million dollars in monetary damages. In October 1996, the Company obtained a judgment of dismissal of the entire Datig Action, which judgment also awarded the Company its attorney's fees and costs in defending the matter. Ms. Datig has appealed the judgment. While the Company believes that it will prevail on the appeal, there is no assurance that the Company will in fact be successful on appeal. In July 1996, the Company was served with a complaint in an action entitled Terrie Maxine Frankle and Jennie Louise Frankle v. Dove Audio (U.S. District Court, Central District of California Case No. 96-4073 RSWL) (the "Frankle Action"). The Frankles claim to be the authors of "You'll Never Make Love In This Town Again," and have alleged claims for copyright infringement and fraud. The Frankles application for a preliminary injunction was denied because they could not demonstrate a likelihood of success on the merits of their claims. The Company believes that it has good and meritorious defenses and counterclaims against the Frankles. Nevertheless, there is no assurance that the Company will prevail. 12 13 In May 1997, the Company was served with a complaint in an action entitled Kenneth Raskoff v. Dove (Los Angeles Superior Court Case No. BC171355) (the "Raskoff Action"). Mr. Raskoff is a former employee of Dove Television. The complaint seeks unspecified damages and other relief for breach of Mr. Raskoff's alleged employment contract, breach of the implied covenant of good faith and fair dealing, breach of implied-in-fact contract, promissory estoppel, and fraudulent inducement. The complaint also seeks an injunction requiring that Mr. Raskoff receive producer credit with respect to the television program entitled "Unwed Father" and other unnamed projects. Although the Company believes that it has good and meritorious defenses to the Raskoff Action, there is no assurance that the Company will prevail in the action. In June 1997, the Company was served with a complaint in an action entitled Michael Bass v. Penguin USA Inc., et al. (New York Superior Court Case No. 97-111143) (the "New York Bass Action"). The complaint in the New York Bass Action alleges, among other things, that the contribution of Liza Greer, one of the authors of the book "You'll Never Make Love In This Town Again", defames Mr. Bass and violates his rights of publicity under New York statutes. The complaint seeks damages of $70,000,000 for defamation and $20,000,000 for violation of the New York right of publicity statutes and an injunction taking the book out of circulation and prohibiting the use of Mr. Bass' name. The New York Bass Action has voluntarily been stayed after Mr. Bass filed a similar action in the State of California in an action entitled Michael Bass v. Penguin USA et.al. (California Superior Court Case No. SC049191) seeking essentially the same damages as in the New York Bass Action. The Company believes that it has good and meritorious defenses to the New York Bass Action and the action filed in California. Nevertheless, there is no assurance that the Company will prevail. As a result of the New York Bass Action, the Company has brought a cross-complaint against Ms. Greer. In July 1997, Michael Viner and Deborah Raffin Viner (the "Former Principals") commenced an arbitration against the Company. In their arbitration demand, the Former Principals claim that they are owed in excess of $1 million by the Company relating to the motion picture entitled "Morning Glory". The Former Principals claim that they are also entitled to the repayment of certain deferred amounts for producing and acting services rendered by them in connection with "Morning Glory" and to 50% of the profits. They claim that a former director of the Company, Gerald Leider, is entitled to the other 50% of the profits. The Former Principals have also asserted that from any recovery of the Stern Judgment, they are entitled to receive $1 million, as well as the deferred amounts and 50% of the profits. Present management believes it has good and sufficient defenses to the claims, including, but not limited to the Former Principals' waiver of their claims that any amounts are owed to them as debt, as profit participation or as deferred compensation and that the Company has not yet recouped its investment in the Picture. The Company has also asked the arbitrator to determine that the Former Principals are not entitled to any moneys or rights with respect to "Morning Glory", including from the proceeds of the Stern Judgment. There is no assurance that the Company will prevail on these defenses and claims. In August 1997, the Former Principals commenced an arbitration against the Company seeking specific performance of, and alleging breach of, a termination agreement to which they and the Company are a party (the "Termination Agreement"). The Former Principals subsequently identified in writing their intention to arbitrate a variety of miscellaneous claims, including the Company's alleged failure to timely pay the full amount of consulting fees under the Termination Agreement, as well as the Producer and Executive Producer fees on "Unwed Father", to reimburse business expenses, payments to one of the Former Principal's masseuse and psychologist, and medical and dental expenses, to return certain personal property, to account for sales with respect to certain titles, and other matters, including claims that the Former Principals did not receive appropriate credit on "Unwed Father" and various audio books. On October 16, 1997, however, the Former Principals filed an action in the Los Angeles Superior Court (Case No. BC179639) for "Breach of Written Contract; Specific Performance; Temporary Restraining Order, Preliminary and Permanent Injunctive Relief" which sought damages for some of the same claims identified as the Former Principals' claims in arbitration. In this action the Former Principals claimed that, in addition to other damages, they were entitled to accelerate all payments to become due under the Termination Agreement, in the aggregate amount of $1,511,824 and to the rights to certain titles. This action appears to have been filed for purposes of obtaining an attachment. After the Company obtained a temporary restraining order in the action staying the arbitration, the Former Principals and Dove II, a company purportedly controlled by the Former Principals, filed another action in the Los Angeles Superior Court (Case No. BC 180301) seeking declaratory relief and an injunction staying other arbitration proceedings between them and the Company. After the Company defeated an application for temporary restraining order in that action, the Former Principals and Dove II, filed requests for dismissals of both actions and are proceeding in the arbitrations. In the arbitration, the 13 14 Company is (i) seeking over $105,000 in compensatory damages from the Former Principals for certain unauthorized Company checks that one of the Former Principals signed to the Former Principals, to the Former Principal's personal attorney, for repairs for one of the Former Principal's car and for payments of the Former Principals' credit card accounts, (ii) seeking punitive damages for one of the Former Principals causing the Company to pay to the Former Principals amounts that had already been credited to them in their purchase of Company stock, (iii) seeking damages of at least $175,000 for breach of the non-interference provision of the Termination Agreement, (iv) seeking reimbursement of approximately $9,600 for unused airline tickets and (v) as a result of their breach of the non-competition provision of the Termination Agreement, requesting that the arbitrator enjoin the Former Principals from competing with the Company in the audio book business through June 9, 2001. The Company believes that, with the exception of certain immaterial amounts which it expects to pay, it has good and meritorious defenses to the claims by the Former Principals and that the Company has meritorious claims against the Former Principals. There is no assurance, however, that the Company will prevail on these issues and claims. The Former Principals also claimed that their agreement not to compete with the Company in the book and audio business is not enforceable. On January 12, 1998, the arbitrator issued his decision in which he held that the Former Principals' contention that the non-compete provision of the Termination Agreement is invalid and unenforceable is without merit and that the provision prohibiting the Former Principals from competing with the Company in the audio book business for a period of four years from June 10, 1997 is valid and enforceable, and the arbitrator enjoined the Former Principals from engaging in the audio book business during such period. In another arbitration proceeding involving the Former Principals and the Company, the Former Principals claimed that the Company breached the Termination Agreement by failing to prepare office space for use by the Former Principals and interfering with their use of the space, failing to repair a toilet and failing to provide for and pay secretaries for the Former Principals, and that a subsequent purported occupancy agreement that allowed the Former Principals to use the Company's offices at 301 N. Canon was enforceable. The Company claimed, among other things, that the Company was entitled to compensatory damages plus costs incurred in restoring the Former Principals' offices to their original condition and the costs of recovering possession and that the occupancy agreement was invalid because it was never disclosed to or approved, authorized or ratified by the Company's shareholders or the Board. The arbitrator rendered a decision on February 13, 1998 (amended and corrected on March 2, 1998), in which he awarded the Company the sum of $14,093 plus costs, finding, among other things, that neither of the Former Principals had the right to occupy the Company's office space after September 1, 1997 and that the occupancy agreement is invalid and unenforceable. In July 1997, the Company was served with a complaint in an action entitled Alan Fields v. Dove Entertainment, Inc., et al. (Los Angeles Superior Court No. BC 174659) (the "Fields Action"). The Fields Action was brought by an alleged purchaser of Common Stock against the Company and the Former Principals as a putative class action on behalf of all persons who acquired Common Stock between July 25, 1995 and August 20, 1996. The complaint alleges a cause of action for violation of Section 25400(d) of the California Corporations Code based on the alleged dissemination of false and misleading statements about, among other things, the success of the Company's printed book operations, financial results, business condition and future prospects. The plaintiff seeks unspecified damages and other relief. In August 1997, an action entitled Global Asset Allocation consultants, L.L.C. v. Dove Entertainment, Inc., et al. (Civil Action No. 97-6253-WDK) (the "Global Asset Action"), was commenced against the Company and the Former Principals in the United States District Court for the Central District of California. The Global Asset Action was brought by an alleged purchaser of Common Stock as a putative class action on behalf of all persons who acquired Common Stock between July 25, 1995 and August 20, 1996. The complaint alleges a cause of action for violation of Section 10(b) of the Securities and Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder based on the conduct at issue in the Fields Action. The plaintiff seeks unspecified damages and other relief. The Company has learned that another putative federal securities class action was filed in the United States District Court for the Central District of California by an alleged purchase of Common Stock represented by the law firm of Berman, DeValerio & Pease LLP (the "Berman Action"; and collectively with the Fields Action and the Global Asset Action, the "Securities Actions"). The complaint is reportedly brought on behalf of all persons who acquired Common Stock between April 15, 1996 and October 10, 1996 and to allege a cause of action against the Company and certain of its former officers for violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder. As of December 31, 1997, the Company has not been served with the complaints in the Global Asset Action or the Berman Action. The 14 15 Company has not yet filed a response to the complaints in the Securities Actions. While the Company believes it has good and meritorious defenses against the claim, the Company has taken a charge of $150,000 in the quarter ended June 30, 1997 in respect of potential costs associated with the claim. In July 1997, the Company was served with a complaint in an action entitled Steven A. Soloway v. Dove Entertainment, Inc., etc. et al. (Los Angeles Superior Court Case No. BC 175516) (the "Soloway Action"). Mr. Soloway is a former director and employee of the Company and has sought damages of approximately $350,000 for breach of contract. Mr. Soloway claims that as a result of the Securities Purchase Agreement he was entitled to declare his employment agreement terminated without cause and to receive his base salary through September 1999. In September 1997, Mr. Soloway obtained a writ of attachment for $350,000 in respect of his claims, for which the Company has substituted an undertaking for the amount of the attachment. Although the Company believes that it has good and meritorious defenses and setoffs to the Soloway Action, there is no assurance that the Company will prevail in the Soloway Action. The Company has filed a cross-complaint against Mr. Soloway for breach of fiduciary duty and legal malpractice asserting that Mr. Soloway fabricated a version of his employment agreement, submitted the fabricated version for inclusion in the Company's public documents, without authorization or approval drafted and signed on behalf of the Company an occupancy agreement pursuant to which the Former Principals unrightfully occupied the Company's offices, fabricated minutes of the Board and disclosed confidential information that he obtained as an officer. On November 4, 1997, James Belasco, a former director of the Company, filed an action against the Company in Los Angeles County Superior Court entitled James A. Belasco v. Dove Entertainment, Inc. etc. et al. LASC case no. BC 180707. Mr. Belasco seeks to recover over $178,000 that he claims he is owed for royalties from the distribution of the book entitled "Flight of the Buffalo: Soaring to Excellence. Learning to Let Employees Lead." Mr. Belasco also seeks punitive damages. On November 4, 1997, James Belasco filed an action against the Company in Los Angeles County Superior Court entitled James A. Belasco v. Dove Entertainment, Inc. etc. et al. LASC case no. BC 180706. Mr. Belasco alleges that the Company has interfered with the publication of the work entitled "The Phoenix Organization." Mr. Belasco seeks punitive damages and over $200,000 in general damages. Mr. Belasco and the Company have agreed to settle all such claims for payments over time to Mr. Belasco totaling $150,000 and the grant to the Company of audio rights to certain current and future books by Mr. Belasco and payment of certain book commissions by Mr. Belasco to the Company. In December of 1997, the Company was served with a complaint in an action entitled Gerald J. Leider V. Dove Entertainment, Inc. f.k.a. Dove Audio, Inc. (Los Angeles Superior Court Case No. BC 183056). Mr. Leider is a former Chairman of the Board and consultant to the Company and has sought damages of approximately $287,000 for breach of contract and $60,000 for unpaid consulting fees. Mr. Leider also is seeking a declaration that the Company must comply with certain purported stock option agreements and for an order for inspection and copying of certain records of the Company and an award of expenses related thereto. Although the Company believes that it has good and meritorious defenses and setoffs to such action, there is no assurance that the Company will prevail in such action. The Company has filed a separate complaint against Mr. Leider for breach of fiduciary duty, fraud and breach of covenant of good faith and fair dealing asserting that Mr. Leider entered into purported agreements with the Company that were unfair to the Company, were not disclosed to the Board or the Company's shareholders and were never approved by the Board or the Company's shareholders. In addition to the above claims, the Company is a party to various other routine legal proceedings and claims incidental to its business. There can be no assurance that the ultimate outcome of these matters will be resolved in favor of the Company. In addition, even if the ultimate outcome is resolved in favor of the Company, involvement in any litigation or claims could entail considerable cost to the Company and the diversion of the attention of management, either of which could have a material adverse effect on the business of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1997, through the solicitation of proxies or otherwise. 15 16 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock is traded in the Nasdaq SmallCap Market under the symbol DOVE. The following table sets forth, for the periods indicated, the range of low and high bid quotations as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ"). The prices reflect inter-dealer quotations without retail mark-ups, mark-downs or commissions and may not represent actual transactions. As of March 27, 1998, there were 91 holders of record of Common Stock.
Low High --- ---- Year Ended December 31, 1996: First quarter (through March 31, 1996) 9 7/8 14 5/8 Second quarter (through June 30, 1996) 9 1/8 14 3/8 Third quarter (through September 30, 1996) 3 1/4 10 Fourth quarter (through December 31, 1996) 1 1/8 3 7/16 Year Ended December 31, 1997: First quarter (through March 31, 1997) 1 3/8 3 13/16 Second quarter (through June 30, 1997) 1 1/8 3 3/4 Third quarter (through September 30, 1997) 1 7/16 3 1/8 Fourth quarter (through December 31, 1997) 1 1/16 1 7/8 Year Ending December 31, 1998: First quarter (through March 31, 1998) 1 3/16 2 7/8
On March 28, 1997, in the first of two closings under a private placement of preferred stock and warrants to purchase Common Stock, the Company sold to Media Equities International, LLC ("MEI") and the Former Principals (i) 3,000 shares of the Company's Series B Preferred Stock, warrants to purchase 500,000 shares of Common Stock at $2.00 per share, warrants to purchase 500,000 shares of Common Stock at $2.50 per share and warrants to purchase 500,000 shares of Common Stock at $3.00 per share for an aggregate of $3,000,000 and (ii) 920 shares of the Company's Series C Preferred Stock and warrants to purchase 166,666 shares of Common Stock at $2.00 per share, warrants to purchase 166,667 shares of Common Stock at $2.50 per share and warrants to purchase 166,667 shares of Common Stock at $3.00 per share for an aggregate of $920,000 (including the contribution of $676,000 payable by the Company to the Former Principals). On June 3, 1997, the second closing (the "Second Closing") was completed whereby the Company sold to MEI and the Former Principals (i) 1,000 shares of Series B Preferred Stock and warrants to purchase 166,666 shares of Common Stock at $2.00 per share, warrants to purchase 166,667 shares of Common Stock at $2.50 per share and warrants to purchase 166,667 shares of Common Stock at $3.00 per share for an aggregate of $1,000,000 in cash and (ii) 1,000 shares of Series C Preferred Stock and warrants to purchase 166,666 shares of Common Stock at $2.00 per share, warrants to purchase 166,667 shares of Common Stock at $2.50 per share and warrants to purchase 166,667 shares of Common Stock at $3.00 per share for an aggregate of $1,000,000 (including the contribution of $175,000 payable by the Company to the Former Principals). In October 1996 Morgan Fuller Capital Group L.L.C. ("Morgan Fuller") completed a loan to the Company in the aggregate amount of $800,000. Such loan bore interest at the rate of 10% per annum. In March 1997, the Company retired $500,000 of its loan from Morgan Fuller in exchange for 210,526 shares of the Company's Common Stock along with warrants to purchase 35,088 shares of the Company's Common Stock at $2.50 per share, warrants to purchase 35,088 shares of the Company's Common Stock at $3.50 per share and warrants to purchase 35,087 shares of the Company's Common Stock at $4.50 per share. The balance of the loan plus accrued interest was repaid in cash. In April 1997, the Company issued 301,111 shares of Common Stock in satisfaction for vendor payables amounting to $750,000. 16 17 In August 1997, the Company issued 200,000 shares of Common Stock to a substantial shareholder for the acquisition of further rights to a future title and certain rights on past titles. In October 1997, the Company issued 66,667 shares of Common Stock to Shukri Ghalayini, a former officer of Dove Television, in settlement of all claims by him against the Company. Following this settlement, the Company released 40,000 shares of Common Stock held in escrow since the acquisition of Four Point Entertainment. During the year, the Company issued 250,000 shares of Common Stock in exercise of options. DIVIDENDS The Company has not declared or paid any cash dividends on its Common Stock and does not intend to declare any cash dividends in the foreseeable future. The Company's credit facility limits the ability of the Company to declare or pay any dividends except cash dividends if the ratio of (i) the sum of the Company's consolidated net income plus interest expense of the Company plus the provision for income taxes to (ii) interest expense of the Company is at least 20:1. The payment of dividends, if any, is within the discretion of the Board and will depend on the Company's earnings, if any, its capital requirements and financial condition and such other factors as the Board may consider. ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis below should be read in conjunction with the Financial Statements of the Company and the Notes to the 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 (i.e., unaffiliated with any single book publisher) of audio books in the United States. The Company produces and distributes approximately 100 to 120 new titles annually and has built a library of approximately 1000 titles currently offered for sale. Through Dove Television, the Company is engaged in the production and development of television programming. Other activities of the Company include a limited printed book publishing program and the distribution of feature films and television programming. 1997 was a year of consolidation and rationalization of operations of the Company. In 1996 the Company had rapidly expanded its printed book publishing and television production operations and entered into the theatrical film distribution business. However, heavy returns from the printed book publishing operations and the liquidity needs of the rapid expansion led to working capital shortages in early 1997 which in turn, affected the Company's ability to acquire and develop new product. The effect of working capital shortages and heavy printed book publishing returns led to a reduction in revenues of 38% in 1997 compared to 1996 and to increased cost of sales arising from surplus inventories. In June 1997, the second of two closings was completed resulting in the Company having issued 5,920 shares of Preferred Stock with warrants for approximately $6,000,000 to the Former Principals and MEI. Subsequently and also in June 1997 following the purchase of all of the Preferred Stock held by the Former Principals, the Former Principals' employment with the Company terminated and the Former Principals resigned from the Board. As a result of these changes, representatives of MEI were named to five Board positions and Mr. Ronald Lightstone, a partner of MEI and a member of the Board was appointed President and Chief Executive Officer of the Company. Subsequently, certain other Board members resigned their positions. An extensive review of all operations led to the discontinuance of "Dove Kids" book publishing, "Dove Video" and theatrical distribution (other than existing library) operations, the curtailment of printed book publishing operations and the cancellation of unprofitable elements of the new audio book publishing program. These, together with the cost of disposing of excess returns, resulted in write-offs of $2,495,000 in audio book and printed 17 18 book operations and $3,767,000 in film distribution operations (primarily theatrical) for the year. Additionally, the Company incurred $1,614,000 in employee separation costs and approximately $2,000,000 in legal and settlement costs in respect of claims pertaining to events prior to the change in management. Following the change in management, the Company reduced overhead and substantially strengthened its management team. In November 1997, the Company secured a three year $8,000,000 loan facility for the purpose of repaying its existing senior term loan with Sanwa Bank and providing working capital. In September 1997, Dove Television delivered the made for television motion picture, "Unwed Father" to ABC Television and sold international distribution rights to BWE Distribution, Inc. "Unwed Father" aired on ABC on Sunday, October 11, 1997 achieving a rating of 9.4/15. Dove Television also commenced production of a further 100 episodes of "Make Me Laugh" for Buena Vista Television and 165 episodes were delivered during 1997. In 1997, Dove Television commenced negotiations for a number of new made for television motion pictures resulting in an agreement with ABC Television in 1998 to produce "Futuresport", a two-hour television motion picture. "Futuresport" completed principal photography in March 1998 and is anticipated to be delivered to ABC Television by May 1998. In early 1998, Dove Television commenced marketing "Futuresport" for the home video and international markets achieving initial success with the sale of worldwide home video rights to Columbia Tri-Star and a number of international sales. The theatrical movie "WILDE" was delivered to the Company mid 1997. The film, a biography of the 19th century writer Oscar Wilde, was successfully launched by its producers in the United Kingdom and other international markets during 1997. The Company owns United States and Engligh-speaking Canadian distribution rights to this film and in late 1997, the Company entered into an agreement with Sony Pictures Classics for its distribution in North America. Sony Pictures Classics has scheduled the film to premiere at the San Francisco film festival in April 1998 and fine arts theater openings in New York and Los Angeles in May 1998. Due to the Company's focus on stabilizing working capital, the Company significantly limited its new title releases in the latter half of 1997. Key audio books published by the Company included "Best Laid Plans" by Sidney Sheldon, "Another City Not My Own" by Dominick Dunne, "Then Came Heaven" by LaVryle Spencer, "The President's Daughter" by Jack Higgins, "The Cat Who Tailed A Thief" by Lilian Jackson Brun and "Small Vices" by Robert Parker. In December 1997, the Company transferred its traditional audio book and printed book distribution to a new distributor, Mercedes Distribution of Brooklyn, New York. With the transfer of audio book and printed book distribution to Mercedes Distribution Center, the Company has assumed direct sales responsibility to all key traditional accounts. In early 1998, the Company entered into a distribution agreement with UAV Corporation to manufacture and distribute selected audio books into major mass market retail outlets. It is planned that this innovative program will broaden audio book distribution providing back-list sales impetus. The Company plans an expanded audio book publishing program in development for 1998 with greater emphasis on quality. The Company's catalog of 1998 audio book releases includes "The Last Hostage" by John Nance, "Sudden Mischief" by Robert Parker and "Flight of Eagles" by Jack Higgins. A limited printed book program is planned for 1998. The demand for audio books is seasonal, with the majority of shipments taking place in the third and fourth quarters of the year. The Company believes that demand for audio books will remain seasonal, and this may adversely affect results of operations for the first and second quarters. Because a significant portion of the Company's expenses are relatively fixed, below-expectation sales in any quarter could adversely affect operating results for that quarter. From time to time, the Company may have several television projects in development and generally seeks to limit its financial risk in the production of television motion pictures and mini-series by pre-sales and licensing to third parties. The production of television programming 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 television programming revenues. In accordance with the industry practice, substantially all of the Company's sales of audio and printed book products are and will continue to be subject to potential return by distributors and retailers. Although the Company 18 19 estimates allowances and reserves for returned products, significant increases in actual return rates above these estimates could materially and adversely impact the Company's results of operations or financial condition. Selling, general and administrative expenses include costs associated with selling, marketing and promoting the Company's products, as well as general corporate expenses including salaries, occupancy costs and other overhead, professional fees, and travel and entertainment. RESULTS OF OPERATIONS The following table sets forth (i) publishing and television and film revenues and (ii) publishing, television and film, and selling, general and administrative expenses as a percentage of total revenues for the periods indicated:
YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 1995 ---- ---- ---- REVENUES Publishing 41% 43% 98% Television and Film 59 57 2 --- --- --- Total 100% 100% 100% === === === OPERATING EXPENSES Publishing 55% 42% 64% Television and Film 72 44 1 Selling, general & administrative 59 37 33 --- --- --- Employee separation costs 10 -- -- --- --- --- Total 196% 123% 98% === === ===
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Publishing Revenues. Net publishing revenues for 1997 decreased $4,786,000 to $6,800,000 compared with $11,586,000 for 1996. Of the 1997 net publishing revenues, net audio book revenue was approximately $7,400,000 and printed books incurred net returns of approximately $600,000. In 1996, net audio book revenue was approximately $6,810,000 and net printed book revenue was approximately $4,776,000. The decrease in net publishing revenues was primarily attributable to cancellation or delay in the planned new release of most printed book titles, as well as some audio titles, due to working capital constraints and high returns of printed books throughout the year and audio book product during the three months ended March 31, 1997 but partly offset by increased remainder sales. 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 sold to the public. Although the Company makes allowances and reserves for returned product that it believes are adequate, significant increases in return rates can materially and adversely impact the Company's financial condition or results of operations. Cost of Sales. Cost of sales for 1997 decreased $2,189,000 to $9,164,000 compared with $11,353,000 for 1996. The decrease was attributable to the decrease in revenues for the year. Cost of sales as a percentage of net publishing revenues increased from 98% in 1996 to 135% for 1997 due primarily to the effect of fixed elements of cost of sales, such as product development expense being spread over a lower revenue base, the inclusion of abnormally high low or negative margin remainder sales in the revenue base, the write-off of $200,000 in product master costs due to a reduction in future sales estimates for a number of titles, the write-off of $564,000 following the decision to discontinue the Dove Kids and Video Books lines, the write-off of $885,000 due to the cancellation of product under development, and the write-down of $846,000 in recorded inventories to estimated net realizable value. 19 20 Film and Television Revenues. Film and television revenues for 1997 decreased $5,395,000 to $9,872,000, compared with $15,267,000 for 1996. The reduction was due to a reduced production schedule in 1997 where the Company through Dove Television produced only one made for television motion picture compared with two in 1996 and reduced series production by Dove Television. Cost of sales. Film and television amortization for 1997 increased $124,000 to $11,979,000, compared with $11,855,000 for 1996. Cost of sales as a percentage of net film and television revenues increased from 78% in 1996 to 121% for 1997, due primarily to the write-off of $3,767,000 in production costs arising from an assessment of film net realizable values, mainly in theatrical productions. In addition, cost overages on certain film projects were incurred. General Gross Profit/(Loss). The Company experienced a gross loss of $4,471,000 for 1997 versus a gross profit of $3,645,000 for 1996, resulting from the matters previously discussed regarding publishing and film revenues and cost of sales. Selling, General and Administrative ("SG&A"). SG&A includes 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 decreased 2% to $9,898,000 for 1997 compared to $10,089,000 for 1996. The decrease in SG&A was mostly attributable to cost savings implemented by the new management in June 1997, partially offset by legal costs associated with a number of claims outstanding at or in respect of the period leading up to the change in management in June 1997, and in respect of arbitration associated with the Former Principals. In addition to SG&A, the Company expensed $1,614,000 in employee separation costs representing contracted payments to the Former Principals in their employment capacity together with associated costs arising from their termination in June 1997. The contracted payments to the Former Principals are payable over the next five years from June 1997 in approximately equal monthly installments. Net Interest Expense. Net interest expense for 1997 was $358,000 compared with $197,000 for 1996. The interest expense is primarily the result of the utilization of funds and the assumption of debt in connection with the acquisition of Dove Television in 1996, the purchase of the Company's new office building in 1996 and the operating cash losses experienced during 1996 and 1997. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Publishing Revenues. Net publishing revenues increased by $625,000 or 6% from $10,961,000 in 1995 to $11,586,000 in 1996. Of the 1996 net publishing revenue, net audio book revenue was approximately $6,810,000 and net printed book revenue was approximately $4,776,000. In 1995, net audio book revenue was approximately $8,635,000 and net printed book revenue was approximately $2,326,000. The increase in net printed book revenues was due to the expansion of the Company's publishing operations. However, the increased activity was offset by returns during the year of 52% of sales, which is above industry averages. The reduction in net audio revenues was due to a re-assessment by major customers of gross order quantities and returns to adjust their inventory carrying quantities. "The Private Diary of Lyle Menendez" experienced return rates in 1995 which were significantly greater than the industry average. The provision for returns as a percentage of gross publishing revenue decreased from 47% in 1995 to 44% in 1996. Cost of Sales. Publishing cost of sales increased by $4,184,000 or 58% from $7,169,000 in 1995 to $11,353,000 in 1996. Publishing cost of sales as percentage of net publishing revenues increased from 65% in 1995 to 98% 1996. The increase in cost of sales was due in part to the costs accompanying the $625,000 increase in net sales but was primarily attributable to an approximate $ 1,900,000 write-down in inventory and production costs as well as excess fulfillment costs consisting of: (i) inventories and production costs of approximately $600,000 relating to 20 21 various titles associated with the O.J. Simpson trial which were written down in the fourth quarter because estimates from remainder sales timed for the O.J Simpson civil trial were not realized due to diminished market interest; (ii) efforts to consummate remainder sales of excess inventory which have proven more difficult than anticipated due to a general market over-supply in the remainder market (accordingly, inventory has been written down to revised estimates of remainder or destruction value, as appropriate, resulting in an additional write-down of $600,000); and (iii) a $500,000 inventory write-off which was taken in the second quarter of the year. Cost of sales was also impacted in 1996 by approximately $1,200,000 due to an increase in production cost amortization relative to sales due to lower than anticipated gross sales following the re-assessment by major customers of gross order quantities. Television and Film Revenues. Television and film revenues increased from $187,000 in 1995 to $15,267,000 in 1996. The increase was primarily attributable to the delivery of the "Home Song" television motion picture to CBS in the first quarter of 1996, the delivery of "Family Blessings" to CBS and ITC in the fourth quarter of 1996, distribution revenue generated by Dove International combined with the inclusion of eight months of activity from Dove Television (including the activities of Dove Television arising from the acquisition of Four Point Entertainment in April 1996) which contributed approximately $8,000,000 of revenue due primarily to the programs "Unnatural History," Amazing America," "The Bradshaw Difference," and "Scoop with Sam and Dorothy." Cost of Sales. Film cost of sales increased to $11,855,000 for 1996 compared to $99,000 for 1995. The increase was attributable to a significant increase in film sales in 1996 and the inclusion of eight months of activity from Dove Television (including the activities of Four Point Entertainment subsequent to the date of its acquisition by Dove Television in April 1996). Film amortization is generally incurred in proportion to the estimated revenues generated from the release or licensing of film properties.GeneralGross Profit. The Company's gross profit decreased $235,000, or 6%, from $3,880,000 in 1995 to $3,645,000 in 1996. The gross profit margin decreased from 35% in 1995 to 14% in 1996. This decrease resulted primarily from the substantial increase in publishing cost of sales discussed above and the Company's expansion of its film and television production activities which generally produce narrower margins than the Company's historical publishing margins. SG&A. SG&A increased by $6,393,000 or 172% from $3,696,000 in 1995 to $10,089,000 in 1996. The increase was primarily attributable to additional direct SG&A costs associated with the operations of Dove Television ($2,388,000 for the year) subsequent to its establishment and the acquisition of Four Point Entertainment and the expansion of Dove International ($871,000 for the year, a large portion of which arose from the partial funding of overhead and sales operations of G.E.L., an outside distributor of television and film product with which the Company then had a distribution arrangement). In addition, approximately $500,000 resulted from an increase in the provision for doubtful accounts and approximately $1,200,000 in professional fees resulting from increased activity relating to abandoned acquisition attempts, aborted attempts to raise financing and general business activity. Selling and advertising expense increased by approximately $1,400,000 primarily in connection with the Company's printed book operations due in part to marketing commitments made in connection with the securing of due underlying rights. The remaining increases were primarily due to increases in salaries resulting from increased staffing levels, occupancy costs, travel and entertainment, and depreciation of the Company's building. Interest Expense. Interest expense, net increased from $22,000 in 1995 to $197,000 in 1996 due to increased debt outstanding during 1996. LIQUIDITY AND CAPITAL RESOURCES In December 1995 and January 1996, the Company raised net proceeds of approximately $6,303,000 from the sale of 76 Units in a private placement. Each Unit consisted of 12,500 shares of the Common Stock of the Company and 12,500 warrants to purchase shares of Common Stock at $12.00 per share. In September 1994, the Company completed the sale of 300,000 Units in a private placement for an aggregate of approximately $926,000, each Unit 21 22 consisting of one share of Common Stock and one Redeemable Warrant to purchase Common Stock at $8.00 per share. In December 1994, the Company completed its initial public offering ("IPO"), resulting in net proceeds of approximately $4,805,000 to the Company. In January 1995, the underwriter of the IPO exercised its over allotment option relating to the IPO in full resulting in additional net proceeds to the Company of approximately $770,000. In April 1996 the Company refinanced its $1,900,000 mortgage note which the Company borrowed from the seller in connection with the acquisition of its new office building. The loan from Asahi Bank of California is secured by a deed of trust on such building and such loan 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 schedule. In connection with the acquisition of Four Point Entertainment, which was completed on April 29, 1996, the Company guaranteed certain term debt and a $1 million revolving line of credit of Four Point Entertainment from Sanwa Bank of California ("Sanwa Bank"). In August 1996, the Company refinanced its existing line of credit and term loan with Sanwa Bank with a $1,365,000 term loan from Sanwa Bank, maturing on August 1, 1997. In addition, the Company borrowed a further $220,000 with a short-term bridge loan which was repaid on October 7, 1996. Both loans were secured by the Company's assets, other than the Company's building, and were guaranteed by the Former Principals. The Sanwa Bank loan had various covenants with which the Company was required to adhere, including restrictions on payment of dividends, additional indebtedness, change in the nature of business, financial covenants including minimum tangible net worth, current ratio, debt service coverage ratio and debt to net worth ratio and restrictions on mergers or acquisitions. The Company was not in compliance with certain of such financial covenants as of December 31, 1996 and at certain times during the year ended December 31, 1997, but received waivers from compliance from Sanwa Bank on each occasion. The balance of the Sanwa Bank loan was repaid on November 12, 1997 with proceeds from a loan facility provided by The Chase Manhattan Bank ("Chase Bank"), and the Sanwa Bank facility was terminated. In May 1996 the Company entered into an agreement with Samuelson Entertainment Ltd. to acquire the North American (excluding French speaking Canada) distribution rights to the theatrical film "Wilde" and the exclusive worldwide print, audio and interactive rights. The film was financed by Guinness Mahon & Co. Ltd. whereby the Company was required to pay sums totaling pound sterling1,333,333 (approximately $2,000,000) over the 12 months subsequent to the agreement for such rights. As of December 31, 1997, the Company had fully paid all obligations in respect of "Wilde" and had taken delivery of the picture. On September 17, 1996, the Company's registration statement on Form S-3, registering 2,335,000 shares of Common Stock then outstanding or issuable upon exercise of certain warrants, was declared effective by the Securities and Exchange Commission. In October 1996, the Company obtained a bridge loan of $800,000 from Morgan Fuller. In March 1997, the Company retired $500,000 of such loan through the issuance of 210,526 shares of Common Stock with warrants and the balance of the loan plus accrued interest was repaid in cash. In October 1996 the Company entered into a financial advisory agreement with Morgan Fuller pursuant to which Morgan Fuller agreed to provide certain financial advisory services for the Company. As compensation for such services, the Company granted to Morgan Fuller warrants to purchase for a period of three years from the date thereof, up to 180,000 shares of Common Stock of the Company at an exercise price of $2.75 per share. In March 1997, the Company entered into an agreement with MEI and the Former Principals for an equity investment of approximately $6,000,000 through the sale of Preferred Stock and warrants to purchase Common Stock of the Company in a private placement. In the first of two closings, the Company received an aggregate of $3,920,000 (including the contribution of $676,000 payable by the Company to the Former Principals) and in a second closing completed May 31, 1997 received an additional $2,000,000. In September 1997, the Company entered into an agreement with MEI providing the Company with a $450,000 loan facility for working capital purposes ("MEI Loan"). The MEI Loan was subsequently increased to $550,000 The MEI Loan was secured by substantially all of the Company's assets, other than the Company's building which 22 23 security interest was junior to the security interest of Sanwa Bank. On November 12, 1997, the MEI Loan was repaid in full with the proceeds from a loan facility provided by Chase Bank, and the MEI Loan was terminated. On November 12, 1997, the Company entered into an agreement with Chase Bank providing the Company with an $8,000,000 loan facility for working capital purposes ("Chase Loan"). The Chase Loan is secured by substantially all of the Company's assets, other than the Company's building. The Chase Loan runs for three years until November 4, 2000. The Chase Loan establishes a "Borrowing Base" comprising: (1) 35% of an independent valuation of the Company's audio library, (2) 85% of the Company's eligible receivables and (3) 30% of the Company's finished goods audio and book inventory. At any time, the Company may borrow up to the Borrowing Base. In addition, the Company may borrow a further $2,000,000 (provided the aggregate amount borrowed does not exceed $8,000,000) with the consent and guarantee of MEI. The Chase Loan provides for interest at the bank prime rate plus 2% per annum or the bank's LIBOR rate plus 3% per annum, at the option of the Company. In addition, unused commitment fees are payable at 1/2% per annum. The Chase Loan contains various covenants to which the Company must adhere including limitations on additional indebtedness, investments, acquisitions, capital expenditures and sale of assets, restrictions on the payment of dividends and distributions to shareholders, and various financial compliance tests. At December 31, 1997, the Company was not in compliance with certain of the financial compliance tests but received a waiver and amendment from Chase Bank. At December 31, 1997, the Company had borrowed $5,250,000 against the facility. In addition, Chase Bank had provided a letter of guarantee for $350,000 in respect of certain litigation. In February 1998, the Company entered into an agreement with Chase Bank providing the Company with up to $3,000,000 in short-term financing to produce the television motion picture "Futuresport". This loan is secured against "Futuresport" and is expected to be repaid in 1998 with proceeds from the sale of the television motion picture. The Company has historically experienced significant negative cash flows from operations, including $8,546,000 for 1997 - see "Financial Statements of the Company - Consolidated Statements of Cash Flows". Such negative cash flows have resulted from, among other things, use of working capital for expansion of audio and printed book publishing, development of television programming and the acquisition of theatrical motion picture product. The Company plans to significantly increase the level of activity in both its audio book and television production operations. In addition, the Company will consider acquisitions of properties or libraries or companies in related lines of business. It will be necessary to obtain additional capital in order to accomplish its growth objective. Such additional capital would likely be obtained through sales of equity securities, by obtaining debt financing or through the sale of assets. Even if the Company does not pursue its growth objective, if the Company is unable to realize anticipate revenues or if the Company incurs costs inconsistent with anticipated levels, the Company would either need to obtain additional financing (through the sale of debt or equity securities, by obtaining additional bank financing or through the sale of certain assets), limit its commitments to new projects or possibly curtail its current operations. There is no assurance that any such additional financing will be available on acceptable terms. The Company's television production activities can affect its capital needs in that the revenues from the initial licensing of television programming may be less than the associated production costs. The ability of the Company to cover the production costs of particular programming 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 programming 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 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, from additional debt or equity financings from outside sources or from other financing arrangements, including bank financing. There is no assurance that any such additional financing will be available on acceptable terms. If the Company is unable to obtain such financing, it may be required to reduce or curtail certain operations. In order to obtain rights to certain properties for the Company's publishing and television operations, the Company may be required to make advance cash payments to sources of such properties, including book authors and 23 24 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 and there is no assurance it will be able to do so in the future. The Company's operations in general, and its publishing and television operations in particular, are capital intensive. The Company anticipates, based on currently proposed plans and assumptions relating to its operations and anticipated outcomes of current litigation, that the projected cash flow from operations and available cash resources, including its existing financing arrangements, will be sufficient to satisfy its anticipated cash requirements for the fiscal year ending December 31, 1998. In the event that the Company's plans change, its assumptions change or prove to be inaccurate or the cash flow proves to be insufficient to fund operations (due to unanticipated expenses, delays, problems, difficulties or otherwise), the Company would be required to seek additional financing sooner than anticipated or to curtail its activities. As of March 30, 1998 the Company's unused sources of funds consisted primarily of approximately $163,000 in cash and $1,000,000 available under the Chase Loan. Any draw-downs of such currently available amounts under the Chase Loan are subject to approval and guarantee by MEI. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. This statement is effective for fiscal years beginning after December 15, 1997. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. SFAS No. 131 is effective for financial statements for periods beginning after December 31, 1997. The Company has not yet determined whether it has any separately reportable business segments. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits. This Statement is effective for fiscal years beginning after December 15, 1997. Management does not believe that the impact of this statement will be material to the Company's financial statements. INFLATION The Company does not believe its business and operations have been materially affected by inflation. YEAR 2000 Some of the Company's financial business systems were written using two digits, rather than four, to define the applicable year. As a result, those systems have date-sensitive software that recognizes a date "00" as the year 1900 rather than 2000. If not modified or updated, this could cause system failure or miscalculations, potentially resulting in the temporary disruption of operations due to the inability to process certain transactions. The Company plans to convert its financial business systems to standardized package systems that are 2000 compliant within 1998. The only other critical business system to the Company is the distribution system run by Mercedes Distribution. Mercedes Distribution have assured the Company that their distribution system is 2000 compliant. 24 25 The Company has initiated communications with significant suppliers and customers to determine the extent that they may be vulnerable to their own year 2000 issues. Based on the representations on suppliers and customers contacted, management does not believe the Company's continued operation is at risk due to key business partners not addressing the year 2000 issue. ITEM 7. FINANCIAL STATEMENTS The financial statements, including notes thereto, required by Item 7 are set forth on the pages indicated in Item 13(a)(1). PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There is hereby incorporated by reference the information appearing under the caption "Directors and Executive Officers" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended December 31, 1997. ITEM 10. EXECUTIVE COMPENSATION There is hereby incorporated by reference the information appearing under the caption "Executive Compensation" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended December 31, 1997. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT There is hereby incorporated by reference the information appearing under the caption "Security Ownership of Certain beneficial Owner and Management" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended December 31, 1997. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There is hereby incorporated by reference the information appearing under the caption "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended December 31, 1997. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS Page Report of KPMG Peat Marwick LLP.................................................F-l Balance Sheet at December 31, 1997..............................................F-2 Statements of Operations for the Years Ended December 31, 1997 and 1996 ........F-3 Statements of Shareholder's Equity for the Years Ended December 31, 1997 and 1996 ...............................................F-4 Statements of Cash Flows for the Years Ended December 31, 1997 and 1996 ........F-5 Notes to Financial Statements ..................................................F-7
25 26 (2) EXHIBITS
EXHIBIT NO. DESCRIPTION ----------- -------------------------------------------------------------- 3.1 Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Registration Statement) 3.2 Certificate of Amendment of Articles of Incorporation of the Company filed with the Secretary of State of the State of California on March 14, 1990 (filed as Exhibit 3.2 to the Registration Statement) 3.3 Certificate of Amendment of Articles of Incorporation of the Company filed with the Secretary of State of the State of California on November 17, 1990 (filed as Exhibit 3.3 to the Registration Statement) 3.4 Certificate of Amendment of Articles of Incorporation of the Company filed with the Secretary of State of the State of California on August 26, 1994 (filed as Exhibit 3.4 to the Registration Statement) 3.5 Bylaws of the Company, as amended (filed as Exhibit 3.5 to the Registration Statement) 3.6 Certificate of Amendment of Articles of Incorporation of the Company filed with the Secretary of State of the State of California on December 24, 1996 (filed as Exhibit 3.6 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 3.7 Form of Amendment to Bylaws dated as of November 7, 1996 (filed as Exhibit 3.7 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 3.8 Amended and Restated Bylaws of the Company 4.1 Specimen common stock certificate of the Company (filed as Exhibit 4.1 to Amendment No. 2 to the Registration Statement ("Amendment No. 2) filed with the Commission on November 29, 1994) 4.2 Specimen Series A Preferred Stock certificate of the Company (filed as Exhibit 4.2 to Amendment No. 2) 4.3 Form of Certificate of Determination of the Series A Preferred Stock of the Company (filed as Exhibit 4.3 to the Registration Statement) 4.4 Form of Underwriter's Warrant Agreement (filed as Exhibit 4.4 to the Registration Statement) 4.5 Form of Warrant Agreement (filed as Exhibit 4.5 to the Registration Statement) 4.6 Form of Subscription Agreement (filed as Exhibit 4.6 to Amendment No. 1 to the Registration Statement ("Amendment No. 1 ") filed with the Commission on November 2, 1994) 4.7 Placement Agency Agreement dated August 1, 1994 between the Company and Joseph Stevens & Company, LP (filed as Exhibit 4.7 to Amendment No. 1 ) 4.8 Placement Agent Warrant Agreement dated December 24, 1995 between Whale Securities Co., LP and Dove Audio (filed as the same numbered Exhibit to the Annual Report on Form 10-KSB for the fiscal year ended 1995)
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EXHIBIT NO. DESCRIPTION ----------- -------------------------------------------------------------- 4.9 Placement Agent Warrant (filed as the same numbered Exhibit to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.10 Form of Registration Rights Agreement (filed as the same numbered Exhibit to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.11 Form of Common Stock Purchase Warrant (filed as the same numbered Exhibit to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.12 Form of Warrant Agreement dated as of October 1, 1996 (filed as Exhibit 4.12 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.13 Certificate of Determination of the Series B Preferred Stock of the Company (filed as Exhibit 4.13 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.14 Warrant Agreement dated as of March 27, 1997 between the Company and Media Equities Intentional, LLC (filed as Exhibit 4.14 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.15 Certificate of Determination of the Series C Preferred Stock of the Company (filed as Exhibit 4.15 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.16 Warrant Agreement dated as of March 27, 1997 between the Company, Michael Viner and Deborah Raffin Viner (filed as Exhibit 4.16 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.17 Certificate of Determination of the Series D Preferred Stock of the Company (filed as Exhibit 4.17 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.18 Form of Warrant Agreement dated as of April 1, 1997 (filed as Exhibit 4.18 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.19 Certificate of Determination of the Series E Preferred Stock of the Company (filed as Exhibit 4.19 to the Company's Current Report on Form 8-K dated June 10, 1997) 4.20 Specimen Series E Preferred Stock Certificate of the Company (filed as Exhibit 4.20 to the Company's Current Report on Form 8-K dated June 10, 1997) 4.21 Registration Rights Agreement, dated June 10, 1997, by and among the Company, Michael Viner and Deborah Raffin Viner (filed as Exhibit 4.21 to the Company's Current Report on Form 8-K dated June 10, 1997) 10.3 Office Building Lease for Suite 203, 301 N. Canon Drive, Beverly Hills, California 90210 (the "Office Lease") between Village on Canon and Dove, Inc. dated July 3, 1990 and Amendment appended thereto dated 1992 (filed as Exhibit 10.10 to the Registration Statement) 10.4 Second Amendment to the Office Lease between Village on Canon and Dove, Inc. dated March 12, 1990 (filed as Exhibit 10.11 to the Registration Statement)
27 28
EXHIBIT NO. DESCRIPTION ----------- -------------------------------------------------------------- 10.5 Third Amendment to the Office Lease between Pinkwood Properties Corp. and Dove, Inc. dated December 1, 1992 (filed as Exhibit 10.12 to the Registration Statement) 10.13 Agreement to Assume and Amend Lease of Dove, Inc. dated February, 1994 among Pinkwood Properties Corp., Michael Viner and the Company (filed as Exhibit 10.13 to the Registration Statement) 10.14 Letter Agreement between Pinkwood Properties Corp. and the Company dated February 3, 1994 amending the OfficeLease (filed as Exhibit 10.14 to the Registration Statement) 10.15 Letter Agreement dated July 1, 1994 between Penguin Books USA, Inc. and the Company (filed as Exhibit 10.15 to the Registration Statement) 10.16 Form of Publishing Agreement (filed as Exhibit 10.16 to Amendment No. 1) 10.17 Form of Artist Agreement (filed as Exhibit 10.17 to Amendment No. 1) 10.18 Form of Company's 1994 Stock Incentive Plan (filed as Exhibit 10.18 to the Registration Statement) 10.19 Settlement Agreement dated as of July 13, 1994 among the Company, SBT-Batif, S.A. and Ethos Capital Management, Inc. (filed as Exhibit 10.19 to Amendment No. 1) 10.20 Form of Option and Stock Purchase Agreement among Michael Viner, Deborah Raffin Viner, Dove, Inc., Dove II, Inc., Dove Communications, Inc. and the Company (filed as Exhibit 10.20 to Amendment No. 2) 10.21 Agreement between the Company and Reader's Digest Association, Inc. dated as of March 15, 1995 (filed as the same numbered Exhibit to the Annual Report on Form 10-KSB for the fiscal year ended 1994) 10.27 Term Loan Agreement, dated August 16, 1996, by and between Sanwa Bank California and the Company (filed as Exhibit 10.1 to the Quarterly Report on Form 10-QSB filed with the Commission on November 14, 1996) 10.28 Continuing Guaranty, dated as of August 16, 1996, of Michael Viner (filed as Exhibit 10.2 to the Quarterly Report on Form 10-QSB filed with the Commission on November 14, 1996) 10.29 Continuing Guaranty, dated as of August 16, 1996, of Deborah Raffin (filed as Exhibit 10.3 to the Quarterly Report on Form 10-QSB filed with the Commission on November 14, 1996) 10.30 Security Agreement, dated August 16, 1996, by and between Sanwa Bank California, Four Point and the Company (filed as Exhibit 10.4 to the Quarterly Report on Form 10-QSB filed with the Commission on November 14, 1996) 10.31 Letter Agreement, dated September 12, 1996, by and between Dove International, Inc., Guinness, Mahon & Co. Limited, Samuelson Entertainment Limited and Michael Viner (filed as Exhibit 10.5 to the Quarterly Report on Form 10-QSB filed with the Commission on November 14, 1996)
28 29
EXHIBIT NO. DESCRIPTION ----------- -------------------------------------------------------------- 10.33 Separation Agreement dated as of May 31, 1996 by and between the Company and Dimitri T. Skouras (filed as Exhibit 10.33 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.35 Letter Agreement dated September 12, 1996 between the Company, Michael Viner and Deborah Raffin (filed as Exhibit 10.35 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.36 Financial Advisor Agreement dated as of September 30, 1996 between the Company and Morgan Fuller Capital Group, LLC (filed as Exhibit 10.36 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.39 Form of First Amendment to the Company's 1994 Stock Incentive Plan dated November 7, 1996 (filed as Exhibit 10.39 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.40 Stock Purchase Agreement dated as of March 27, 1997 among the Company, Media Equities International, LLC, Michael Viner and Deborah Raffin Viner (filed as Exhibit 10.40 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.41 Shareholders Voting Agreement dated as of March 27, 1997 by and between Media Equities International, LLC, Michael Viner and Deborah Raffin Viner (filed as Exhibit 10.41 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.42 Pledge Agreement dated as of March 27, 1997 among Media Equities International, LLC, Michael Viner and Deborah Raffin Viner (filed as Exhibit 10.42 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.45 Employment Termination Agreement, dated June 10, 1997, by and among the Company, Michael Viner and Deborah Raffin (filed as Exhibit 10.45 to the Company's Current Report on Form 8-K dated June 10, 1997) 10.46 Securities Purchase Agreement, dated June 10, 1997, by and among Media Equities International, LLC, Michael Viner and Deborah Raffin Viner (filed as Exhibit 10.46 to the Company's Current Report on Form 8-K dated June 10, 1997) 10.47 Loan Agreement, dated as of September 26, 1997, between the Company and Dove Four Point, Inc. and Media Equities International, Inc. 10.48 Debt Subordination and Intercreditor Agreement, dated September 26, 1997, among the Company, Dove Four Point, Inc., Media Equities International, Inc. and Sanwa Bank California 10.49 Security Agreement, dated as of September 26, 1997, between the Company, Dove Four Point, Inc. and Media Equities International, Inc. 10.50 Copyright Security Agreement, dated as of September 26, 1997, by Dove Four Point, Inc. in favor of Media Equities International, Inc. 10.51 Copyright Security Agreement, dated as of September 26, 1997 by the Company in favor of Media Equities International, Inc.
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EXHIBIT NO. DESCRIPTION ----------- -------------------------------------------------------------- 10.52 Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, among the Company, Dove Four Point, Inc., Dove International, Inc. and The Chase Manhattan Bank, as Lender (the "Credit Agreement") 10.53 Copyright Security Agreement dated as of November 4, 1997 by the Company, Dove Four Point, Inc. and Dove International, Inc. in favor of The Chase Manhattan Bank (the "Copyright Security Agreement") 10.54 Security Agreement, dated as of November 4, 1997 between the Company and Media Equities International 10.55 Subordination Agreement, dated as of November 4,1997, among the Company, Dove International, Inc. and Dove Four Point, Inc., Terrence A. Elkes, Kenneth F. Gorman, Ronald Lightstone, John T. Healy, and Bruce Maggin, Media Equities International, LLC and The Chase Manhattan Bank. 10.56 Contribution Agreement, dated as of November 4, 1997, among, the Company Dove Four Point, Inc. and Dove International, Inc. 10.57 Fee Agreement, made as of November 4, 1997 between the Company and Media Equities International, LLC. 10.58 Employment Agreement, dated as of February 4, 1998 between the Company and Ronald Lightstone 10.59 Supplement No. 1 to the Copyright Security Agreement dated as of February 20, 1998 by Dove Four Point, Inc. in favor of The Chase Manhattan Bank 10.60 Amendment No. 1 to the Credit Agreement, dated as of February 27, 1998, between the Company, Dove International, Inc., Dove Four Point, Inc. and The Chase Manhattan Bank 10.61 Amendment No. 2 to the Credit Agreement, dated as of April 1, 1998, between the Company, Dove International, Inc., Dove Four Point, Inc. 10.62 Form of Publishing Agreement (1997) 10.63 Form of Artist Agreement (1997) 10.64 Form of Executive Publication Agreement 21 Subsidiaries of Dove (filed as Exhibit 21 to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 23 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. None. 30 31 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of Dove Entertainment, Inc. We have audited the accompanying consolidated balance sheet of Dove Entertainment, Inc. and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended December 31, 1997 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dove Entertainment, Inc. and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the years ended December 31, 1997 and 1996 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Los Angeles, California April 3, 1998 F-1 32 DOVE ENTERTAINMENT, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997
ASSETS CURRENT ASSETS Cash and cash equivalents $ 302,000 Accounts receivable, net of allowances of $1,125,000 2,073,000 Inventory 3,037,000 Film costs - note 6 928,000 Prepaid expenses and other assets 504,000 ------------ Total current assets 6,844,000 NON-CURRENT ASSETS Production masters - note 5 1,527,000 Film costs, net - note 6 716,000 Property and equipment, net - note 4 3,935,000 Goodwill and other assets 6,049,000 ------------ Total non-current assets 12,227,000 ------------ Total assets $ 19,071,000 ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 6,672,000 Notes payable - note 8 47,000 Due to related party - note 9 150,000 Royalties payable 633,000 Advances and deferred income 524,000 Accrued dividends 376,000 ------------ Total current liabilities 8,402,000 NON-CURRENT LIABILITIES Notes payable, less current portion - note 8 7,033,000 Accrued liabilities 824,000 ------------ Total non-current liabilities 7,857,000 ------------ Total liabilities 16,259,000 COMMITMENTS AND CONTINGENCIES - note 10 LIQUIDITY - note 16 SHAREHOLDERS' EQUITY - note 11 Preferred stock $.01 par value; 2,000,000 shares authorized and 220,033 shares issued and outstanding, liquidation preference $7,152,000 2,000 Common stock $.01 par value; 20,000,000 shares authorized and 6,341,544 shares issued and outstanding 63,000 Additional paid-in capital 28,029,000 Accumulated deficit (25,282,000) ------------ Total shareholders' equity 2,812,000 ------------ Total liabilities and shareholders' equity $ 19,071,000 ============
See accompanying notes to consolidated financial statements F-2 33 DOVE ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, --------------------------------- 1997 1996 ------------ ------------ Revenues - Note 12 Publishing, net $ 6,800,000 $ 11,586,000 Film 9,872,000 15,267,000 ------------ ------------ 16,672,000 26,853,000 Less: Cost of sales Publishing 9,164,000 11,353,000 Film 11,979,000 11,855,000 ------------ ------------ 21,143,000 23,208,000 ------------ ------------ (4,471,000) 3,645,000 Less: Selling, general and administrative expenses- Note 9 9,898,000 10,089,000 Employee separation costs 1,614,000 -- ------------ ------------ 11,512,000 10,089,000 ------------ ------------ Loss from operations (15,983,000) (6,444,000) Less: Interest expense, net 358,000 197,000 ------------ ------------ Loss before income taxes (16,341,000) (6,641,000) Less: Income tax expense - Note 7 229,000 32,000 ------------ ------------ Net loss $(16,570,000) $ (6,673,000) ============ ============ Basic and diluted loss attributable to common shareholders $(19,018,000) $ (6,742,000) ============ ============ Basic and diluted loss per common share $ (3.27) $ (1.31) ============ ============ Weighted average number of common and common equivalent shares outstanding 5,819,000 5,138,000 ============ ============
See accompanying notes to consolidated financial statements F-3 34 DOVE ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
Additional Preferred Stock Common Stock Paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total ------------ ------------ ------------ ------------ ------------ ------------ ------------ January 1, 1996 214,113 $ 856,000 4,663,853 $ 47,000 $ 13,265,000 $ (1,665,000) $ 12,503,000 Net loss (6,673,000) (6,673,000) Sale of common stock -- -- 220,313 2,000 1,545,000 -- 1,547,000 Acquisition of Four Point Entertainment -- -- 387,274 4,000 4,789,000 -- 4,793,000 Exercise of warrants -- -- 1,800 -- -- -- -- Accrued preferred stock dividend -- -- -- -- -- (69,000) (69,000) ------------ ------------ ------------ ------------ ------------ ------------ ------------ December 31, 1996 214,113 856,000 5,273,240 53,000 19,599,000 (8,407,000) 12,101,000 Net loss -- -- -- -- -- (16,570,000) (16,570,000) Terms of preferred stock revised -- (854,000) -- -- 854,000 -- Issuance of common stock in payment of debt, vendors, legal settlements and publishing rights -- -- 778,304 7,000 1,727,000 1,734,000 Issuance of preferred stock 5,920 -- -- -- 5,789,000 5,789,000 Escrow common stock released as part of litigation settlement -- -- 40,000 -- 60,000 60,000 Exercise of options -- -- 250,000 3,000 -- 3,000 Accrued preferred stock dividend -- -- -- -- -- (305,000) (305,000) ------------ ------------ ------------ ------------ ------------ ------------ ------------ December 31, 1997 220,033 $ 2,000 6,341,544 $ 63,000 $ 28,029,000 $(25,282,000) $ 2,812,000 ============ ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements F-4 35 DOVE ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, --------------------------------- 1997 1996 ------------ ------------ OPERATING ACTIVITIES Net loss $(16,570,000) $ (6,673,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 513,000 321,000 Amortization of goodwill 253,000 164,000 Amortization of production masters 4,338,000 4,196,000 Amortization of film costs 10,235,000 11,855,000 Changes in operating assets and liabilities Accounts receivable 201,000 (309,000) Inventory 1,000,000 (332,000) Prepaid expenses (159,000) 173,000 Expenditures for production masters (2,462,000) (4,366,000) Film costs (8,184,000) (10,393,000) Accounts payable and accrued expenses 1,582,000 3,126,000 Royalties payable 99,000 193,000 Income taxes 727,000 (81,000) Advances and deferred revenue (637,000) (2,069,000) Other 373,000 (13,000) ------------ ------------ Net cash used in operating activities (8,691,000) (4,208,000) ------------ ------------ INVESTING ACTIVITIES Acquisition of Four Point Entertainment -- (2,500,000) Purchase of marketable securities -- (214,000) Sale of marketable securities -- 359,000 Purchases of property and equipment (166,000) (303,000) Proceeds from the sale of equipment 26,000 -- ------------ ------------ Net cash used in investing activities (140,000) (2,658,000) ------------ ------------ FINANCING ACTIVITIES Proceeds from sale of common stock -- 1,547,000 Proceeds from sale of preferred stock 5,113,000 -- Proceeds of bank borrowings 5,800,000 1,020,000 Repayments of bank borrowings and notes payable (2,173,000) (257,000) Proceeds from exercise of common stock options 3,000 -- ------------ ------------ Net cash provided by financing activities 8,743,000 2,310,000 ------------ ------------ Net decrease in cash and cash equivalents (88,000) (4,556,000) Cash and cash equivalents at beginning of year 390,000 4,946,000 ------------ ------------ Cash and cash equivalents at end of year $ 302,000 $ 390,000 ============ ============
See accompanying notes to consolidated financial statements F-5 36 DOVE ENTERTAINMENT, INC CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
For the Years Ended December 31, --------------------------------- 1997 1996 ------------ ------------ SUPPLEMENTAL CASH FLOW INFORMATION NON-CASH TRANSACTIONS: Acquisition of Four Point Entertainment, Inc.: Assets acquired $ -- $ 10,229,000 Liabilities assumed -- (2,936,000) Issuance of Common Stock -- (4,793,000) ------------ ------------ Net cash paid $ -- $ 2,500,000 ============ ============ Cash paid for interest $ 319,000 $ 278,000 Refunds received for income taxes $ 555,000 $ -- Film cost acquired in exchange for payable related party $ -- $ 500,000 Common stock issued as payment for debt vendor, $ -- $ -- legal settlements and publishing rights $ 1,727,000 $ -- Preferred stock issued as payment for expenses, loans and commissions payable to former officers of the Company $ 676,000 $ -- Preferred stock dividends accrued $ 305,000 $ 69,000 ============ ============
See accompanying notes to consolidated financial statements F-6 37 DOVE ENTERTAINMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND BUSINESS Dove Entertainment, Inc. is a diversified entertainment company primarily engaged in publication of audio and printed books, the production of television programming through its wholly-owned subsidiary Dove Four Point, Inc. ("Dove Television"), and the distribution of feature films and television product, both domestically and internationally. The Company acquires audio publishing rights for specific titles or groups of titles for audio production and distribution, primarily in the United States of America. Dove Television is an independent production company which develops and produces television productions for which rights are controlled by Dove Television. In addition, Dove Television is often engaged as a producer-for-hire in connection with a creative concept and literary property owned by another party to produce all forms of television productions, including pilots, series, telefilms, miniseries, talk shows and game shows for network, cable and syndicated production. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RECOGNITION OF PUBLISHING REVENUE Revenues from publishing, including the sale of audio books (net of provisions for estimated returns and allowances), and related royalties payable are recognized upon shipment of the product. The Company records an allowance for future returns based on anticipated return rates. The activity relating to the allowance for returns during the years ended December 31, 1997 and 1996 was as follows:
Years Ended December 31, --------------------------------- 1997 1996 ----------- ----------- Balance at beginning of year $ 1,825,000 $ 2,132,000 Provision for returns 6,025,000 9,119,000 Actual returns (6,815,000) (9,426,000) ----------- ----------- Balance at end of year $ 1,035,000 $ 1,825,000 =========== ===========
The activity relating to the allowance for doubtful accounts during the years ended December 31, 1997 and December 31, 1996 was as follows:
Years Ended December 31, ------------------------------ 1997 1996 --------- --------- Balance at beginning of year $ 170,000 $ -- Provision for doubtful debts 90,000 552,000 Write-offs (170,000) (382,000) --------- --------- Balance at end of year $ 90,000 $ 170,000 ========= =========
F-7 38 CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities to the Company of three months or less to be cash equivalents. INVENTORY Inventory, consisting primarily of recorded audio cassettes and printed books, is valued at the lower of cost or market, determined using the first-in, first-out method. Periodically, management reviews inventory on a title-by-title basis. The Company expenses through cost of sales, inventory that management believes will not be sold. 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 commencing from the time a title is initially released, consistent with the estimated timing of revenue for a title. Prior to January 1, 1997, for printed book titles, this had 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 following release. Beginning January 1, 1997, the Company accelerated the amortization of costs on printed book titles so that 80% of a title's production master costs were amortized in the initial quarter of release with the remaining 20% amortized over the following three quarters. This charge has no significant financial impact. Audio book titles are amortized on a quarter-by-quarter basis over a two-year period resulting in approximately 80% of such audio title's production master cost being amortized in the first twelve months of release. 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 such loss becomes evident. TELEVISION AND FILM REVENUES AND COSTS Television programming and film costs, which include development, production and acquisition costs, are capitalized and amortized, and participations and royalties are accrued, in accordance with the individual-film-forecast method in the proportion that current year's revenue bears to the estimated total revenues from all sources. These costs are stated at the lower of unamortized costs or estimated realizable value on an individual program or film basis. Revenue forecasts for television programs and films are periodically reviewed by management and revised if warranted by changing conditions. If estimates of total revenue indicate that a television program or film will result in an ultimate loss, the loss is recognized currently. Revenues from the distribution of television programming and theatrical films are recognized upon availability of the completed film to the broadcaster or the Company's distributors. The Company licenses distribution rights to distributors and has not recognized any revenue from the direct distribution of theatrical films. Deferred revenues arise when distributors or broadcasters make advances to the Company prior to the date of revenue recognition. Revenues from producer-for-hire contracts are recognized on a percentage-of-completion method, measured by the percentage of costs completed to date to estimated total cost for each contract. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. INCOME TAXES The Company provides for income taxes under Statement of Financial Accounting Standards ("SFAS") No. 109 . In accordance with SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial and tax reporting basis of the Company's assets and liabilities. F-8 39 GOODWILL Goodwill, representing the excess of the purchase price of Dove Television over its net assets, is included in other assets and is being amortized over a twenty-five year period. Goodwill amounted to $5,960,000 net of accumulated amortization of $914,000 at December 31, 1997. Management continuously monitors and evaluates the realizability of recorded intangibles to determine whether their carrying values have been impaired. In evaluating the value and future benefits of intangible assets, their carrying value is compared to management's best estimates of undiscounted future cash flows over the remaining amortization period. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets. The Company believes that the carrying value of the recorded intangibles is not impaired. PROPERTY AND EQUIPMENT Property and Equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of assets as follows: Building 39 years Furniture, fixtures and equipment 5 - 7 years
Leasehold improvements are amortized over the estimated useful life or the remaining lease term, whichever is less. NET LOSS PER COMMON SHARE SFAS No. 128, "Earnings per Share", is effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 replaces Accounting Principles Board Opinion ("APB") No. 15 and simplifies the computation of earnings per share ("EPS") by replacing the presentation of primary EPS with a presentation of basic EPS. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company, similar to fully diluted EPS under APB No. 15. The statement requires dual presentation of basic and diluted EPS by entities with complex capital structures. The Company adopted SFAS No. 128 for the financial statements ended December 31, 1997. SFAS No. 128 had no impact on the previously reported loss per share. Dilutive securities (described in note 11) have been omitted from the diluted calculation since they are antidilutive. The net loss utilized in the calculation of net loss per common share is increased by accrued dividends on Preferred Stock of $305,000 and imputed dividends of $2,143,000 on Preferred Stock issued during 1997. Such imputed dividend has been treated as an increase and decrease to Additional Paid-in Capital. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Significant estimates include those related to ultimate revenues and expenses related to film and television productions, the net realizability of inventory and production masters and the allowance for returns on publishing sales. STOCK OPTION PLAN Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of the grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income and pro forma earnings per share F-9 40 disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. RECLASSIFICATION Certain prior year accounts have been reclassified to conform to the current year's presentation. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. This statement is effective for fiscal years beginning after December 15, 1997. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. SFAS No. 131 is effective for financial statements for periods beginning after December 31, 1997. The Company has not yet determined whether it has any separately reportable business segments. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits. This Statement is effective for fiscal years beginning after December 15, 1997. Management does not believe that the impact of this statement will be material to the Company's financial statements. NOTE 3 - CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's cash deposits periodically exceed federally insured limits. Based on the quality of the depository institutions at which the Company's cash deposits are maintained from time to time, management does not believe the Company faces an unacceptable credit risk. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, other notes payable and advances and deferred income approximate fair value because of the short maturity of those instruments. The carrying amount of the mortgage note payable approximates fair value. The fair value of long term debt approximates its carrying value due to its variable interest rate. NOTE 4 - PROPERTY AND EQUIPMENT A summary of property and equipment at December 31, 1997 is as follows: Land $ 502,000 Building 2,147,000 Furniture, fixtures and equipment 2,428,000 Leasehold improvements 6,000 ---------- Total 5,083,000 Less: Accumulated depreciation and amortization 1,148,000 ---------- $3,935,000 ==========
F-10 41 NOTE 5 - PRODUCTION MASTERS Production masters, net of accumulated amortization of $4,226,000 at December 31, 1997 consist of the following: Released titles $1,168,000 Unreleased titles 359,000 ---------- Total $1,527,000 ==========
NOTE 6 - FILM COSTS Film costs, net of accumulated amortization of $4,707,000 at December 31, 1997 consist of the following: Current: Television and theatrical projects in production $ 928,000 Non-current: Television and theatrical projects released less accumulated amortization 716,000 ---------- Total $1,644,000 ==========
As of December 31, 1997 approximately 90% of the unamortized balance of film costs will be amortized within the next three-year period based upon the Company's revenue estimates at that date. NOTE 7 - INCOME TAXES The provision for income taxes is as follows:
Years Ended December 31, ------------------------------ 1997 1996 -------- -------- Current tax expense Federal $ -- $ -- State -- -- -------- -------- Total current -- $ -- Deferred tax expense Federal 229,000 24,000 State -- 8,000 -------- -------- Total deferred 229,000 32,000 -------- -------- $229,000 $ 32,000 ======== ========
Net deferred tax assets at December 31, 1997 is comprised of the following: Deferred tax assets: Net operating loss carryforward $ 6,539,000 Sales returns reserve 249,000 Inventory reserve 270,000 Film amortization reserve 561,000 Accrued expenses 690,000 Royalty payable 271,000 Deferred income 224,000 State taxes 468,000 Other 137,000 ----------- Total 9,409,000 Valuation allowance (9,409,000) ----------- Net deferred taxes $ 0 ===========
F-11 42 SFAS No. 109 requires that a valuation allowance be recorded against tax assets which are not likely to be realized. Due to the uncertainty of their ultimate realization based upon past earnings performance and the expiration dates of carryforwards, the Company has established a valuation allowance against these tax assets except to the extent that they are realizable through carrybacks. Realization of additional amounts is entirely dependent upon future earnings in specific tax jurisdictions. While the need for this valuation allowance is subject to periodic review, if the allowance is reduced, the tax benefits of the carryforwards will be recorded in future operations as a reduction of the Company's income tax expense. Net operating loss carryforwards expire as follows:
Year ending December 31, 2011 $ 1,989,000 2012 4,550,000 ----------- Total $ 6,539,000 ===========
The provision for income taxes differs from amounts computed by applying the statutory federal income tax rate to income before income taxes for the years ended December 31, 1997 and 1996, respectively, as a result of the following differences:
Years Ended December 31, -------------------------------- 1997 1996 Federal income tax expense (benefit) based on federal statutory rates $(5,556,000) $(2,336,000) Increase (reduction) in taxes resulting from: State income taxes (786,000) (230,000) Non-deductible expenses 72,000 112,000 Increase in valuation allowance 6,499,000 2,486,000 ----------- ----------- $ 229,000 $ 32,000 =========== ===========
NOTE 8 - NOTES PAYABLE Notes payable at December 31, 1997 consist of the following: Current portion of long term mortgage note payable $ 47,000 Non-current notes payable: Chase Manhattan Bank revolving credit loan 5,250,000 Long-term mortgage note payable, less current portion 1,783,000 ---------- Total non-current notes payable 7,033,000 ---------- Total notes payable $7,080,000 ==========
Maturity of notes payable: Year Ending December 31, 1998 47,000 1999 49,000 2000 5,303,000 2001 1,681,000 ---------- $7,080,000
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 loan from Asahi Bank of California is secured by a deed of trust on such building and bears interest at a fixed rate of 8% per annum. The loan matures in April F-12 43 2001 and provides for a 20 year maturity amortization payment rate through April 2001 with a repayment of the remaining outstanding principal amount at that time. In August 1996, the Company refinanced the Company's existing revolving line of credit and term loan with Sanwa Bank California ("Sanwa Bank") with a $1,365,000 term loan from Sanwa Bank. On September 1, 1996, the Company began making principal and interest payments based on a five year amortization schedule with a repayment of the remaining outstanding principal on August 1, 1997. In addition, the Company borrowed a further $220,000 with a short-term bridge loan which was repaid on October 7, 1996. Both loans were secured by the Company's assets, other than the Company's building, and were guaranteed by two former principal shareholders/officers of the Company ("Former Principals"). The Sanwa Bank loan had various covenants with which the Company was required to adhere, including restrictions on payment of dividends, additional indebtedness, change in the nature of business, financial covenants including minimum tangible net worth, current ratio, debt service coverage ratio and debt to net worth ratio and restrictions on mergers or acquisitions. The Company was not in compliance with certain of such financial covenants as of December 31, 1996 and at certain times during the year ended December 31, 1997, but received waivers from compliance from Sanwa Bank on each occasion. The balance of the Sanwa Bank loan was repaid on November 12, 1997 with proceeds from a loan facility provided by The Chase Manhattan Bank ("Chase Bank"), and the Sanwa Bank facility was terminated. In September 1997, the Company entered into an agreement with Media Equities International, L.L.C. ("MEI") providing the Company with a $450,000 loan facility for working capital purposes ("MEI Loan"). The MEI Loan was subsequently increased to $550,000. MEI is a substantial shareholder of the Company, see Note 9 - Related Party Transactions and Note 11 - Capital Activities. The MEI Loan was secured by substantially all of the Company's assets, other than the Company's building, which security interest was junior to the security interest of Sanwa Bank. The MEI Loan provided for interest at 10% per annum, payable monthly and to be repaid in full in the event that the Company refinanced the term loan with Sanwa Bank. On November 12, 1997, the MEI Loan was repaid in full with the proceeds from a loan facility provided by Chase Bank, and the MEI Loan was terminated. On November 12, 1997, the Company entered into an agreement with Chase Bank providing the Company with an $8,000,000 loan facility for working capital purposes ("Chase Loan"). The Chase Loan is secured by substantially all of the Company's assets, other than the Company's building. The Chase Loan runs for three years until November 4, 2000. The Chase Loan establishes a "Borrowing Base" comprised of: (1) 35% of an independent valuation of the Company's audio library, (2) 85% of the Company's eligible receivables and (3) 30% of the Company's finished goods audio and book inventory. At any time, the Company may borrow up to the Borrowing Base. In addition, the Company may borrow an additional $2,000,000 (provided the aggregate amount borrowed does not exceed $8,000,000) with the consent and guarantee of MEI. The Chase Loan provides for interest at the bank prime rate (8-1/2% at December 31, 1997) plus 2% per annum or the bank's LIBOR rate (5.69% six month rate at December 31, 1997) plus 3% per annum, at the option of the Company. Both rates are applicable to Company draw-downs on the Chase Loan at December 31, 1997. In addition, unused commitment fees are payable at -1/2% per annum. The Chase Loan contains various covenants to which the Company must adhere including limitations on additional indebtedness, investments, acquisitions, capital expenditures and sale of assets, restrictions on the payment of dividends and distributions to shareholders, and various financial compliance tests. At December 31, 1997, the Company was not in compliance with certain of the financial compliance tests but received a waiver and amendment from Chase Bank. At December 31, 1997, the Company had borrowed $5,250,000 against the facility. In addition, Chase Bank had provided a letter of credit for $350,000. NOTE 9 - RELATED PARTY TRANSACTIONS As of January 1, 1995, the Company entered into employment agreements with the Former Principals which were to expire in December 1999. The agreements originally provided for aggregate compensation to the Former Principals of no less than a combined total of $345,000 per year, plus benefits such as health insurance and an automobile allowance and a combined non-accountable expenses of $75,000 per year. In addition, the Former Principals were entitled to an annual salary increase and bonus subject to certain limitations agreed upon with the underwriter of the Company's initial public offering at the discretion of the Company's Board. The Board approved an increase in the salary portion of the employment agreements with the Former Principals to a combined total of $562,000 per year for 1996. On June 10, 1997, the Former Principals entered into a Securities Purchase F-13 44 Agreement with MEI whereby they sold all their Preferred Stock and a portion of their common stock to MEI. Concurrently each of the Former Principals resigned as officers and directors of the Company and its subsidiaries pursuant to an employment termination agreement ("Termination Agreement"). Pursuant to the Termination Agreement, and in consideration for the settlement of their respective employment agreements, the Former Principals are entitled to each receive combined monthly payments ("the Payments") of approximately $25,000, and medical insurance for 60 months. In addition, they are entitled to each receive a car allowance for 24 months and reimbursements for certain medical and business expenses. Certain payments under, and other provisions of, the Termination Agreement are subject to arbitration proceedings. See Note 10 - Commitments and Contingencies. To secure the Payments, the Company has issued into escrow 1,500 shares of its Series E Preferred Stock, convertible into shares of Common Stock to the extent set forth in the Certificate of Determination for the Series E Preferred Stock. The Series E Preferred Stock will be held in escrow and will not be released to the Former Principals except in the event of a default in the Payments by the Company. In the event of a default in the Payments by the Company, the Series E Preferred Stock will be released to the Former Principals, as the case may be, in an amount equal to the portion of the Payments unpaid as a result of default divided by the stated value of the Series E Preferred Stock. The Former Principals have registration rights pursuant to a registration rights agreement, dated June 10, 1997, among the Company and the Former Principals with respect to any Series E Preferred Stock received by them. In addition to full-time salary and payments pursuant to the Termination Agreement, the Company made the following payments to the Former Principals:
Years Ended December 31, ------------------------ 1997 1996 ---- ---- Reimbursement of condominium rental $ 2,000 $ 14,000 Accrued non-accountable expenses paid 181,000 -- Automobile lease, insurance and repair payments 15,000 20,000 Medical expense and life insurance reimbursements 1,000 4,000 Executive producer fees and per-diem in respect of television productions 103,000 290,000 Writing services 11,000 -- Interest in respect of partial funding of "Wilde", see below 13,000 -- Commission in respect of "Wilde", see below 75,000 -- -------- -------- $401,000 $328,000 ======== ========
The above amounts were all paid or incurred prior to the date of the Termination Agreement. In September 1996, 50,000 options to purchase Common Stock at an exercise price of $2.74 were issued to each of the Former Principals. These options have since been terminated or expired. In May 1996, the Company's wholly owned subsidiary, Dove International, Inc. ("Dove International") entered into an agreement to acquire United States and English-speaking Canadian distribution rights in the production of the movie "Wilde" (the "Picture"). As part of the financing of the Picture, one of the Former Principals personally guaranteed $1,000,000 of Dove International's payment obligations and personally deposited $500,000 at Guinness Mahon & Co. Ltd. ("Guinness Mahon") (and pledged the deposit plus interest thereon) to secure Dove International's payment obligations in respect of the Picture. In consideration for agreeing to pledge the deposit, the producers of the Picture and Dove International agreed that one of the Former Principals would receive a 5% commission, up to a maximum of $120,000, payable from 5% of 100% of the gross receipts from North American distribution. As partial consideration for the acquisition by the Former Principals of Series C Preferred Stock and warrants to acquire Common Stock of the Company (see Note 11 to the Consolidated Financial Statements), the Company's obligation to repay one of the Former Principals the $500,000 deposit made with Guinness Mahon and to repay one of the Former Principals the 5% commission on proceeds from the Picture were released. F-14 45 In August 1996, the Former Principals personally guaranteed the Company's obligations to Sanwa Bank to a maximum principal amount of $1,600,000 in order to avoid an event of default on such obligations. On November 12, 1997 such obligation to Sanwa Bank was repaid by the Company and the guarantee was canceled. Pursuant to a purported agreement, dated May 16, 1996, Mr. Leider, then a director of the Company, was to provide management consulting services to the Company until the Company and Mr. Leider mutually agreed to terminate such agreement. Such purported agreement provided for an annual compensation of $125,000 payable monthly in arrears. Under the terms of such purported agreement, Mr. Leider was granted options to purchase 50,000 shares of Common Stock with an exercise price of $3.50 per share. These options have since expired. The Company is challenging the validity of such purported agreement. Pursuant to a purported severance agreement, dated September 4, 1996, if Mr. Leider's consultancy pursuant to the above referenced agreement is terminated, the Company may be required to pay all amounts accrued through the date Mr. Leider is terminated and his consulting compensation for a period of time following the date of termination. Further, the purported agreement provides that if Mr. Leider's consultancy is terminated for any reason other than death, disability, retirement or for cause, as defined in the agreement, or Mr. Leider terminates his consultancy within three months of any of the following: (i) assignment of duties materially inconsistent with his status with the Company or a material change in his reporting responsibilities, (ii) material reduction of Mr. Leider's consulting compensation, (iii) subsequent to an Event, failure by the Company to continue any benefit or compensation in which Mr. Leider is participating at the time of the Event or (iv) any purported termination of Mr. Leider's consultancy effected pursuant to a Notice of Termination, as defined in the agreement, and such termination is not valid or effective; then Mr. Leider may be entitled to all amounts accruing to him as of the date of such termination and his consulting compensation for up to six months following the date of termination. These options have since expired. The Company is challenging the validity of such purported agreement. Mr. Leider's consultancy with the Company was terminated on September 12, 1997 and in October 1997 he resigned as a director of the Company. The Company made the following payments to Mr Leider:
Years Ended December 31, ------------------------ 1997 1996 -------- -------- Consulting retainer fees $ 52,000 $ 83,000 Executive producer fees in respect of television productions -- 75,000 -------- -------- $ 52,000 $158,000 ======== ========
Pursuant to a purported employment agreement with Steven Soloway, Mr. Soloway was provided a base salary of $125,000 per year with an annual increase of at least 10% per annum and was granted options to purchase 30,000 shares of Common Stock pursuant to the terms of the Company's 1994 Stock Incentive Plan ("the Plan) with an exercise price of $2.50 per share. Such purported agreement contained various provisions related to early termination and change of ownership of the Company's outstanding shares of Common Stock. In June 1997, Mr. Soloway's employment with the Company ended and on July 30, 1997, Mr. Soloway resigned from the Board. As part of the Stock Purchase Agreement, the Company and MEI agreed to the terms of a three year consulting arrangement with MEI which arrangement commenced on April 1, 1997. MEI has agreed to provide substantial general management consulting advice including but not limited to, financial (including assisting in obtaining bank financing), television and film distribution and business affairs. As compensation for such services and advice, the Company will pay MEI $300,000 per year, of which $200,000 will be payable in cash on a quarterly basis in advance and the remaining $100,000 will be paid in shares of Common Stock valued at the current market value on the date of payment, payable quarterly in arrears. During the year ended December 31, 1997, the Company paid $75,000 and accrued $75,000 for such services. In January, 1998, the Company and MEI agreed that the balance owing in respect of consulting services for the year ended December 31, 1997 would be paid in shares of Common Stock. The Company and MEI further agreed that consulting fees in respect of 1998 would be paid $100,000 in cash and the balance of $200,000 in shares of Common Stock. F-15 46 In September 1997, the Company entered into an agreement with MEI for a $450,000 loan, subsequently extended to $550,000. This loan was repaid in November 1997 - see note 8 Notes Payable. Pursuant to Guaranty Agreements each dated as of November 4, 1997, each of the principals of MEI (i.e. Messrs. Elkes, Gorman, Healy, Maggin and Lightstone) have agreed to guaranty the obligations of the Company under the Chase Loan in an amount not to exceed to lesser of $2,000,000 and the outstanding principal of and any interest on all loans made under the credit facility in excess of the borrowing base. Each MEI principal guarantees an amount not to exceed the product of 110% of such principal's ownership interest in MEI multiplied by the aggregate amount guaranteed. The Company is not permitted to borrow any amounts under the Chase Loan in excess of the borrowing base without the prior written approval of MEI. The Company has agreed to pay MEI a fee of $25,000 for such guaranty by its principals. In order to secure the repayment of any amounts the MEI principals may be required to pay to Chase Bank under the guarantees, MEI has been granted a security interest in substantially all of the assets of the Company, other than the Company's building. Such security interest is junior to the security interest of Chase Bank which secures the Company's obligations under the Chase Loan. The Company acquired audio book rights for fifteen titles which were written by a substantial shareholder. The Company recorded the following net audio sales (net of returns) from these titles:
Years Ended December 31, ------------------------ 1997 1996 --------- --------- $ 610,000 $ (74,000) ========= =========
In 1997, the Company agreed to issue 50,000 shares of Common Stock to the substantial shareholder for certain rights to future titles. In August 1997, the Company issued 200,000 shares of Common Stock to the substantial shareholder for further rights to future titles and certain rights on past titles. During the fiscal years ended December 31, 1996 and December 31, 1997, the Company made the following payments in respect of audio duplication to Tin Man Enterprises which was an affiliate of Mr. A Bussen, a substantial shareholder from June 10, 1997 until August 1997:
Years Ended December 31, -------------------------- 1997 1996 ----------- ----------- $ 1,885,000 $ 1,766,000 =========== ===========
In September 1996, the Company entered into a consulting agreement with a director whereby the director was to provide certain financial consulting and investment banking services to the Company. Such agreement provided for compensation of $3,000 per month, options to purchase 10,000 shares of Common Stock, certain contingent compensation based on financing arranged by such director for the Company and customary expense reimbursement. The agreement was terminable by either party upon 30 days notice. Such agreement was terminated effective February 28, 1997. In January 1998, the Company and Mr. Ronald Ziskin agreed to cancel and option to purchase 300,000 shares of Common Stock at an exercise price of $11.00 and in lieu thereof, the Company will grant Mr. Ziskin the option to purchase 150,000 shares of Common Stock at an exercise price of $1.50 per share. Pursuant to an employment agreement dated as of February 4, 1998, Ronald Lightstone is employed by the Company as its President and Chief Executive Officer. The term of Mr. Lightstone's employment agreement commenced on June 10, 1997 and ends on June 10, 1999. Pursuant to the agreement, Mr. Lightstone is paid a base salary of $200,000 per year. In addition to such base salary, Mr. Lightstone was granted 400,000 shares of Common Stock issued as of January 9, 1998, ownership which shall vest over a three year period (1/36 of such shares vesting each month), commencing July 10, 1997. The employment agreement also provides for (i) three weeks paid vacation, (ii) reimbursement of business related expenses, (iii) a car allowance of $1,000 per month, and (iv) eligibility to participate in all compensation, pension, retirement and welfare and fringe benefit plans, programs and policies of the Company applicable to executives of the Company generally. F-16 47 The Company has agreed to reimburse each Board member's travel expenses. For the fiscal year ended December 31, 1997, pursuant to the Plan, each outside director was granted options to purchase 5,000 shares of Common Stock. The Company granted 10,000 options outside of the Plan to each of the non-employee directors for each members' service during the prior year. For the fiscal year ending December 31, 1998, the Company has agreed to grant to each director options to purchase 10,000 shares of Common Stock, which options will vest 25% at the end of each quarter, and to make a cash payment of $1,000 per quarter to each director not associated with MEI. NOTE 10 - COMMITMENTS AND CONTINGENCIES LITIGATION In August 1993, the trial court confirmed an arbitration award in favor of the Company, Michael Viner and Gerald J. Leider and against Steven Stern and Sharmhill Productions in the approximate amount of $4.5 million (plus interest accruing thereon from September 1992 and attorney's fees) relating to the film "Morning Glory ("Stern Judgment"). In March 1995, defendants appealed the judgment to the California Court of Appeals. In June 1995, the Court of Appeals affirmed the judgment, and that judgment is now final. In a related matter, the Company sought to restore certain fraudulent conveyances that Mr. Stern had made. In August 1995, Mr. Stern filed for bankruptcy protection. The United States Trustee is pursuing the fraudulent conveyance action on behalf of the bankruptcy estate, of which the Company comprises approximately 80%, and the Company, Mr. Viner and Mr. Leider are separately pursuing their own adversary proceeding for conspiracy against Mr. Stern and others in the bankruptcy case. There is no assurance that the Company will ultimately prevail, or as to if, when or in what amount the Company will be able to recover the amount of the original judgment in its favor. In February 1993, Mr. Stern filed a complaint against the Company, Mr. Viner and Mr. Leider entitled Steven A. Stern and Steven A. Stern as assignee of the claims of Sharmhill Productions (B.C.), Inc., a bankrupt company v. Dove Audio, Inc. et al. (British Columbia Supreme Court, Vancouver Registry No. C930935) (the "Canadian Stern Action") claiming that he had been fraudulently induced to enter into the agreement underlying the arbitration award and seeking as damages the amount of the judgment. The Company believes that it has good and meritorious defenses to the Canadian Stern Action. Nevertheless, there is no assurance that the Company will prevail in the Canadian Stern Action. In February 1996, the Company was served with a complaint in an action entitled Robert H. Tourtelot v. Dove Audio, Inc. etc. et al. (Los Angeles Superior Court Case No. SC040739) (the "Tourtelot Action"). Mr. Tourtelot seeks in excess of a million dollars in damages claiming that he had an oral agreement with the Company to write a book that the Company would publish, and that information he provided to the Company was used in another book published by the Company, "Legacy of Deception." Mr. Tourtelot alleged causes of action for breach of oral contract, fraud, suppression of fact, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, infringement of common law copyright, conversion, conspiracy and accounting. The Company successfully removed the action to the United States District Court for the Central District of California, and successfully moved to have the claims for infringement of common law copyright, breach of fiduciary duty, conversion, conspiracy and accounting dismissed. The Tourtelot Action was then remanded to the Los Angeles Superior Court, which permitted Mr. Tourtelot to pursue claims for breach of oral contract, fraud, suppression of fact, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, conversion, conspiracy and quantum meruit. In March 1998, the Company prevailed on summary judgment and obtained a dismissal of the infringement of common law copyright, conversion, conspiracy and breach of duty claims. Such claims were dismissed with prejudice by the trial court. While the Company believes that it has good and meritorious defenses to the Tourtelot Action, there is no assurance that the Company will prevail in the Tourtelot Action. In March 1996, the Company was served with a complaint in an action entitled Alexandra D. Datig v. Dove Audio, et al. (Los Angeles Superior Court Case No. BC145501) (the "Datig Action"). The Datig Action was brought by a contributor to, and relates to, the book "You'll Never Make Love In This Town Again." The Datig complaint sought in excess of a million dollars in monetary damages. In October 1996, the Company obtained a judgment of dismissal of the entire Datig Action, which judgment also awarded the Company its attorney's fees and costs in defending the matter. Ms. Datig has appealed the judgment. While the Company believes that it will prevail on the appeal, there is no assurance that the Company will in fact be successful on appeal. F-17 48 In July 1996, the Company was served with a complaint in an action entitled Terrie Maxine Frankle and Jennie Louise Frankle v. Dove Audio (U.S. District Court, Central District of California Case No. 96-4073 RSWL) (the "Frankle Action"). The Frankles claim to be the authors of "You'll Never Make Love In This Town Again," and have alleged claims for copyright infringement and fraud. The Frankles application for a preliminary injunction was denied because they could not demonstrate a likelihood of success on the merits of their claims. The Company believes that it has good and meritorious defenses and counterclaims against the Frankles. Nevertheless, there is no assurance that the Company will prevail. In May 1997, the Company was served with a complaint in an action entitled Kenneth Raskoff v. Dove (Los Angeles Superior Court Case No. BC171355) (the "Raskoff Action"). Mr. Raskoff is a former employee of Dove Television. The complaint seeks unspecified damages and other relief for breach of Mr. Raskoff's alleged employment contract, breach of the implied covenant of good faith and fair dealing, breach of implied-in-fact contract, promissory estoppel, and fraudulent inducement. The complaint also seeks an injunction requiring that Mr. Raskoff receive producer credit with respect to the television program entitled "Unwed Father" and other unnamed projects. Although the Company believes that it has good and meritorious defenses to the Raskoff Action, there is no assurance that the Company will prevail in the action. In June 1997, the Company was served with a complaint in an action entitled Michael Bass v. Penguin USA Inc., et al. (New York Superior Court Case No. 97-111143) (the "New York Bass Action"). The complaint in the New York Bass Action alleges, among other things, that the contribution of Liza Greer, one of the authors of the book "You'll Never Make Love In This Town Again", defames Mr. Bass and violates his rights of publicity under New York statutes. The complaint seeks damages of $70,000,000 for defamation and $20,000,000 for violation of the New York right of publicity statutes and an injunction taking the book out of circulation and prohibiting the use of Mr. Bass' name. The New York Bass Action has voluntarily been stayed after Mr. Bass filed a similar action in the State of California in an action entitled Michael Bass v. Penguin USA et.al. (California Superior Court Case No. SC049191) seeking essentially the same damages as in the New York Bass Action. The Company believes that it has good and meritorious defenses to the New York Bass Action and the action filed in California. Nevertheless, there is no assurance that the Company will prevail. As a result of the New York Bass Action, the Company has brought a cross-complaint against Ms. Greer. In July 1997, the Former Principals commenced an arbitration against the Company. In their arbitration demand, the Former Principals claim that they are owed in excess of $1 million by the Company relating to the motion picture entitled "Morning Glory". The Former Principals claim that they are also entitled to the repayment of certain deferred amounts for producing and acting services rendered by them in connection with "Morning Glory" and to 50% of the profits. They claim that a former director of the Company, Gerald Leider, is entitled to the other 50% of the profits. The Former Principals have also asserted that from any recovery of the Stern Judgment, they are entitled to receive $1 million, as well as the deferred amounts and 50% of the profits. Present management believes it has good and sufficient defenses to the claims, including, but not limited to the Former Principals' waiver of their claims that any amounts are owed to them as debt, as profit participation or as deferred compensation and that the Company has not yet recouped its investment in the Picture. The Company has also asked the arbitrator to determine that the Former Principals are not entitled to any moneys or rights with respect to "Morning Glory", including from the proceeds of the Stern Judgment. There is no assurance that the Company will prevail on these defenses and claims. In August 1997, the Former Principals commenced an arbitration against the Company seeking specific performance of, and alleging breach of the Termination Agreement. The Former Principals subsequently identified in writing their intention to arbitrate a variety of miscellaneous claims, including the Company's alleged failure to timely pay the full amount of consulting fees under the Termination Agreement, as well as the Producer and Executive Producer fees on "Unwed Father", to reimburse business expenses, payments to one of the Former Principal's masseuse and psychologist, and medical and dental expenses, to return certain personal property, to account for sales with respect to certain titles, and other matters, including claims that the Former Principals did not receive appropriate credit on "Unwed Father" and various audio books. On October 16, 1997, however, the Former Principals filed an action in the Los Angeles Superior Court (Case No. BC179639) for "Breach of Written Contract; Specific Performance; Temporary Restraining Order, Preliminary and Permanent Injunctive Relief" which sought damages for some of the same claims identified as the Former Principals' claims in arbitration. In this action the Former Principals claimed that, in addition to other damages, they were entitled to accelerate all F-18 49 payments to become due under the Termination Agreement, in the aggregate amount of $1,511,824 and to the rights to certain titles. This action appears to have been filed for purposes of obtaining an attachment. After the Company obtained a temporary restraining order in the action staying the arbitration, the Former Principals and Dove II, a company purportedly controlled by the Former Principals, filed another action in the Los Angeles Superior Court (Case No. BC 180301) seeking declaratory relief and an injunction staying other arbitration proceedings between them and the Company. After the Company defeated an application for temporary restraining order in that action, the Former Principals and Dove II filed requests for dismissals of both actions and are proceeding in the arbitrations. In the arbitration, the Company is (i) seeking over $105,000 in compensatory damages from the Former Principals for certain unauthorized Company checks that one of the Former Principals signed to the Former Principals, to the Former Principal's personal attorney, for repairs for one of the Former Principal's car and for payments of the Former Principals' credit card accounts, (ii) seeking punitive damages for one of the Former Principals causing the Company to pay to the Former Principals amounts that had already been credited to them in their purchase of Company stock, (iii) seeking damages of at least $175,000 for breach of the non-interference provision of the Termination Agreement, (iv) seeking reimbursement of approximately $9,600 for unused airline tickets and (v) as a result of their breach of the non-competition provision of the Termination Agreement, requesting that the arbitrator enjoin the Former Principals from competing with the Company in the audio book business through June 9, 2001. The Company believes that, with the exception of certain immaterial amounts which it expects to pay, it has good and meritorious defenses to the claims by the Former Principals and that the Company has meritorious claims against the Former Principals. There is no assurance, however, that the Company will prevail on these issues and claims. The Former Principals also claimed that their agreement not to compete with the Company in the book and audio business is not enforceable. On January 12, 1998, the arbitrator issued his decision in which he held that the Former Principals' contention that the non-compete provision of the Termination Agreement is invalid and unenforceable is without merit and that the provision prohibiting the Former Principals from competing with the Company in the audio book business for a period of four years from June 10, 1997 is valid and enforceable, and the arbitrator enjoined the Former Principals from engaging in the audio book business during such period. In another arbitration proceeding involving the Former Principals and the Company, the Former Principals claimed that the Company breached the Termination Agreement by failing to prepare office space for use by the Former Principals and interfering with their use of the space, failing to repair a toilet and failing to provide for and pay secretaries for the Former Principals, and that a subsequent purported occupancy agreement that allowed the Former Principals to use the Company's offices at 301 N. Canon was enforceable. The Company claimed, among other things, that the Company was entitled to compensatory damages plus costs incurred in restoring the Former Principals' offices to their original condition and the costs of recovering possession and that the occupancy agreement was invalid because it was never disclosed to or approved, authorized or ratified by the Company's shareholders or the Board. The arbitrator rendered a decision on February 13, 1998 (amended and corrected on March 2, 1998), in which he awarded the Company the sum of $14,093 plus costs, finding, among other things, that neither of the Former Principals had the right to occupy the Company's office space after September 1, 1997 and that the occupancy agreement is invalid and unenforceable. In July 1997, the Company was served with a complaint in an action entitled Alan Fields v. Dove Entertainment, Inc., et al. (Los Angeles Superior Court No. BC 174659) (the "Fields Action"). The Fields Action was brought by an alleged purchaser of Common Stock against the Company and the Former Principals as a putative class action on behalf of all persons who acquired Common Stock between July 25, 1995 and August 20, 1996. The complaint alleges a cause of action for violation of Section 25400(d) of the California Corporations Code based on the alleged dissemination of false and misleading statements about, among other things, the success of the Company's printed book operations, financial results, business condition and future prospects. The plaintiff seeks unspecified damages and other relief. In August 1997, an action entitled Global Asset Allocation consultants, L.L.C. v. Dove Entertainment, Inc., et al. (Civil Action No. 97-6253-WDK) (the "Global Asset Action"), was commenced against the Company and the Former Principals in the United States District Court for the Central District of California. The Global Asset Action was brought by an alleged purchaser of Common Stock as a putative class action on behalf of all persons who acquired Common Stock between July 25, 1995 and August 20, 1996. The complaint alleges a cause of action for violation of Section 10(b) of the Securities and Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder based on the conduct at issue in the Fields Action. The plaintiff seeks unspecified damages and other relief. The Company has learned that another putative federal securities class action was filed F-19 50 in the United States District Court for the Central District of California by an alleged purchase of Common Stock represented by the law firm of Berman, DeValerio & Pease LLP (the "Berman Action"; and collectively with the Fields Action and the Global Asset Action, the "Securities Actions"). The complaint is reportedly brought on behalf of all persons who acquired Common Stock between April 15, 1996 and October 10, 1996 and to allege a cause of action against the Company and certain of its former officers for violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder. As of December 31, 1997, the Company has not been served with the complaints in the Global Asset Action or the Berman Action. The Company has not yet filed a response to the complaints in the Securities Actions. While the Company believes it has good and meritorious defenses against the claim, the Company has taken a charge of $150,000 in the quarter ended June 30, 1997 in respect of potential costs associated with the claim. In July 1997, the Company was served with a complaint in an action entitled Steven A. Soloway v. Dove Entertainment, Inc., etc. et al. (Los Angeles Superior Court Case No. BC 175516) (the "Soloway Action"). Mr. Soloway is a former director and employee of the Company and has sought damages of approximately $350,000 for breach of contract. Mr. Soloway claims that as a result of the Securities Purchase Agreement he was entitled to declare his employment agreement terminated without cause and to receive his base salary through September 1999. In September 1997, Mr. Soloway obtained a writ of attachment for $350,000 in respect of his claims, for which the Company has substituted an undertaking for the amount of the attachment. Although the Company believes that it has good and meritorious defenses and setoffs to the Soloway Action, there is no assurance that the Company will prevail in the Soloway Action. The Company has filed a cross-complaint against Mr. Soloway for breach of fiduciary duty and legal malpractice asserting that Mr. Soloway fabricated a version of his employment agreement, submitted the fabricated version for inclusion in the Company's public documents, without authorization or approval drafted and signed on behalf of the Company an occupancy agreement pursuant to which the Former Principals unrightfully occupied the Company's offices, fabricated minutes of the Board and disclosed confidential information that he obtained as an officer. On November 4, 1997, James Belasco, a former director of the Company, filed an action against the Company in Los Angeles County Superior Court entitled James A. Belasco v. Dove Entertainment, Inc. etc. et al. LASC case no. BC 180707. Mr. Belasco seeks to recover over $178,000 that he claims he is owed for royalties from the distribution of the book entitled "Flight of the Buffalo: Soaring to Excellence. Learning to Let Employees Lead." Mr. Belasco also seeks punitive damages. On November 4, 1997, James Belasco filed an action against the Company in Los Angeles County Superior Court entitled James A. Belasco v. Dove Entertainment, Inc. etc. et al. LASC case no. BC 180706. Mr. Belasco alleges that the Company has interfered with the publication of the work entitled "The Phoenix Organization." Mr. Belasco seeks punitive damages and over $200,000 in general damages. Mr. Belasco and the Company have agreed to settle all such claims for payments over time to Mr. Belasco totaling $150,000 and the grant to the Company of audio rights to certain current and future books by Mr. Belasco and payment of certain book commissions by Mr. Belasco to the Company. In December of 1997, the Company was served with a complaint in an action entitled Gerald J. Leider V. Dove Entertainment, Inc. f.k.a. Dove Audio, Inc. (Los Angeles Superior Court Case No. BC 183056). Mr. Leider is a former Chairman of the Board and consultant to the Company and has sought damages of approximately $287,000 for breach of contract and $60,000 for unpaid consulting fees. Mr. Leider also is seeking a declaration that the Company must comply with certain purported stock option agreements and for an order for inspection and copying of certain records of the Company and an award of expenses related thereto. Although the Company believes that it has good and meritorious defenses and setoffs to such action, there is no assurance that the Company will prevail in such action. The Company has filed a separate complaint against Mr. Leider for breach of fiduciary duty, fraud and breach of covenant of good faith and fair dealing asserting that Mr. Leider entered into purported agreements with the Company that were unfair to the Company, were not disclosed to the Board or the Company's shareholders and were never approved by the Board or the Company's shareholders. In addition to the above claims, the Company is a party to various other routine legal proceedings and claims incidental to its business. F-20 51 There can be no assurance that the ultimate outcome of these matters will be resolved in favor of the Company. In addition, even if the ultimate outcome is resolved in favor of the Company, involvement in any litigation or claims could entail considerable cost to the Company and the diversion of the attention of management, either of which could have a material adverse effect on the business of the Company. At December 31, 1997, the Company has reserved $975,000 in respect of such claims served against the Company. LETTERS OF CREDIT Pursuant to a Court Attachment Order in respect of the Soloway Action, Chase Bank has issued a letter of credit on behalf of the Company for $350,000. OFFICE LEASE The Company leases office space under a non-cancelable operating lease expiring Jan. 31, 1999. The Company's lease obligation is secured by a $15,000 irrevocable letter of credit. The lease is subject to annual rent escalations and the pass-through of certain costs of the landlord. Rent expense was $292,000 and $302,000 in 1997 and 1996, respectively. The minimum future non-cancelable lease payments are as follows: 1998 $ 264,000 1999 22,000 ---------- $ 286,000 ==========
In January 1998, the Company sub-leased the above office space for the remainder of the term of the lease at an annual rental of $194,000 per annum. NOTE 11 - CAPITAL ACTIVITIES PREFERRED STOCK The Company has 2,000,000 shares designated as Preferred Stock. At December 31, 1997, 220,033 of such shares have been issued comprising: (1) 4,000 shares of Series B Preferred Stock. The Series B Preferred Stock has a stated value of $1,000.00 per share and a dividend preference at an annual rate per share equal to 6%. Such dividends are cumulative and, to the extent in arrears, bear interest at 6% compounded quarterly. The Series B Preferred Stock bears a liquidation preference in the amount equal to the stated value plus all accumulation of unpaid dividends and interest thereon. Each share of Series B Preferred Stock is convertible at the option of the holder after six months of issuance into 500 shares of common stock, subject to adjustment. Each of the Series B Preferred Stock is redeemable, in whole or in part at the option of the Company, at any time after March 28, 2002 at a redemption price of 110% of the stated value plus all accumulated but unpaid dividends thereon (plus interest on such accumulations). The holders of the outstanding shares of Series B Preferred Stock, voting as a separate class, shall be entitled to elect one-third of the directors of the Company, so long as the initial holders of the Series B Preferred Stock hold not less than 750,000 shares of Common Stock (assuming Series B Preferred Stock is converted into Common Stock). (2) 1,920 shares of Series C Preferred Stock. The Series C Preferred Stock has a stated value of $1,000.00 per share and a dividend preference at an annual rate per share equal to 6%. Such dividends are cumulative and, to the extent in arrears, bear interest at 6% compounded quarterly. The Series C Preferred Stock bears a liquidation preference in the amount equal to the stated value plus all accumulation of unpaid dividends and interest thereon. Each share of Series C Preferred Stock is convertible at the option of the holder after six months of issuance into 500 shares of common stock, subject to adjustment. Each of the Series C Preferred Stock is redeemable, in whole or in part at the option of the Company, at any time after March 28, 2002 at a redemption price of 110% of the stated value plus all accumulated but unpaid dividends thereon (plus interest on such accumulations). F-21 52 (3) 214,113 shares of Series D Preferred Stock, formerly designated as Series A Preferred Stock. The Series D Preferred Stock has a stated value of $4.00 per share and a dividend preference at an annual rate per share equal to 8%. Such dividends are cumulative and, to the extent in arrears, bear interest at 8%, compounded quarterly. The Series D Preferred Stock bears a liquidation preference in the amount equal to the stated value plus all accumulation of unpaid dividends and interest thereon. Each share of Series D Preferred Stock is convertible at the option of the holder into 1.20497 shares of common stock, subject to adjustment. Series B, Series C and Series D Preferred Stock rank pari passu with respect to liquidation and dividends. On March 28, 1997, in the first of two closings under a private placement of preferred stock and warrants to purchase Common Stock (i) MEI purchased 3,000 shares of the Company's Series B Preferred Stock and warrants to purchase 500,000 shares of Common Stock at $2.00 per share, warrants to purchase 500,000 shares of Common Stock at $2.50 per share and warrants to purchase 500,000 shares of Common Stock at $3.00 per share for an aggregate of $3,000,000 and, (ii) the Former Principals purchased 920 shares of the Company's Series C Preferred Stock and warrants to purchase 166,666 shares of Common Stock at $2.00 per share, warrants to purchase 166,667 shares of Common Stock at $2.50 per share and warrants to purchase 166,667 shares of Common Stock at $3.00 per share for an aggregate of $920,000 (including the contribution of $676,000 payable by the Company to the Former Principals). On June 3, 1997, the second closing (the "Second Closing") was completed whereby (i) MEI purchased 1,000 shares of Series B Preferred Stock and warrants to purchase 166,666 shares of Common Stock at $2.00 per share, warrants to purchase 166,667 shares of Common Stock at $2.50 per share and warrants to purchase 166,667 shares of Common Stock at $3.00 per share for $1,000,000 in cash and (ii) the Former Principals and their assigns purchased 1,000 shares of Series C Preferred Stock and warrants to purchase 166,666 shares of Common Stock at $2.00 per share, warrants to purchase 166,667 shares of Common Stock at $2.50 per share and warrants to purchase 166,667 shares of Common Stock at $3.00 per share for an aggregate of $1,000,000 (including the contribution of $175,000 payable by the Company to the Former Principals). In connection with this transaction, the Company has allocated the amounts invested between the Preferred Stock and the warrants and has recorded a dividend (which was a reallocation of Additional Paid-in Capital between Common Stock and Preferred Stock) amounting to $2,143,000 for the difference between the amount allocated to Preferred Stock and the value, as of the issuance date, of the Common Stock issuable upon conversion of such Preferred Stock. On June 10, 1997, MEI purchased all of the Preferred Stock and warrants held by the Former Principals along with 500,000 shares of Common Stock (see Related Party Transactions). In August, 1997, MEI purchased 350 shares of the Company's Series C Preferred Stock with warrants to purchase 175,000 shares of Common Stock from the assigns of the Former Principals under the same terms as described above applying to the Company's Series C Preferred Stock. COMMON STOCK In January 1996 the Company received additional net proceeds of approximately $1,547,000 from a private placement of the Company's equity securities initiated in December 1995 (the "Placement"). Pursuant to the January 1996 closing 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 (December 1995). In conjunction with the Placement, the broker received a warrant to acquire 7.6 units for $100,000 per Unit. Each unit consists of 12,500 shares of Common Stock and 12,500 warrants to acquire 12,500 shares of Common Stock at $12.00 per share. The shares issued in the acquisition of Four Point Entertainment, Inc. ("Four Point") and shares of Common Stock outstanding at December 31, 1996 exclude 40,000 shares issued in the acquisition which were placed in escrow pending the receipt of certain outstanding receivables. In October 1997, the Company agreed to the release of these shares from escrow. F-22 53 In October 1996 Morgan Fuller Capital Group, L.L.C. ("Morgan Fuller") completed a loan to the Company in the aggregate amount of $800,000. Such loan bore interest at the rate of 10% per annum. In March 1997, the Company retired $500,000 of such loan in exchange for 210,526 shares of Common Stock along with warrants to purchase 35,088 shares of Common Stock at $2.50 per share, warrants to purchase 35,088 shares of Common Stock at $3.50 per share and warrants to purchase 35,087 shares of the Common Stock at $4.50 per share. The balance of the loan plus accrued interest was repaid in cash. In April 1997, the Company issued 301,111 shares of Common Stock in satisfaction of vendor payables amounting to $750,000. In August 1997, the Company issued 200,000 shares of Common Stock to a substantial shareholder for the acquisition of further rights to a future title and certain rights on past titles. In October 1997, the Company issued 66,667 shares of Common Stock to Shukri Ghalayini in settlement of all claims by him against the Company. During the year, the Company issued 250,000 shares of Common Stock in exercise of options. STOCK OPTIONS AND WARRANTS The Plan, adopted by the Board, 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). In 1996, the Plan was amended to increase the aggregate number of shares of Common Stock available under the Plan to 750,000. 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 was as follows:
Weighted Average Number of Exercise Exercise Shares Price Price ------ ----- ----- Options outstanding at December 31, 1995 309,999 $6.00 - $9.75 $8.12 Options issued 285,000 $ 3.50 $3.50 Options canceled (215,000) $6.75 - $8.50 $8.48 -------- Options outstanding at December 31, 1996 379,999 $2.50 - $9.75 $4.25 Options issued -- -- Options canceled (290,999) $3.50 - $9.75 $4.42 -------- Options outstanding at December 31, 1997 89,000 $2.50 - $6.00 $3.08 ========
At December 31, 1997 and 1996 respectively, options to acquire 78,998 and 177,199 shares of Common Stock under the Plan were exercisable. F-23 54 In addition to the above options issued under the Plan, at December 31, 1997, the following options to acquire shares of Common Stock were outstanding: (1) 300,000 options at $ 11.00 per share issued in 1996 to one of the principals of Four Point as part of an employment agreement. None of these options were exercisable at December 31, 1997. In January 1998, the Company agreed with the holder of such options to cancel such options and in lieu thereof issue 150,000 options at $1.50 per share under the Plan fully vested. (2) 80,000 options issued in 1996 under the Plan, with an exercise price of $3.50 per share to the Company's public relations firm. The Company has terminated the agreement with the public relations firm. During the year ended December 31, 1997, 250,000 options to acquire shares of Common Stock outside the Plan at an exercise price of $.01 per share were exercised by the Former Principals. At December 31, 1997, the weighted average remaining contractual life of all outstanding options was 8.22 years. Determining compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss attributable to common shareholders would have been increased to the pro forma amounts indicated below:
For the Years Ended December 31, ------------------------------------- 1997 1996 ---- ---- Basic and diluted loss attributable to Common Shareholders As reported $ (19,018,000) $ (6,742,000) Pro forma (19,081,000) (7,212,000) Basic and diluted loss per share As reported (3.27) (1.31) Pro forma (3.28) (1.42)
Pro forma net loss reflects only options granted in the years ended December 31, 1995 through December 31, 1997. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period of five years and compensation cost for options granted prior to January 1, 1995 is not considered. No stock options were granted during the year ended December 31, 1997. The per share weighted-average fair value of stock options granted during the year ended December 31, 1996 was $6.63 on the date of grant using the modified Black-Scholes option-pricing model with the following weighted-average assumptions: Expected dividend yield 0%, risk-free interest rate of 6.5%, expected volatility of 70%, and an expected life of 8 years. Warrant activity was as follows:
Number of Weighted Number of Equivalent Common Average Warrants Shares Exercise Price Exercise Price ---------- ---------- -------------- -------------- Warrants outstanding as of December 31, 1995 1,124,687 974,687 $6.00 - $12.00 $10.92 Warrants issued 495,313 590,313 $2.75 - $12.00 $ 7.89 Warrants exercised (12,500) (6,250) $ 8.20 $ 8.20 ---------- ---------- Warrants outstanding as of December 31, 1996 1,607,500 1,558,750 $2.00 - $12.00 $ 9.78 Warrants issued 3,105,263 3,105,263 $2.00 - $4.50 $ 2.42 Warrants exercised -- -- ---------- ---------- Warrants outstanding as of December 31, 1997 4,712,763 4,664,013 $2.00 - $12.00 $ 5.06 ---------- ----------
F-24 55 At December 31, 1997 warrants to acquire 4,664,013 Shares of common stock were exercisable. During the year ended December 31, 1996, the holder of 12,500 warrants to acquire 6,250 shares of Common Stock exchanged all such warrants for 1,800 shares of Common Stock. During the year ended December 31, 1996, the Company issued 220,313 warrants to acquire 220,313 shares of Common Stock in conjunction with the January 1996 Placement. The broker for the Placement was issued warrants to acquire 95,000 shares of Common Stock at $12.00 per share. In October 1996 the Company entered into a financial advisory agreement with Morgan Fuller pursuant to which Morgan Fuller agreed to provide certain financial advisory services for the Company. As compensation for such services, the Company granted to Morgan Fuller 180,000 warrants to purchase, for a period of three years from the date thereof, up to 180,000 shares of Common Stock at an exercise price of $2.75. The Company has recorded expense, equal to the fair market value of such warrants derived using the Black-Scholes method, over the term of the agreement. The remaining warrants issued and outstanding were issued in conjunction with equity placements. In March 1997, the Company issued the following warrants to Morgan Fuller in conjunction with the issuance of 210,526 shares of Common Stock:
Number of Number of Shares Warrants of Common Stock Exercise Price -------- --------------- -------------- 35,087 35,087 $2.50 35,088 35,088 $3.50 35,088 35,088 $4.50
In March and June 1997, the Company issued in aggregate, the following warrants in conjunction with the issuance of Series B Preferred Stock and Series C Preferred Stock in March and June 1997:
Number of Number of Shares Warrants of Common Stock Exercise Price -------- --------------- -------------- 1,000,000 1,000,000 $2.00 1,000,000 1,000,000 $2.50 1,000,000 1,000,000 $3.00
NOTE 12 - MAJOR CUSTOMERS AND SUPPLIERS For the years ended December 31, 1997 and 1996, revenues, net of returns, as a percentage of the Company's net revenues from the Company's customers exceeding 10% in any given year were as follows:
Years Ended December 31, ------------------------- 1997 1996 ---- ---- ABC 16% -- ACI Pearson -- 11% Buena Vista 26% 3% CBS -- 18% MGM 1% 13%
A significant quantity of audio inventory is supplied by two manufacturers. The Company believes there are other suppliers and accordingly, the Company is not dependent on these manufacturers as its sole source of product. F-25 56 NOTE 13 - FOUR POINT ACQUISITION On April 29, 1996 the Company acquired Four Point for consideration of $2.5 million in cash and 427,274 shares of Common Stock (Initial Shares) of the Company with an earn-out provision of up to an additional 163,636 shares of Common Stock. The acquisition has been accounted for as a purchase, and accordingly the results of operations of Four Point have been included in the Company's financial statements from April 29, 1996. The excess of the purchase price over the fair value of the net identifiable assets acquired of $6,125,000 (including $100,000 incurred during the year ended December 31, 1997 as a result of settlement of the litigation between one of the former vendors), has been recorded as goodwill and is being amortized on a straight-line basis over 25 years. NOTE 14 - RETIREMENT AND SAVINGS PLAN The Company has a 401(k) defined contribution retirement and savings plan covering all eligible employees who have completed 60 days of consecutive employment. Participants may make pre-tax contributions to the plan of up to 15% of their compensation subject to certain limitations as prescribed by the Internal Revenue Code. The Company matches the employee contribution up to 3% of the employee's compensation. The Company matching contribution vests to the employee on a staggered basis over three years and is fully vested at the end of the employee's third year of service. The Company matching contribution is contributed in Company shares of Common Stock. NOTE 15 - YEAR 2000 Some of the Company's financial business systems were written using two digits, rather than four, to define the applicable year. As a result, those systems have date-sensitive software that recognizes a date "00" as the year 1900 rather than 2000. If not modified or updated, this could cause system failure or miscalculations, potentially resulting in the temporary disruption of operations due to the inability to process certain transactions. The Company plans to convert its financial business systems to standardized package systems that are 2000 compliant within 1998. The only other critical business system to the Company is the distribution system run by Mercedes Distribution. Mercedes Distribution have assured the Company that their distribution system is 2000 compliant. The Company has initiated communications with significant suppliers and customers to determine the extent that they may be vulnerable to their own year 2000 issues. Based on the representations on suppliers and customers contacted, management does not believe the Company's continued operation is at risk due to key business partners not addressing the year 2000 issue. NOTE 16 - LIQUIDITY The Company has historically experienced significant negative cash flows from operations, including $8,691,000 and $4,208,000 for the years ended December 31, 1997 and December 31, 1996 respectively. In November 1997, the Company entered into an agreement with Chase Bank providing the Company with an $8,000,000 loan facility for working capital purposes and the Company had borrowed $5,250,000 against the facility at December 31, 1997. The Company believes its capital resources will be sufficient to meet the Company's working capital requirements for at least the next twelve months. The Company plans to expand its development, production and distribution activities, including the expansion of its publishing and television 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. However, there are no assurances that such financing would be available. F-26 57 NOTE 17 - FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 1996, the Company recorded a $1,400,000 write-down in inventory and production costs consisting of: (i) approximately $600,000 relating to various titles associated with the O.J. Simpson trial which were written down in the fourth quarter as the estimates for remainder sales timed for the O.J. Simpson civil trial were not realized due to diminished market interest and (ii) efforts to consummate remainder sales of excess inventory have proven more difficult than anticipated due to a general market over-supply in the remainder market and accordingly, such inventory has been written down to revised estimates of remainder or destruction value, as appropriate. During the fourth quarter of 1997, the Company recorded the following adjustments: (i) $2,998,000 write-down in film and television libraries following an evaluation of estimated future revenues associated with such libraries, (ii) $1,060,000 write-down in audio and book inventories together with reserves for costs anticipated to be incurred in transferring inventory from the Company's former exclusive distributor to its new distributor, and (iii) $1,235,000 in legal, litigation and settlement costs and reserves associated with claims against the Company arising from events prior to or as a result of the Termination Agreement. F-27 58 SIGNATURE 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, on this 3rd day of April, 1998. DOVE ENTERTAINMENT, INC. By: /s/ RONALD LIGHTSTONE ---------------------------------- Ronald Lightstone, President In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE /s/ RONALD LIGHTSTONE President, Chief Executive April 3, 1998 --------------------- Officer and Director Ronald Lightstone /s/ NEIL TOPHAM Chief Financial Officer and April 3, 1998 --------------------- Chief Accounting Officer Neil Topham /s/ TERRENCE ELKES Director April 3, 1998 --------------------- Terrence Elkes /s/ KEN GORMAN Director April 3, 1998 --------------------- Ken Gorman --------------------- Director April _, 1998 John Healy /s/ BRUCE MAGGIN Director April 3, 1998 --------------------- Bruce Maggin /s/ STEVE MAYER Director April 3, 1998 --------------------- Steven Mayer /s/ LEE MASTERS Director April 3, 1998 --------------------- Lee Masters
59 (2) EXHIBITS
EXHIBIT NO. DESCRIPTION ----------- -------------------------------------------------------------- 3.1 Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Registration Statement) 3.2 Certificate of Amendment of Articles of Incorporation of the Company filed with the Secretary of State of the State of California on March 14, 1990 (filed as Exhibit 3.2 to the Registration Statement) 3.3 Certificate of Amendment of Articles of Incorporation of the Company filed with the Secretary of State of the State of California on November 17, 1990 (filed as Exhibit 3.3 to the Registration Statement) 3.4 Certificate of Amendment of Articles of Incorporation of the Company filed with the Secretary of State of the State of California on August 26, 1994 (filed as Exhibit 3.4 to the Registration Statement) 3.5 Bylaws of the Company, as amended (filed as Exhibit 3.5 to the Registration Statement) 3.6 Certificate of Amendment of Articles of Incorporation of the Company filed with the Secretary of State of the State of California on December 24, 1996 (filed as Exhibit 3.6 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 3.7 Form of Amendment to Bylaws dated as of November 7, 1996 (filed as Exhibit 3.7 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 3.8 Amended and Restated Bylaws of the Company 4.1 Specimen common stock certificate of the Company (filed as Exhibit 4.1 to Amendment No. 2 to the Registration Statement ("Amendment No. 2) filed with the Commission on November 29, 1994) 4.2 Specimen Series A Preferred Stock certificate of the Company (filed as Exhibit 4.2 to Amendment No. 2) 4.3 Form of Certificate of Determination of the Series A Preferred Stock of the Company (filed as Exhibit 4.3 to the Registration Statement) 4.4 Form of Underwriter's Warrant Agreement (filed as Exhibit 4.4 to the Registration Statement) 4.5 Form of Warrant Agreement (filed as Exhibit 4.5 to the Registration Statement) 4.6 Form of Subscription Agreement (filed as Exhibit 4.6 to Amendment No. 1 to the Registration Statement ("Amendment No. 1 ") filed with the Commission on November 2, 1994)
60
EXHIBIT NO. DESCRIPTION ----------- -------------------------------------------------------------- 4.7 Placement Agency Agreement dated August 1, 1994 between the Company and Joseph Stevens & Company, LP (filed as Exhibit 4.7 to Amendment No. 1 ) 4.8 Placement Agent Warrant Agreement dated December 24, 1995 between Whale Securities Co., LP and Dove Audio (filed as the same numbered Exhibit to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.9 Placement Agent Warrant (filed as the same numbered Exhibit to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.10 Form of Registration Rights Agreement (filed as the same numbered Exhibit to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.11 Form of Common Stock Purchase Warrant (filed as the same numbered Exhibit to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.12 Form of Warrant Agreement dated as of October 1, 1996 (filed as Exhibit 4.12 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.13 Certificate of Determination of the Series B Preferred Stock of the Company (filed as Exhibit 4.13 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.14 Warrant Agreement dated as of March 27, 1997 between the Company and Media Equities Intentional, LLC (filed as Exhibit 4.14 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.15 Certificate of Determination of the Series C Preferred Stock of the Company (filed as Exhibit 4.15 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.16 Warrant Agreement dated as of March 27, 1997 between the Company, Michael Viner and Deborah Raffin Viner (filed as Exhibit 4.16 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.17 Certificate of Determination of the Series D Preferred Stock of the Company (filed as Exhibit 4.17 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.18 Form of Warrant Agreement dated as of April 1, 1997 (filed as Exhibit 4.18 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 4.19 Certificate of Determination of the Series E Preferred Stock of the Company (filed as Exhibit 4.19 to the Company's Current Report on Form 8-K dated June 10, 1997) 4.20 Specimen Series E Preferred Stock Certificate of the Company (filed as Exhibit 4.20 to the Company's Current Report on Form 8-K dated June 10, 1997) 4.21 Registration Rights Agreement, dated June 10, 1997, by and among the Company, Michael Viner and Deborah Raffin Viner (filed as Exhibit 4.21 to the Company's Current Report on Form 8-K dated June 10, 1997)
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EXHIBIT NO. DESCRIPTION ----------- -------------------------------------------------------------- 10.3 Office Building Lease for Suite 203, 301 N. Canon Drive, Beverly Hills, California 90210 (the "Office Lease") between Village on Canon and Dove, Inc. dated July 3, 1990 and Amendment appended thereto dated 1992 (filed as Exhibit 10.10 to the Registration Statement) 10.4 Second Amendment to the Office Lease between Village on Canon and Dove, Inc. dated March 12, 1990 (filed as Exhibit 10.11 to the Registration Statement) 10.5 Third Amendment to the Office Lease between Pinkwood Properties Corp. and Dove, Inc. dated December 1, 1992 (filed as Exhibit 10.12 to the Registration Statement) 10.13 Agreement to Assume and Amend Lease of Dove, Inc. dated February, 1994 among Pinkwood Properties Corp., Michael Viner and the Company (filed as Exhibit 10.13 to the Registration Statement) 10.14 Letter Agreement between Pinkwood Properties Corp. and the Company dated February 3, 1994 amending the Office Lease (filed as Exhibit 10.14 to the Registration Statement) 10.15 Letter Agreement dated July 1, 1994 between Penguin Books USA, Inc. and the Company (filed as Exhibit 10.15 to the Registration Statement) 10.16 Form of Publishing Agreement (filed as Exhibit 10.16 to Amendment No. 1) 10.17 Form of Artist Agreement (filed as Exhibit 10.17 to Amendment No. 1) 10.18 Form of Company's 1994 Stock Incentive Plan (filed as Exhibit 10.18 to the Registration Statement) 10.19 Settlement Agreement dated as of July 13, 1994 among the Company, SBT-Batif, S.A. and Ethos Capital Management, Inc. (filed as Exhibit 10.19 to Amendment No. 1) 10.20 Form of Option and Stock Purchase Agreement among Michael Viner, Deborah Raffin Viner, Dove, Inc., Dove II, Inc., Dove Communications, Inc. and the Company (filed as Exhibit 10.20 to Amendment No. 2) 10.21 Agreement between the Company and Reader's Digest Association, Inc. dated as of March 15, 1995 (filed as the same numbered Exhibit to the Annual Report on Form 10-KSB for the fiscal year ended 1994) 10.27 Term Loan Agreement, dated August 16, 1996, by and between Sanwa Bank California and the Company (filed as Exhibit 10.1 to the Quarterly Report on Form 10-QSB filed with the Commission on November 14, 1996) 10.28 Continuing Guaranty, dated as of August 16, 1996, of Michael Viner (filed as Exhibit 10.2 to the Quarterly Report on Form 10-QSB filed with the Commission on November 14, 1996) 10.29 Continuing Guaranty, dated as of August 16, 1996, of Deborah Raffin (filed as Exhibit 10.3 to the Quarterly Report on Form 10-QSB filed with the Commission on November 14, 1996)
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EXHIBIT NO. DESCRIPTION ----------- -------------------------------------------------------------- 10.30 Security Agreement, dated August 16, 1996, by and between Sanwa Bank California, Four Point and the Company (filed as Exhibit 10.4 to the Quarterly Report on Form 10-QSB filed with the Commission on November 14, 1996) 10.31 Letter Agreement, dated September 12, 1996, by and between Dove International, Inc., Guinness, Mahon & Co. Limited, Samuelson Entertainment Limited and Michael Viner (filed as Exhibit 10.5 to the Quarterly Report on Form 10-QSB filed with the Commission on November 14, 1996) 10.33 Separation Agreement dated as of May 31, 1996 by and between the Company and Dimitri T. Skouras (filed as Exhibit 10.33 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.35 Letter Agreement dated September 12, 1996 between the Company, Michael Viner and Deborah Raffin (filed as Exhibit 10.35 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.36 Financial Advisor Agreement dated as of September 30, 1996 between the Company and Morgan Fuller Capital Group, LLC (filed as Exhibit 10.36 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.39 Form of First Amendment to the Company's 1994 Stock Incentive Plan dated November 7, 1996 (filed as Exhibit 10.39 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.40 Stock Purchase Agreement dated as of March 27, 1997 among the Company, Media Equities International, LLC, Michael Viner and Deborah Raffin Viner (filed as Exhibit 10.40 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.41 Shareholders Voting Agreement dated as of March 27, 1997 by and between Media Equities International, LLC, Michael Viner and Deborah Raffin Viner (filed as Exhibit 10.41 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.42 Pledge Agreement dated as of March 27, 1997 among Media Equities International, LLC, Michael Viner and Deborah Raffin Viner (filed as Exhibit 10.42 to the Annual Report on Form 10-KSB for the fiscal year ended 1996) 10.45 Employment Termination Agreement, dated June 10, 1997, by and among the Company, Michael Viner and Deborah Raffin (filed as Exhibit 10.45 to the Company's Current Report on Form 8-K dated June 10, 1997) 10.46 Securities Purchase Agreement, dated June 10, 1997, by and among Media Equities International, LLC, Michael Viner and Deborah Raffin Viner (filed as Exhibit 10.46 to the Company's Current Report on Form 8-K dated June 10, 1997) 10.47 Loan Agreement, dated as of September 26, 1997, between the Company and Dove Four Point, Inc. and Media Equities International, Inc. 10.48 Debt Subordination and Intercreditor Agreement, dated September 26, 1997, among the Company, Dove Four Point, Inc., Media Equities International, Inc. and Sanwa Bank California
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EXHIBIT NO. DESCRIPTION ----------- -------------------------------------------------------------- 10.49 Security Agreement, dated as of September 26, 1997, between the Company, Dove Four Point, Inc. and Media Equities International, Inc. 10.50 Copyright Security Agreement, dated as of September 26, 1997, by Dove Four Point, Inc. in favor of Media Equities International, Inc. 10.51 Copyright Security Agreement, dated as of September 26, 1997 by the Company in favor of Media Equities International, Inc. 10.52 Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, among the Company, Dove Four Point, Inc., Dove International, Inc. and The Chase Manhattan Bank, as Lender (the "Credit Agreement") 10.53 Copyright Security Agreement dated as of November 4, 1997 by the Company, Dove Four Point, Inc. and Dove International, Inc. in favor of The Chase Manhattan Bank (the "Copyright Security Agreement") 10.54 Security Agreement, dated as of November 4, 1997 between the Company and Media Equities International 10.55 Subordination Agreement, dated as of November 4,1997, among the Company, Dove International, Inc. and Dove Four Point, Inc., Terrence A. Elkes, Kenneth F. Gorman, Ronald Lightstone, John T. Healy, and Bruce Maggin, Media Equities International, LLC and The Chase Manhattan Bank. 10.56 Contribution Agreement, dated as of November 4, 1997, among, the Company Dove Four Point, Inc. and Dove International, Inc. 10.57 Fee Agreement, made as of November 4, 1997 between the Company and Media Equities International, LLC. 10.58 Employment Agreement, dated as of February 4, 1998 between the Company and Ronald Lightstone 10.59 Supplement No. 1 to the Copyright Security Agreement dated as of February 20, 1998 by Dove Four Point, Inc. in favor of The Chase Manhattan Bank 10.60 Amendment No. 1 to the Credit Agreement, dated as of February 27, 1998, between the Company, Dove International, Inc., Dove Four Point, Inc. and The Chase Manhattan Bank 10.61 Amendment No. 2 to the Credit Agreement, dated as of April 1, 1998, between the Company, Dove International, Inc., Dove Four Point, Inc. 10.62 Form of Publishing Agreement (1997) 10.63 Form of Artist Agreement (1997) 10.64 Form of Executive Publication Agreement 21 Subsidiaries of Dove (filed as Exhibit 21 to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 23 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule
EX-3.8 2 EXHIBIT 3.8 1 EXHIBIT 3.8 AMENDED AND RESTATED BYLAWS OF DOVE ENTERTAINMENT, INC. ARTICLE I OFFICES Section 1. Principal Executive Office. The principal executive office of the corporation shall be located at such place as the board of directors shall from time to time determine. Section 2. Other Offices. The corporation may also have offices at such other places both within and without the State of California as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. Place of Meetings. All meetings of shareholders shall be held at the principal executive office of the corporation or at any other place within or without the State of California, which may be designated by the board of directors and stated in the notice of the meeting. Section 2. Annual Meetings. The annual meeting of shareholders shall be held at such time as shall be designated by the board of directors and stated in the notice of the meeting. At such annual meetings, directors shall be elected and any other business may be transacted which is within the power of the shareholders. Section 3. Special Meetings. Special meetings of the shareholders, for the purpose of taking any action which is within the power of the shareholders, may be called at any time by the chairman of the board of directors, or by the holders of shares entitled to cast not less than ten percent of the votes at the meeting; provided, however, that if, after the filling of any vacancy by the directors as provided in Section 5 of Article III hereof, the directors then in 2 office who have been elected by the shareholders shall constitute less than a majority of the directors then in office, then the holders of shares entitled to cast not less than five percent of the total number of shares at the time outstanding having the right to vote for those directors may call a special meeting of the shareholders for the purpose of electing the entire board of directors, and the term of any director shall terminate upon the election at such meeting of a successor. Section 4. Notice of Meetinqs. Written notice of each meeting of shareholders, whether annual or special, shall be given to each shareholder entitled to vote thereat, either personally or by first class mail or other means of written communications, charges prepaid, addressed to such shareholder at the address of such shareholder appearing on the books of the corporation or given by such shareholder to the corporation for the purpose of notice. If any notice addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at such address, all future notices shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice to all other shareholders. If no address appears on the books of the corporation or is given by the shareholder to the corporation for the purpose of notice, notice shall be deemed to have been given to such shareholder if sent by mail or other means of written communication addressed to the place where the principal executive office of the corporation is located or if published at least once in a newspaper of general circulation in the county in which the principal executive office is located. Upon request in writing that a special meeting of shareholders be called for any proper purpose, directed to the president, any vice president or the secretary by any person (other than the board of directors) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting not less than 35 nor more than 60 days after receipt of the request. All such notices shall be given to each shareholder entitled thereto not less than ten days nor more than 60 days before the meeting. Any such notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. All such notices shall state 3 the place, date and hour of such meeting. In the case of a special meeting, such notice shall also state the general nature of the business to be transacted at such meeting, and no other business may be transacted thereat. In the case of an annual meeting, such notice shall also state those matters which the board of directors at the time of the mailing of the notice intends to present for action by the shareholders. Any proper matter may be presented at an annual meeting of shareholders though not stated in the notice, provided that, unless the general nature of a proposal relating to the following matters is stated in the notice or a written waiver of notice, the same shall require unanimous approval of all shareholders entitled to vote: (a) a proposal to vote a contract or other transaction between the corporation and one or more of its directors or any corporation, firm or association in which one or more of its directors has a material financial interest or is also a director; (b) a proposal to amend the articles of incorporation; (c) a proposal to approve the principal terms of a reorganization as defined in Section 181 of the General Corporation Law; (d) a proposal to wind up and dissolve the corporation; (e) if the corporation has preferred shares outstanding and the corporation is in the process of winding up, a proposal to adopt a plan of distribution of shares, obligations or securities of any other corporation or assets other than money which is not in accordance with the liquidation rights of preferred shares, if any. The business transacted at any special meeting of shareholders shall be limited to the purposes stated in the notice of such meeting. Section 5. Quorum. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum if any action taken (other than adjournment) 4 4 is approved by at least a majority of the shares required to constitute a quorum. Section 6. Adjourned Meetings and Notice Thereof. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by vote of a majority of the shares the holders of which are present either in person or by proxy thereat, but in the absence of a quorum, no other business may be transacted at any such meetinq, Section 7. Voting. At all meetings of shareholders, every shareholder entitled to vote shall have the right to vote in person or by proxy the number of shares standing in the name of such shareholder on the stock records of the corporation on the record date for such meeting. Shares of this corporation owned by this corporation or a subsidiary (except shares held in a fiduciary capacity) shall not be entitled to vote. Unless a record date for voting purposes is fixed pursuant to Section 1 of Article VI of these bylaws, then only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held, shall be entitled to vote at such meeting, and such day shall be the record date for such meeting. Votes at a meeting may be given viva voce or by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at any election and before the voting begins. If a quorum is present at the beginning of the meeting, except with respect to the election of directors (and subject to the provisions of Section 5 of this Article II should shareholders withdraw thereafter) the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter shall be the act of the shareholders and shall decide any question properly brought before the meeting, unless the vote of a greater number or voting by classes is required by the General Corporation Law or the articles of incorporation, in which case the vote so required shall govern and control the decision of such question. Subject to the provisions of the next sentence, at all elections of directors of the corporation, each shareholders shall be entitled to cumulate his or her votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which his or her shares are normally entitled, or to distribute his or her votes on the same principle among as many candidates as he or she shall see fit. No shareholder shall be entitled to cumulate his or her votes unless the name of the candidate or candidates for whom such votes would be cast has been 5 5 placed in nomination prior to the voting and any shareholder has given notice at the meeting prior to the voting of such shareholders' intention to cumulate his or her votes. The candidates receiving the highest number of votes up to the number of directors to be elected shall be elected. Section 8. Waiver of Notice and Consent of Absentees. The proceedings and transactions of any meeting of shareholders, either annual or special, however called and noticed and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present either in person or by proxy and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of such meeting or an approval of the minutes thereof. Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by law or these bylaws to be included in the notice but which were not so included, if such objection is expressly made at the meeting; provided, however, that any person making such objection at the beginning of the meeting or to the consideration of matters required to be but not included in the notice may orally withdraw such objection at the meeting or thereafter waive such objection by signing a written waiver thereof or a consent to the holding of the meeting or the consideration of the matter or an approval of the minutes of the meeting. Neither the business to be transacted at nor the purpose of any annual or special meeting of shareholders need be specified in any written waiver of notice except that the general nature of the proposals specified in clauses (a) through (e) of Section 4 of this Article shall be so stated. Section 9. Action Without a Meeting. Directors may be elected without a meeting by a consent in writing setting forth the action so taken signed by all the persons Who would be entitled to vote for the election of directors, provided, that, without notice except as hereinafter set forth, a director may be elected at any time to fill a vacancy not filled by the directors by the written consent of persons holding a majority of the outstanding shares entitled to vote for the election of that director. Any other action which under any provision of the General Corporation Law may be taken at any annual or special meeting of the shareholders may be taken without a meeting, and without notice 6 6 except as hereinafter set forth, if a consent in writing setting forth the action so taken is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless tbe consents of all shareholders entitled to vote on any proposed action have been solicited in writing, (a) notice of any proposed shareholder approval of a proposal of a type referred to in clauses (a) through (e) of Section 4 of this Article without a meeting by less than unanimous written consent shall be given at least ten days before the consummation of the action authorized by such approval; and (b) prompt notice shall be given of the taking of any other corporate action approved by shareholders without a meeting by less than unanimous written consent to those shareholders entitled to vote who have not consented in writing. Such notice shall be given in the manner and shall be deemed to have been given as provided in Section 4 of this Article. Unless, as provided in Section 1 of Article VI of these bylaws, the board of directors has fixed a record date for the determination of shareholders entitled to notice of and to give such written consent, the record date for such determination shall be the day on which the first written consent is given. Section 10. Proxies. Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or the duly authorized agent of such person and filed with the secretary or persons appointed as inspectors of election or such other person as may be designated by the board of directors or the chief executive officer to receive proxies, provided that no such proxy shall be valid after the expiration of 11 months from the date of its execution unless the shareholder executing it specifies therein the length of time for which such proxy is to continue in force. Every proxy duly executed continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto. Except as otherwise provided by law, such revocation may be effected by attendance at the meeting and voting in person or by the person executing the proxy or by a writing stating that the proxy is revoked or by a proxy bearing a later date executed by the person executing the proxy and filed with the secretary of the corporation or the persons appointed as inspectors of election of such other 7 7 persons as may be designated by the board of directors or the chief executive officer to receive proxies. Section 11. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any persons as inspectors of election to act at such meeting or any adjournment thereof in accordance with Section 707 of the General Corporation Law. ARTICLE III DIRECTORS Section 1. Powers. The business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Section 2. Number and Oualifications. The number of directors of the corporation shall be not less than five (5) nor more than nine (9). Effective upon the commencement of the 1997 Annual Meeting of Shareholders, the exact number of directors within the limits specified shall be seven (7) until changed by an amendment to these bylaws duly adopted by the board of directors or by the shareholders. Such indefinite number may be changed, or a definite number fixed without provision for an indefinite number, by an amendment to these bylaws duly adopted by the vote or written consent of the shareholders provided, however, that a bylaw reducing the minimum number of directors to a number less than five cannot be adopted if the votes cast against its adoption at a meeting or the shares not consenting in the case of action by written consent are equal to more than 16-2/3 percent of the outstanding shares entitled to vote. No amendment may change the stated maximum number of authorized directors to a number greater than two times the stated minimum number of directors minus one. Section 3. Election and Term of Office. The directors shall be elected at each annual meeting of shareholders, but if any such annual meeting is not held or the directors are not elected at any annual meeting, the directors may be elected at any special meeting of shareholders held for that purpose or at the next annual meeting of shareholders held thereafter. Each director shall hold office until the next annual meeting of shareholders and until his or her successor has been elected and qualified or until his or her earlier resignation or removal. 8 8 Section 4. Resiqnation and Removal of Directors. Any director may resign effective upon giving written notice to the chairman of the board of directors, the president, the secretary or the board of directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation, in which case such resignation shall be effective at the time specified. Unless such resignation specifies otherwise, its acceptance by the corporation shall not be necessary to make it effective. The board of directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. Any or all of the directors may be removed without cause if such removal is approved by the affirmative vote of a majority of the outstanding shares entitled to vote, provided that no director may be removed (unless the entire board is removed) when the votes cast against removal (or, if such action is taken by written consent, the shares held by persons not consenting in writing to such removal) would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the total time of the director's most recent election were then being elected and, provided, further, that if, pursuant to the provisions of the articles of incorporation, the holders of the shares of any class or series, voting as a class or series, are entitled to elect one or more members of the board of directors, any director so elected may be removed only by the applicable vote (or consent) of the holders of the shares of that class or series. Section 5. Vacancies. Vacancies on the board of directors (except vacancies created by the removal of a director) may be filled by approval of the board, or, if the number of directors then in office is less than a quorum by (x) the unanimous written consent of the directors then in office, (y) the affirmative vote of a majority of the directors then in office at a meeting held pursuant to notice or waivers of notice complying with Section 307 of the General Corporation Law or (z) a sole remaining director, and each director elected in this manner shall (subject to Section 3 of Article II hereof) hold office until the next annual meeting of shareholders and until a successor has been elected and qualified or until his or her earlier resignation or removal, provided that if, pursuant to the provisions of the articles of incorporation, the holders of the shares of any class or series, voting as a class or series, are entitled to elect one or more directors, only the director or directors elected by the holders of such class or series may fill a vacancy involving a director or directors which the holders of such class or series are entitled to elect. If the resignation of a 9 9 director states that it is to be effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 6. Place of Meetinqs. Regular and special meetings of the board of directors may be held at any place within or without the State of California which has been designated in the notice or written waiver of notice of the meeting, or if not stated in the notice or waiver of notice or if there is no notice, designated by resolution of the board of directors or, either before or after the meeting, consented to in writing by all members of the board of directors who were not present at the meeting. If the place of a regular or special meeting is not designated in the notice or waiver of notice or fixed by a resolution of the board or consented to in writing by all members of the board not present at the meeting, it shall be held at the corporation's principal executive office. Section 7. Regular Meetings. Immediately following each annual shareholders' meeting, the board of directors shall hold a regular meeting to elect officers and transact other business. Such meeting shall be held at the same place as the annual meeting or such other place as shall be fixed by the board of directors. Other regular meetings of the board of directors shall be held at such times and places as are fixed from time to time by the board of directors. Call and notice of regular meetings of the board of directors shall not be required and is hereby dispensed with. Section 8. Special Meetings. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board of directors, the president, by the secretary or by any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone or telegraph or sent by mail. In case notice is given by mail or telegram, it shall be sent, charges prepaid, addressed to the director at his or her address appearing on the corporation's records, or, if it is not on these records or is not readily ascertainable, at the place where meetings of the directors are regularly held. If notice is delivered personally or given by telephone or telegraph, it shall be given or delivered to the telegraph office at least 48 hours before the meeting. If notice is mailed, it shall be deposited in the United States mail at least four days before the meeting. Section 9. Quorum. A majority of the authorized number of directors shall constitute a quorum of the board for the transaction of business. Every act or decision done or made by a majority of the 10 10 directors present at a meeting duly held at which a quorum is present is the act of the board of directors. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, provided that any action taken is approved by at least a majority of the required quorum for such meeting. Section 10. Waiver of Notice of Consent. The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before after the meeting, each of the directors not present or who, though present, has prior to the meeting or at its commencement, protested the lack of proper notice to him, signs a written waiver of the notice, a consent to holding the meeting or an approval of the minutes of the meeting. Section 11. Adjournment. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than 24 hours, notice of the adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 12. Meetings by Conference Telephone. Members of the board of directors may participate in a meeting through use of conference telephone or similar communications eguipment, so long as all members participating in such meeting can hear one another. Participation by directors in a meeting in the fflanner provided in this Section constitutes presence in person at such meeting. Section 13. Action Without a Meetinq. Any action required or permitted to be taken by the board of directors may be taken without a meeting if all members of the board shall consent in writing to such action. Such written consents shall be filed with the minutes of the proceedings of the board. Section 14. Committees. The board of directors may, at its discretion, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each of which shall be composed of two or more directors,to serve at the please of the board. The board may designate one or more directors as alternative members of any committee who may replace any absent member at any meeting of a committee. The board may delegate to any such committee- to the extent provided in such resolution, any of the 11 11 board's powers and authority in the management of the corporation's business and affairs, except with respect to: (a) the approval of any action for which the General Corporation Law also requires approval by the shareholders; (b) the filling of vacancies on the board of directors or any committee thereof; (c) the fixing of compensation of directors for serving on the board or on any committee thereof; (d) the amendment or repeal of bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board; (g) the authorization of the issuance of shares; and (h) the appointment of other committees of the board or the members thereof. The board of directors may prescribe appropriate rules, not inconsistent with these bylaws, by which proceedings of any such committee shall be conducted. The provisions of these bylaws relating to the calling of meetings of the board, notice of meetings of the board and waiver of such notice, adjournments of meetings of the board, written consents to board meetings and approval of minutes, action by the board by consent in writing without a meeting, the place of holding such meetings, meetings by conference telephone or similar communications equipment, the quorum for such meetings, the vote required at such meetings and the withdrawal of directors after commencement of a meeting shall apply to committees of the board and action by such committees. In addition, any member of a committee designated by the board as the chairman or as secretary of the committee or any two members of a committee may call meetings of the committee. Regular meetings of any committee may be held without notice if the time and place of such meetings are fixed by the board of directors or the committee. 12 12 Section 15. Audit Committee. There shall at all times be an audit committee of the board of directors which shall be composed of three or more directors to serve at the pleasure of the board. At all times one director serving on the audit committee shall be required to qualify as an "independent" director for purposes of meeting any requirements with respect to such committee imposed for continued listing on the National Association of Securities Dealers Automatic Quotation System (NASDAQ) or any national securities market on which the corporation's common stock is then listed. The audit committee shall be responsible for approving, from time to time, the chief financial officer of the corporation, for performing such functions as is required with respect to such committee for continued listing on NASDAQ or any national securities market on which the corporation's common stock is then listed and for such other matters as delegated to such committee by the board of directors by resolution adopted by a majority of the authorized number of directors, not inconsistent with the articles of incorporation or by-laws of the corporation. The provisions of these bylaws relating to the calling of meetings of the board, notice of meetings of the board and waiver of such notice, adjournments of meetings of the board, written consents to board meetings and approval of minutes, action by the board by consent in writing without a meeting, the place of holding such meetings, meetings by conference telephone or similar communications equipment, the quorum for such meetings, the vote required at such meetings and the withdrawal of directors after commencement of a meeting shall apply to the audit committee and action by the audit committee. In addition, any member of the audit committee designated by the board as the chairman or as secretary of the audit committee or any member of the audit committee may call meetings of the audit committee. Regular meetings of the audit committee may be held without notice if the time and place of such meetings are fixed by the board of directors or the audit committee. ARTICLE IV OFFICERS Section 1. Officers. The officers of the corporation shall be a president, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. Any two or more offices may be held by the same person. 13 13 Section 2. Elections. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen annually by the board of directors, and each such officer shall serve at the pleasure of the board of directors until the regular meeting of the board of directors following the annual meeting of shareholders and until his or her successor is elected and qualified or until his or her earlier resignation or removal. Section 3. Other Officers. The board of directors may appoint such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these bylaws and as the board of directors may from time to time determine. Section 4. Removal and Resignation. Any officer may be removed with or without cause by the board of directors. Any officer may resign at any time upon written notice to the corporation. Any such resignation shall take effect upon receipt of such notice or at any later time specified therein. If the resignation is effective at a future date, a successor may be elected to take office when the resignation becomes effective. Unless a resignation specifies otherwise, its acceptance by the corporation shall not be necessary to make it effective. Section 5. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the bylaws for regular appointments to the office. Section 6. Chairman of the Board. The chairman of the board, if there shall be such an officer, shall, if present, preside at all meetings of the board of directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the board of directors or prescribed by the bylaws. Section 7. President. Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the corporation's general manager and chief executive officer and shall, subject to the control of the board of directors, have general supervision, direction and control of the business, affairs and officers of the corporation. He shall preside as chairman at all meetings of shareholders and in the absence of the chairman of the board, or if there be none, at all meetings of the board of directors. He shall have the general powers and duties of management 14 14 usually vested in the office of president of a corporation; shall have any other powers and duties that are prescribed by the board of directors or these bylaws; and shall be primarily responsible for carrying out all orders and resolutions of the board of directors. Section 8. Vice Presidents. In case of the absence or disability of the chief executive officer, the vice presidents in order of their rank as fixed by the board of directors, or, if not ranked, the vice president designated by the chief executive officer, shall perform all the duties of the chief executive officer and, when so acting, shall have all the powers of, and be subject to all the restrictions on, the chief executive officer. Each vice president shall have any of the powers and perform any other duties that from time to time may be prescribed for him by the board of directors or the bylaws or the chief executive officer. Section 9. Secretary. The secretary shall keep or cause to be kept a book of minutes of all meetings and actions by written consent of all directors, shareholders and committees of the board of directors. The minutes of each meeting shall state the time and place that it was held and such other information as shall be necessary to determine whether the meeting was held in accordance with law and these bylaws and the actions taken thereat. The secretary shall keep or cause to be kept at the corporation's principal executive office, or at the office of its transfer agent or registrar, a record of the shareholders of the corporation, giving the names and addresses of all shareholders and the number and class and series of shares held by each. The secretary shall give, or cause to be given, notice of all meetings of shareholders, directors and committees required to be given under these bylaws or by law, shall keep or cause the keeping of the corporate seal in safe custody and shall have any other powers and perform any other duties that are prescribed by the board of directors, these bylaws or the chief executive officer. If the secretary refuses or fails to give notice of any meeting lawfully called, any other officer of the corporation may give notice of such meeting. The assistant secretary or, if there be more than one, any assistant secretary may perform any or all of the duties and exercise any or all of the powers of the secretary unless prohibited from doing so by the board of directors, the chief executive officer or the secretary, and shall have such other powers and perform any other duties as are prescribed for him by the board of directors or the chief executive officer. Section 10. Chief Financial Officer. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account. The chief 15 15 financial officer shall cause all money and other valuables in the name and to the credit of the corporation to be deposited at the depositories designated by the board of directors or any person authorized by the board of directors to designate such depositories. He shall render to the chief executive officer and board of directors, when either of them request it, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation and shall have any other powers and perform any other duties that are prescribed by the board of directors, these bylaws or the chief executive officer. The assistant treasurer or, if there be more than one, any assistant treasurer may perform any or all of the duties and exercise any or all of the powers of the chief financial officer unless prohibited from doing so by the board of directors, the chief executive officer or the chief financial officer, and shall have such other powers and perform any other duties as are prescribed for him by the board of directors, the chief executive officer or the chief financial officer. Section 11. Compensation. The salaries of the officers of the corporation shall be fixed from time to time by the board of directors. No officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the corporation. ARTICLE V INDEMNIFICATION OF AGENTS Section 1. Definitions. For the purposes of this Article, "agent" means any person who is or was a director, officer, employee or other agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was serving as a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under Section 4 of this Article or clause (c) of Section 5 of this Article. Section 2. Indemnification: Other than Corporate Judgment. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation to procure a judgment in 16 16 its favor) by reason of the fact that such person is or was an agent of the corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner he or she reasonably believed to be in the best interests of the corporation, and, in the case of a criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in the best interests of the corporation or that he or she had reasonable cause to believe that his or her conduct was unlawful. Section 3. Indemnification: Corporate Judgment. The corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was an agent of the corporation, against expenses actually and reasonably incurred by such person in connection with the defense of settlement of such action if such person acted in good faith and in a manner he or she believed to be in the best interests of the corporation and its shareholders, except that no indemnification shall be made under this Section: (a) in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation in the performance of such person's duty to the corporation and its shareholders, unless, and only to the extent that, the court in which such proceeding is or was pending shall determine that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for expenses; (b) of amounts paid in settling or otherwise disposing of a pending action without court approval; or (c) of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. Section 4. Expenses. To the extent that an agent has been successful on the merits in defense of any proceeding referred to in Section 2 or 3 of this Article or in defense of any claim, issue or matter therein, the agent shall be indemnified against expenses 17 17 actually and reasonably incurred by the agent in connection therewith. Section 5. Determination of Indemnification. Except as provided in Section 4 of this Article, any indemnification under this Article shall be made by the corporation only if authorized in the specific case upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Section 2 or 3, as the case may be, of this Article by: (a) a majority vote of a quorum consisting of directors who are not parties to such proceeding; (b) if such a quorum of directors is not obtainable, by independent legal counsel in a written opinion; (c) approval or ratification by the affirmative vote of a majority of the shares of this corporation entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of the holders of a majority of the outstanding shares entitled to vote (for such purpose, the shares owned by the person to be indemnified not to be considered outstanding or entitled to vote thereon); or (d) the court in which such proceeding is or was pending, upon application by this corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney of other person is opposed by the corporation. Section 6. Advanced Expenses. Expenses incurred in defending any proceeding may be advanced by the corporation prior to the final disposition of such proceeding upon receipt of any undertaking by or on behalf of the agent to repay such amount if it shall be determined ultimately that the agent is not entitled to be indemnified as authorized in this Article. Section 7. No Indemnification or Advance. No indemnification or advance shall be made under this Article, except as provided in Section 4 or subsection (c) of Section 5 of this Article, in any circumstance where it appears: (a) that it would be inconsistent with a provision of the articles of incorporation, a resolution of the shareholders of an agreement in effect at the time of the accrual of the alleged 18 18 cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) that it would be inconsistent with any condition expressly imposed by a court in approving a settlement. ARTICLE VI MISCELLANEOUS Section 1. Record Date. The board of directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to give consent to corporate action in writing without a meeting, to receive any report, to receive payment of any dividend or other distribution or allotment of any rights or to exercise rights in respect to any change, conversion or exchange of shares or any other action for the purposes of which it is fixed. Section 2. Inspection of Records. The books of account, record of shareholders and minutes of proceedings of the shareholders and the board of directors and committees of the board shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any time during usual business hours for a purpose reasonably related to such holder's interests as a shareholder or as the holder of such voting trust certificate. Such inspection may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. A shareholder or shareholders holding at least five percent in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent of such voting shares and has filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the corporation shall have (in person or by agent or attorney) the absolute right to inspect and copy the record of shareholders' names and addresses and shareholding during usual business hours upon five business days' prior written demand upon the corporation and to obtain from the tranfer agent for the corporation, upon written demand and upon the tender of its usual charges, a list of the names and addresses of shareholders who are entitled to vote for the election of directors as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The list shall be made available on or before the later of 19 19 five business days after the demand is received or the date specified therein as the date as of which the list is to be compiled. Every director shall have the absolute right at any reasonable time to inspect and copy or make extracts from all books, records and documents of every kind and to inspect the physical properties of the corporation and any subsidiary of the corporation. -Such inspection by a director may be made in person or by agent or attorney. Section 3. Checks, Drafts, etc. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors. The board of directors may authorize one or more officers of the corporation to designate the person or persons authorized to sign such documents and the manner in which such documents shall be signed. Section 4. Annual and Other Reports. The board of directors shall cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year and at least 15 days prior to the annual meeting of shareholders to be held during the next fiscal year unless the corporation has outstanding shares held of record by fewer than 100 persons, and the requirement of the General Corporation Law that such a report be so sent to shareholders is hereby expressly waived. Such report shall contain a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. A shareholder or shareholders holding at least five percent of the outstanding shares of any class of the corporation may request of the corporation in writing an income statement of the corporation for the three month, six month or nine month period of the current fiscal year ended more than 30 days prior to the date of the request and a balance sheet of the corporation as of the end of such period and, in addition, if no annual report for the last fiscal year has been sent to shareholders, the annual report for the last fiscal year. The statements shall be delivered or mailed to the person making the requeSt within 30 days thereafter. A copy of such statements shall be kept on file in the principal executive office of 20 20 the corporation for 12 months, and they shall be exhibited at all reasonable times to any shareholder demanding an examination of them or a copy shall be mailed to such shareholder. Unless otherwise determined by the board of directors or the chief executive officer, the chief financial officer and any assistant treasurer are each authorized officers of the corporation to execute the certificate to the effect that the income statements, statements of changes in financial position and balance sheets referred to in this section were prepared without audit from the books and records of the corporation. Section 5. Contracts, etc. How Executed. The board of directors may authorize any officer or officers, agents or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. Section 6. Certificate for Shares. Every holder of shares in the corporation shall be entitled to have a certificate or certificates signed in the name of the corporation by the chairman of the board of directors, the president or a vice president and by the chief financial officer or any assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Any such certificate shall also contain such legend or other statement as may be required by the General Corporation Law, the Corporate Securities Law of 1968 or any other applicable law or regulation or agreement. Certificates for shares may be issued prior to full payment therefor under such restrictions and for such purposes as the board of directors may provide; provided, however, that any such certificates so issued prior to full payment shall state the total amount of the consideration to be paid therefor and the amount paid thereon. 21 21 No new certificates for shares shall be issued in place of any certificates theretofore issued unless the latter are surrendered and cancelled at the same time; provided, however, that a new certificate may be issued without the surrender and cancellation of the old certificate if the certificate theretofore issued is alleged to have been lost, stolen or destroyed. In case of any allegedly lost, stolen or destroyed certificate, the corporation may require the owner thereof or the legal representative of such owner to give the corporation a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 7. Representation of Shares of Other Corporations. Unless the board of directors shall otherwise determine, the chairman of the board of directors, the president, any vice president, the secretary and any assistant secretary of the corporation are each authorized to vote, represent and exercise on behalf of the corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the corporation. The authority herein granted to such officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised either by such officers in person or by any person authorized so to do by proxy or power of attorney or other document duly executed by any such officer. Section 8. Inspection of Bylaws. The corporation shall keep in its principal executive office in California, or if its principal executive office is not in California, at its principal business office in California, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the corporation has no office in California, it shall upon the written request of any shareholder, furnish him a copy of the bylaws as amended to date. Section 9. Seal. The corporation shall have a common seal and shall have inscribed thereon the name of the corporation, the date of its incorporation and the words "INCORPORATED" and "CALIFORNIA". Section 10. Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the General Corporation Law 22 22 shall govern the construction of these bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and plural number includes the singular, and the term "Person" includes a corporation as well as a natural person. ARTICLE VII AMENDMENTS Section 1. Power of Shareholders. New bylaws may be adopted or these bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote, or by the written assent of shareholders entitled to vote such shares, except as otherwise provided by law or by the articles of incorporation. Section 2. Power of Directors. Subject to the right of shareholders as provided in Section 1 of this Article to adopt, amend or repeal bylaws, bylaws other than a bylaw or amendment thereof changing the authorized number of directors, may be adopted, amended or repealed by the affirmative vote of a majority of the board of directors. 23 EX-10.47 3 EXHIBIT 10.47 1 EXHIBIT 10.47 $450,000 LOAN AGREEMENT Dated as of September 26th, 1997 between DOVE ENTERTAINMENT, INC. DOVE FOUR POINT, INC. AND MEDIA EQUITIES INTERNATIONAL, LLC ================================= 2 LOAN AGREEMENT dated as of September 26th, 1997 ("the "Agreement") between DOVE ENTERTAINMENT, INC., a California corporation, having its principal place of business at 8955 Beverly Boulevard, Los Angeles, California 90048 ("Dove"), DOVE FOUR POINT, INC., a Florida corporation, having its principal place of business at 8955 Beverly Boulevard, Los Angeles, California 90048 ("Four Point"; Dove and Four Point, individually and collectively, "Borrower"), and MEDIA EQUITIES INTERNATIONAL, LLC, a New York limited liability company, having its principal place of business at c/o Morrison Cohen Singer & Weinstein, LLP, 750 Lexington Avenue, New York, New York 10022 (the "Lender"). WHEREAS, Four Point is a wholly-owned subsidiary of Dove; WHEREAS, the Borrower has requested the Lender to extend credit to it not in excess of $450,000 in the aggregate at any time outstanding, the proceeds of which shall be used by the Borrower to finance working capital needs. The Lender is willing to extend such credit to the Borrower, subject to the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the foregoing the parties hereto agree to the following I. DEFINITIONS SECTION 1.1. DEFINITIONS. As used herein, the following words and terms shall have the following meanings: "Accounts Receivable" shall mean any and all rights of the Borrower to payment for goods sold or leased or for services rendered, including accounts, contract rights, general intangibles and any such right evidenced by chattel paper, purchase orders, instruments or documents, whether due or to become due and whether or not it has been earned by performance, and whether now or hereafter acquired or arising in the future and any proceeds arising therefrom or relating thereto. "Affiliate" shall mean any corporation, partnership, limited liability company, joint venture, trust or unincorporated organization which, directly or indirectly, controls or is controlled by or is under common control with the Borrower. "Business Day" shall mean any day not a Saturday, Sunday or legal holiday, on which the Lender is open for business in New York City, provided, however, that when used in connection with determining the Eurodollar Rate, the term "Business Day" shall also exclude any day on which the Lender is not open for dealings in dollar deposits in an Interbank Market. "Closing Date" shall mean September 26th, 1997. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. 3 "Collateral" shall mean and include all Accounts, Inventory, Documents and Fixtures of the Borrower (as those term(s) are defined in the Security Agreement) and any other items of real or personal property in which the Borrower has granted or may in the future grant a security interest in favor of the Lender. "Contractual Obligation" shall mean as to any Person, any provision of any security issued by such Person or any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Default" shall mean any of the events specified in Article VII hereof, whether or not any requirement for the giving of notice or the lapse of time or both or any other condition has been satisfied. "Default Interest Rate" shall have the meaning set forth in Section 2.6 hereof. "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 environmental protection matters, including, without limitation, Hazardous Materials, as now or may hereafter be in effect. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. Section references to ERISA are to ERISA, as in effect at the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with the Companies or a Subsidiary would be deemed to be a member of the same "controlled group" within the meaning of Section 414(b), (c), (m) and (o) of the Code. "Event of Default" shall mean any Event of Default set forth in Article VII. "Hazardous Materials" includes, without limit, any flammable explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances, defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Sections 9601, et seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.), the Resource Conservation and Recovery Act, as amended (42 U.S.C. Sections 9601, et seq.), and in the regulations adopted and publications promulgated pursuant thereto, or any other laws. "Indebtedness" shall have the meaning set forth in Section 6.2 hereof. 2 4 "Insolvency" shall mean with respect to any Multiemployer Plan, the condition that such plan is insolvent within the meaning of such term used in Section 4245 of ERISA. "Insolvent" shall mean the condition of Insolvency. "Interest Payment Date" shall mean as to any Loan, the last day of each calendar month during the term thereof commencing with the calendar month immediately following the date of such Loan. "Loan(s)" shall mean a loan by the Lender to the Borrower pursuant to Article II hereof. "Loan Commitment" shall have the meaning set forth in Section 2.1 hereof. "Loan Documents" shall mean collectively, this Agreement, the Note, the Security Agreement, any agreements or documents referred to in Article IV hereof and all other documents, certificates and instruments executed in connection therewith. "Loan Maturity Date" shall mean the earlier of (a) the date which is 180 days following the date of this Agreement or (b) the date on which Borrower refinances its existing Indebtedness to Sanwa Bank in the original principal amount of $1,365,447.27, incurred on August 16, 1996. "Material Adverse Effect" shall mean a material adverse effect on (a) the business, operations, property, condition (financial or otherwise) or prospects of the Borrower and its subsidiaries taken as a whole, (b) the ability of the Borrower to perform its obligations under the Loan Documents, or (c) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Lender hereunder or thereunder. "Obligations" shall mean all obligations, liabilities and indebtedness of every nature of the Borrower from time to time owed to the Lender under this Agreement or any of the Loan Documents including the principal amount of all debts, claims and indebtedness, accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and/or from time to time hereafter owing, due or payable whether before or after the filing of a proceeding under the United States Bankruptcy Code by or against the Borrower. "Permitted Encumbrances" shall have the meaning assigned to such term in Section 6.1 hereof. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title 1 of ERISA or any successor thereto. "Person" shall mean any natural person, corporation, limited liability company, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. 3 5 "Plan" shall mean, at any particular time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or an ERISA Affiliate is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Reportable Event" shall mean any of the events described in Section 4043(b) of ERISA other than those events as to which the twenty day notice period is waived under Subsections .13, .14, .16, .18, .19 or .20 of PBGC Reg. Section 2615. "Subsidiaries" shall mean any corporation, association or other business entity more than 50% of the voting stock of which is at the time owned or controlled, directly or indirectly, by the Borrower or one or more of its Subsidiaries or a combination thereof. "Unfunded Current Liability" of any Plan means the amount, if any, by which the present value of the accrued benefits under the Plan as of the close of its most recent plan year exceeds the fair market value of the assets allocable thereto, determined in accordance with Section 412 of the Code. SECTION 1.2. ACCOUNTING TERMS. Except as otherwise herein specifically provided, each accounting term used herein shall have the meaning given to it under Generally Accepted Accounting Principles. "Generally Accepted Accounting Principles" shall mean those generally accepted accounting principles and practices which are recognized as such by the American Institute of Certified Public Accountants acting through the Financial Accounting Standards Board ("FASB") or through other appropriate boards or committees thereof and which are consistently applied for all periods so as to properly reflect the financial condition, and the results of operations and changes in financial position, of the Borrower, except that any accounting principle or practice required to be changed by the FASB (or other appropriate board or committee of the FASB) in order to continue as a generally accepted accounting principle or practice may be so changed. Any dispute or disagreement between the Borrower and the Lender relating to the determination of Generally Accepted Accounting Principles shall, in the absence of manifest error, be conclusively resolved for all purposes hereof by the written opinion with respect thereto, delivered to the Lender, of independent accountants selected by the Borrower and approved by the Lender. II. LOANS SECTION 2.1. LOANS. Subject to the following terms and conditions, and relying upon the representations and warranties set forth herein, the Lender agrees to make "Loans" to the Borrower at any time or from time to time on or after the date hereof and until the Loan Maturity Date, in an aggregate principal amount not in excess of $450,000 at any time outstanding (the "Loan Commitment"). Subject to the terms and conditions of this Agreement, $150,000 shall be advanced to the Borrower on the date hereof, and $300,000 shall be advanced to the Borrower on five (5) Business Days' notice given to the Lender at any time prior to the Loan Maturity Date. Dove and 4 6 Four Point confirm and agree that all obligations hereunder shall be joint and several and Four Point confirms that any and all amounts loaned hereunder may be loaned to Dove for the benefit of Dove and Four Point. SECTION 2.2. NOTE. (a) The Loans by the Lender shall be evidenced by a promissory note (the "Note"), substantially in the form attached hereto as Exhibit A, appropriately completed, duly executed and delivered on behalf of the Borrower and payable to the order of the Lender in the principal amount equal to the Loan Commitment. The date and amount of each Loan and the date and amount of each payment or prepayment of principal of any Loan shall be recorded on the books and records of Lender or on a grid schedule annexed to the Note and the Borrower authorizes the Lender to make such recordation. The Note and such books and records or grid schedule shall be presumptive evidence of the Loans, absent manifest error. Promptly following the Borrower's request, the Lender shall provide the Borrower with a copy of the applicable portion of the books and records of Lender or of such grid schedule. The aggregate unpaid amount of the Loans at any time shall be the principal amount owing on the Note at such time. The aggregate principal amount outstanding on the Note shall be payable on the Loan Maturity Date and all accrued and unpaid interest thereon shall be payable on each Interest Payment Date and on the Loan Maturity Date; provided, however, that if any such day is not a Business Day, such principal and accrued interest, if any, shall be payable on the next succeeding Business Day with additional accrued interest until paid. (b) All said notations and endorsements on the books and records of Lender or on the grid schedule annexed to the Note shall, in the absence of manifest error, be conclusive as to such notations and endorsements, provided, however, that the failure to make said notation or endorsement with respect to any Loan or any payment thereunder shall not limit or otherwise affect the obligation of the Borrower under the Agreement or the Note. SECTION 2.3. INTEREST ON LOANS. Each Loan shall bear interest on its principal amount outstanding from time to time at a rate (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to ten percent (10%) per annum. SECTION 2.4. PAYMENT AND PREPAYMENT OF LOANS. (a) The Borrower shall repay the principal amount of the Loan plus all accrued and unpaid interest on the Loan Maturity Date. (b) The Borrower may, upon at least five (5) Business Days' notice to the Lender, prepay the outstanding amount of any Loan in whole or in part with accrued interest to the date of such prepayment on the amount prepaid without premium or penalty; provided, however, that each partial prepayment of a Loan shall be in a minimum amount of $25,000. 5 7 (c) Each partial prepayment of the Loan shall be permanent. SECTION 2.5. OVERDUE INTEREST; ALTERNATE RATE OF INTEREST. Any amount of principal, interest or any other amounts due hereunder which is not paid when due ("Overdue Payment"), whether at stated maturity, by acceleration or otherwise, shall, to the extent permitted by law, bear interest from such due date until the Overdue Payment is paid in full, which interest shall be payable on demand, at a fluctuating interest rate per annum equal to four percent (4%) in excess of the rate of interest in effect from time to time on the Loan (the "Default Interest Rate"). SECTION 2.6. COMPUTATIONS. All computations of the interest rate and of Fees hereunder shall be made by the Lender on the basis of a year of 360 days, for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. III. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lender, that: SECTION 3.1. ORGANIZATION, CORPORATE POWERS, ETC. The Borrower (i) is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California, and (ii) has the power and authority to own its properties and to carry on its business as now being conducted, (iii) is duly qualified to do business in every jurisdiction wherein the conduct of its business or the ownership of its properties is such as to require such qualification and (iv) has the corporate power to execute, deliver and perform the Loan Documents. SECTION 3.2. CORPORATE AND GOVERNMENTAL AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by the Borrower of the Loan Documents and the borrowings by the Borrower hereunder (a) have been duly authorized, (b) will not violate (i) any provision of law or any governmental rule or regulation applicable to the Borrower or, (ii) any order of any court or other agency of government binding on the Borrower or any indenture, agreement or other instrument to which the Borrower is a party, or by which the Borrower or any of its property is bound, and (c) will not be in conflict with, result in a breach of or constitute (with due notice and/or lapse of time) a default under, any such indenture, agreement or other instrument, or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of their property or assets other than as contemplated by the Loan Documents. Each person executing the Loan Documents has full authority to execute and deliver same for and on behalf of the Borrower. SECTION 3.3. SEC DOCUMENTS. The Borrower has furnished the following information to the Lender: (a) the Report of Form 10-K of the Borrower and it wholly-owned subsidiaries for the year ended December 31, 1996, (b) the Borrower's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1997 and June 30, 1997, and (c) all other documents that the Borrower was required to file, which it represents and warrants it did timely file with SEC under Section 13 or 6 8 14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), since June 30, 1997 (collectively, the "SEC Documents"). As of their respective filing dates, the SEC Documents complied in all material respects with the requires of the Exchange Act or the Securities Act of 1933, as amended (the "Securities Act"), as applicable. The SEC Documents as of their respective dates did not 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 made therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Borrower included in the SEC Documents (the "Financial Statements") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto. Except as may be indicated in the notes to the Financial Statements or, in the case of unaudited statements, as permitted by Form 10-Q, the Financial Statements have been prepared in accordance with Generally Accepted Accounting Principles consistently applied and fairly present the consolidated financial position of the Borrower and any subsidiaries at the dates thereof and the consolidated result of their operations and consolidated cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, recurring adjustments). The SEC Documents, this Agreement, the exhibits and schedules hereto, and any certificates or documents to be delivered to the Lender pursuant to this Agreement, when taken together, do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements contained herein and therein, in light of the circumstances under which statements were made, not misleading. SECTION 3.4. ABSENCE OF CHANGES. Since June 30, 1997, there has not been: (a) any changes in the assets, liabilities, financial condition or operations of the Borrower from that reflected in the Financial Statements except changes in the ordinary course of business which have not been, either in any individual case or in the aggregate, materially adverse, other than as shown in Schedule 3.4; (b) any material change, except in the ordinary course of business, in the aggregate contingent obligations of the Borrower, whether by way of guarantee, endorsement, indemnity, warrant or otherwise, other than as shown in Schedule 3.4; (c) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the properties or business of the Borrower; (d) any declaration or payment of any dividend or other distribution of the assets of the Borrower, or any stock split, stock dividend, reclassification, reorganization, combination or the like; (e) any labor organization activity; (f) any transfer or grant of a right other than in the ordinary course of business or any material change in the patents, patent applications, copyrights, trade secrets, trademarks, 7 9 proprietary information, proprietary rights, and processes necessary for the Borrower's business as currently conducted without any conflict with or infringement of the rights of others; (g) any notification or communication received by the Borrower alleging that the Borrower, by conducting its business as currently conducted, would violate any of the patents, trademarks, service marks, trade names, copyrights, or trade secrets or other proprietary rights of any other person or entity; (h) any notification or communication received by the Borrower that any of its employees or consultants is obligated under any contract (including licenses, covenants, or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that is violated by or would materially interfere with the current or prospective services provided to the Borrower by the employee or consultant or the use of his best efforts to promote the interests of the Borrower or that would materially conflict with the Borrower's business as currently conducted and proposed to be conducted; (i) any claim or legal action or other proceeding threatened or brought before any court, any arbitrator of any kind or any administrative agency, or any governmental investigation, which could have a Material Adverse Effect; or (j) any other event or condition of any character which has materially and adversely affected the Borrower's assets, liabilities, financial condition or operations or prospects. SECTION 3.5. TAXES. All assessed deficiencies resulting from Internal Revenue Service examinations of the Federal income tax returns of the Borrower have been discharged or reserved against. The Borrower has filed or caused to be filed all Federal, state and local tax returns which are required to be filed, and has paid or has caused to be paid all taxes as shown on said returns or on any assessment received by it, to the extent that such taxes have become due, except any such taxes that are immaterial in amount or are being contested in good faith with appropriate reserves set aside therefor. SECTION 3.6. TITLE TO PROPERTIES. The Borrower has good and marketable title to its properties and assets reflected in the Financial Statements referred to in Section 3.3 hereof, except for equipment leases in the ordinary course of business and such properties and assets as have been disposed of since the date of such balance sheet as no longer used or useful in the conduct of its business or as have been disposed of in the ordinary course of business, and all such properties and assets are free and clear of mortgages, pledges, liens, charges and other encumbrances, except as required or permitted by the provisions hereof or as disclosed in the Financial Statements referred to in Section 3.3 hereof. 8 10 SECTION 3.7. LITIGATION. (a) There are no actions, suits or proceedings (whether or not purportedly on behalf of the Borrower) pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any material property of the Borrower, at law or in equity or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which involve any of the transactions contemplated herein or which, if adversely determined against the Borrower, would in the opinion of management have a Material Adverse Effect, other than as shown in Schedule 3.4; (b) The Borrower is not in default with respect to any judgment, writ, injunction, decree, rule or regulation of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which would have a Material Adverse Effect. SECTION 3.8. AGREEMENTS; NO DEFAULT. The Borrower is not a party to any agreement or instrument or subject to any charter or other corporate restriction or any judgment, order, writ, injunction, decree or regulation materially and adversely affecting its business, properties or assets, operations or condition (financial or otherwise). The Borrower is not in default in any manner which would have a Material Adverse Effect or materially and adversely affect the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any other agreement or instrument to which it is a party. SECTION 3.9. ERISA. No Reportable Event has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. The Borrower's Plan has been approved for termination by the Internal Revenue Service and will be so terminated as of the Closing Date and the assets of the Plan at least equal all liabilities of the Plan. SECTION 3.10. PROCEEDS OF THE LOAN. The proceeds of the Loan shall be used by the Borrower only for the purposes described in the preamble hereto. SECTION 3.11. FEDERAL RESERVE REGULATIONS. (a) The Borrower is not engaged principally in, nor has as one of its important activities, the business of extending credit for the purpose of purchasing or carrying any "margin stock" (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System of the United States, as amended to the date hereof). No part of the proceeds of the Borrowing hereunder will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock. No part of the proceeds of the borrowing hereunder will be used for any purpose which violates or which is inconsistent with the provisions of Regulation X of said Board of Governors. If requested by the Lender, the Borrower will furnish to the Lender a statement on Federal Reserve Form U-1. 9 11 (b) No part of the proceeds of the Loans will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (i) to purchase or to carry margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock, or to refund indebtedness originally incurred for such purpose, or (ii) for any purpose which violates or is inconsistent with the provisions of the Regulations G, T, U, or X of the Board of Governors of the Federal Reserve System. SECTION 3.12. SUBSIDIARIES. The Borrower has no Subsidiaries other than those set forth on Schedule 3.12 attached hereto. SECTION 3.13. ENVIRONMENTAL MATTERS. The Borrower and its Subsidiaries are in compliance with all Environmental Laws and regulations including those governing Hazardous Wastes, asbestos and any other environmental issues that the Lender and its counsel deem to be appropriate. SECTION 3.14. NOT AN INVESTMENT COMPANY. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. The Borrower is not subject to regulation under any Federal or State statute or regulation which limits its ability to incur Indebtedness. SECTION 3.15. GOVERNMENTAL APPROVAL. No registration with or consent or approval of, or other action by, any Federal, state or other governmental authority or regulatory body is required in connection with the execution, delivery and performance of the Loan Documents or the borrowings hereunder. SECTION 3.16. FULL DISCLOSURE. All written information heretofore furnished by the Borrower to the Lender for purposes of or in connection with this Agreement is, and all such information hereafter furnished by the Borrower to the Lender will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Lender in writing any and all facts which, in the reasonable judgment of the Borrower have or would be reasonably likely to cause a Material Adverse Effect. SECTION 3.17. BINDING EFFECT. This Agreement and each other Loan Document to which the Borrower is a party constitute the legal, valid and binding obligations of the Borrower, enforceable against such the Borrower in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. SECTION 3.18. SECURITY AGREEMENT. The Security Agreement attached hereto as Exhibit B creates a valid, binding and enforceable perfected security interest in and lien on all of the Borrower's assets described therein. 10 12 IV. CONDITIONS OF LENDING The obligation of the Lender to lend hereunder is subject to the following conditions precedent: SECTION 4.1. REPRESENTATIONS AND WARRANTIES; NO DEFAULT. At the time of each borrowing hereunder: (i) the representations and warranties set forth in Article III hereof shall be true and correct in all material respects on and as of such time with the same effect as though such representations and warranties had been made on and as of such time; (ii) the Borrower shall be in compliance with all the terms and provisions set forth herein and no Default or Event of Default shall have occurred and be continuing at the time of each borrowing hereunder; and (iii) in the judgment of Lender, no Material Adverse Effect shall have occurred and be continuing and the prospect of repayment shall not have been impaired. SECTION 4.2. SECURITY AGREEMENT. On or prior to the Closing Date, the Lender shall have received the Security Agreement from the Borrower substantially in the form attached hereto as Exhibit B. SECTION 4.3. UCC FINANCING STATEMENTS. On or prior to the Closing Date, the Lender shall have received UCC-1 financing statements executed by the Borrower with respect to the Collateral, in form satisfactory to the Lender and which shall be recorded by the Lender at the expense of the Borrower. SECTION 4.4. NO DEFAULT CERTIFICATE; DEEMED REPRESENTATION. On the Closing Date, the Borrower shall deliver to the Lender a certificate, dated such date and signed by the Chief Financial Officer of the Borrower confirming compliance with the conditions precedent set forth in clauses (i) and (ii) of Section 4.1 hereof. Each request for a subsequent borrowing hereunder shall be deemed a representation and warranty by the Borrower that the conditions precedent set forth in Section 4.1 hereof are true and correct with the same effect as though such representations and warranties had been made on and as of the date of such borrowing. SECTION 4.5. COLLATERAL UNENCUMBERED. On or prior to the Closing Date, the Lender shall have received satisfactory proof that the Collateral is free and clear of all liens, claims, security interests and other encumbrances, other than Permitted Encumbrances. SECTION 4.6. FEES AND EXPENSES. Borrower shall have paid to Lender all Fees payable on the Closing Date and shall have paid to Lender's counsel its fees and disbursements incurred in connection with the preparation, negotiation and execution of the Loan Documents. SECTION 4.7. OTHER INFORMATION, DOCUMENTATION. The Lender shall receive such other and further information and documentation as it may reasonably require. 11 13 V. AFFIRMATIVE COVENANTS The Borrower covenants and agrees with the Lender that, so long as this Agreement shall remain in effect or any of the principal of or interest on the Note or any Fees remain unpaid, it will: SECTION 5.1. CORPORATE EXISTENCE, PROPERTIES, INSURANCE, ETC. Except as permitted in Section 5.2, do or cause to be done all things necessary to preserve and keep in full force and effect its existence as a corporation, its rights and franchises and comply, in all material respects, with all laws applicable to it; at all times maintain, preserve and protect all franchises, trade names licenses, patents, trademarks and copyrights and preserve all material property used or useful in the conduct of its business and keep the same in good repair, working order and condition, reasonable wear and tear excluded, and from time to time make, or cause to be made, all needful and proper repairs, renewals, replacements, betterments and improvements thereto so that the business carried on in connection therewith may be properly and advantageously conducted at all times; at all times keep its insurable properties adequately insured and maintain (i) insurance to such extent and against such risks, including fire, public liability and business interruption, as is customary with companies in the same or similar business, (ii) workmen's compensation insurance in the amount required by applicable law, (iii) professional liability insurance in the amount customary with companies in the same or similar business and (iv) such other insurance as may be required by law or as may be reasonably required in writing by the Lender. In addition, the Borrower shall deliver to the Lender written notice of any cancellation of any of the insurance policies required by this Section 5.1 within seven (7) Business Days after the Borrower receives notification of such cancellation. SECTION 5.2. PAYMENT OF INDEBTEDNESS, TAXES, ETC. (a) Pay, and cause each of its Subsidiaries to pay, all indebtedness and obligations in the manner consistent with its operations over the past 6 months; and (b) Pay and discharge or cause to be paid and discharged promptly all taxes, assessments and governmental charges or levies imposed upon it or any of its Subsidiaries or upon their income and profits, or upon any of their property, real, personal or mixed, or upon any part thereof, before the same shall become in default, as well as all lawful claims for labor, materials and supplies or otherwise which, if unpaid, might become a lien or charge upon such properties or any part thereof; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to pay and discharge or cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity thereof shall be contested in good faith by appropriate proceedings, and the Borrower or its Subsidiaries, as the case may be, shall have set aside on its books adequate reserves with respect to any such tax, assessment, charge, levy or claim so contested; and further provided that, subject to the foregoing provision, the Borrower or its Subsidiaries, as the case may be, will pay or cause to be paid all such taxes, assessments, charges, levies or claims upon the commencement of proceedings to foreclose any lien which has attached as security therefor. 12 14 SECTION 5.3. ACCESS TO PREMISES AND RECORDS. Maintain financial records in accordance with Generally Accepted Accounting Principles and permit representatives of the Lender to have access to such financial records, the Collateral and the premises of the Borrower upon five (5) Business Days notice, and to make such excerpts from such records or to conduct such audits and field examinations as such representatives deem reasonably necessary, the costs thereof to be borne by the Borrower. SECTION 5.4. NOTICE OF ADVERSE CHANGE. Promptly, but not later than ten (10) Business Days after any change or information shall have come to the attention of any executive officer of the Borrower, notify the Lender in writing of (a) any change in the business or the operations which, in the good faith judgment of such Person, would be reasonably likely to have a Material Adverse Effect, and (b) any information which indicates that any financial statements which are the subject of any representation contained in this Agreement, or which are furnished to the Lender pursuant to this Agreement, fail, to any material extent, to present fairly the financial condition and results of operations purported to be presented therein, disclosing the nature thereof. SECTION 5.5. NOTICE OF DEFAULT. Promptly, in the event any executive officer of the Borrower knows of any Default or Event of Default, or knows of an event of default under any other of the Loan Documents, furnish to the Lender a written statement as to such occurrence, specifying the nature and extent thereof and the action (if any) which is proposed to be taken with respect thereto. SECTION 5.6. LITIGATION NOTICE. Give the Lender prompt written notice of any action, suit or proceeding at law or in equity or by or before any governmental instrumentality or other agency which, if adversely determined against the Borrower or, the Subsidiaries on the basis of the allegations and information set forth in the complaint or other notice of such action, suit or proceedings, would be reasonably likely to have a Material Adverse Effect. SECTION 5.7. ERISA. (a) Comply and cause each of its Subsidiaries to comply, in all material respects with the provisions of ERISA applicable to any Plan maintained by the Borrower or any of its Subsidiaries; (b) as soon as possible and, in any event, within 10 days after the Borrower knows any of the following, deliver to the Lender a certificate of the Chief Financial Officer setting forth details as to such occurrence and such action, if any, which the Borrower or a ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by the Borrower, ERISA Affiliate, the PBGC, a Plan participant or the Plan Administrator with respect thereto: that a Reportable Event has occurred or is expected to occur, that an accumulated funding deficiency has been incurred or an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard (including 13 15 any required installment payments) or an extension of any amortization period under Section 412 of the Code with respect to a Plan, that a Plan has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA, that a Plan has an Unfunded Current Liability giving rise to a lien under ERISA, that proceedings may be or have been instituted to terminate a Plan, that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan, or that the Borrower, any Subsidiary or any ERISA Affiliate will or may incur any liability (including any contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064, 4201 or 4204 of ERISA. In addition to any certificates or notices delivered to the Lender pursuant to the second sentence hereof, copies of annual reports and any other notices received by the Borrower, required to be delivered to the Lender hereunder shall be delivered to the Lender no later than 30 days after the later of the date such report or notice has been filed with the Internal Revenue Service or the PBGC, given to Plan participants or received by the Borrower. SECTION 5.8. COMPLIANCE WITH CONTRACTUAL OBLIGATIONS AND REQUIREMENTS AND REQUIREMENTS OF LAW; APPLICABLE LAWS. Comply, in all material respects, with all Contractual Obligations and all applicable requirements of law, the breach of which would be reasonably likely to have a Material Adverse Effect. SECTION 5.9. SUBSIDIARIES. Give the Lender prompt written notice of the creation, establishment or acquisition, in any manner, of any Subsidiary not existing on the date hereof and listed on Schedule 3.12 attached hereto and cause each such Subsidiary to become a guarantor hereunder within thirty (30) Business Days of such due organization. VI. NEGATIVE COVENANTS The Borrower covenants and agrees with the Lender that, so long as this Agreement shall remain in effect or any of the principal of or interest on the Note or any Fees remain unpaid, it will not, directly or indirectly, and it will not, directly or indirectly cause or permit any Subsidiary to: SECTION 6.1. LIENS. Incur, create, assume or suffer to exist any mortgage, pledge, lien, charge or other encumbrance or restriction of any nature whatsoever (including conditional sales or other title retention agreements) on any of their assets now or hereafter owned, other than the following "Permitted Encumbrances": (a) liens existing on the date hereof as set forth on Schedule 6.1 attached hereto; (b) deposits under workmen's compensation, unemployment insurance and social security laws, or to secure the performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases or to secure statutory obligations or surety, appeal bonds or discharge of lien bonds, or to secure indemnity, performance or other similar bonds in the ordinary course of business; 14 16 (c) statutory liens of landlords and other liens imposed by law, such as carriers', warehousemen's or mechanic's liens, incurred in good faith in the ordinary course of business (provided that the Borrower will pay or cause to be paid or bonded any such liens in an amount greater than or equal to $25,000) and deposits made or bonds filed in the ordinary course of business to obtain the release of such liens. SECTION 6.2. INDEBTEDNESS. Incur, create, assume or permit to exist or otherwise become liable in respect of any indebtedness or liability for borrowed money evidenced by notes, bonds, debentures, or similar obligations, or accept any deposits, advances or progress payments under contracts (excluding unearned retainers and advances) ("Indebtedness"), other than: (a) Indebtedness outstanding as of the Closing Date which is set forth on Schedule 6.2; (b) Indebtedness to the Lender outstanding as of the Closing Date or hereafter incurred; or (c) Short-term unsecured Indebtedness incurred in the ordinary course of business, not in excess of $150,000 in the aggregate outstanding at any time; (d) New mortgage on 8955 Beverly Boulevard for up to $3.5 million. SECTION 6.3. GUARANTEES. Guarantee, endorse, become surety for, or otherwise in any way become or be responsible for any obligations incurred by its Subsidiaries, or obligations of any other Person in excess of $50,000 in the aggregate, provided, however, that the Borrower may endorse negotiable instruments in the ordinary course of business and make guarantees to the Lender. SECTION 6.4. SALE OF ASSETS, CONSOLIDATION OR MERGER, SALE AND LEASEBACK. (a) Sell, lease transfer or otherwise dispose of all or a substantial portion of its properties, capital stock and assets or (b) consolidate with or merge into any other corporation, or permit another corporation to merge into it, or acquire all or substantially all of the property or assets of any Person, unless the Borrower is the surviving entity and there exists no Default or Event of Default hereunder, both before and after such merger or acquisition or (c) enter into any arrangement, directly or indirectly, with any Person whereby the Borrower shall sell or transfer property, real or personal, whether now owned or hereafter acquired, if the Borrower, at the time of such sale or disposition, intends to lease or otherwise acquire the right to use or possess (except by purchase) such property or like property for a substantially similar purpose. 15 17 SECTION 6.5. SALE OF NOTES. Sell, transfer, discount or otherwise dispose of notes, accounts receivable or other rights to receive payment with or without recourse, except for the purpose of collection in the ordinary course of business. SECTION 6.6. CHANGE IN BUSINESS. Materially change or alter the nature of its business from the business currently engaged in. SECTION 6.7. DISTRIBUTIONS. Declare or pay any dividends or distribution to the shareholders of the Borrower other than for accrual of dividends on Preferred Stock. SECTION 6.8. OTHER PREPAYMENTS. Make any payment of principal of any Indebtedness, with a maturity of more than one year, for borrowed money (except the Note) or for the deferred purchase price of property or services, except at the stated maturity of such Indebtedness or as required by applicable mandatory prepayment provisions (subject to any applicable subordination provisions) other than for refinancing the mortgage with Asahi Bank. SECTION 6.9. AMENDMENT TO CERTIFICATE OF INCORPORATION OR BY-LAWS. Amend its Certificate of Incorporation or By-Laws in a material manner without the prior written consent of the Lender. VII. EVENTS OF DEFAULT SECTION 7.1. EVENTS OF DEFAULT. In the case of the happening of any of the following events ("Events of Default"): (a) default shall occur (i) in the payment of the principal or interest on the Note when due or (ii) in the payment of any Fees or other amounts due hereunder; (b) any representation or warranty herein or in any of the Loan Documents, in any certificate or report furnished in connection herewith or in any amendment to this Agreement, shall prove to be false or misleading in any material respect when made or given or deemed made or given; (c) default shall be made in respect of any agreement or obligation relating to any obligation of the Borrower in excess of $100,000 for borrowed money (other than the Note), if the effect of such default or the result of any action by the obligee is to accelerate the maturity of such obligation or to permit the holder or obligee thereof (or a trustee on behalf of such holder or obligee) to cause such obligation to become due prior to the stated maturity thereof or which, with the passage of time, the giving of notice or both would constitute an event of default under any agreement, or any such obligation shall not be paid when due after giving effect to any applicable grace period; 16 18 (d) default shall be made in the due observance or performance of any covenant, condition or agreement to be performed pursuant to this Agreement or any of the Loan Documents and, in the case of Affirmative Covenants in Article V hereof, such default continues for at least thirty (30) days, except for breach of financial covenants at September 30, 1997 under the Sanwa Bank California Loan Agreement with Borrower; (e) the Borrower (i) voluntarily commences any case, proceeding or other action or file any petition seeking relief under Title 11 of the United States Code or any other existing or future Federal domestic or foreign Bankruptcy, insolvency or similar law, (ii) consents to the institution of, or fails to controvert in a timely and appropriate manner, any such proceeding or the filing of any such petition, (iii) applies for or consents to the employment of a receiver, trustee, custodian, sequestrator or similar official for the Borrower or any Guarantor or for a substantial part of their property, (iv) files an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) makes a general assignment for the benefit of creditors, (vi) becomes unable, admits in writing its inability or fails generally to pay its debts as they become due or (vii) takes corporate action for the purpose of effecting any of the foregoing; (f) an involuntary case, proceeding or other action shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Borrower or of a substantial part of property, under Title 11 of the United States Code or any other existing or future Federal, domestic or foreign bankruptcy, insolvency or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator or similar official for the Borrower or for a substantial part of its property, or (iii) the winding-up or liquidation of the Borrower; and such proceeding or petition shall continue undismissed for sixty (60) days or an order or decree approving or ordering any of the foregoing shall continue unstayed and in effect for sixty (60) days; (g) there shall be commenced against the Borrower, any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged or stayed or bonded pending appeal within sixty (60) days from the entry thereof; (h) final judgments or orders for the payment of money in excess of $50,000 in the aggregate shall be rendered against the Borrower, and the same shall remain undischarged, unsatisfied or unbonded for a period of thirty (30) days during which execution shall not be effectively stayed; (i) dissolution of the Borrower (without automatic reconstitution) and no successor acceptable to the Lender shall have acquired substantially all the assets and assumed substantially all the liabilities of the Borrower including, without limitation, the Obligations; (j) termination, expiration or cancellation of, or re-entry of dispossession by summary proceedings or otherwise by the landlord with respect to any lease material to the business 17 19 of Borrower the Lease unless, at such time, the Borrower is in possession of alternate leased premises reasonably approved by the Lender; then, at any time thereafter during the continuance of any such event, the Lender may, by written notice to the Borrower (i) terminate the Loan Commitment, (ii) declare the Note to be forthwith due and payable, both as to principal and interest, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Note to the contrary notwithstanding, and (iii) charge the Default Interest Rate for the days that the Event of Default continues provided, however, that if an event specified in Section 7.1(e),(f) of(g) hereof shall have occurred, the Loan Commitment and the Loan shall automatically terminate and the Note shall immediately become due and payable, and the Lender in each instance shall have the right to exercise its rights under the Loan Document as permitted by law. VIII. MISCELLANEOUS SECTION 8.1. NOTICES. All notices, requests and other communications provided for hereunder shall be in writing and shall be deemed to have been duly given or made when delivered by certified mail with a return receipt requested, three days after the day on which mailed, or, in the case of overnight courier service, one business day after delivery to such courier service, addressed as set forth below, or to such other address as may be hereafter notified by the respective parties hereto: (a) if to the Lender, at Media Equities International, LLC c/o Morrison Cohen Singer & Weinstein, LLP 750 Lexington Avenue New York, New York 10022 Attention: Peter D. Weinstein, Esq. if to the Borrower, at Dove Entertainment Inc. 8955 Beverly Boulevard Los Angeles, California 90048 Attention: Mr. R. Lightstone SECTION 8.2. SURVIVAL OF AGREEMENT; SUCCESSORS AND ASSIGNS. (a) All covenants, agreements, representations and warranties made herein and in the certificates delivered pursuant hereto shall survive the making by the Lender of the Loans herein contemplated and the execution and delivery to the Lender of the Note evidencing such Loans 18 20 and shall continue in full force and effect so long as the Note is outstanding and unpaid or the Loan Commitment is outstanding. (b) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include (i) the successors and assigns of such party; (ii) all covenants, promises and agreements by or on behalf of the Borrower and the Guarantors which are contained in this Agreement shall bind and inure to the benefit of the respective successors and assigns of the Lender and (iii) no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with this Agreement or any of the other Loan Documents. The Lender shall not have any obligation to any Person not a party to this Agreement or other Loan Documents. SECTION 8.3. EXPENSES OF THE LENDER; INDEMNIFICATION. (a) The Borrower will pay all reasonable out-of-pocket costs and expenses incurred by the Lender in connection with the preparation, development and execution of the Loan Documents and any amendment, supplement or modification to this Agreement, the Note and the other Loan Documents including, without limitation, the fees and disbursements of counsel to the Lender (including, without limitation, allocation of the cost of in-house counsel to the Lender) incurred in connection with the preparation, negotiation, execution, waiver, modification and enforcement of this Agreement or any of the Loan Documents. (b) The Borrower agrees to indemnify the Lender and its respective directors, officers, employees and agents against, and to hold the Lender and each such person harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees and expenses, incurred by or asserted against the Lender or any such person arising out of, in any way connected with, or as a result of (i) the use of any of the proceeds of the Loans, (ii) this Agreement or other Loan Documents, (iii) the performance by the parties hereto and thereto of their respective obligations hereunder and thereunder (including but not limited to the making of the Commitment) and consummation of the transactions contemplated hereby and thereby, (iv) breach of any representation or warranty or (v) any claim, litigation, investigation or proceedings relating to any of the foregoing, whether or not the Lender or any such person is a party thereto; provided, however, that such indemnity shall not, as to the Lender, apply to any such losses, claims, damages, liabilities or related expenses to the extend that they result from the gross negligence or willful misconduct of the Lender. (c) The Borrower agrees to indemnify, defend and hold harmless the Lender and its respective officers, directors, shareholder, agents and employees (collectively, the "Indemnitees") from and against any loss, cost, damage, liability, lien, deficiency, fine, penalty or expense (including, without limitation, reasonable attorney's fees and reasonable expenses for investigation, removal, cleanup and remedial costs and modification costs incurred to permit continue or resume normal operations of any property or assets or business of the firm) arising from a violation of, or failure to comply with any Environmental Laws and to remove any lien arising therefrom except to 19 21 the extent caused by the gross negligence or willful misconduct of any Indemnitee, which any of the Indemnitees may incur of which may be claimed or recorded against any of the Indemnitees by any Person. (d) The provisions of this Section 8.3 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the invalidity or unenforceability of any term or provision of this Agreement or any of the Loan Documents, or any investigation made by or on behalf of the Lender. All amounts due under this Section 8.3 shall be payable on written demand therefor. SECTION 8.4. APPLICABLE LAW. This Agreement, the Note and the other Loan Documents (other than those containing a contrary express choice of law) shall be governed and construed by and interpreted in accordance with the laws of the State of New York. SECTION 8.5. WAIVER OF RIGHTS BY THE LENDER; WAIVER OF JURY TRIAL, ETC. (a) Neither any failure nor any delay on the part of the Lender in exercising any right, power or privilege hereunder or under the Loan Documents shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any other right, power or privilege. Except as prohibited by law, each party hereto hereby waives any right it may have to claim or recover in any litigation referred to in this Section any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. Each party hereto (i) certifies that neither any representative, agent or attorney of the Lender has represented, expressly or otherwise, that the Lender would not, in the event of litigation, seek to enforce the foregoing waivers and (ii) acknowledges that it has been induced to enter into this Agreement or the Loan Documents, as applicable, by, among other things, the mutual waivers and certifications herein. (b) THE BORROWER AND THE LENDER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE, AND COVENANT THAT THEY WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM OR ACTION IN ANY WAY, INVOLVING OR ARISING, DIRECTLY OR INDIRECTLY, OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. SECTION 8.6. ACKNOWLEDGMENTS. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement, the Note and the other Loan Documents; (b) no joint venture exists among the Borrower and the Lender. 20 22 SECTION 8.7. CONSENT TO JURISDICTION. (a) The Borrower hereby irrevocably submits to the non-exclusive jurisdiction of any United States federal or New York state court sitting in New York City in any action or proceedings arising out of or relating to any Loan Documents and the Borrower hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in any such court and irrevocably waives any objection it may now or hereafter have as to the venue of any such action or proceeding brought in such a court or the fact that such court is an inconvenient forum. (b) The Borrower irrevocably and unconditionally consents to the service or process in any such action or proceeding in any of the aforesaid courts by the mailing of copies of such process to them by certified or registered mail at its address specified in Subsection 8.1. SECTION 8.8. EXTENSION OF MATURITY. Except as otherwise expressly provided herein, whenever a payment to be made hereunder shall fall due and payable on any day other than a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall be included in computing interest. SECTION 8.9. MODIFICATION OF AGREEMENT. No modification, amendment or waiver of any provision of this Agreement or the Note, nor consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by the Lender and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Borrower the Guarantors in any case shall entitle the Borrower to any other or further notice or demand in the same, similar or other circumstance. SECTION 8.10. PARTICIPATIONS AND ASSIGNMENTS. (a) The Borrower may not assign or transfer any of their interests under this Agreement, the Note or the Loan Documents without the prior written consent of the Lender. (b) The Lender reserves the right to grant participations in or to sell and assign its rights, duties or obligations with respect to the Loan or the Commitment to such lending institutions or other parties as it may choose, without the consent of the Borrower, which consent is deemed to be granted. SECTION 8.11. SEVERABILITY. In case any one or more of the provisions contained in this Agreement or in the Note should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. 21 23 SECTION 8.12. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument. SECTION 8.13. ENTIRE AGREEMENT; CUMULATIVE REMEDIES. (a) This Agreement and the other Loan Documents constitute the entire agreement among the parties hereto and thereto as to the subject matter hereof and thereof and supersede any previous agreement, oral or written, as to such subject matter. (b) The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. SECTION 8.14. HEADINGS. Section headings used herein are for convenience of reference only and are not to affect the construction of or be taken into consideration in interpreting this Agreement. 22 24 IN WITNESS WHEREOF, the Borrower and the Lender have caused this Agreement to be duly executed by their duly authorized officers, all of the day and year first above written. DOVE ENTERTAINMENT, INC. By: /s/ NEIL TOPHAM -------------------------------------- Name: Neil Topham Title: Chief Financial Officer DOVE FOUR POINT, INC. By: /s/ NEIL TOPHAM -------------------------------------- Name: Neil Topham Title: Chief Financial Officer MEDIA EQUITIES INTERNATIONAL, LLC By: /s/ RON LIGHTSTONE -------------------------------------- Name: Ron Lightstone Title: Partner 23 25 Schedule 3.4 Potential Materially Adverse Effect Transactions: Class Action Suit Viner "Morning Glory" Arbitration Viner Employee Separation Agreement Arbitration Termination of Penguin Distribution Agreement The Company projects that it may incur a loss for the quarter ending September 30, 1997 Certain Company payables are overdue Lawsuit with Steven Soloway Threatened lawsuit with Jerry Leider 24 26 Schedule 3.12 - Subsidiaries Dove Four Point, Inc. Dove International, Inc. Dove Retail, Inc. 25 27 Schedule 6.1 - Existing Liens Asahi Bank, 1st mortgage on 8955 Beverly Boulevard, Los Angeles Sanwa Bank, Senior Debt Loan with security interest in the assets of the Company (other than 8955 Beverly Boulevard, Los Angeles). Mercedes Benz Credit Corporation, Security Interest in Mercedes Benz 500 SL. Lien in favor of Guinness Mahon in connection with the film "Wilde". Operating Leases: Fletcher Jones Motorcars, Inc. - Mercedes 94 C280W Miller Infinity - Infinity QX4 Truck Various operating leases for Apple Computers, photocopies and telephone systems. 26 28 EXHIBIT A $450,000 New York, New York September ____, 1997 FOR VALUE RECEIVED, the undersigned, DOVE ENTERTAINMENT, INC., a California corporation and DOVE FOUR POINT, INC., a Florida corporation, DO HEREBY JOINTLY AND SEVERALLY PROMISE to pay to the order of MEDIA EQUITIES INTERNATIONAL, LLC (the "Lender"), at the office of the Lender c/o Morrison Cohen Singer & Weinstein, LLP, 750 Lexington Avenue, New York, New York 10022, on the Loan Maturity Date, (as such term and all other capitalized terms in this Note are defined in the and Loan Agreement (the "Agreement") dated as of September _____, 1997 between the Borrower and the Lender) in lawful money of the United States of America, in immediately available funds, (i) the principal amount of the lesser of (a) Four Hundred and Fifty Thousand Dollars ($450,000), or (b) the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower pursuant to the Agreement as shown on the books and records of Lender or on a grid schedule annexed hereto, and (ii) interest from the date hereof on the unpaid principal amount hereof, in like money, at said office, on the dates and at the rate provided in accordance with Article II of the Agreement and, upon default, on demand from time to time, on any overdue principal and on any overdue charge or fee, and, to the extent permitted by law, on any overdue interest, for each day from the due date thereof (by acceleration or otherwise) until such sum is paid in full, at a rate of four percent (4%) per annum in excess of the rate in effect from time to time on the Loan. This Note is the Note referred to in Section 2.2 of the Agreement, and is subject to prepayment and acceleration of maturity as set forth in the Agreement. This Note shall be governed by and construed in accordance with the laws of the State of New York and any applicable laws of the United States of America. DOVE ENTERTAINMENT, INC. By:________________________________________ Name: Title: DOVE FOUR POINT, INC. By:________________________________________ Name: Title: 27 EX-10.48 4 EXHIBIT 10.48 1 EXHIBIT 10.48 DEBT SUBORDINATION AND INTERCREDITOR AGREEMENT THIS AGREEMENT is made this 26th day of September, 1997 by and among DOVE ENTERTAINMENT, INC., a California corporation, having its principal place of business at 8955 Beverly Boulevard, Los Angeles, California 90048 ("Dove"), DOVE FOUR POINT, INC., a Florida corporation, having its principal place of business at 8955 Beverly Boulevard, Los Angeles, California 90048 ("Four Point"; Dove and Four Point, individually and collectively, "Borrower"), MEDIA EQUITIES INTERNATIONAL, LLC a New York limited liability company having its principal place of business at c/o Morrison Cohen Singer & Weinstein, LLP, 750 Lexington Avenue, New York , New York, ("Creditor") and SANWA BANK CALIFORNIA having a place of business at 601 South Figueroa Street, Los Angeles, California 90017 ("Lender"). 1. Definitions. (a) "Junior Debt" means all indebtedness, liabilities and obligations of Borrower to Creditor of every kind and description, absolute or contingent, due or to become due, now existing or hereafter arising, and all increases, extensions and renewals thereof, together with all interest, fees, charges, expenses and costs for which Borrower is now or hereafter becomes liable to pay to Creditor, arising out of: (a) a $450,000 promissory note dated September 26th, 1997; and (b) obligations and liabilities of the Borrower to the Creditor contained in that certain Loan Agreement dated September 26th, 1997 between Borrower and Creditor and all amendments thereto or modifications thereof (the "Loan Agreement"). (b) "Lender's Loan Documents" means the Term Loan Agreement dated as of August 16, 1996 in the original principal amount of $1,365,447.27 between Dove and Lender, the Continuing Guaranty dated August 16, 1996 executed by Four Point and all other agreements, documents, contracts and instruments, executed and delivered at any time by the Borrower in favor of the Lender in connection with the loan described therein (the "Loan"), including without limitation the Supplemental Loan Agreement and Supplemental Security Agreement, each dated on or about April 30, 1997 and the Forbearance Agreement, Amendment, Waiver and Release dated as of August 28, 1997 among Borrower and Lender. (c) "Superior Debt" means all indebtedness, liabilities and obligations of Borrower to Lender of every kind and description, whenever and however arising, absolute or contingent, due or to become due, now existing or hereafter arising, under the Lender's Loan Documents, and all increases, extensions and renewals thereof, together with all interest, fees, charges, expenses and costs for which Borrower is now or hereafter becomes liable to pay to Lender; but not exceeding a total principal balance at any one time outstanding of One Million Three Hundred Thousand Dollars ($1,300,000). 1 2 2. Subordination. Creditor hereby postpones and subordinates, to the extent and in the manner provided in this Agreement, all of the Junior Debt to the full and final payment of all of the Superior Debt and the termination of any obligation of Lender to extend further Superior Debt. Except as permitted in Section 2(a) hereof, no payments shall be made on account of the Junior Debt so long as any Superior Debt is outstanding. If Borrower issues or has issued any instrument or document evidencing the Junior Debt, each such instrument and document shall bear a conspicuous legend that it is subordinated to the Superior Debt. Borrower's books shall be marked to evidence the subordination of all of the Junior Debt to the Superior Debt. Lender is authorized to examine such books from time to time and to make any notations required by this Agreement. (a) Until such time as the Lender gives the creditor notice that there has occurred a monetary default under the Lender's Loan Documents, the Borrower shall be permitted to make, and the Creditor is permitted to receive and retain monthly installments of interest under the Junior Debt at the rate of ten percent (10%) per annum. 3. Security Interest Priorities. Notwithstanding (a) the time, date, manner, method or order of the attachment and/or perfection of any mortgages, pledges, security interests or liens granted in favor of the Creditor or the Lender, in or on any collateral securing the Superior Debt, (b) the time or manner of the filing of the Lender's respective financing statements or mortgages, (c) the provisions of the UCC or any other applicable laws or court decisions, (d) the dating, executing or delivery of any document granting Creditor or Lender security interest and/or liens in or on any collateral, (e) the provisions of any contract or document in effect between the Creditor or Lender, on the one hand, and Borrower or any affiliate thereof, on the other, (f) the giving or failure to give notice of the acquisition or expected acquisition of any purchase money or other security interests and (g) whether the Creditor or the Lender or any agent or bailee thereof holds possession of any part or all of any collateral the following, as among the Creditor and the Lender, shall be the relative priority of the security interests and liens of the Creditor and the Lender in the collateral securing the Superior Debt: (a) The liens, mortgages, pledges, security interests and rights that the Lender has or may have in the collateral securing the Superior Debt shall at all times be superior and prior to any lien or security interest of the Creditor therein. (b) All realizations upon the collateral securing the Superior Debt shall be first applied to the satisfaction of the Superior Debt, irrespective of whether at any time any part or all of the Superior Debt is due and payable, until the Superior Debt shall be fully, finally and indefeasibly paid in cash. (c) If any of the collateral securing the Superior Debt is received by the Creditor in violation of the terms of this Agreement, such collateral shall be promptly delivered by the Creditor to the Lender in the form received, except for the addition of any endorsement or assignment necessary to effect a transfer of all rights to the Lender, without the necessity of demand or request by the Lender. The Lender is irrevocably authorized to supply any required endorsement 2 3 or assignment that may have been omitted. Until so delivered, any such collateral shall be held by the Creditor in trust for the Lender and shall not be commingles with other funds or property of the Creditor. (d) Lender may, at its option, during any period of default relating to the Superior Debt, take such enforcement action it deems appropriate with respect to the collateral for the Superior Debt without any requirement that it obtain the prior consent of Creditor. Until the Superior Debt has been fully, finally and indefeasibly paid in cash, and all of the financing arrangements and commitments between Borrower and Lender have been terminated, Creditor shall not take any enforcement action against any of the collateral securing the Superior Debt without first obtaining the prior written consent of Lender, which consent may be withheld for any reason whatsoever, in the sole discretion of Lender. (e) After all of the Superior Debt has been fully, finally and indefeasibly paid in cash, and all of the financing arrangements and commitments between Borrower and Lender have been terminated, the balance of realizations upon the collateral securing the Superior Debt, if any, shall be paid in accordance with Section 9-504 of the UCC. 4. Warranties and Representations of Borrower and Creditor. Borrower and Creditor each hereby represent and warrant that: (a) Creditor has not relied and will not rely on any representation or information of any nature made by or received from Lender relative to Borrower in deciding to execute this Agreement or to permit it to continue in effect; (b) as of the date hereof, the total maximum aggregate principal amount of the Junior Debt is $450,000; (c) no part of the Junior Debt is evidenced by any instrument, security or other writing which has not previously been or is not simultaneously herewith being delivered to Lender, (d) Creditor is the lawful owner of the Junior Debt and no part thereof is subject to any defense, offset or counterclaim; (e) Creditor has not heretofore assigned or transferred any of the Junior Debt or any interest therein; (f) Creditor has not heretofore given any subordination with respect to the Junior Debt which is currently effective; and (g) the only collateral or security for the Junior Debt is a blanket lien or security interest in all of the assets of the Borrower subordinate to the lien(s) or security interest(s) of the Lender. 5. Negative Covenants. Until all of the Superior Debt has been fully and indefeasibly paid and any obligations of Lender to extend further Superior Debt is terminated: (a) Borrower shall not, directly or indirectly, make any payment on account of the Junior Debt, except as permitted in Section 2(a) hereof, and shall not grant any security interest in, mortgage, pledge, assign or transfer, any of its assets to secure or satisfy all or any part of the Junior Debt, except as stated in Section 4(g) hereof; (b) Except as provided in Sections 2(a) or 4(g) hereof, and subject to Section 3 hereof, Creditor shall not demand or accept from Borrower or any other person any payment of, or collateral for the Junior Debt, nor shall Creditor enforce any part of the Junior Debt; (c) Creditor shall not hereafter give any subordination with respect to the Junior Debt, or transfer or assign any of the Junior Debt to any person other than Lender; (d) Borrower will not hereafter issue any instrument, security or other writing evidencing any part of the Junior Debt, and Creditor will not receive any such writing, except upon the prior written approval of Lender or at the request of and in the manner 3 4 requested by Lender, (e) Creditor will not commence or join with any other creditors of Borrower in commencing any bankruptcy, reorganization, receivership or insolvency proceeding against Borrower, and (f) Borrower nor Creditor shall otherwise take or permit any action prejudicial to or inconsistent with the provisions of this Agreement. 6. Authority to Act for Creditor. For so long as any of the Superior Debt shall remain unpaid, Lender shall have the right to act as Creditor's attorney-in-fact for the purposes specified herein and Creditor hereby irrevocably appoints Lender its true and lawful attorney, with full power of substitution, in the name of Creditor or in the name of Lender, for the use and benefit of Lender, without notice to Creditor or any of his representatives, heirs or administrators, to perform the following acts, at Lender's option, at any meeting of creditors of Borrower or in connection with any case or proceeding, whether voluntary or involuntary, for the distribution, division or application of the assets of Borrower or the proceeds thereof, regardless of whether such case or proceeding is for the liquidation, dissolution, winding up of affairs, reorganization or arrangement of Borrower, or for the composition of the creditors of Borrower, in bankruptcy or in connection with a receivership, or under an assignment for the benefit of creditors of Borrower or otherwise: (a) To enforce claims comprising the Junior Debt, either in its own name or in the name of Creditor, by proof of debt, proof of claim, suit or otherwise; (b) To collect any assets of Borrower distributed, divided or applied by way of dividend or payment on account of the Junior Debt, or any securities issued on account of the Junior Debt and to apply the same, or the proceeds of any realization upon the same that Lender in its discretion elects to effect, to the Superior Debt until all of the Superior Debt (including without limitation, all interest accruing on the Superior Debt after the commencement of any bankruptcy case) has been paid in full, rendering any surplus to Creditor if and to the extent permitted by law; (c) To vote claims comprising the Junior Debt to accept or reject any plan of partial or complete liquidation, reorganization, arrangement, composition or extension; and (d) To take generally any action in connection with any such meeting, case or proceeding that Creditor would be authorized to take but for this Agreement. In no event shall Lender be liable to Creditor for any failure to prove the Junior Debt, to exercise any right with respect thereto or to collect any sums payable thereon, except in the event of Lender's gross negligence (provided Lender has received Creditor's full cooperation) or willful misconduct 7. Waivers. Borrower and Creditor each hereby waives any defense based on the adequacy of a remedy at law which might be asserted as a bar to the remedy of specific performance of this Agreement in any action brought therefor by Lender. To the fullest extent permitted by law, Borrower and Creditor each hereby further waives: presentment, demand, protest, notice of protest, notice of default or dishonor, notice of payment or nonpayment and any and all other notices and 4 5 demands of any kind in connection with instruments, documents and agreements evidencing, securing or relating in any way to all or any portion of the Superior Debt or the Junior Debt to which Borrower or Creditor may be a party; notice of the acceptance of this Agreement by Lender; notice of any loans made, extensions granted or other action taken by Lender in reliance hereon, including without limitation: (a) granting time or other indulgences to Borrower, (b) renewing, extending, modifying or compromising any of the Superior Debt, (c) possessing, substituting, modifying, waiving or releasing any guaranty or collateral held as security for any of the Superior Debt, or (d) adding or releasing any person primarily or secondarily liable thereon; and all other demands and notices of every kind in connection with this Agreement, the Superior Debt or Junior Debt, and no such action taken by Lender shall affect the subordination or other provisions herein in any manner. 8. Indulgences Not Waivers. Neither the failure nor any delay on the part of Lender to exercise any right, remedy, power or privilege hereunder or under any instruments, documents or agreements evidencing or relating to the Superior Debt shall operate as a waiver thereof or give rise to an estoppel, nor be construed as an agreement to modify the terms of this Agreement, nor shall any single or partial exercise of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No consent or waiver by a party hereunder shall be effective unless it is in writing and signed by the party making such consent or waiver, and then only to the extent specifically stated in such writing. 9. Duration and Termination. This Agreement shall constitute a continuing agreement of subordination and shall terminate only upon the full and final payment of the Superior Debt and termination of any obligation of Lender to extend any further Superior Debt. Neither the dissolution nor the bankruptcy of any Creditor shall effect a termination hereof. 10. Administration by Lender. In the administration of the Superior Debt, either before or after a demand or default, Creditor acknowledges and agrees that Lender may proceed in its sole discretion, including without limitation, raising or lowering loan advances, interest rates or fees, charging additional fees, declining to make further advances, extending additional loans or other financing accommodations to Borrower, increasing the dollar amounts of Borrower's credit limits, extending credit terms and maturities, compromising claims and exchanging and releasing collateral or obligors; all with no duty to Creditor, and no such action shall affect the subordination or other provisions herein in any manner. 11. New Superior Debt. If any of the Superior Debt consists of revolving loans and such loans are at any time or times thereafter paid or performed in full and thereafter Borrows again becomes indebted or otherwise obligated to Lender for revolving loans, the provisions of this Agreement shall apply to said new indebtedness, which, for purposes of this Agreement, shall be deemed Superior Debt. 12. Subrogation. Following the final and indefeasible payment in full of all Superior Debt, the holders of Junior Debt shall be subrogated to the rights of the holdoffs of Superior Debt 5 6 to receive payments or distributions of assets of the Borrows until all Junior Debt shall be paid in full; and for the purposes of such subrogation, no payments or distributions to the holdoffs of such Superior Debt of any cash, property or securities to which the holdoffs of Junior Debt would otherwise be entitled except for the provisions of this Agreement, and no payment over pursuant to the provisions of this Agreement to the holdoffs of such Superior Debt by the holdoffs of Junior Debt, shall, as among the Borrower and its creditors other than the holdoffs of such Superior Debt and the holders of Junior Debt, be deemed to be a payment by the Borrower to or on account of such Superior Debt, it being understood that the provisions of this Agreement are solely for the purposes of defining the relative rights of the holdoffs of such Superior Debt, on the one hand, and the holders of the Junior Debt, on the other hand. 13. Notices. All notices, requests, demands and other communications required or permitted under this Agreement or by law shall be in writing and shall be deemed to have been duly given, made and received only when delivered against receipt or when deposited in the United States mails, certified mail, return receipt requested, postage prepaid, or when delivered by next day express delivery service, addressed as set forth in the first paragraph of this Agreement. Any addressee may alter the address to which communications are to be sent by giving notice of such change of address in conformity with the provisions of this Paragraph 13 for the giving of notice. 14. Lender's Duties Limited. The rights granted to Lender in this Agreement are solely for its protection and nothing herein contained imposes on Lender any duties with respect to any property either of Borrower or of Creditor heretofore or hereafter received by Lender. Lender has no duty to preserve rights against prior parties on any instrument or chattel paper received from Borrower as collateral security for the Superior Debt or any portion thereof 15. Effect on Borrower. This Agreement is being entered into solely for the benefit of Lender and is not intended to give any rights, benefits or privileges to Borrower or Creditor. Except as expressly et forth herein, this Agreement shall not otherwise (i) impair or affect, as among the Borrower or its creditors (other than the Lender) and the holdoffs of the Junior Debt, the obligation of the Borrower, which is absolute and unconditional, to pay the holders of Junior Debt the principal of and interest on the Junior Debt, or (ii) affect the relative rights against the Borrower of the holder of the Junior Debt and the creditors of the Borrower (other than the Lender), or (iii) prevent any holder of any Junior Debt from exercising all remedies otherwise permitted by applicable law upon default under the instrument or instruments governing the Junior Debt. 16. Authority. Borrower and Creditor represent and warrant that they have the legal power and authority to enter into this Agreement and that the persons signing for each party are authorized and directed to do so. 17. Entire Agreement. Amendment. This Agreement constitutes and expresses the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, whether express or implied, oral or written. Neither this Agreement nor any portion or provision hereof may 6 7 be amended orally or in any manner other than by an agreement in writing signed by Lender, Borrower and Creditor. 18. Additional Documentation. Borrower and Creditor shall execute and deliver to Lender such further instruments and shall take such further action as Lender may at any time or times request in order to carry out the provisions and intent of this Agreement. 19. Jury Waiver. EACH PARTY HERETO HEREBY WAIVES TRIAL BY JURY IN ANY COURT IN ANY SUIT, ACTION OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO THE FINANCING TRANSACTIONS OF WHICH THIS AGREEMENT IS A PART AND/OR THE DEFENSE OR ENFORCEMENT OF ANY OF LENDER'S RIGHTS AND REMEDIES, INCLUDING WITHOUT LIMITATION, TORT CLAIMS. CREDITOR ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY AND ONLY AFTER CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH HIS ATTORNEY. 20. Successors and Assigns. This Agreement shall inure to the benefit of Lender, its successors and assigns, and shall be binding upon both Borrower and Creditor and their respective heirs, personal representatives, successors and assigns. 21. Defects Waived. This Agreement is effective notwithstanding any defect in the validity or enforceability of any instrument or document evidencing the Superior Debt. 22. Governing Law. The validity, construction and enforcement of this Agreement shall be governed by the internal laws of the State of California. 23. Severability. The provisions of this Agreement are independent of and separable from each other. If any provision hereof shall for any reason be held invalid or unenforceable, it is the intent of the parties that such invalidity or unenforceability shall not affect the validity or enforceability of any other provision hereof, and that this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. 7 8 24. Counterparts. This Agreement may be executed in separate counterparts and by each party on a separate counterpart, each of which, when executed and delivered, shall be deemed to be an original. Such counterparts shall together constitute one and the same instrument IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed, sealed and delivered. this 26th day of September, 1997. DOVE ENTERTAINMENT, INC. By: /s/ NEIL TOPHAM ------------------------------------ Name: Neil Topham Title: Chief Financial Officer DOVE FOUR POINT, INC. By: /s/ NEIL TOPHAM ------------------------------------ Name: Neil Topham Title: Chief Financial Officer MEDIA EQUITIES INTERNATIONAL, LLC By: /s/ RON LIGHTSTONE ------------------------------------ Name: Title: SANWA BANK CALIFORNIA By: /s/ E. LEIGH IRWIN ------------------------------------ Name: E. Leigh Irwin Title: Vice President 8 EX-10.49 5 EXHIBIT 10.49 1 EXHIBIT 10.49 SECURITY AGREEMENT AGREEMENT dated as of September 26, 1997 between DOVE ENTERTAINMENT, INC., a California corporation ("Dove"), DOVE FOUR POINT, INC., a Florida corporation ("Four Point; Dove and Four Point, individually and collectively, "Borrower"), and MEDIA EQUITIES INTERNATIONAL, LLC, a New York limited liability company ("Lender"). W I T N E S S E T H: WHEREAS, Borrower and Lender are parties to a Loan Agreement dated as of September 26th, 1997 (as the same may be amended and in effect from time to time, the "Loan Agreement"), providing for extensions of credit to be made to Borrower by Lender; and WHEREAS, it is a condition precedent to the making of Loans under the Loan Agreement that Borrower shall have granted the security interests contemplated by this Agreement; NOW, THEREFORE, in consideration of the premises and in order to induce Lender to make Loans under the Loan Agreement, Borrower hereby agrees with Lender as follows: SECTION I. Definitions A. Certain Defined Terms. Terms defined in the Loan Agreement and not otherwise defined herein have the respective meanings provided for in the Loan Agreement. The following terms, as used herein, have the meanings set forth below: "Accounts" means all "accounts" (as defined in the UCC) now owned or hereafter created or acquired by Borrower including, without limitation, all of the following now owned or hereafter created or acquired by Borrower: (a) accounts receivable, contract rights, book debts, notes, drafts and other obligations or indebtedness owing to Borrower arising from the sale, lease or exchange of goods or other property and/or the performance of services; (b) Borrower's rights in, to and under all purchase orders for goods, services or other property; (c) Borrower's rights to any goods, services or other property represented by any of the foregoing (including returned or repossessed goods and unpaid sellers' rights of rescission, replevin, reclamation and rights to stoppage in transit); (d) monies due to or to become due to Borrower under all contracts for the sale, lease or exchange of goods or other property and/or the performance of services (whether or not yet earned by performance on the part of Borrower); (e) uncertificated securities; and (f) Proceeds of any of the foregoing and all 1 2 collateral security and guaranties of any kind given by any Person with respect to any of the foregoing. "Collateral" has the meaning assigned to that term in Section 2. "Copyright License" means any written agreement now or hereafter in existence granting to Borrower any right to use any Copyright including, without limitation, the agreements described in Schedule 1 of the Copyright Security Agreement. "Copyrights" means collectively all of the following: (a) all copyrights, rights and interests in copyrights, works protectable by copyright, copyright registrations and copyright applications now owned or hereafter created or acquired by Borrower, including, without limitation, those listed on Schedule 1 of the Copyright Security Agreement; (b) all renewals of any of the foregoing; (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing, including, without limitation, damages or payments for past or future infringements of any of the foregoing; (d) the right to sue for past, present and future infringements of any of the foregoing; (e) all rights corresponding to any of the foregoing throughout the world; and (f) all goodwill associated with and symbolized by any of the foregoing. "Copyright Security Agreement" means the copyright security agreement to be executed and delivered by Borrower to Lender, substantially in the form of Exhibit A, as such agreement may hereafter be amended, supplemented or otherwise modified from time to time. "Documents" means all "documents" (as defined in the UCC) or other receipts covering, evidencing or representing goods now owned or hereafter acquired by Borrower. "Equipment" means all "equipment" (as defined in the UCC) now owned or hereafter acquired by Borrower including, without limitation, all machinery, motor vehicles, trucks, trailers, vessels, aircraft and rolling stock and all parts thereof and all additions and accessions thereto and replacements therefor. "Fixtures" means all of the following now owned or hereafter acquired by Borrower: plant fixtures; business fixtures; other fixtures and storage office facilities, wherever located; and all additions and accessions thereto and replacements therefor. "General Intangibles" means all "general intangibles" (as defined in the UCC) now owned or hereafter acquired by Borrower including, without limitation, all right, title and interest of Borrower in and to: (a) all obligations or indebtedness owing to Borrower (other than Accounts) from whatever source arising; (b) all tax refunds; (c) Intellectual Property; and (d) all trade secrets and other confidential information relating to the business of Borrower including by way of illustration and not limitation: systems and techniques for the analysis, diagnosis and correction of malfunctions of products used by Borrower's customers; the names and addresses of, and credit and other business information concerning, Borrower's past, present or future customers; the prices which 2 3 Borrower obtains for its services or at which it sells merchandise; estimating and cost procedures; profit margins; policies and procedures pertaining to the sale and design of equipment, components, devices and services furnished by Borrower; information concerning suppliers of Borrower; and information concerning the manner of operation, business plans, pledges, projections, and all other information of any kind or character, whether or not reduced to writing, with respect to the conduct by Borrower of its business not generally known by the public. "Instruments" means all "instruments", "chattel paper" or "letters of credit" (each as defined in the UCC) including, but not limited to, promissory notes, drafts, bills of exchange and trade acceptances, now owned or hereafter acquired by Borrower. "Intellectual Property" shall mean collectively all of the following: Copyrights and Copyright Licenses. "Inventory" means all "inventory" (as defined in the UCC), now owned or hereafter acquired by Borrower, wherever located including, without limitation, finished goods, raw materials, work in process and other materials and supplies (including packaging and shipping materials) used or consumed in the manufacture or production thereof and goods which are returned to or repossessed by Borrower. "Proceeds" means all proceeds of, and all other profits, rentals or receipts, in whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition of, or realization upon, any Collateral including, without limitation, all claims of Borrower against third parties for loss of, damage to or destruction of, or for proceeds payable under, or unearned premiums with respect to, policies of insurance with respect to any Collateral, and any condemnation or requisition payments with respect to any Collateral, in each case whether now existing or hereafter arising. "Secured Obligations" has the meaning assigned to that term in Section 3. "Security Interests" means the security interests granted pursuant to Section 2, as well as all other security interests created or assigned as additional security for the Secured Obligations pursuant to the provisions of this Agreement. "UCC" means the Uniform Commercial Code as in effect on the date hereof in the State of New York, provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the Security Interest in any Collateral or the availability of any remedy hereunder is governed by the Uniform Commercial Code as in effect on or after the date hereof in any other jurisdiction, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection or availability of such remedy. 3 4 B. Other Definition Provisions. References to "Subsections", "subsections", "Exhibits" and "Schedules" shall be to Sections, subsections, Exhibits and Schedules, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in subsection 1.1 may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. All references to statutes and related regulations shall include (unless otherwise specifically provided herein) any amendments of same and any successor statutes and regulations. SECTION II. Grant of Security Interests In order to secure the payment and performance of the Secured Obligations in accordance with the terms thereof, each of Dove and Four Point hereby grants to Lender a continuing security interest, subordinated as provided in the Debt Subordination and Intercreditor Agreement among Borrower, Lender and Sanwa Bank California dated September 26, 1997, in and to all of its right, title and interest in the following property, whether now owned or existing or hereafter acquired or arising and regardless of where located (all being collectively referred to as the "Collateral"): (i) Accounts; (ii) Inventory; (iii) General Intangibles; (iv) Documents; (v) Instruments; (vi) Equipment; (vii) Fixtures; (viii) All deposit accounts of Borrower maintained with any bank or financial institution; (ix) All books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the property described in subparts (i) - (viii) above or are otherwise necessary or helpful in the collection thereof or realization thereon; and (x) Proceeds of all or any of the property described in subparts (i) - (ix) above. Notwithstanding the foregoing, so long as no Event of Default has occurred and is continuing, Borrower shall have the exclusive, non-transferable right and license to use the Intellectual Property 4 5 and the exclusive right to grant to other Persons licenses and sublicenses with respect to Intellectual Property. SECTION III. Security for Obligations This Agreement secures the payment and performance of the Obligations (as defined in the Loan Agreement) and all obligations of Borrower now or hereafter existing under this Agreement and all renewals, extensions, restructurings and refinancings of any of the above (all such debts, obligations and liabilities of Borrower being collectively called the "Secured Obligations"). SECTION IV. Borrower Remains Liable Anything herein to the contrary notwithstanding: (a) Borrower shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed; (b) the exercise by Lender of any of the rights hereunder shall not release Borrower from any of its duties or obligations under the contracts and agreements included in the Collateral; and (c) Lender shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall Lender be obligated to perform any of the obligations or duties of Borrower thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION V. Representations and Warranties Borrower represents and warrants as follows: A. Binding Obligation. This Agreement is the legally valid and binding obligation of Borrower, enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or similar laws or equitable principles relating to or limiting creditor's rights generally. B. Location of Equipment and Inventory. All of the Equipment and Inventory is located at the places specified on Schedule I. C. Ownership of Collateral; Bailees. Except for matters disclosed on Schedule II, other Permitted Encumbrances and the Security Interests, Borrower owns the Collateral free and clear of any Lien. No effective financing statement or other form of lien notice covering all or any part of the Collateral is on file in any recording office, except for those in favor of Lender and as disclosed on Schedule II. Except as disclosed on Schedule II, none of the Collateral is in the possession of any bailee, warehouseman, Lender or processor. 5 6 D. Office Locations; Fictitious Names. The chief place of business, the chief executive office and the office where Borrower keeps its books and records are located at the places specified on Schedule I. Borrower does not do business and has not done business during the past five years under any trade-name or fictitious business name except as disclosed on Schedule III. E. Perfection. This Agreement creates a valid, perfected and, except for the Permitted Encumbrances, first priority security interest in the Collateral, securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken. F. Governmental Authorizations; Consents. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or consent of any other Person (including without limitation any Licensor of Intellectual Property or party to any Assigned Agreement) is required either (a) for the grant by Borrower of the security interest granted hereby or for the execution, delivery or performance of this Agreement by Borrower or (b) for the perfection of or the exercise by Lender of its rights and remedies hereunder (except as may have been taken by or at the direction of Borrower or Lender). G. Accounts. Each Account constitutes the legally valid and binding obligation of the customer obligated to pay the same. The amount represented by Borrower to Lender as owing by each customer is the correct amount actually and unconditionally owing, except for normal cash discounts and allowances where applicable. No customer has any defense, set-off, claim or counterclaim against Borrower that can be asserted against Lender, whether in any proceeding to enforce Lender's rights in the Collateral or otherwise except defenses, set-offs, claims or counterclaims that are not, in the aggregate, material to the value of the Accounts. None of the Accounts is evidenced by a promissory note or other instrument other than a check. H. Intellectual Property. The Copyrights and Copyright Licenses constitute all of the Intellectual Property owned by Borrower. I. Accurate Information. All information heretofore, herein or hereafter supplied to Lender by or on behalf of Borrower with respect to the Collateral is and will be accurate and complete in all material respects. J. Loan Agreement Warranties. Each representation and warranty set forth in the Loan Agreement is true and correct in all material respects and such representations and warranties are hereby incorporated herein by this reference with the same effect as though set forth in their entirety herein. SECTION VI. Further Assurances; Covenants 6 7 A. Other Documents and Actions. Borrower will, from time to time, at its expense, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or desirable, or that Lender may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Lender to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Borrower will: (a) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Lender may request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (b) at any reasonable time, upon demand by Lender exhibit the Collateral to allow inspection of the Collateral by Lender or persons designated by Lender; and (c) upon Lender's request, appear in and defend any action or proceeding that may affect Borrower's title to or Lender's security interest in the Collateral. B. Lender Authorized. Borrower hereby authorizes Lender to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of Borrower where permitted by law. C. Corporate or Name Change. Borrower will notify Lender promptly in writing prior to any change in Borrower's name, identity or corporate structure. D. Business Locations. Borrower will keep the Collateral at the locations specified on Schedule I. Borrower will give Lender thirty (30) days prior written notice of any change in Borrower's chief place of business or of any new location of business or any new location for any of the Collateral. With respect to any new location (which in any event shall be within the continental United States), Borrower will execute such documents and take such actions as Lender deems necessary to perfect and protect the Security Interests. E. Bailees. If any Collateral is at any time in the possession or control of any warehouseman, bailee or any of Borrower's Lenders or processors, Borrower shall, upon the request of Lender, notify such warehouseman, bailee, Lender or processor of the Security Interests created hereby and shall instruct such Person to hold all such Collateral for Lender's account subject to Lender's instructions. F. Instruments. Borrower will deliver and pledge to Lender all Instruments duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Lender. Borrower will mark conspicuously all chattel paper with a legend, in form and substance satisfactory to Lender, indicating that such chattel paper is subject to the Security Interests. G. Certificates of Title. Borrower shall promptly deliver to Lender any and all certificates of title, applications for title or similar evidence of ownership of all Equipment and shall cause Lender to be named as lienholder on any such certificate of title or other evidence of ownership. Borrower shall promptly inform Lender of any additions to or deletions from the 7 8 Equipment and shall not permit any such items to become fixtures to real estate other than real estate described in the Mortgages. H. Account Covenants. Except as otherwise provided in this subsection 6.8, Borrower shall continue to collect, at its own expense, all amounts due or to become due Borrower under the Accounts. In connection with such collections, Borrower may take (and, at Lender's direction, shall take) such action as Borrower or Lender may deem necessary or advisable to enforce collection of the Accounts; provided, that Lender shall have the right at any time after the occurrence of a Default or an Event of Default to: (a) notify the customers or obligors under any Accounts of the assignment of such Accounts to Lender (on behalf of Lenders) and to direct such customers or obligors to make payment of all amounts due or to become due directly to Lender; (b) enforce collection of any such Accounts; and (c) adjust, settle or compromise the amount or payment of such Accounts. After the occurrence of a Default or an Event of Default, Borrower shall not adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any customer or obligor thereof, or allow any credit or discount thereon without the prior consent of Lender. I. Intellectual Property Covenants. Borrower shall concurrently herewith deliver to Lender the Copyright Security Agreement, and all other documents, instruments and other items as may be necessary for Lender to file such agreements with the United States Copyright Office, United States Patent and Trademark Office and any similar domestic or foreign office, department or agency. If, before the Secured Obligations are paid in full, Borrower obtains any new Intellectual Property or rights thereto or becomes entitled to the benefit of any Intellectual Property not listed on the respective schedules to each security agreement, Borrower shall give to Lender prompt written notice thereof, and shall amend the respective security agreement to include any such new Intellectual Property. Borrower shall: (a) prosecute diligently any copyright, patent, trademark or license application at any time pending; (b) make application on all new copyrights, patents and trademarks as reasonably deemed appropriate by Borrower; (c) preserve and maintain all rights in the Intellectual Property; and (d) use its best efforts to obtain any consents, waivers or agreements necessary to enable Lender to exercise its remedies with respect to the Intellectual Property. Borrower shall not abandon any right to file a copyright application nor shall Borrower abandon any pending copyright application, or Copyright or Copyright License, without the prior written consent of Lender. Borrower represents and warrants to Lender that the execution, delivery and performance of this Agreement by Borrower will not violate or cause a default under any of the Intellectual Property or any agreement in connection therewith. J. Equipment Covenants. Borrower shall cause the Equipment to be maintained and preserved in the same condition, repair and working order as when new, ordinary wear and tear excepted, and in accordance with any manufacturer's manual, and shall promptly make or cause to be made all repairs, replacements, and other improvements in connection therewith that are necessary or desirable to such end. K. Insurance. Borrower shall maintain insurance with respect to the Collateral in accordance with the terms of the Loan Agreement. 8 9 L. Taxes and Claims. Borrower will pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Collateral (including claims for labor, materials and supplies), except to the extent the validity thereof is being contested in good faith. M. Collateral Description. Borrower will furnish to Lender, from time to time, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Lender may reasonably request, all in reasonable detail. N. Use of Collateral. Borrower will not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statue, regulation or ordinance or any policy of insurance covering any of the Collateral. O. Records of Collateral. Borrower shall keep full and accurate books and records relating to the Collateral and shall stamp or otherwise mark such books and records in such manner as Lender may reasonably request indicating that the Collateral is subject to the Security Interests. P. Other Information. Borrower will, promptly upon request, provide to Lender all information and evidence it may reasonably request concerning the Collateral, and in particular the Accounts, to enable Lender to enforce the provisions of this Agreement. SECTION VII. Lender Appointed Attorney-in-Fact Borrower hereby irrevocably appoints Lender as Borrower's attorney-in-fact, with full authority in the place and stead of Borrower and in the name of Borrower, Lender or otherwise, from time to time in Lender's discretion to take any action and to execute any instrument that Lender may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation: 1. to obtain and adjust insurance required to be paid to Lender; 2. to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; 3. to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clauses (a) and (b) above; 4. to file any claims or take any action or institute any proceedings that Lender may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Lender with respect to any of the Collateral; 9 10 5. to pay or discharge taxes or Liens, levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Lender in its sole discretion, and such payments made by Lender to become obligations of Borrower to Lender, due and payable immediately without demand; 6. to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, assignments, verifications and notices in connection with Accounts and other documents (including without limitation financing statements, continuation statements and other documents necessary or advisable to perfect the Security Interests) relating to the Collateral; and 7. generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Lender were the absolute owner thereof for all purposes, and to do, at Lender's option and Borrower's expense, at any time or from time to time, all acts and things that Lender deems necessary to protect, preserve or realize upon the Collateral. Borrower hereby ratifies and approves all acts of Lender made or taken pursuant to this Section 8. Neither Lender nor any person designated by Lender shall be liable for any acts or omissions or for any error of judgment or mistake of fact or law. This power, being coupled with an interest, is irrevocable so long as this Agreement shall remain in force. SECTION VIII. Transfers and Other Liens Except as otherwise permitted by the Loan Agreement, Borrower shall not: 1. Sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral, except that Borrower may sell Inventory in the ordinary course of business. 2. Create or suffer to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Collateral to secure indebtedness of any Person except for the security interest created by this Agreement or permitted under the Loan Agreement, except with written permission of Lender. SECTION IX. Remedies If any Event of Default shall have occurred and be continuing, Lender may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Collateral) and also may: (a) require Borrower to, and Borrower 10 11 hereby agrees that it will, at its expense and upon request of Lender forthwith, assemble all or part of the Collateral as directed by Lender and make it available to Lender at a place to be designated by Lender which is reasonably convenient to both parties; (b) without notice or demand or legal process, enter upon any premises of Borrower and take possession of the Collateral; and (c) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Lender's offices or elsewhere, at such time or times, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as Lender may deem commercially reasonable. Borrower agrees that, to the extent notice of sale shall be required by law, at least ten days notice to Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. At any sale of the Collateral, if permitted by law, Lender may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase of the Collateral or any portion thereof for the account of Lender (on behalf of Lenders). Lender shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Lender may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the extent permitted by law, Borrower hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any law now existing or hereafter enacted. SECTION X. License of Intellectual Property Borrower hereby assigns, transfers and conveys to Lender, effective upon the occurrence of any Event of Default hereunder, the nonexclusive right and license to use all Intellectual Property owned or used by Borrower together with any goodwill associated therewith, all to the extent necessary to enable Lender to realize on the Collateral and any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Lender and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge, without requirement that any monetary payment whatsoever be made to Borrower by Lender. SECTION XI. Limitation on Duty of Lender with Respect to Collateral Beyond the safe custody thereof, Lender shall have no duty with respect to any Collateral in its possession or control (or in the possession or control of any Lender or bailee) or with respect to any income thereon or the preservation of rights against prior parties or any other rights pertaining thereto. Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property. Lender shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission 11 12 of any warehouseman, carrier, forwarding agency, consignee or other Lender or bailee selected by Lender in good faith. SECTION XII. Application of Proceeds Upon the occurrence and during the continuance of an Event of Default, the proceeds of any sale of, or other realization upon, all or any part of the Collateral and any cash held in the Collateral Account shall be applied: first, to all fees, costs and expenses incurred by Lender or any Lender with respect to the Loan Agreement, the other Loan Documents or the Collateral including, without limitation, those described in subsection 8.3 of the Loan Agreement and in Section 13 hereof; second, to all fees due and owing to Lender or any Lender; third, to accrued and unpaid interest on the Obligations (including any interest which but for the provisions of the Bankruptcy Code, would have accrued on such amounts); fourth, to the principal amounts of the Obligations outstanding; and fifth, to any other indebtedness or obligations of Borrower owing to Lender. SECTION XIII. Expenses Borrower shall pay all insurance expenses and all expenses of protecting, storing, warehousing, appraising, insuring, handling, maintaining and shipping the Collateral, all costs, fees and expenses of perfecting and maintaining the Security Interests, and any and all excise, property, sales and use taxes imposed by any state, federal or local authority on any of the Collateral, or with respect to periodic appraisals and inspections of the Collateral, or with respect to the sale or other disposition thereof. If Borrower fails promptly to pay any portion of the above expenses when due or to perform any other obligation of Borrower under this Agreement, Lender or any other Lender may, at its option, but shall not be required to, pay or perform the same and charge Borrower's account for all costs and expenses incurred therefor, and Borrower agrees to reimburse Lender or such Lender therefor on demand. All sums so paid or incurred by Lender or any other Lender for any of the foregoing, any and all other sums for which Borrower may become liable hereunder and all costs and expenses (including attorneys' fees, legal expenses and court costs) incurred by Lender or any other Lender in enforcing or protecting the Security Interests or any of their rights or remedies under this Agreement shall be payable on demand, shall constitute Obligations, shall bear interest until paid at the highest rate provided in the Loan Agreement and shall be secured by the Collateral. SECTION XIV. Termination of Security Interests; Release of Collateral Upon payment in full of all Secured Obligations and the termination of all Loan Commitments, the Security Interests shall terminate and all rights to the Collateral shall revert to Borrower. Upon such termination of the Security Interests or release of any Collateral, Lender will, at the expense of Borrower, execute and deliver to Borrower such documents as Borrower shall 12 13 reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be. SECTION XV. Notices All notices, approvals, requests, demands and other communications hereunder shall be given in accordance with the notice provision of the Loan Agreement. SECTION XVI. Waivers, Non-Exclusive Remedies No failure on the part of Lender to exercise, and no delay in exercising and no course of dealing with respect to, any right under the Loan Agreement or this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise by Lender of any right under the Loan Agreement or this Agreement preclude any other or further exercise thereof or the exercise of any other right. The rights in this Agreement and the Loan Agreement are cumulative and are not exclusive of any other remedies provided by law. SECTION XVII. Successors and Assigns This Agreement is for the benefit of Lender and its successors and assigns, and in the event of an assignment of all or any of the Secured Obligations, the rights hereunder, to the extent applicable to the Secured Obligations so assigned, may be transferred with such Secured Obligations. This Agreement shall be binding on Borrower and its successors and assigns. SECTION XVIII. Changes in Writing No amendment, modification, termination or waiver of any provision of this Agreement or consent to any departure by Borrower therefrom, shall in any event be effective without the written concurrence of Lender. SECTION XIX. Applicable Law THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. SECTION XX. Failure or Indulgence Not Waiver; Remedies Cumulative 13 14 No failure or delay on the part of Lender in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or any other right, power or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION XXI. Headings Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION XXII. Counterparts This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. Witness the due execution hereof by the respective duly authorized officers of the undersigned as of the day first above written. DOVE ENTERTAINMENT, INC. MEDIA EQUITIES INTERNATIONAL, LLC By: /s/ NEIL TOPHAM By: /s/ RON LIGHTSTONE ------------------------------- ------------------------------- Title: Chief Financial Officer Title: Partner ---------------------------- ---------------------------- DOVE FOUR POINT, INC. By: /s/ NEIL TOPHAM ------------------------------- Title: Chief Financial Officer ---------------------------- 14 15 SCHEDULE I Locations of Equipment, Inventory, Books and Records, Chief Executive Office, Other Locations 8955 Beverly Boulevard, Los Angeles* 301 North Cannon Street, Beverly Hills Penguin Distribution Center 100 Fabrite Road Newbern, TN 38059-1334 *Chief Executive Office 15 16 SCHEDULE II Other Liens, Security Interests and Financing Statements; Bailees Asahi Bank, 1st mortgage on 8955 Beverly Boulevard, Los Angeles Sanwa Bank, Senior Debt Loan with security interest in the assets of the Company (other than 8955 Beverly Boulevard, Los Angeles). Mercedes Benz Credit Corporation, Security Interest in Mercedes Benz 500 SL. Lien in favor of Guinness Mahon in connection with the film "Wilde". Operating Leases: Fletcher Jones Motorcars, Inc. - Mercedes 94 C280W Miller Infinity - Infinity QX4 Truck Various operating leases for Apple Computers, photocopies and telephone systems. 16 17 SCHEDULE III Trade-names and Fictitious Names (Present and Past Five Years) None 17 18 EXHIBIT A COPYRIGHT SECURITY AGREEMENT WHEREAS, ___________________, a ______________ corporation ("Grantor") owns the Copyright registrations and Copyright applications listed on Schedule 1 annexed hereto, and WHEREAS, Grantor, an affiliate of Grantor and Media Equities International, LLC, a New York limited liability company ("Lender") are parties to a Loan Agreement dated September ___, 1997 (as the same may be amended and in effect from time to time, the "Loan Agreement"), providing for extensions of credit to be made to Grantor by Lender; and WHEREAS, pursuant to the terms of the Security Agreement dated as of September 26th, 1997 (as said Agreement may be amended and in effect from time to time, the "Security Agreement"), between Grantor, an affiliate of Grantor and Lender, Grantor has granted to Lender a security interest in substantially all the assets of Grantor including all right, title and interest of Grantor in, to and under all now owned and hereafter acquired Copyrights (as defined in the Security Agreement), Copyright registrations, Copyright applications and Copyright Licenses (as defined in the Security Agreement), together with the goodwill of the business symbolized by Grantor's Copyrights and all proceeds thereof, to secure the payment of all amounts owing by Grantor under the Loan Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Grantor does hereby grant to Lender a continuing security interest in all of Grantor's right, title and interest in, to and under the following (all of the following items or types of property being herein collectively referred to as the "Copyright Collateral"), whether presently existing or hereafter created or acquired: (1) each Copyright, Copyright application and Copyright registration, together with any reissues, extensions or renewals thereof, including, without limitation, the Copyright, Copyright registrations and Copyright applications referred to in Schedule 1 annexed hereto, and all of the goodwill of the business connected with the use of, and symbolized by, each Copyright, Copyright registration and Copyright application; (2) each Copyright License and all of the goodwill of the business connected with the use of, and symbolized by, each Copyright License; and (3) all products and proceeds of the foregoing, including, without limitation, any claim by Grantor against third parties for past, present or future (a) infringement or dilution of any Copyright or Copyright registration including, without limitation, the Copyright and Copyright registrations referred to in Schedule 1 annexed hereto, the Copyright registrations 18 19 issued with respect to the Copyright applications referred in Schedule 1 and the Copyright licensed under the Copyright License, or (b) injury to the goodwill associated with any Copyright, Copyright registration or Copyright licensed under any Copyright License. This security interest is granted in conjunction with the security interests granted to Lender pursuant to the Security Agreement. Grantor hereby acknowledges and affirms that the rights and remedies of Grantee with respect to the security interest in the Copyright Collateral made and granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein. IN WITNESS WHEREOF, Grantor has caused this Copyright Security Agreement to be duly executed by its duly authorized officer as of the ______ day of ___________, 19___. --------------------------------- By: ------------------------------ Title: --------------------------- 19 20 ACKNOWLEDGMENT STATE OF ) ) ss. COUNTY OF ) On the ____ day of ____________, 19__ before me personally appeared ______________, to me personally known or proved to me on the basis of satisfactory evidence to be the person described in and who executed the foregoing instrument as _____________ of _______________ who being by me duly sworn, did depose and say that he is ______________ of ________________, the corporation described in and which executed the foregoing instrument; that the said instrument was duly signed on behalf of said corporation; and that he acknowledged said instrument to be the free act and deed of said corporation. _____________________________ Notary Public {Seal} My commission expires: ____________________________ 20 21 Schedule 1 to Copyright Security Agreement COPYRIGHT REGISTRATIONS REG. NO. DATE COPYRIGHT LICENSES Name of Agreement Parties Date of Agreement NONE 21 EX-10.50 6 EXHIBIT 10.50 1 EXHIBIT 10.50 COPYRIGHT SECURITY AGREEMENT WHEREAS, Dove Four Point, Inc. a California corporation ("Grantor") owns the Copyright registrations and Copyright applications listed on Schedule 1 annexed hereto, and WHEREAS, Grantor, an affiliate of Grantor and Media Equities International, LLC, a New York limited liability company ("Lender") are parties to a Loan Agreement dated September 26th, 1997 (as the same may be amended and in effect from time to time, the "Loan Agreement"), providing for extensions of credit to be made to Grantor by Lender; and WHEREAS, pursuant to the terms of the Security Agreement dated as of September 26th, 1997 (as said Agreement may be amended and in effect from time to time, the "Security Agreement"), between Grantor, an affiliate of Grantor and Lender, Grantor has granted to Lender a security interest in substantially all the assets of Grantor including all right, title and interest of Grantor, in to and under all now owned and hereafter acquired Copyrights (as defined in the Security Agreement), copyright registrations, Copyright applications and Copyright Licenses (as defined in the Security Agreement), together with the goodwill of the business symbolized by Grantor's Copyrights and all proceeds thereof, to secure the payment of all amounts owing by Grantor under the Loan Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Grantor does hereby grant to lender a continuing security interest in all of Grantor's right, title and interest in, to and under the following (all of the following items or types of property being herein collectively referred to as the "Copyright Collateral"), whether presently existing or hereafter created or acquired: (1) each Copyright, Copyright application and Copyright registration, together with any reissues, extensions or renewals thereof, including, without limitation, the Copyright, Copyright registrations and Copyright applications referred to in Schedule 1 annexed hereto, and all of the goodwill of the business connected with the use of, and symbolized by, each Copyright, Copyright registration and Copyright application; (2) each Copyright License and all of the goodwill of the business connected with the use of, and symbolized by, each Copyright License; and (3) all products and proceeds of the foregoing, including, without imitation, any claim by Grantor against third parties for past, present or future (a) infringement or dilution of any Copyright or Copyright registration including, without limitation, the Copyright and Copyright registrations referred to in Schedule 1 annexed hereto, the Copyright registrations 1 2 issued with respect to the Copyright applications referred to in Schedule 1 and the Copyright licensed under the Copyright License, or (b) injury to the goodwill associated with any Copyright, Copyright registration or Copyright licensed under any Copyright License. This security interest is granted in conjunction with the security interests granted to Lender pursuant to the Security Agreement. Grantor hereby acknowledges and affirms that the rights and remedies of Grantee with respect to the security interest in the Copyright Collateral made and granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein. IN WITNESS WHEREOF, Grantor has caused this Copyright Security Agreement to be duly executed by its duly authorized officer as of the 26th day of September, 1997. DOVE FOUR POINT, INC. By: /s/ NEIL TOPHAM ----------------------------------- Title: /s/ Chief Financial Officer -------------------------------- 2 3 ACKNOWLEDGMENT STATE OF ) ) ss. COUNTY OF ) On the 26th day of September, 1997 before me personally appeared Neil Topham, to me personally known or proved to me on the basis of satisfactory evidence to be the person described in and who executed the foregoing instrument as CFO of Dove Entertainment, Inc. who being by me duly sworn, did depose and say that he is CFO of Dove Entertainment, Inc. the corporation described in and which executed the foregoing instrument; that the said instrument was duly signed on behalf of said corporation; and that he acknowledged said instrument to be the free act and deed of said corporation. /s/ VICTORIA KAY -------------------------- {Seal} My commission expires: JANUARY 20, 2001 - -------------------------- 3 4 DOVE FOUR POINT, INC. SCHEDULE 1 TO COPYRIGHT SECURITY AGREEMENT Copyright Registrations Saved By The Light/Motion Picture Teleplay PA Saved By The Light/Motion Picture Telefilm PA Unwed Father/Motion Picture Teleplay (Pending) PA Unwed Father/Motion Picture Telefilm (Pending) PA Copyright Licenses None EX-10.51 7 EXHIBIT 10.51 1 EXHIBIT 10.51 COPYRIGHT SECURITY AGREEMENT WHEREAS, Dove Four Point, Inc. a California corporation ("Grantor") owns the Copyright registrations and Copyright applications listed on Schedule 1 annexed hereto, and WHEREAS, Grantor, an affiliate of Grantor and Media Equities International, LLC, a New York limited liability company ("Lender") are parties to a Loan Agreement dated September 26th, 1997 (as the same may be amended and in effect from time to time, the "Loan Agreement"), providing for extensions of credit to be made to Grantor by Lender; and WHEREAS, pursuant to the terms of the Security Agreement dated as of September 26th, 1997 (as said Agreement may be amended and in effect from time to time, the "Security Agreement"), between Grantor, an affiliate of Grantor and Lender, Grantor has granted to Lender a security interest in substantially all the assets of Grantor including all right, title and interest of Grantor, in to and under all now owned and hereafter acquired Copyrights (as defined in the Security Agreement), copyright registrations, Copyright applications and Copyright Licenses (as defined in the Security Agreement), together with the goodwill of the business symbolized by Grantor's Copyrights and all proceeds thereof, to secure the payment of all amounts owing by Grantor under the Loan Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Grantor does hereby grant to lender a continuing security interest in all of Grantor's right, title and interest in, to and under the following (all of the following items or types of property being herein collectively referred to as the "Copyright Collateral"), whether presently existing or hereafter created or acquired: (1) each Copyright, Copyright application and Copyright registration, together with any reissues, extensions or renewals thereof, including, without limitation, the Copyright, Copyright registrations and Copyright applications referred to in Schedule 1 annexed hereto, and all of the goodwill of the business connected with the use of, and symbolized by, each Copyright, Copyright registration and Copyright application; (2) each Copyright License and all of the goodwill of the business connected with the use of, and symbolized by, each Copyright License; and (3) all products and proceeds of the foregoing, including, without imitation, any claim by Grantor against third parties for past, present or future (a) infringement or dilution of any Copyright or Copyright registration including, without limitation, the Copyright and Copyright registrations referred to in Schedule 1 annexed hereto, the Copyright registrations 1 2 issued with respect to the Copyright applications referred to in Schedule 1 and the Copyright licensed under the Copyright License, or (b) injury to the goodwill associated with any Copyright, Copyright registration or Copyright licensed under any Copyright License. This security interest is granted in conjunction with the security interests granted to Lender pursuant to the Security Agreement. Grantor hereby acknowledges and affirms that the rights and remedies of Grantee with respect to the security interest in the Copyright Collateral made and granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein. IN WITNESS WHEREOF, Grantor has caused this Copyright Security Agreement to be duly executed by its duly authorized officer as of the 26th day of September, 1997. DOVE FOUR POINT, INC. By: /s/ NEIL TOPHAM --------------------------------- Title: /s/ Chief Financial Officer ------------------------------ 2 3 ACKNOWLEDGMENT STATE OF ) ) ss. COUNTY OF ) On the 26th day of September, 1997 before me personally appeared Neil Topham, to me personally known or proved to me on the basis of satisfactory evidence to be the person described in and who executed the foregoing instrument as CFO of Dove Entertainment, Inc. who being by me duly sworn, did depose and say that he is CFO of Dove Entertainment, Inc. the corporation described in and which executed the foregoing instrument; that the said instrument was duly signed on behalf of said corporation; and that he acknowledged said instrument to be the free act and deed of said corporation. /s/ VICTORIA KAYE ----------------------------- {Seal} My commission expires: January 20, 2001 - ----------------------------- 3 EX-10.52 8 EXHIBIT 10.52 1 EXHIBIT 10.52 ================================================================================ CREDIT, SECURITY, GUARANTY AND PLEDGE AGREEMENT DATED AS OF NOVEMBER 4, 1997 AMONG DOVE ENTERTAINMENT, INC. AS BORROWER, THE GUARANTORS NAMED HEREIN AND THE CHASE MANHATTAN BANK, AS LENDER ================================================================================ 2 TABLE OF CONTENTS
Page ---- 1. DEFINITIONS..............................................................................2 2. THE LOANS...............................................................................24 SECTION 2.1. Loans.....................................................................24 SECTION 2.2. Making of Loans...........................................................25 SECTION 2.4. Interest on Note..........................................................26 SECTION 2.5. Commitment Fees and Other Fees............................................27 SECTION 2.6. Optional and Mandatory Termination or Reduction of Commitment............27 SECTION 2.7. Default Interest; Alternate Rate of Interest..............................28 SECTION 2.8. Continuation and Conversion of Loans......................................28 SECTION 2.9. Prepayment of Loans; Reimbursement of Lender..............................29 SECTION 2.10. Change in Circumstances..................................................31 SECTION 2.11. Change in Legality.......................................................34 SECTION 2.12. Manner of Payments.......................................................34 SECTION 2.13. Interest Adjustments.....................................................34 SECTION 2.14. Letters of Credit........................................................35 3. REPRESENTATIONS AND WARRANTIES OF CREDIT PARTIES........................................38 SECTION 3.1. Corporate Existence and Power.............................................39 SECTION 3.2. Corporate Authority and No Violation. (a) ..............................39 SECTION 3.3. Governmental Approval.....................................................40 SECTION 3.4. Binding Agreements........................................................40 SECTION 3.5. Financial Statements......................................................40 SECTION 3.6. No Material Adverse Change (a) .........................................40 SECTION 3.7. Ownership of Pledged Securities, etc......................................41 SECTION 3.8. Copyrights and Other Rights...............................................41 SECTION 3.9. Fictitious Names..........................................................42 SECTION 3.10. Title to Properties......................................................42 SECTION 3.11. Places of Business.......................................................42 SECTION 3.12. Litigation...............................................................42 SECTION 3.13. Federal Reserve Regulations..............................................43 SECTION 3.14. Investment Company Act...................................................43 SECTION 3.15. Taxes....................................................................43 SECTION 3.16. Compliance with ERISA....................................................43 SECTION 3.17. Agreements...............................................................44 SECTION 3.18. Security Interest; Other Security........................................44 SECTION 3.19. Disclosure...............................................................44 SECTION 3.20. Distribution Rights......................................................45 SECTION 3.21. Environmental Liabilities................................................45 SECTION 3.22. Pledged Securities.......................................................46
i 3 SECTION 3.23. Compliance with Laws.....................................................46 SECTION 3.24. Projected Financial Information..........................................46 4. CONDITIONS OF LENDING...................................................................46 SECTION 4.1. Conditions Precedent to Initial Loans or Letter of Credit.................46 SECTION 4.2. Conditions Precedent to Each Loan and Letter of Credit....................51 5. AFFIRMATIVE COVENANTS...................................................................51 SECTION 5.1. Financial Statements and Reports..........................................51 SECTION 5.2. Corporate Existence.......................................................54 SECTION 5.3. Maintenance of Properties.................................................54 SECTION 5.4. Notice of Material Events.................................................54 SECTION 5.5. Insurance.................................................................55 SECTION 5.6. Production................................................................56 SECTION 5.7. Music.....................................................................56 SECTION 5.8. Copyright.................................................................56 SECTION 5.9. Books and Records. ......................................................57 SECTION 5.10. Third Party Audit Rights.................................................57 SECTION 5.11. Observance of Agreements.................................................58 SECTION 5.12. Film Properties and Rights; Credit Parties to Act as Pledgeholder........58 SECTION 5.13. Laboratories; No Removal.................................................58 SECTION 5.14. Taxes and Charges; Indebtedness in Ordinary Course of Business...........58 SECTION 5.15. Liens....................................................................59 SECTION 5.16. Further Assurances; Security Interests...................................59 SECTION 5.17. ERISA Compliance and Reports.............................................59 SECTION 5.18. Environmental Laws.......................................................60 SECTION 5.19. Use of Proceeds..........................................................61 SECTION 5.20. Security Agreements with the Guilds......................................61 SECTION 5.21. Uncompleted Product......................................................61 6. NEGATIVE COVENANTS......................................................................62 SECTION 6.1. Limitations on Indebtedness...............................................62 SECTION 6.2. Limitations on Liens......................................................63 SECTION 6.3. Limitation on Guarantees..................................................65 SECTION 6.4. Limitations on Investments................................................65 SECTION 6.5. Restricted Payments.......................................................65 SECTION 6.6. Limitations on Leases.....................................................65 SECTION 6.7. Consolidation, Merger, Sale or Purchase of Assets, etc....................65 SECTION 6.8. Receivables...............................................................66 SECTION 6.9. Sale and Leaseback........................................................66 SECTION 6.10. Places of Business; Change of Name.......................................66 SECTION 6.11. Limitations on Capital Expenditures......................................66 SECTION 6.12. Transactions with Affiliates. ..........................................66 SECTION 6.13. Prohibition of Amendments or Waivers.....................................66
ii 4 SECTION 6.14. Development Costs........................................................67 SECTION 6.15. Overhead Expense.........................................................67 SECTION 6.16. Consolidated Capital Base................................................67 SECTION 6.17. EBIT Ratio...............................................................67 SECTION 6.18. Liquidity Ratio.........................................................67 SECTION 6.19. No Change in Business....................................................68 SECTION 6.20. ERISA Compliance.........................................................68 SECTION 6.21. Additional Limitations on Production and Acquisition of Product..........68 SECTION 6.22. Subsidiaries.............................................................69 SECTION 6.23. Bank Accounts............................................................69 SECTION 6.24. Hazardous Materials......................................................69 SECTION 6.25. Use of Proceeds of Loans and Requests for Letters of Credit..............69 SECTION 6.26. Interest Rate Protection Agreements, etc.................................69 SECTION 6.27. Amortization Method......................................................69 7. EVENTS OF DEFAULT.......................................................................69 8. GRANT OF SECURITY INTEREST; REMEDIES....................................................72 SECTION 8.1. Security Interests. .....................................................72 SECTION 8.2. Use of Collateral.........................................................72 SECTION 8.3. Collection Accounts.......................................................72 SECTION 8.4. Credit Parties to Hold in Trust...........................................75 SECTION 8.5. Collections, etc. .......................................................75 SECTION 8.6. Possession, Sale of Collateral, etc.......................................76 SECTION 8.7. Application of Proceeds on Default........................................77 SECTION 8.8. Power of Attorney.........................................................77 SECTION 8.9. Financing Statements, Direct Payments.....................................78 SECTION 8.10. Further Assurances.......................................................78 SECTION 8.11. Termination..............................................................78 SECTION 8.12. Remedies Not Exclusive...................................................78 SECTION 8.13. Quiet Enjoyment..........................................................78 SECTION 8.14. Continuation and Reinstatement...........................................79 9. GUARANTY................................................................................79 SECTION 9.1. Guaranty..................................................................79 SECTION 9.2. No Impairment of Guaranty, etc............................................80 SECTION 9.3. Continuation and Reinstatement, etc.......................................81 SECTION 9.4. Limitation on Guaranteed Amount etc.......................................81 10. PLEDGE..................................................................................81 SECTION 10.1. Pledge....................................................................82 SECTION 10.2. Covenant.................................................................82 SECTION 10.3. Registration in Nominee Name; Denominations..............................82 SECTION 10.4. Voting Rights; Dividends; etc............................................82
iii 5 SECTION 10.5. Remedies Upon Default....................................................83 SECTION 10.6. Application of Proceeds of Sale and Cash.................................84 SECTION 10.7. Securities Act, etc.......................................................85 SECTION 10.8. Continuation and Reinstatement...........................................85 SECTION 10.9. Termination..............................................................85 11. [RESERVED]..............................................................................86 12. MISCELLANEOUS...........................................................................86 SECTION 12.1. Notices..................................................................86 SECTION 12.2. Survival of Agreement, Representations and Warranties, etc...............86 SECTION 12.3. Successors and Assigns; Loan Sales; Participations.....................86 SECTION 12.4. Expenses; Documentary Taxes..............................................88 SECTION 12.5. Indemnification of the Lender............................................89 SECTION 12.6. CHOICE OF LAW............................................................90 SECTION 12.7. WAIVER OF JURY TRIAL.....................................................90 SECTION 12.8. No Waiver................................................................90 SECTION 12.9. Extension of Payment Date................................................90 SECTION 12.10. Amendments, etc.........................................................91 SECTION 12.11. Severability............................................................91 SECTION 12.12. SERVICE OF PROCESS......................................................91 SECTION 12.13. Headings................................................................92 SECTION 12.14. Execution in Counterparts...............................................92 SECTION 12.15. Subordination of Intercompany Advances..................................92 SECTION 12.16. Confidentiality.........................................................93 SECTION 12.17. Entire Agreement........................................................93
iv 6 Schedules 1 MEI Ownership Interest 3.7(a) Corporate Guarantors/Pledged Securities 3.7(b) Beneficial Interests 3.8 Items of Product; Copyrights 3.9 Fictitious Names 3.11 Principal Executive Office/Location of Collateral/Filing Offices 3.12 Litigation 3.17 Existing Indebtedness/Material Agreements 3.21 Environmental Liabilities 3.22 Outstanding Rights Re Pledged Securities 6.2 Existing Liens 6.3 Guarantees 6.4 Scheduled Investments 6.23 Bank Accounts Exhibits A Form of Note B-1 Form of Opinion of Hughes Hubbard & Reed, special counsel to the Credit Parties B-2 Form of Opinion of Robert C. Murray, general counsel of the Borrower C Form of Borrowing Base Certificate D-1 Form of Pledgeholder Agreement (Uncompleted Product) D-2 Form of Pledgeholder Agreement (Completed Product) E-1 Form of Copyright Security Agreement E-2 Form of Copyright Security Agreement Supplement F Form of Laboratory Access Letter G Form of Notice of Assignment and Irrevocable Instructions H Form of Borrowing Certificate I Form of Instrument of Assumption and Joinder J Form of Contribution Agreement K-1 Form of Individual Guaranty Agreement by Terrence A. Elkes K-2 Form of Individual Guaranty Agreement by Kenneth F. Gorman K-3 Form of Individual Guaranty Agreement by Bruce Maggin K-4 Form of Individual Guaranty Agreement by John T. Healy K-5 Form of Individual Guaranty Agreement by Ronald Lightstone v 7 CREDIT, SECURITY, GUARANTY AND PLEDGE AGREEMENT, dated as of November 4, 1997 (as amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among DOVE ENTERTAINMENT, INC., a California corporation (the "Borrower"), the Corporate Guarantors named herein and THE CHASE MANHATTAN BANK, a New York banking corporation, as Lender (together with any permitted assignees of all or part of the Commitment in accordance with the terms hereof, the "Lender"). INTRODUCTORY STATEMENT All terms not otherwise defined above or in this Introductory Statement are as defined in Article 1 hereof, or as defined elsewhere herein. The Borrower has requested that the Lender make available an $8,000,000 three-year secured revolving credit facility which will be used (i) to refinance outstanding obligations as of the Closing Date under the Sanwa Credit Agreement and the MEI Line of Credit; (ii) to finance the development, production, distribution or acquisition of audio books, books and television product and film product (other than the production and distribution of motion pictures in theaters) and the production and distribution expenses of the motion picture entitled "Wilde" and (iii) for other general corporate purposes. To provide assurance for the repayment of the Loans and other Obligations of the Borrower and the Corporate Guarantors hereunder, the Borrower and the Corporate Guarantors will provide or will cause to be provided to the Lender, the following (each as more fully described herein): (i) a security interest in the Collateral pursuant to Article 8 hereof; (ii) a guaranty of the Obligations pursuant to Article 9 hereof; and (iii) a pledge of the Pledged Securities pursuant to Article 10 hereof. A principal shareholder of the Borrower is Media Equities International, L.L.C. ("MEI") which is directly and indirectly owned by Terrence A. Elkes, Kenneth F. Gorman, Ronald Lightstone, John T. Healy and Bruce Maggin (collectively referred to herein as the "Individual Guarantors"). To provide further assurance and in order to induce the Lender to enter into this Credit Agreement, as security for the repayment of the Loans and the other Obligations of the Borrower hereunder, the Individual Guarantors will provide to the Lender, pursuant to the Guaranty Agreement, an unconditional guaranty of payment of the Obligations in an amount equal to the lesser of (x) $2,000,000 and (y) the amount by which the actual borrowings by the Borrower in accordance with the terms of this Credit Agreement and Guaranty Agreement exceeds the Borrowing Base, subject to the limitations set forth therein (the "Maximum Guaranty 1 8 Amount"); provided, that in the case of any Individual Guarantor, such guarantor's guaranty obligation shall not exceed the product of 110% of such Individual Guarantor's ownership interest in MEI as of the date hereof (as indicated in Schedule 1 hereto) mutliplied by the Maximum Guaranty Amount (such amount to be reduced in accordance with the terms thereof). Subject to the terms and conditions set forth herein, the Lender is willing to make Loans to the Borrower and issue Letters of Credit in amounts in the aggregate at any one time outstanding not in excess of its Commitment hereunder. Accordingly, the parties hereto hereby agree as follows: 1. DEFINITIONS For the purposes hereof unless the context otherwise requires, all Section references herein shall be deemed to correspond with Sections herein, the following terms shall have the meanings indicated, all accounting terms not otherwise defined herein shall have the respective meanings accorded to them under GAAP and all terms defined in the UCC and not otherwise defined herein shall have the respective meanings accorded to them therein. Unless the context otherwise requires, any of the following terms may be used in the singular or the plural, depending on the reference: "Acceptable L/C" shall mean an irrevocable letter of credit which (i) is in form and on terms reasonably acceptable to the Lender, (ii) is payable in Dollars at an office of the issuing or confirming bank in New York City (or another city acceptable to the Lender in its sole discretion), (iii) is issued or confirmed by (a) the Lender; (b) any commercial bank that has (or which is the principal operating subsidiary of a holding company which has) as of the time such letter of credit is issued, public debt outstanding with a rating of at least "A" (or the equivalent of an "A") from one of the nationally recognized debt rating agencies; or (c) by any other bank which the Lender may in its sole discretion determine to be of acceptable credit quality and (iv) with respect to letters of credit delivered in connection with an uncompleted item of Product for which a Completion Guarantee is required pursuant to the terms hereof, has an expiration date no earlier than three (3) months after the "Outside Delivery Date" for an item of Product (as set forth in the Completion Guarantee for such item of Product) to which the letter of credit relates. "Affiliate" shall mean any Person which, directly or indirectly, is in control of, is controlled by or is under common control with, another Person. For purposes of this definition, a Person shall be deemed to be "controlled by" another Person if such latter Person possesses, directly or indirectly, power either to (i) vote 20% or more of the securities having ordinary voting power for election of directors of such Person or (ii) direct or cause the direction of the management and policies of such controlled Person whether by contract or otherwise. "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such 2 9 day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect for such day plus 1/2 of 1%. For purposes hereof, "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by the Lender as its prime rate in effect at its principal office in New York City. "Base CD Rate" shall mean the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) Statutory Reserves and (b) the Assessment Rate. "Three-Month Secondary CD Rate" shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day is not a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Lender from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. "Statutory Reserves" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority to which the Lender is subject for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Lender from three Federal funds brokers of recognized standing selected by it. If for any reason the Lender shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Effective Rate or both for any reason, including the inability or failure of the Lender to obtain sufficient quotations in accordance with the terms hereof, the Alternate Base Rate shall be determined without regard to clause (b) or (c), or both, of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "Alternate Base Rate Loan" shall mean a Loan based on the Alternate Base Rate in accordance with the provisions of Article 2 hereof. "Applicable Law" shall mean all provisions of statutes, rules, regulations and orders of the United States or foreign governmental bodies or regulatory agencies applicable to the Person 3 10 in question, and all orders and decrees of all U.S. federal or state courts and arbitrators in proceedings or actions in which the Person in question is a party. "Applicable Margin" shall mean in the case of Alternate Base Rate Loans, 2% per annum, or in the case of Eurodollar Loans, 3% per annum. "Approved Completion Guarantor" shall mean a financially sound and reputable completion guarantor approved by the Lender. The Lender hereby pre-approves as a completion guarantor (i) Fireman's Fund Insurance Company, acting through its agent, International Film Guarantors L.P. (the general partner of which is International Film Guarantors, Inc.), (ii) Cinema Completions International Inc./Continental Casualty Company, (iii) The Motion Picture Bond Company Inc. (to the extent a completion guarantee is accompanied by a London Guarantee Insurance Company "cut-through") and (iv) Film Finances, Inc. and its Affiliates that are insured under the same Lloyds of London insurance policies as Film Finances, Inc. (only for items of Product with a Budgeted Negative Cost of $7,500,000 or less and only to the extent the completion guarantee is accompanied by a Lloyd's of London "cut-through"); provided, however, that any such pre-approval may be revoked by the Lender if deemed appropriate in its sole discretion at any time upon 5 days prior written notice to the Borrower; but further, provided, that such pre-approval may not be revoked with regard to an item of Product if a Completion Guarantee has already been issued for such item of Product. "Assessment Rate" shall mean, for any day, the net annual assessment rate (rounded upwards, if necessary, to the next higher 1/100 of 1%) as most recently estimated by the Lender for determining the then current annual assessment payable by the Lender to the Federal Deposit Insurance Corporation (or any successor) for insurance by such Corporation (or such successor) of time deposits made in Dollars at the Lender's domestic offices. "Authorized Officer" shall mean, with respect to any Credit Party, such Credit Party's Chief Executive Officer or Chief Financial Officer. "Bankruptcy Code" shall mean the Bankruptcy Reform Act of 1978, as heretofore and hereafter amended, as codified at 11 U.S.C. Section 101 et seq. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States of America. "Borrowing" shall mean a group of Loans of a single interest rate type and as to which a single Interest Period is in effect on a single day. "Borrowing Base" shall mean, at any date for which the amount thereof is to be determined, an amount equal to the aggregate (without double counting) of the following: (i) one hundred percent (100%) of Eligible L/C Receivables; plus 4 11 (ii) eighty-five percent (85%) of Eligible Receivables; plus (iii) thirty-five percent (35%) of Eligible Library Amount; plus (iv) thirty percent (30%) of the book value of physical audio cassettes and printed books; minus (v) to the extent not already deducted in computing the Borrowing Base, all amounts payable to third parties from or with regard to the amounts otherwise included in the Borrowing Base (not to exceed with respect to any item of Product, the amount included in the Borrowing Base attributable to such item of Product), including without limitation remaining acquisition payments, set offs, current profit participations, deferments, residuals, commissions and royalties not yet paid; minus (vi) to the extent not otherwise deducted in computing the Borrowing Base, the aggregate amount of all accrued but unpaid residuals (not to exceed with respect to any item of Product, the amount included in the Borrowing Base attributable to such item of Product) owed to any trade guild, to the extent that the obligation of any Credit Party to pay such residuals is secured by a security interest in any Eligible Receivable included in the Borrowing Base, which security interest is not subordinated to the security interests of the Lender; provided, however, that credit in the Borrowing Base attributable to any Eligible Receivable may not exceed 20% of the total Borrowing Base, except as may be approved in writing by the Lender. "Borrowing Base Certificate" shall have the meaning given such term in Section 5.1(e) hereof. "Borrowing Certificate" shall mean a borrowing certificate, substantially in the form of Exhibit H hereto, to be delivered by the Borrower to the Lender in connection with each Borrowing. "Budgeted Negative Cost" shall mean, with respect to any item of Product, the amount of the cash budget (stated in Dollars) for such item of Product including all costs customarily included in connection with the acquisition of all underlying literary and musical rights with respect to such item of Product and in connection with the preparation, production and completion of such item of Product, including costs of materials, equipment, physical properties, personnel and services utilized in connection with such item of Product, both "above-the-line" and "below-the-line", any Completion Guarantee fee (if applicable), and all other items customarily included in negative costs, including finance charges and interest expense, but excluding production fees and overhead charges payable to a Credit Party. 5 12 "Business Day" shall mean any day other than a Saturday, Sunday or other day on which banks are required or permitted to close in the States of California and New York; provided, however, that when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in Dollar deposits on the London Interbank Market. "Capital Expenditures" shall mean, with respect to any Person for any period, the sum of (i) the aggregate of all expenditures (whether paid in cash or accrued as a liability) by such Person during that period which, in accordance with GAAP, are or should be included in "additions to property, plant or equipment" or similar items included in cash flows (including Capital Leases) and (ii) to the extent not covered by clause (i) hereof, the aggregate of all expenditures properly capitalized in accordance with GAAP by such Person to acquire, by purchase or otherwise, in whole or in part, the business, property or fixed assets of, or stock or other evidence of beneficial ownership of any other Person (other than the portion of such expenditures allocable in accordance with GAAP to net current assets). "Capital Lease" shall mean any lease of any property (whether real, personal or mixed) by that Person as lessee which, in accordance with GAAP, is or should be accounted for as a capital lease on the balance sheet of that Person. "Cash Equivalents" shall mean (i) marketable securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (ii) time deposits, certificates of deposit, acceptances or prime commercial paper or repurchase obligations for underlying securities of the types described in clause (i) entered into with the Lender or any commercial bank having a short-term deposit rating of at least A-2 or the equivalent thereof by Standard & Poor's Corporation or at least P-2 or the equivalent thereof by Moody's Investors Service, Inc. or (iii) commercial paper with a rating of A-1 or A-2 or the equivalent thereof by Standard & Poor's Corporation or P-1 or P-2 or the equivalent thereof by Moody's Investors Service, Inc. and in each case maturing within twelve months after the date of acquisition. "Change in Control" shall mean either (i) any Person or group (such term being used as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) acquires ownership or control of voting stock of the Borrower having voting power greater than the voting power at the time controlled by MEI or (ii) if at any time, individuals who at the Closing Date constituted the Board of Directors of the Borrower (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Borrower was approved by a vote of the majority of the directors then still in office who were either directors at the Closing Date or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Borrower. 6 13 "Change in Management" shall mean that either Ronald Lightstone or Neil Topham shall cease to perform executive functions for the Borrower; provided that a Change in Management shall not be deemed to have occurred if such Person has been replaced by a Person reasonably acceptable to the Lender within 180 days of such discontinuance. "Closing Date" shall mean the earliest date on which all conditions precedent to the making of the initial Loans as set forth in Section 4.1 have been satisfied or waived. The closing shall take place in New York, New York. "Code" shall mean the Internal Revenue Code of 1986 and the rules and regulations issued thereunder, as heretofore amended, as codified at 26 U.S.C. Section 1 et seq or any successor provision thereto. "Collateral" shall mean with respect to each Credit Party, all of such Credit Party's right, title and interest in personal property, tangible and intangible, wherever located or situated and whether now owned or hereafter acquired or created, including but not limited to goods, accounts, intercompany obligations, partnership and joint venture interests, contract rights, documents, chattel paper, general intangibles, goodwill, equipment, inventory, investment property, instruments, copyrights, trademarks, trade names, insurance proceeds, cash and deposit accounts and any proceeds thereon, products thereof or income therefrom, further including but not limited to all of such Credit Party's right, title and interest in and to each and every item and type of Product and Recorded Product, the scenario, screenplay or script upon which an item of Product is based, all of the properties thereof, tangible and intangible, and all domestic and foreign copyrights and all other rights therein and thereto, of every kind and character, whether now in existence or hereafter to be made or produced, and whether or not in possession of such Credit Party, including with respect to each and every item of Product and/or Recorded Product and without limiting the foregoing language, each and all of the following particular rights and properties (to the extent they are owned or hereafter created or acquired by such Credit Party): (i) all scenarios, screenplays and/or scripts at every stage thereof; (ii) all common law and/or statutory copyright and other rights in all literary and other properties (hereinafter called "said literary properties") which form the basis of each item of Product and/or Recorded Product and/or which are and/or will be incorporated into each item of Product and/or Recorded Product, all component parts of each item of Product and/or Recorded Product consisting of said literary properties, all rights in and to the story, all treatments of said story and said literary properties, together with all preliminary and final screenplays used and to be used in connection with the item of Product and/or Recorded Product, and all other literary material upon which the item of Product and/or Recorded Product is based or from which it is adapted; 7 14 (iii) all rights in and to all music and musical compositions used and to be used in each item of Product and/or Recorded Product, including, each without limitation, all rights to record, rerecord, produce, reproduce or synchronize all of said music and musical compositions in and in connection therewith; (iv) all tangible personal property relating to each item of Product and/or Recorded Product, including, without limitation, all exposed film, developed film, positives, negatives, prints, positive prints, answer prints, special effects, preparing materials (including interpositives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices, and all other forms of pre-print elements), sound tracks, cutouts, trims and any and all other physical properties of every kind and nature relating to such item of Product and/or Recorded Product, whether in completed form or in some state of completion, and all masters, duplicates, drafts, versions, variations and copies of each thereof, in all formats whether on film, videotape, disk or otherwise and all music sheets and promotional materials relating to such item of Product and/or Recorded Product (collectively, the "Physical Materials"); (v) all collateral, allied, subsidiary and merchandising rights appurtenant or related to each item of Product and/or Recorded Product including, without limitation, the following rights: all rights to produce remakes or sequels or prequels to each item of Product and/or Recorded Product based upon each item of Product and/or Recorded Product, said literary properties or the theme of each item of Product and/or Recorded Product and/or the text or any part of said literary properties; all rights throughout the world to broadcast, transmit and/or reproduce by means of television (including commercially sponsored, sustaining and subscription or "pay" television) or by any process analogous thereto, now known or hereafter devised, each item of Product and/or Recorded Product or any remake or sequel or prequel to the item of Product and/or Recorded Product; all rights to produce primarily for television or similar use a motion picture or series of motion pictures, by use of film or any other recording device or medium now known or hereafter devised, based upon each item of Product and/or Recorded Product, said literary properties or any part thereof, including, without limitation, based upon any script, scenario or the like used in each item of Product and/or Recorded Product; all merchandising rights including, without limitation, all rights to use, exploit and license others to use and exploit any and all commercial tie- ups of any kind arising out of or connected with said literary properties, each item of Product and/or Recorded Product, the title or titles of each item of Product and/or Recorded Product, the characters of each item of 8 15 Product and/or Recorded Product or said literary properties and/or the names or characteristics of said characters and including further, without limitation, any and all commercial exploitation in connection with or related to each item of Product and/or Recorded Product, any remake or sequel thereof and/or said literary properties; (vi) all statutory copyrights, domestic and foreign, obtained or to be obtained on each item of Product and/or Recorded Product, together with any and all copyrights obtained or to be obtained in connection with each item of Product and/or Recorded Product or any underlying or component elements of each item of Product and/or Recorded Product, including, in each case without limitation, all copyrights on the property described in subparagraphs (i) through (v) inclusive, of this paragraph, together with the right to copyright (and all rights to renew or extend such copyrights) and the right to sue in the name of any of the Credit Parties for past, present and future infringements of copyright; (vii) all insurance policies and completion bonds connected with each item of Product and/or Recorded Product and all proceeds which may be derived therefrom; (viii) all rights to distribute, sell, rent, license the exhibition of and otherwise exploit and turn to account each item of Product and/or Recorded Product, the Physical Materials and rights in and to said story, other literary material upon which each item of Product and/or Recorded Product is based or from which it is adapted, and said music and musical compositions used or to be used in each item of Product and/or Recorded Product; (ix) any and all sums, proceeds, money, products, profits or increases, including money profits or increases (as those terms are used in the UCC or otherwise) or other property obtained or to be obtained from the distribution, exhibition, sale or other uses or dispositions of each item of Product and/or Recorded Product or any part of each item of Product and/or Recorded Product, including, without limitation, all proceeds, profits, products and increases, whether in money or otherwise, from the sale, rental or licensing of each item of Product and/or Recorded Product and/or any of the elements of each item of Product and/or Recorded Product including from collateral, allied, subsidiary and merchandising rights; (x) the dramatic, nondramatic, stage, television, radio and publishing rights, title and interest in and to each item of Product and/or Recorded Product, and the right to obtain copyrights and renewals of copyrights therein; 9 16 (xi) the name or title of each item of Product and/or Recorded Product and all rights of such Credit Party to the use thereof, including, without limitation, rights protected pursuant to trademark, service mark, unfair competition and/or the rules and principles of law and of any other applicable statutory, common law, or other applicable statutes, common law, or other rule or principle of law; (xii) any and all contract rights and/or chattel paper which may arise in connection with each item of Product and/or Recorded Product; (xiii) all accounts and/or other rights to payment which such Credit Party presently owns or which may arise in favor of such Credit Party in the future, including, without limitation, any refund under a completion guaranty, all accounts and/or rights to payment due from exhibitors in connection with the distribution of each item of Product and/or Recorded Product, and from exploitation of any and all of the collateral, allied, subsidiary, merchandising and other rights in connection with each item of Product and/or Recorded Product; (xiv) any and all "general intangibles" (as that term is defined in the UCC) not elsewhere included in this definition, including, without limitation, any and all general intangibles consisting of any right to payment which may arise in the distribution or exploitation of any of the rights set out herein, and any and all general intangible rights in favor of such Credit Party for services or other performances by any third parties, including actors, writers, directors, individual producers and/or any and all other performing or nonperforming artists in any way connected with each item of Product and/or Recorded Product, any and all general intangible rights in favor of such Credit Party relating to licenses of sound or other equipment, licenses for any photograph or photographic process, and all general intangibles related to the distribution or exploitation of each item of Product and/or Recorded Product including general intangibles related to or which grow out of the exhibition of each item of Product and/or Recorded Product and the exploitation of any and all other rights in each item of Product and/or Recorded Product set out in this definition; (xv) any and all goods including inventory (as that term is defined in the UCC) which may arise in connection with the creation, production or delivery of each item of Product and/or Recorded Product and which goods pursuant to any production or distribution agreement or otherwise are owned by such Credit Party; (xvi) all and each of the rights, regardless of denomination, which arise in connection with the creation, production, completion of production, 10 17 delivery, distribution, or other exploitation of each item of Product and/or Recorded Product, including, without limitation, any and all rights in favor of such Credit Party, the ownership or control of which are or may become necessary or desirable, in the opinion of the Lender, in order to complete production of each item of Product and/or Recorded Product in the event that the Lender exercises any rights it may have to take over and complete production of each item of Product and/or Recorded Product; (xvii) any and all documents issued by any pledgeholder or bailee with respect to the item of Product and/or Recorded Product or any Physical Materials (whether or not in completed form) with respect thereto; (xviii) any and all production accounts or other bank accounts established by such Credit Party with respect to such item of Product and/or Recorded Product; (xix) any and all rights of such Credit Party under contracts relating to the production or acquisition of such item of Product and/or Recorded Product; and (xx) any and all rights of such Credit Party under Distribution Agreements relating to each item of Product and/or Recorded Product; provided, that, notwithstanding anything to the contrary contained above, "Collateral" shall not include the "Real Property" described in the Deed of Trust dated April 24, 1996 among the Borrower, Asahi Bank of California and North American Title Company, as trustee, and the "Rents" described in the Assignment of Rents dated April 24, 1996 between the Borrower and Asahi Bank of California. "Collection Account" shall have the meaning of given such term in Section 8.3 hereof. "Commitment" shall mean the commitment of the Lender to make Loans to the Borrower and issue Letters of Credit from the Closing Date through the Commitment Termination Date up to an aggregate principal amount, at any one time, not in excess of $8,000,000, as such amount may be reduced from time to time in accordance with the terms of this Credit Agreement. "Commitment Fee" shall have the meaning given such term in Section 2.5 hereof. "Commitment Termination Date" shall mean the earlier to occur of (i) November 4, 2000 or (ii) such earlier date on which the Commitments shall terminate in accordance with Section 2.6 or Article 7 hereof. 11 18 "Completed" and "Completion" shall mean with respect to any item of Product that (A) either (i) sufficient elements have been delivered by the Borrower to, and accepted by, a Person (other than the Borrower or Affiliate thereof) to permit such Person to exhibit the item of Product in the medium for which the item of Product is intended for initial exploitation in the United States or (ii) the Borrower has certified to the Lender that an independent laboratory has in its possession a complete final 35 mm or 70 mm (or other size which has become standard in the industry) composite positive print, video master or other equivalent master copy of the item of Product as finally cut, main and end titled, edited, scored and assembled with sound track printed thereon in perfect synchronization with the photographic action and fit and ready for exhibition and distribution in the medium for which the item of Product is intended for initial exploitation, provided that if such certification shall not be verified to the Lender by such independent laboratory within 20 business days thereafter, such item of Product shall revert to being uncompleted until the Lender receives such verification, and (B) if such item of Product was acquired from a third party, the entire acquisition price or minimum advance shall have been paid to the extent then due and there is no condition or event (other than the payment of money not yet due) the occurrence of which might result in the Borrower losing any of its rights in such item of Product. "Completion Guarantee" shall mean a completion guarantee, in the customary form accepted by the Lender or otherwise in form and substance satisfactory to the Lender, issued by an Approved Completion Guarantor which names the Lender as a beneficiary thereof to the extent of the applicable Credit Party's financial interest in an item of Product. "Consolidated Capital Base" shall mean the sum of the principal amount of Subordinated Debt outstanding (net of unamortized debt discount) plus the amount of Shareholders' Equity of the Borrower and its Consolidated Subsidiaries, all determined in accordance with GAAP. "Consolidated Net Income" shall mean, for any period for which such amount is being determined, the net income (or loss) of the Borrower and its Consolidated Subsidiaries during such period, determined on a consolidated basis for such period taken as a single accounting period in accordance with GAAP, provided that there shall be excluded (i) income (or loss) of any Person (other than a Consolidated Subsidiary) in which the Borrower or any of its Consolidated Subsidiaries has an equity investment or comparable interest, except to the extent of the amount of dividends or other distributions actually paid to the Borrower or any of its Consolidated Subsidiaries by such Person during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a Consolidated Subsidiary of the Borrower or is merged into or consolidated with the Borrower or any of its Consolidated Subsidiaries or the Person's assets are acquired by the Borrower or any of its Consolidated Subsidiaries and (iii) the income of any Consolidated Subsidiary to the extent that the declaration or payment of dividends or similar distributions by that Consolidated Subsidiary of its income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Consolidated Subsidiary. 12 19 "Consolidated Subsidiaries" shall mean all Subsidiaries of a Person which are required or permitted to be Consolidated with such Person for financial reporting purposes in accordance with GAAP. "Contribution Agreement" shall mean a Contribution Agreement executed by the Credit Parties substantially in the form of Exhibit J hereto, as the same may be amended, supplemented or otherwise modified from time to time. "Controlled Group" shall mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with any Credit Party, are treated as a single employer under Section 414(b), (c), (m) or (o) of the Code. "Copyright Security Agreement" shall mean the Copyright Security Agreement, substantially in the form of Exhibit E-1 hereto as the same may be amended or supplemented from time to time by delivery of a Copyright Security Agreement Supplement or otherwise. "Copyright Security Agreement Supplement" shall mean a Supplement to the Copyright Security Agreement substantially in the form of Exhibit E-2 hereto. "Corporate Guarantors" shall mean all of the direct and indirect Subsidiaries of the Borrower, now existing or hereafter acquired or created. "Credit Party" shall mean the Borrower or any of the Corporate Guarantors. "Currency Agreement" shall mean any foreign exchange contract, currency swap agreement, futures contract, option contract or other similar agreement designed to protect any Credit Party against fluctuations in currency values. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Distribution Agreements" shall mean (i) any and all agreements entered into by a Credit Party pursuant to which such Credit Party has sold, leased, licensed or assigned distribution rights or other exploitation rights to any item of Product to an un-Affiliated Person and (ii) any agreement hereafter entered into by a Credit Party pursuant to which such Credit Party sells, leases, licenses or assigns distribution rights to an item of Product to an un-Affiliated Person. "Dollars" and "$" shall mean lawful money of the United States of America. "EBIT" shall mean, for any period, for the Borrower and its Subsidiaries on a Consolidated basis, the sum for such period of (i) Consolidated Net Income, (ii) Total Interest, 13 20 and (iii) provision for income taxes during such period, all as determined for such period in conformity with GAAP. "Eligible L/C Receivable" shall have the same definition as an Eligible Receivable except that an Acceptable L/C shall have been delivered to the Lender for the full amount of the receivable. "Eligible Library Amount" shall initially be equal to $10,000,000 and shall be redetermined on a bi-annual basis by Richard L. Medress or an independent consultant selected by the Lender in its reasonable discretion exercised in good faith using methodology consistent with the initial valuation without double counting for items of Product that are receiving the credit in the Borrowing Base; provided, however, that there will be interim reductions to the Eligible Library Amount to reflect decreases, if any, in the remaining value of unsold library rights resulting from major library deals (e.g., any single agreement or series of related agreements pertaining to the licensing, distribution or sale of library product providing for aggregate payments (including reasonably estimated contingent payments) to a Credit Party in excess of $250,000) during such interim period. "Eligible Receivables" shall mean, at any date at which the amount thereof is to be determined, an amount equal to the sum of the present values (discounted, in the case of amounts which are not due and payable within 12 months following the date of determination, on a quarterly basis by a rate of interest equal to the interest rate in effect on the Note on the date of computation) of (a) all net amounts which pursuant to a binding agreement are contractually obligated to be paid to any Credit Party either unconditionally or subject only to normal delivery requirements, and which are reasonably expected by the Borrower to be payable and collected from obligors (including, without limitation, amounts which a distributor has reported to a Credit Party in writing (and such report has been forwarded to the Lender) will be paid to such Credit Party following receipt by the distributor of sums contractually required to be paid to the distributor from third parties) minus (b) the sum, without double counting and computed on a receivable by receivable basis and never in excess of the amount of the corresponding receivable, of (i) in the case of audio and book receivables, a reserve in respect of estimated returns for items of Product sold on a returnable basis, allowances and doubtful payments of accounts for each such receivable, in an amount which shall not be less than 30% of the amount of the corresponding receivable, (ii) the following items (based on the Borrower's then best estimates): third party profit participations, residuals, collection/ distribution expenses, commissions, video fulfillment costs, foreign withholding, remittance and similar taxes chargeable in respect of such accounts receivable, and any other projected expenses of such Credit Party arising in connection with such amounts and (iii) the outstanding amount of unrecouped advances made by a distributor to the extent subject to repayment by a Credit Party or adjustment pursuant to approved Distribution Agreements, but Eligible Receivables shall not include amounts: (i) which in the reasonable discretion of the Lender (acting in good faith) are subject to material conditions precedent to payment (including a material performance obligation or a material executory aspect on the part of the 14 21 Credit Parties or any other party or obligations contingent upon future events not within a Credit Party's direct control within the ordinary course of business); (ii) to the extent such receivables are more than 90 days past due; (iii) in excess of $50,000 that are to be paid in a currency other than Dollars unless hedged in a manner satisfactory to the Lender; (iv) to the extent included in the Borrower's estimated bad debts; (v) due from any obligor which has 20% or more of the total receivable amount from such obligor 120 or more days past due (exclusive of amounts that are being disputed or contested in good faith); (vi) for which there is a bona fide request for a material credit, adjustment, compromise, offset, counterclaim or dispute; provided, however, that only the amount in question shall be excluded from such receivable; (vii) which are attributable to an item of Product in which a Credit Party cannot warrant sufficient title to the underlying rights to justify such receivable; (viii) in which the Lender does not have a first perfected security interest under the UCC and applicable copyright law; provided that, such receivable may be subject to permitted liens subordinate to the security interest of the Lender; (ix) which are determined by the Lender in its reasonable discretion, acting in good faith, upon written notice from the Lender to the Borrower and effective 10 days subsequent to the Borrower's receipt of such notice, to be unacceptable (it being understood that certain unacceptable receivables may be made acceptable and may be included in the Borrowing Base if secured by an Acceptable L/C); (x) which relate to items of Product as to which the Lender has not received a fully executed Laboratory Access Letter or Pledgeholder Agreement for each laboratory holding Physical Materials sufficient to fully exploit the rights held by the Borrower in such item of Product; (xi) which will be subject to reduction or repayment to the extent not earned by performance; (xii) which are attributable to items of Product as described in Section 5.21 unless the Borrower is in compliance with Section 5.21; 15 22 (xiii) which are attributable to items of Product which have not been Completed (except that (1) if a Letter of Credit is issued in order to support the Borrower's minimum payment obligation to acquire distribution rights in such item of Product, amounts attributable to such rights may be treated as Eligible Receivables (even though the item of Product has not yet been Completed), provided that (A) proof of Completion of such item of Product must be presented in order to draw under the Letter of Credit, (B) the portion of the Borrowing Base attributable to such Eligible Receivables for such item of Product does not exceed the amount of such Letter of Credit for such item of Product, and (C) such amounts otherwise meet all of the applicable criteria for inclusion as Eligible Receivables except clause (x); or (2) if a Completion Guarantee has been issued for such item of Product or the Borrower is otherwise in compliance with Section 5.21, amounts attributable to such item of Product may be treated as Eligible Receivables (even though the item of Product has not yet been Completed), provided that (A) the portion of the Borrowing Base attributable to such Eligible Receivables for such item of Product shall not exceed the amounts which would be paid to the Borrower or a Corporate Guarantor under such Completion Guarantee if such item of Product were abandoned as of the date of computation of the Borrowing Base and (B) such amounts otherwise meet all of the applicable criteria for inclusion as Eligible Receivables except clause (x); or (xiv) which will not become due and payable until one year or more after the scheduled final maturity of the Credit Agreement. The Lender from time to time by written notice to the Borrower (which notice shall be prospective only, i.e., to the extent that giving effect to such notice would otherwise result in a mandatory prepayment by the Borrower under Section 2.9, such notice shall not be given effect for purposes of such mandatory prepayment, but shall nevertheless be effective for all other purposes under this Credit Agreement immediately upon the Borrower's receipt of such notice) may determine that any amounts due under any Distribution Agreement are unacceptable and shall no longer constitute an Eligible Receivable as it may, acting in good faith, in its discretion deem appropriate. "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. Sections 7401 et seq., the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"), 7 U.S.C. Sections 136 et seq., the Surface Mining Control and Reclamation Act ("SMCRA"), 30 U.S.C. Sections 1201 et seq., the Comprehensive Environmental 16 23 Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et seq., the Superfund Amendments 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 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 pursuant thereto. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as heretofore and hereafter amended, as codified at 29 U.S.C. Section 1001 et seq. and the regulations promulgated thereunder. "Eurodollar Loan" shall mean a Loan based on the LIBO Rate in accordance with the provisions of Article 2 hereof. "Event of Default" shall have the meaning given such term in Article 7 hereof. "Fundamental Documents" shall mean this Credit Agreement, the Note, the Guaranty Agreement, the Pledgeholder Agreements, the Laboratory Access Letters, the Copyright Security Agreement, the Copyright Security Agreement Supplements, the Instruments of Assumption and Joinder, the Notices of Assignment and Irrevocable Instruction, UCC financing statements, and any other ancillary documentation which is required to be or is otherwise executed by any of the Credit Parties and delivered to the Lender in connection with this Credit Agreement or any other Fundamental Document. "GAAP" shall mean generally accepted accounting principles in the United States of America consistently applied (except for accounting changes in response to FASB releases, or other authoritative pronouncements). "Governmental Authority" shall mean any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, or any court, in each case whether of the United States or a foreign jurisdiction. "Guaranty" shall mean, as to any Person, any direct or indirect obligation of such Person guaranteeing or intended to guaranty any Indebtedness, Capital Lease, dividend or other monetary obligation ("primary obligation") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (a) for the purchase or payment of any such primary obligation or (b) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, or (iii) to purchase property, securities or services, in each case, primarily for the purpose of assuring the performance of the obligor of any such primary obligation; provided, however, that the term Guaranty shall not include endorsements for collection or collections for deposit, in either case in the ordinary course of business. The amount of any Guaranty shall be deemed to 17 24 be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder). "Guaranty Agreement" shall mean, collectively, the Individual Guaranty Agreements dated the date hereof, each between an Individual Guarantor and the Lender substantially in the form of Exhibits K-1 through K-5 hereto, as the same may be amended, supplemented or otherwise modified from time to time. "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. "Indebtedness" shall mean (without double counting), at any time and with respect to any Person, (i) indebtedness of such Person for borrowed money (whether by loan or the issuance and sale of debt securities) or for the deferred purchase price of property or services purchased (other than amounts constituting trade payables (payable within 90 days) arising in the ordinary course of business); (ii) obligations of such Person in respect of letters of credit, acceptance facilities, or drafts or similar instruments issued or accepted by banks and other financial institutions for the account of such Person; (iii) obligations of such Person under Capital Leases; (iv) deferred payment obligations of such Person resulting from the adjudication or settlement of any claim or litigation and (v) Indebtedness of others of the type described in clauses (i), (ii), (iii) and (iv) hereof which such Person has (a) directly or indirectly assumed or guaranteed in connection with a Guaranty or (b) secured by a Lien on the assets of such Person, whether or not such Person has assumed such indebtedness. Indebtedness shall not include non-refundable advances made by a third-party distributor to "cash-flow" the production of an item of Product. "Individual Guarantors" shall be as defined in the Introductory Statement hereof. "Instruments of Assumption and Joinder" shall mean the Instruments of Assumption and Joinder substantially in the form of Exhibit I pursuant to which Subsidiaries of the Borrower become parties to this Credit Agreement as contemplated by Section 6.22. "Interest Payment Date" shall mean (i) as to any Eurodollar Loan having an Interest Period of one, two or three months, the last day of such Interest Period, (ii) as to any Eurodollar Loan having an Interest Period of more than three months, the last day of such Interest Period and, in addition, each date during such Interest Period that would be the last day of an Interest Period commencing on the same day as the first day of such Interest Period but having a duration of three months or any integral multiple thereof and (iii) with respect to Alternate Base Rate Loans, the last Business Day of each March, June, September and December (commencing the last Business Day of December 1997). 18 25 "Interest Period" shall mean as to any Eurodollar Loan, the period commencing on the date such Loan is made, continued or converted or the last day of the preceding Interest Period and ending on the numerically corresponding day (or if there is no corresponding day, the last day) in the calendar month that is one, two, three or six months thereafter as the Borrower may elect; provided, however, that (i) if any Interest Period would end on a day which shall not be a Business Day, such Interest Period shall be extended to the next succeeding Business Day, unless such next succeeding Business Day would fall in the next calendar month, in which case, such Interest Period shall end on the next preceding Business Day and (ii) no Interest Period may be selected which would end later than the Commitment Termination Date. "Interest Rate Protection Agreement" shall mean any interest rate swap agreement, interest rate cap agreement, synthetic caps, collars and floors or other financial agreement or arrangement designed to protect any Credit Party against fluctuations in interest rates. "Investment" shall mean any stock, evidence of indebtedness or other securities of any Person, any loan, advance, contribution of capital, extension of credit or commitment therefor, including without limitation the guarantee of loans made to others (except for current trade and customer accounts receivable for goods or services provided or rendered in the ordinary course of business and payable in accordance with customary trading terms in the ordinary course of business), and any purchase of (i) any securities of another Person or (ii) any business or undertaking of any Person or any commitment or option to make any such purchase. "L/C Exposure" shall mean, at any time, the amount expressed in Dollars of the aggregate face amount of all drafts which may then or thereafter be presented by beneficiaries under all Letters of Credit then outstanding plus (without duplication) the face amount of all drafts which have been presented or accepted under all Letters of Credit but have not yet been paid or have been paid but not reimbursed. "Laboratory" shall mean any laboratory reasonably acceptable to the Lender which is located in the United States and is a party to a Pledgeholder Agreement or a Laboratory Access Letter. "Laboratory Access Letter" shall mean a letter agreement among (i) a Laboratory holding any elements of any item of Product to which a Credit Party has the right of access, (ii) such Credit Party and (iii) the Lender, substantially in the form of Exhibit F hereto or a form otherwise acceptable to the Lender. "Lender" shall be as defined in the Introductory Statement hereof. "Lending Office" shall mean, with respect to the Lender, the branch or branches (or affiliate or affiliates) from which the Lender's Eurodollar Loans or Alternate Base Rate Loans, as the case may be, are made or maintained and for the account of which all payments of 19 26 principal of, and interest on, the Lender's Eurodollar Loans or Alternate Base Rate Loans are made. "Letter of Credit" shall mean a letter of credit issued by the Lender pursuant to Section 2.14. "LIBO Rate" shall mean, with respect to the Interest Period for a Eurodollar Loan, an interest rate per annum equal to the quotient (rounded upwards to the next 1/100 of 1%) of (A) the average of the rates at which Dollar deposits approximately equal in principal amount to such Eurodollar Loan and for a maturity equal to the applicable Interest Period are offered to the Lending Office of the Lender in immediately available funds in the London Interbank Market for Eurodollars at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period divided by (B) one minus the applicable statutory reserve requirements of the Lender, expressed as a decimal (including without duplication or limitation, basic, supplemental, marginal and emergency reserves), from time to time in effect under Regulation D or similar regulations of the Board. It is agreed that for purposes of this definition, Eurodollar Loans made hereunder shall be deemed to constitute Eurocurrency Liabilities as defined in Regulation D and to be subject to the reserve requirements of Regulation D. "Lien" shall mean any mortgage, copyright mortgage, pledge, security interest, encumbrance, lien or charge of any kind whatsoever (including any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction or the agreement to grant a security interest at a future date). "Loans" shall mean the loans made hereunder in accordance with the provisions of Section 2.2, whether made as a Eurodollar Loan or an Alternate Base Rate Loan, as permitted hereby. "Margin Stock" shall be as defined in Regulation U of the Board. "Material Agreement" shall mean any agreement set forth on Schedule 3.17 hereto. "Maximum Guaranty Amount" shall be as defined in the Introductory Statement hereof. "MEI Line of Credit" shall mean the loan made to the Borrower and certain of the Corporate Guarantors by MEI on September 26, 1997 in the principal amount of $550,000. "Multiemployer Plan" shall mean a plan described in Section 4001(a)(3) of ERISA. "Notice of Assignment and Irrevocable Instructions" shall mean the Notice of Assignment and Irrevocable Instructions substantially in the form of Exhibit G or in such other 20 27 form as shall be acceptable to the Lender, including without limitation the inclusion of such notice and instructions in a Distribution Agreement. "Obligations" shall mean the obligation of the Borrower to make due and punctual payment of principal of and interest on the Loans, the Commitment Fee, reimbursement obligations in respect of Letters of Credit and all other monetary obligations of the Borrower owed to the Lender under this Credit Agreement, the Note, the Commitment Letter or any other Fundamental Document and all amounts payable by the Borrower to the Lender under any Interest Rate Protection Agreement or Currency Agreement, provided that the Lender shall have received written notice within 10 days after execution of each such Interest Rate Protection Agreement or Currency Agreement. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor thereto. "Permitted Encumbrances" shall mean Liens permitted under Section 6.2 hereof. "Person" shall mean any natural person, corporation, partnership, trust, joint venture, association, company, estate, unincorporated organization or government or any agency or political subdivision thereof. "Physical Materials" shall have the meaning given such term in the definition of "Collateral" herein. "Plan" shall mean an employee benefit plan within the meaning of Section 3(2) of ERISA, other than a Multiemployer Plan, maintained by the Borrower or any member of the Controlled Group, or to which the Borrower or any member of the Controlled Group contributes or is required to contribute or any other plan covered by Title IV of ERISA that cover any employees of the Borrower or any member of the Controlled Group. "Pledged Securities" shall mean 100% of the issued and outstanding capital stock of each of the Corporate Guarantors. "Pledgeholder Agreement" shall mean a Laboratory Pledgeholder Agreement among a Credit Party, the Lender, a third party completion guarantor (if there is one), and one or more Laboratories, substantially in the form of Exhibit D-1 or Exhibit D-2 hereto, or in such other form as shall be acceptable to the Lender. "Pledgors" shall mean those Credit Parties identified as such on Schedule 3.7(a). "Product" shall mean any motion picture, film or video tape produced for television release or for release in any other medium, in each case whether recorded on film, videotape, cassette, cartridge, disc or on or by any other means, method, process or device whether now known or hereafter developed, with respect to which a Credit Party (i) is the initial 21 28 copyright owner or (ii) acquires an equity interest or distribution rights. The term "item of Product" shall include, without limitation, the scenario, screenplay or script upon which such Product is based, all of the properties thereof, tangible and intangible, and whether now in existence or hereafter to be made or produced, whether or not in possession of the Credit Parties, and all rights therein and thereto, of every kind and character. "Production Account(s)" shall mean individually or collectively, as the context so requires, each demand deposit account(s) established by a Credit Party at a commercial bank located in the United States or otherwise acceptable to the Lender, for the sole purpose of paying the production costs of a particular item of Product and, if a Completion Guaranty is required for such item of Product pursuant to the terms hereof, as to which the Approved Completion Guarantor for such item of Product has agreed in writing that amounts deposited in such account shall be deemed available for production of such item of Product for purposes of the Completion Guarantee for such item of Product. "Production Exposure" for an item of Product shall mean the Budgeted Negative Cost or acquisition price paid or to be paid by a Credit Party (net of amounts being cash-flowed by a third party unrelated to a Credit Party pursuant to contractual arrangements reasonably acceptable to the Lender). "Recorded Product" shall mean any audio embodiment or musical, spoken or other sound based upon literary or other works regardless of the nature of the material object, such as discs, tapes or other phonorecords, in which such sounds are embodied, including without limitation audio books. "Reportable Event" shall mean any reportable event as defined in Section 4043(c) 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. "Restricted Payment" shall mean (i) any distribution, dividend or other direct or indirect payment on account of shares of any class of stock of, partnership interest in, or any other equity interest of, a Credit Party, other than a dividend, distribution or other payment payable solely in shares of common stock, (ii) any redemption or other acquisition, re-acquisition or retirement by a Credit Party of any class of its own stock or other equity interest of a Credit Party or an Affiliate, now or hereafter outstanding, (iii) any payment made to retire, or obtain the surrender of any outstanding warrants, puts or options or other rights to purchase or acquire shares of any class of stock of, or any equity interest in, a Credit Party, now or hereafter outstanding and (iv) any payment by a Credit Party of principal of, premium, if any, or interest on, or any redemption, purchase, retirement, defeasance, sinking fund or similar payment with respect to, any Subordinated Debt now or hereafter outstanding. "Sanwa Credit Agreement" shall mean the Term Loan Agreement dated as of August 16, 1996, between Sanwa Bank California and the Borrower. 22 29 "Shareholders' Equity" shall mean the consolidated capital, surplus and retained earnings and deficits of the Borrower and its Subsidiaries, subject to intercompany eliminations and reduced by the outstanding amount of any note held by the Borrower in payment for capital stock, all as determined in accordance with GAAP. "Strike Price" shall mean, with respect to any item of Product, the amount of funds required to be provided under the relevant Completion Guarantee, if applicable. "Subordinated Debt" shall mean all Indebtedness of any of the Credit Parties that is subordinated to the Obligations pursuant to written agreements, containing interest rates, payment terms, maturities, amortization schedules, covenants, defaults, remedies, subordination provisions and other material terms in form and substance satisfactory to the Lender. "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 and one or more subsidiaries of such Person. "Total Interest" shall mean the sum of (i) all cash interest expenses (net of interest income) calculated on an accrual basis of the Borrower and its Consolidated Subsidiaries computed in accordance with GAAP (whether indicated on the consolidated statement of earnings under the caption "Interest Expense" or netted out under the amount appearing under the caption "Interest and Investment Income") plus (ii) any cash interest expense calculated on an accrual basis that has been capitalized (other than as part of film costs) during the relevant period. "UCC" shall mean the Uniform Commercial Code as in effect in the State of New York on the date of execution of this Credit Agreement. "Voting Stock" shall mean the capital stock of an entity having ordinary voting power under ordinary circumstances to vote in the election of directors of such entity. "Weighted Average Life to Maturity" shall mean, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the then outstanding principal amount of such Indebtedness into (b) the sum of the products obtained by (x) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof by (y) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment. 23 30 2. THE LOANS SECTION 2.1. Loans. (a) The Lender agrees, upon the terms and subject to the conditions hereof, to make loans to the Borrower, on any Business Day and from time to time from the Closing Date to but excluding the Commitment Termination Date, each in an aggregate principal amount which when added to the aggregate principal amount of all Loans then outstanding to the Borrower from the Lender plus the then current L/C Exposure, does not exceed the Lender's Commitment (after giving effect to all Loans repaid and all reimbursements of Letters of Credit made concurrently with the making of any Loans). (b) Subject to Section 2.2, the Loans shall be made at such times as the Borrower shall request. (c) Subject to the terms and conditions of this Credit Agreement, the Borrower may borrow, repay and re-borrow amounts constituting the Commitment. (d) Notwithstanding anything to the contrary above, the Lender shall not be obligated to make Loans or to incur any incremental L/C Exposure if, as a result thereof, the aggregate principal amount of all Loans then outstanding plus the then current L/C Exposure exceeds the lesser of (x) the sum of (A) the Maximum Guaranty Amount plus (B) amounts currently held in the Collection Account plus (C) the Borrowing Base or (y) the Commitment. SECTION 2.2. Making of Loans. (a) Each Loan shall be an Alternate Base Rate Loan or a Eurodollar Loan as the Borrower may request subject to and in accordance with this Section 2.2. (b) The Borrower shall give the Lender at least three Business Days' prior written, facsimile or telephonic (promptly confirmed in writing) notice of each Borrowing which is to consist of Eurodollar Loans, and at least one Business Day's prior written, facsimile or telephonic (promptly confirmed in writing) notice of each Borrowing which is to consist of Alternate Base Rate Loans. Each such notice in order to be effective must be received by the Lender not later than 2:00 p.m., New York City time, on the day required and shall specify the date (which shall be a Business Day) on which such Loan is to be made, the aggregate principal amount of the requested Loan. Each such notice shall be irrevocable and shall specify whether the Borrowing then being requested is to consist of Alternate Base Rate Loans or Eurodollar Loans and in the case of Eurodollar Loans, the Interest Period or Interest Periods with respect thereto; provided, that in the event the Lender shall have determined that Eurodollar Loans are not available pursuant to Section 2.7(b), the Borrower may rescind such Borrowing request by providing the Lender notice thereof no later than 5:00 p.m. (New York City time) on the day the Borrower received notice of such unavailability. If no election of an Interest Period is specified in such notice in the case of a Borrowing consisting of Eurodollar Loans, such notice shall be deemed to be a request for an Interest Period of one month. If no election is made as to the type of Loan, such notice shall be deemed a request for a Borrowing consisting of Alternate Base Rate Loans. No Borrowing shall consist of Eurodollar Loans if after giving effect thereto an aggregate 24 31 of more than six (6) separate Eurodollar Loans would be outstanding hereunder (determined in accordance with Section 2.9(c) hereof). (c) Each Loan requested by the Borrower shall be as specified on the applicable Borrowing Certificate delivered to the Lender in connection with such Loan; provided, that with respect to any request for a Loan in excess of the Borrowing Base (which amount shall be subject to the guaranty obligations of the Individual Guarantors under the Guaranty Agreement), the Borrower shall obtain the written approval of MEI in accordance with the terms of the Guaranty Agreement. The Lender shall disburse such funds by depositing the requested amounts into an account designated by the Borrower. (d) The Lender may at its option fulfill its obligation to make Eurodollar Loans by causing a foreign branch or affiliate to fund such Eurodollar Loans, provided that any exercise of such option shall not affect the obligation of the Borrower to repay Loans in accordance with the terms hereof. Subject to the other provisions of this Section 2.2, Loans of more than one interest rate type may be outstanding at the same time. (e) The amount of any Borrowing of new funds shall be in an aggregate principal amount of $125,000 (or such lesser amount as shall equal the available but unused portion of the Commitment) or such greater amount which is an integral multiple of $100,000; provided, however that the amount of any Borrowing of new funds which shall be a Eurodollar Loan shall be in an aggregate principal amount of $500,000 or such greater amount which is an integral multiple of $100,000. (f) Notwithstanding the provisions of clause (b) above and/or the absence of a request from the Borrower that the Lender make a Loan, the Lender may make Loans and apply the proceeds thereof as follows: (i) if the Approved Completion Guarantor for an item of Product being produced by the Borrower or for which receivables are included in the Borrowing Base shall take over production of such item of Product pursuant to the Completion Guarantee with respect to such item of Product, to make Loans up to the Strike Price with respect to the production of such item of Product and pay the proceeds thereof directly to the Approved Completion Guarantor to be used to finance the production and delivery of such item of Product pursuant to the terms of the Completion Guarantee; and (ii) if an Event of Default shall have occurred and be continuing, to make Loans with respect to any item of Product being produced by the Borrower or for which receivables are included in the Borrowing Base and pay the proceeds thereof directly to Persons providing services in connection with the production, delivery and 25 32 distribution of such Product so as to ensure Completion of such item of Product and/or the collection of Eligible Receivables. SECTION 2.3. Note. (a) The Loans made by the Lender hereunder shall be evidenced by a single promissory note substantially in the form of Exhibit A hereto (the "Note") in the face amount of the Lender's Commitment, payable to the order of the Lender, duly executed by the Borrower and dated the date hereof. (b) The Note shall bear interest on the outstanding principal balance thereof as set forth in Section 2.4 hereof. The Lender is hereby authorized by the Borrower, but not obligated, to enter the amount of each Loan and the amount of each payment or prepayment of principal or interest thereon in the appropriate spaces on the reverse of or on an attachment to the Note; provided, however, that the failure of the Lender to set forth such Loans, principal payments or other information shall not in any manner affect the obligations of the Borrower to repay such Loans. SECTION 2.4. Interest on Note. (a) In the case of a Eurodollar Loan, interest shall be payable at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the LIBO Rate plus the Applicable Margin. Interest shall be payable on each Eurodollar Loan on each applicable Interest Payment Date, at maturity and on the date of a conversion of such Eurodollar Loan to an Alternate Base Rate Loan. The Lender shall determine the applicable LIBO Rate for each Interest Period as soon as practicable on the date when such determination is to be made in respect of such Interest Period and shall notify the Borrower of the applicable interest rate so determined. Such determination shall be conclusive absent manifest error. (b) In the case of an Alternate Base Rate Loan, interest shall be payable at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 365/366 days, as the case may be, during such times as the Alternate Base Rate is based upon the Prime Rate, and over a year of 360 days at all other times) equal to the Alternate Base Rate plus the Applicable Margin. Interest shall be payable on each Alternate Base Rate Loan on each applicable Interest Payment Date and at maturity. (c) Anything in this Credit Agreement or the Note to the contrary notwithstanding, the interest rate on the Loans shall in no event be in excess of the maximum permitted by Applicable Law. SECTION 2.5. Commitment Fees and Other Fees. (a) The Borrower agrees to pay to the Lender on the last Business Day of each March, June, September and December in each year (commencing on the last Business Day of December 1997) prior to the Commitment Termination Date and on the Commitment Termination Date, an aggregate fee (the "Commitment Fee") of 1/2 of 1% per annum, computed on the basis of the actual number of days elapsed during the preceding period or quarter over a year of 360 days, on the average daily amount by which the Lender's Commitment, as such Commitment may be reduced in accordance 26 33 with the provisions of this Credit Agreement, exceeds the sum of the principal balance of the Lender's outstanding Loans plus its L/C Exposure during the preceding period or quarter. (b) The Commitment Fee shall commence to accrue from the Closing Date. (c) In addition, the Borrower agrees to pay to the Lender on the Closing Date a one-time fee in an amount equal to 2% of the Lender's Commitment. SECTION 2.6. Optional and Mandatory Termination or Reduction of Commitment. (a) Upon at least three Business Days' prior written, facsimile or telephonic notice (provided that such telephonic notice is immediately followed by written confirmation) to the Lender, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitment. In the case of a partial reduction, each such reduction of the Commitment shall be in a minimum aggregate principal amount of $500,000 or an integral multiple thereof; provided, however, that the Commitment may not be reduced by more than the amount of the then unused Commitment and may not be reduced to an amount less than the aggregate principal amount of the Loans outstanding, plus the then current L/C Exposure. (b) Simultaneously with each such termination or reduction of the Commitment, the Borrower shall pay to the Lender all accrued and unpaid Commitment Fees on the amount of the Commitment so terminated or reduced through the date of such termination or reduction. SECTION 2.7. Default Interest; Alternate Rate of Interest. (a) If the Borrower shall default in the payment of the principal of, or interest on any Loan becoming due hereunder, whether at stated maturity, by acceleration or otherwise, or the payment of any other amount becoming due hereunder after written notification from the Lender to the Borrower of such amount, the Borrower shall on demand from time to time pay interest, to the extent permitted by law, on all Loans and overdue amounts outstanding up to the date of actual payment of such defaulted amount (after as well as before judgment) (i) for the remainder of the then current Interest Period for each Eurodollar Loan, at 2% in excess of the rate then in effect for each such Eurodollar Loan and (ii) for all periods subsequent to the then current Interest Period for each Eurodollar Loan, for all Alternate Base Rate Loans and for all other overdue amounts hereunder, at 2% in excess of the rate then in effect for Alternate Base Rate Loans. (b) In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Loan, (i) the Lender shall have determined (which determination, absent manifest error, shall be conclusive) that Dollar deposits in the amount of the principal amount of such Eurodollar Loan are not generally available in the London Interbank Market or that the rate at which such Dollar deposits are being offered will not adequately and fairly reflect the cost to the Lender of making or maintaining the principal amount of such Eurodollar Loan during such Interest Period or (ii) the Lender shall have determined that reasonable means do not exist for ascertaining the applicable LIBO Rate, the Lender shall, as 27 34 soon as practicable thereafter, give written or facsimile notice of such determination to the Borrower, and any request by the Borrower for a Eurodollar Loan (or conversion to or continuation as a Eurodollar Loan pursuant to Section 2.8 hereof), made after receipt of such notice, shall be deemed a request for an Alternate Base Rate Loan (unless such borrowing request has been rescinded pursuant to Section 2.2 (b)). After such notice shall have been given and until the circumstances giving rise to such notice no longer exist, each request (or portion thereof, as the case may be) for a Eurodollar Loan shall be deemed to be a request for an Alternate Base Rate Loan. SECTION 2.8. Continuation and Conversion of Loans. The Borrower shall have the right, at any time, (i) to convert any Eurodollar Loan or portion thereof to an Alternate Base Rate Loan or to continue such Eurodollar Loan or a portion thereof for a successive Interest Period, or (ii) to convert any Alternate Base Rate Loan or a portion thereof to a Eurodollar Loan, subject to the following: (a) the Borrower shall give the Lender prior written, facsimile or telephonic (promptly confirmed in writing) notice of each continuation or conversion hereunder of at least three Business Days for continuation as or conversion to a Eurodollar Loan; such notice shall be irrevocable and to be effective, must be received by the Lender on the day required not later than 2:00 p.m., New York City time; (b) no Event of Default or Default shall have occurred and be continuing at the time of any conversion to a Eurodollar Loan or continuation of any such Eurodollar Loan into a subsequent Interest Period; (c) no Alternate Base Rate Loan may be converted to a Eurodollar Loan and no Eurodollar Loan may be continued as a Eurodollar Loan if, after such conversion or continuance, and after giving effect to any concurrent prepayment of Loans, an aggregate of more than six separate Eurodollar Loans would be outstanding hereunder (for purposes of determining the number of such Loans outstanding, Loans with different Interest Periods shall be counted as different Loans even if made on the same date); (d) the aggregate principal amount of Loans continued as or converted to Eurodollar Loans as part of the same Borrowing shall be $500,000 or such greater amount which is an integral multiple of $100,000; (e) accrued interest on the Eurodollar Loans (or portion thereof) being continued shall be paid by the Borrower at the time of continuation; (f) the Interest Period with respect to a new Eurodollar Loan effected by a continuation or conversion shall commence on the date of such continuation or conversion; 28 35 (g) if a Eurodollar Loan is converted to another type of Loan prior to the last day of the Interest Period with respect thereto, the amounts required by Section 2.9(b) shall be paid upon such conversion; and (h) each request for a continuation as or conversion to a Eurodollar Loan which fails to state an applicable Interest Period shall be deemed to be a request for an Interest Period of one month. In the event that the Borrower shall not give notice to continue or convert any Eurodollar Loan as provided above, such Loan (unless repaid) shall automatically be continued as a Eurodollar Loan having an Interest Period of one month at the expiration of the then current Interest Period. SECTION 2.9. Prepayment of Loans; Reimbursement of Lender. (a) Subject to the terms of paragraph (b) of this Section 2.9, the Borrower shall have the right at its option at any time and from time to time to prepay (i) any Alternate Base Rate Loan, in whole or in part, upon at least one Business Day's prior written, telephonic (promptly confirmed in writing) or facsimile notice to the Lender, in the principal amount of $125,000 or such greater amount which is an integral multiple of $100,000 or the remaining balance of such Loan if prepaid in full and (ii) any Eurodollar Loan, in whole or in part, upon at least three Business Days' prior written, telephonic (promptly confirmed in writing) or facsimile notice, in the principal amount of $500,000 or such greater amount which is an integral multiple of $100,000 if prepaid in part, or the remaining balance of such Loan if prepaid in full. Each notice of prepayment shall specify the prepayment date, each Loan to be prepaid and the principal amount thereof, shall be irrevocable and shall commit the Borrower to prepay such Loan in the amount and on the date stated therein. All prepayments under this Section 2.9(a) shall be accompanied by accrued but unpaid interest on the principal amount being prepaid to (but not including) the date of prepayment. (b) The Borrower shall reimburse the Lender on demand for any loss incurred or to be incurred by the Lender in the reemployment of the funds released (i) by any prepayment (for any reason) of any Eurodollar Loan if such Loan is repaid other than on the last day of the Interest Period for such Loan or (ii) in the event that after the Borrower delivers a notice of borrowing under Section 2.2(b) or Section 2.8(a) in respect of Eurodollar Loans, such Loan is not made, converted to or continued as a Eurodollar Loan on the first day of the Interest Period specified in such notice of borrowing for any reason other than (A) a suspension or limitation under Section 2.7(b) of the right of the Borrower to select a Eurodollar Loan, (B) a breach by the Lender of its obligation to fund such borrowing when it is otherwise required to do so hereunder or (C) a repayment resulting from a conversion required by the Lender pursuant to Section 2.11(a). Such loss shall be the amount as reasonably determined by the Lender as the excess, if any, of (I) the amount of interest which would have accrued to the Lender on the amount so paid or not borrowed, continued or converted at a rate of interest equal to the interest rate applicable to such Loan pursuant to Section 2.4 hereof, for the period from the date of such payment or failure to borrow, continue or convert to the last day (x) in the case of a payment prior to the last day of the Interest Period for such Loan, of the then current Interest Period for such Loan or (y) in 29 36 the case of such failure to borrow, continue or convert, of the Interest Period for such Loan which would have commenced on the date of such failure to borrow, continue or convert, over (II) the amount realized or to be realized by the Lender in reemploying the funds not advanced or the funds received in prepayment or realized from the Loan not so continued or converted during the period referred to above. The Lender shall deliver to the Borrower from time to time one or more certificates setting forth the amount of such loss (and in reasonable detail the manner of computation thereof) as determined by the Lender, which certificates shall be conclusive absent manifest error. The Borrower shall pay the Lender the amounts shown on such certificate within ten days of the Borrower's receipt of such certificate. (c) In the event the Borrower fails to prepay any Loan on the date specified in any prepayment notice delivered pursuant to Section 2.9(a), the Borrower shall pay to the Lender any amounts required to compensate the Lender for any actual loss incurred by the Lender as a result of such failure to prepay, including, without limitation, any loss, cost or expenses incurred by reason of the acquisition of deposits or other funds by the Lender to fulfill deposit obligations incurred in anticipation of such prepayment. The Lender shall deliver to the Borrower from time to time one or more certificates setting forth the amount of such loss (and in reasonable detail the manner of computation thereof) as determined by the Lender, which certificates shall be conclusive absent manifest error. The Borrower shall pay the Lender the amounts shown on such certificate within ten days of the Borrower's receipt of such certificate. (d) If at any time the sum of the Loans outstanding plus the L/C Exposure exceeds the sum of (x) the Maximum Guaranty Amount, (y) the Borrowing Base and (z) the amounts currently held in the Collection Account, as set forth on the most recent Borrowing Base Certificate, the Borrower shall immediately pay down the Loans outstanding or otherwise eliminate such excess. (e) Simultaneously with each termination and/or mandatory or optional reduction of the Commitment pursuant to Section 2.6, the Borrower shall pay to the Lender an amount equal to the excess of the sum of aggregate outstanding principal amount of the Loans plus the L/C Exposure, over the reduced Commitment. (f) Unless otherwise designated in writing by the Borrower, all prepayments shall be applied to the applicable principal payment set forth in this Section 2.9, first to that amount of such applicable principal payment then maintained as Alternate Base Rate Loans by the Borrower, and then, to that amount of such applicable principal payment maintained as Eurodollar Loans by the Borrower in order of the scheduled expiry of Interest Periods with respect thereto. (g) All prepayments shall be accompanied by accrued but unpaid interest on the principal amount being prepaid to but not including the date of prepayment. SECTION 2.10. Change in Circumstances. (a) In the event that after the Closing Date any change in Applicable Law or in the official interpretation or administration thereof 30 37 (including, without limitation, any request, guideline or policy not having the force of law) by any Governmental Authority charged with the administration or interpretation thereof or, with respect to clause (ii), (iii) or (iv) below any change in conditions, shall occur which shall: (i) subject the Lender to, or increase the net tax, levy, impost, duty, charge, fee, deduction or withholding with respect to any Eurodollar Loan (other than withholding tax imposed by the United States of America or any political subdivision or taxing authority thereof or any other tax, levy, impost, duty, charge, fee, deduction or withholding (A) that is measured with respect to the overall net income of the Lender or of a Lending Office of the Lender, and that is imposed by the United States of America, or by the jurisdiction in which the Lender or Lending Office is incorporated, in which the Lending Office is located, managed or controlled or in which the Lender has its principal office (or any political subdivision or taxing authority thereof or therein), or (B) that is imposed solely by reason of the Lender failing to make a declaration of, or otherwise to establish, non-residence, or to make any other claim for exemption, or otherwise to comply with any certification, identification, information, documentation or reporting requirements prescribed under the laws of the relevant jurisdiction, in those cases where the Lender may properly make such declaration or claim or so establish non-residence or otherwise comply); or (ii) change the basis of taxation of any payment to the Lender of principal or any interest on any Eurodollar Loan or other fees and amounts payable to the Lender hereunder, or any combination of the foregoing; other than withholding tax imposed by the United States of America or any political subdivision or taxing authority thereof or any other tax, levy, impost, duty, charge, fee, deduction or withholding that is measured with respect to the overall net income of the Lender or of a Lending Office of the Lender, and that is imposed by the United States of America, or by the jurisdiction in which the Lender or Lending Office is incorporated, in which such Lending Office is located, managed or controlled or in which the Lender has its principal office (or any political subdivision or taxing authority thereof or therein); or (iii) impose, modify or deem applicable any reserve, deposit or similar requirement against any assets held by, deposits with or for the account of or loans or commitments by an office of the Lender with respect to any Eurodollar Loan; or 31 38 (iv) impose upon the Lender or the London Interbank Market any other condition with respect to the Eurodollar Loans or this Credit Agreement; and the result of any of the foregoing shall be to increase the actual cost to the Lender of making or maintaining any Eurodollar Loan hereunder or to reduce the amount of any payment (whether of principal, interest or otherwise) received or receivable by the Lender in connection with any Eurodollar Loan hereunder, or to require the Lender to make any payment in connection with any Eurodollar Loan hereunder, in each case by or in an amount which the Lender in its sole judgment shall deem material, then and in each case the Borrower shall pay to the Lender, as provided in paragraph (c) below, such amounts as shall be necessary to compensate the Lender for such cost, reduction or payment. (b) If at any time and from time to time after the Closing Date the Lender shall have determined that the applicability of any law, rule, regulation or guideline adopted after the Closing Date regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender (or any Lending Office of the Lender) or the Lender's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of the authority, central bank or comparable agency, would actually reduce the rate of return on the Lender's capital or on the capital of the Lender's holding company, if any, as a consequence of this Credit Agreement or the Loans made or Letters of Credit issued by the Lender pursuant hereto to a level below that which the Lender or the Lender's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration the Lender's policies and the policies of the Lender's holding company with respect to capital adequacy) by an amount deemed by the Lender to be material, then from time to time the Borrower shall pay to the Lender such additional amount or amounts as will compensate the Lender or the Lender's holding company for any such actual reduction suffered with respect to Loans made by the Lender hereunder. (c) The Lender shall deliver to the Borrower from time to time, one or more certificates setting forth the amounts due to the Lender under paragraphs (a) and (b) above within six months after incurring such additional costs or suffering such reductions, the changes as a result of which such amounts are due, the manner of computing such amounts and the manner of computing the amounts allocable to Loans hereunder pursuant to paragraphs (a) and (b) above. Each such certificate shall be conclusive in the absence of manifest error. The Borrower shall pay to the Lender the amounts shown as due on any such certificate within ten Business Days after its receipt of the same. No failure on the part of the Lender to demand compensation under paragraph (a) or (b) above on any one occasion shall constitute a waiver of its rights to demand compensation on any other occasion. The protection of this Section 2.10(c) shall be available to the Lender regardless of any possible contention of the invalidity or inapplicability of any law, regulation or other condition which shall give rise to any demand by the Lender for compensation thereunder. 32 39 (d) The Lender agrees that after it becomes aware of the occurrence of an event or the existence of a condition that (i) would cause it to incur any increased cost hereunder or render it unable to perform its agreements hereunder for the reasons specifically set forth in Section 2.7(b), this Section 2.10 or Section 2.14(g) or (ii) would require the Borrower to pay an increased amount under Section 2.7(b), this Section 2.10 or Section 2.14(g), it will use reasonable efforts to notify the Borrower of such event or condition and, to the extent not inconsistent with the Lender's internal policies, will use its reasonable efforts to make, fund or maintain the affected Loans of the Lender, or, if applicable, to issue Letters of Credit as required under Section 2.14, through another Lending Office of the Lender if as a result thereof the additional monies which would otherwise be required to be paid or the reduction of amounts receivable by the Lender thereunder in respect of such Loans would be materially reduced, or such inability to perform would cease to exist, or the increased costs which would otherwise be required to be paid in respect of such Loans pursuant to Section 2.7(b), this Section 2.10 or Section 2.14(f) would be materially reduced or the taxes or other amounts otherwise payable under Section 2.7(b), this Section 2.10 or Section 2.14(f) would be materially reduced, and if, as determined by the Lender, in its discretion, the making, funding or maintaining of such Loans through such other Lending Office would not otherwise materially adversely affect such Loans or the Lender. SECTION 2.11. Change in Legality. (a) Notwithstanding anything to the contrary contained elsewhere in this Credit Agreement, if any change after the Closing Date in Applicable Law, guideline or order, or in the interpretation thereof by any Governmental Authority charged with the administration thereof, shall make it unlawful for the Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to a Eurodollar Loan, then, by written notice to the Borrower, the Lender may (i) declare that Eurodollar Loans will not thereafter be made by the Lender hereunder and/or (ii) require that, subject to Section 2.9(b), all outstanding Eurodollar Loans made by it be converted to Alternate Base Rate Loans, whereupon all of such Eurodollar Loans shall automatically be converted to Alternate Base Rate Loans, as of the effective date of such notice as provided in paragraph (b) below. Any subsequent Eurodollar Loan shall, instead, be an Alternate Base Rate Loan unless such declaration is subsequently withdrawn. (b) A notice to the Borrower by the Lender pursuant to paragraph (a) above shall be effective for purposes of clause (ii) thereof, if lawful, on the last day of the current Interest Period for each outstanding Eurodollar Loan; and in all other cases, on the date of receipt of such notice by the Borrower. SECTION 2.12. Manner of Payments. All payments by the Borrower hereunder and under the Note shall be made in Dollars in Federal or other immediately available funds at the office of The Chase Manhattan Bank, Loan and Agency Services Group, 270 Park Avenue, New York, NY 10017,for credit to the "Dove Entertainment Inc. Collection Account," Account No. 323-516-440, no later than 2:00 p.m., New York City time, on the date on which such payment shall be due. Interest in respect of any Loan hereunder shall accrue from and including 33 40 the date of such Loan to but excluding the date on which such Loan is paid or converted to a Loan of a different type. SECTION 2.13. Interest Adjustments. (a) If the provisions of this Credit Agreement or Note would at any time require payment by the Borrower to the Lender of any amount of interest in excess of the maximum amount then permitted by the law applicable to any Loan, the interest payments to the Lender shall be reduced to the extent necessary so that the Lender shall not receive interest in excess of such maximum amount. If, as a result of the foregoing, the Lender shall receive interest payments hereunder or under the Note in an amount less than the amount otherwise provided hereunder, such deficit (hereinafter called the "Interest Deficit") will, to the fullest extent permitted by Applicable Law, cumulate and will be carried forward (without interest) until the termination of this Credit Agreement. Interest otherwise payable to the Lender hereunder and under the Note for any subsequent period shall be increased by the maximum amount of the Interest Deficit that may be so added without causing the Lender to receive interest in excess of the maximum amount then permitted by the law applicable to the Loans. (b) The amount of any Interest Deficit relating to a particular Loan and the Note shall be treated as a prepayment penalty and shall, to the fullest extent permitted by Applicable Law, be paid in full at the time of any optional prepayment by the Borrower to the Lender of all the Loans at that time outstanding pursuant to Section 2.9(a) hereof and upon termination or reduction of the Commitment pursuant to Section 2.6 hereof. The amount of any Interest Deficit relating to a particular Loan and the Note at the time of any complete payment of the Loans at that time outstanding (other than an optional prepayment thereof pursuant to Section 2.9(a) hereof) shall be canceled and not paid. SECTION 2.14. Letters of Credit. (a) (i) Subject to the terms and conditions hereof and of Applicable Law, the Lender agrees to issue Letters of Credit payable in Dollars from time to time after the Closing Date and prior to the Commitment Termination Date upon the request of the Borrower, provided, however, that (A) the Borrower shall not request that any Letter of Credit be issued if, after giving effect thereto, the sum of the then current L/C Exposure, plus the aggregate Loans then outstanding, would exceed the lesser of (x) the sum of (I) the Maximum Guaranty Amount, (II) the then current amount of the Borrowing Base and (III) the then current amount held in the Collection Account or (y) the Commitment and (B) in no event shall the Lender issue any Letter of Credit having an expiration date after the Commitment Termination Date or pursuant to which drafts drawn thereunder would be payable after the Commitment Termination Date. (ii) Each Letter of Credit may, at the option of the Lender, provide that the Lender may (but shall not be required to) pay all or any part of the maximum amount which may at any time be available for drawing thereunder to the beneficiary thereof upon the occurrence and continuation of an Event of Default and the acceleration of the maturity of the Loans, provided that, if payment is not then due to the beneficiary, the Lender may deposit the funds in question in a segregated account with the Lender to secure payment to the beneficiary 34 41 and any funds so deposited shall be paid to the beneficiary of the Letter of Credit if conditions to such payment are satisfied or returned to the Lender (or, if all Obligations shall have been paid in full in cash, to the Borrower) if no payment to the beneficiary has been made and the final date available for drawings under the Letter of Credit has passed. Each payment or deposit of funds by the Lender as provided in this paragraph shall be treated for all purposes of this Credit Agreement as a drawing duly honored by the Lender under the related Letter of Credit. (b) Whenever the Borrower desires the issuance of a Letter of Credit, it shall deliver to the Lender a written notice no later than 2:00 p.m., New York City time, at least five Business Days prior to the proposed date of issuance. Such notice shall specify (i) the proposed date of issuance (which shall be a Business Day), (ii) the face amount of the Letter of Credit, (iii) the expiration date of the Letter of Credit and (iv) the name and address of the beneficiary. Such notice shall be accompanied by a brief description of the underlying transaction and upon request of the Lender, the Borrower shall provide additional details regarding the underlying transaction. Concurrently with the giving of written notice of a request for the issuance of a Letter of Credit, the Borrower shall specify a precise description of the documents and the verbatim text of any certificate to be presented by the beneficiary of such Letter of Credit which, if presented by such beneficiary prior to the expiration date of the Letter of Credit, would require the Lender to make payment under the Letter of Credit; provided, however, that the Lender, in its reasonable discretion, may require customary changes in any such documents and certificates. (c) The payment of drafts under any Letter of Credit shall be made in accordance with the terms of such Letter of Credit and the Uniform Customs and Practice for documentary Credits of the International Chamber of Commerce No. 500, as adopted or amended from time to time. The Lender shall be entitled to honor any drafts and accept any documents presented to it by the beneficiary of such Letter of Credit in accordance with the terms of such Letter of Credit and believed by the Lender in good faith to be genuine. The Lender shall not have any duty to inquire as to the accuracy or authenticity of any draft or other drawing documents which may be presented to it, but shall be responsible only to determine in accordance with customary commercial practices that the documents which are required to be presented before payment or acceptance of a draft under any Letter of Credit have been delivered and that they comply on their face with the requirements of that Letter of Credit. (d) Subject to provisions of Section 2.14(c), the Borrower is absolutely, unconditionally and irrevocably obligated to reimburse all amounts drawn under each Letter of Credit. If any draft is presented under a Letter of Credit, payment of which is required to be made after the Commitment Termination Date (it being understood that no Letter of Credit shall be issued which would expire after the Commitment Termination Date), then the Borrower will, upon demand by the Lender, pay to the Lender, in immediately available funds, the full amount of such draft. (e) (i) The Borrower agrees to pay to the Lender with respect to Letters of Credit issued by it hereunder in connection with the issuance, amendment, transfer or any other transaction related to each Letter of Credit and each drawing made thereunder, documentary and 35 42 processing charges in accordance with the Lender's standard schedule for such charges in effect at the time of such issuance, amendment, transfer or drawing, as the case may be. (ii) The Borrower agrees to pay to the Lender a commission calculated at a rate per annum equal to the Applicable Margin for Eurodollar Loans (calculated in the same manner as interest) of the daily average L/C Exposure. Such commission shall be payable in arrears on and through the last Business Day of each fiscal quarter prior to the Commitment Termination Date and on the Commitment Termination Date. (f) If by reason of (i) any change in Applicable Law after the Closing Date, or in the interpretation or administration thereof (including, without limitation, any request, guide line or policy not having the force of law) by any Governmental Authority charged with the administration or interpretation thereof, or (ii) compliance by the Lender with any direction, request or requirement (whether or not having the force of law) issued after the Closing Date by any Governmental Authority or monetary authority (including any change whether or not proposed or published prior to the Closing Date), including, without limitation, any modifications to Regulation D occurring after the Closing Date: (A) the Lender shall be subject to an increase in any tax, levy, impost, duty, charge, fee, deduction or withholding with respect to any Letter of Credit (other than withholding tax imposed by the United States of America or any political subdivision or taxing authority thereof or any other tax, levy, impost, duty, charge, fee, deduction or withholding (I) that is measured with respect to the overall net income of the Lender or of a Lending Office of the Lender, and that is imposed by the United States of America, or by the jurisdiction in which the Lender or Lending Office is incorporated, or in which such Lending Office is located, managed or controlled or in which the Lender has its principal office (or any political subdivision or taxing authority thereof or therein) or (II) that is imposed solely by reason of the Lender failing to make a declaration of, or otherwise to establish, non-residence or to make any other claim for exemption, or otherwise to comply with any certification, identification, information, documentation or reporting requirements prescribed under the laws of the relevant jurisdiction, in those cases where the Lender may properly make such declaration or claim or so establish non-residence or otherwise comply); (B) the basis of taxation of any fee or amount payable hereunder with respect to any Letter of Credit shall be changed (except as described in clause (A) above); (C) any reserve, deposit or similar requirement is or shall be applicable, imposed or modified in respect of any Letter of Credit issued by the Lender; or 36 43 (D) there shall be imposed on the Lender any other condition regarding this Section 2.14 or any Letter of Credit; and the result of the foregoing is to increase from the conditions that exist on the Closing Date the actual cost to the Lender of issuing, making or maintaining any Letter of Credit or to reduce the amount receivable in respect thereof by the Lender, in each case by or in an amount which the Lender shall reasonably deem material, then and in any such case the Lender may, at any time, notify the Borrower, and the Borrower shall pay on demand such amounts as the Lender may specify to be necessary to compensate the Lender for such additional cost or reduced receipt. Section 2.10(b), (c), (d) and Section 2.11 shall in all instances apply to the Lender with respect to Letters of Credit issued hereunder. The determination by the Lender of any amount due pursuant to this Section 2.14 as set forth in a certificate setting forth the calculation thereof in reasonable detail shall, in the absence of manifest error, be final, conclusive and binding on all of the parties hereto. (g) If at any time when an Event of Default shall have occurred and be continuing, any Letters of Credit shall remain outstanding, then the Lender may, at its option, require the Borrower to deliver to the Lender cash or Cash Equivalents in an amount equal to the full amount of the L/C Exposure or to furnish other security acceptable to the Lender. Any amounts so delivered pursuant to the preceding sentence shall be applied to reimburse the Lender for the amount of any drawings honored under Letters of Credit; provided, however, that if prior to the Commitment Termination Date, no Default or Event of Default is then continuing, the Lender shall return all of such collateral relating to such deposit to the Borrower upon request. (h) If at any time that any Letter of Credit is outstanding, the L/C Exposure, plus Loans outstanding, exceeds the sum of (i) the Maximum Guaranty Amount, plus (ii) the Borrowing Base, plus (iii) the amount of cash and Cash Equivalents currently held in the Collection Account, then the Lender may, at its option, require (x) a prepayment of the Loans in accordance with Section 2.9(d) or (y) the Borrower to deliver cash or Cash Equivalents to the Lender in an amount sufficient to eliminate such excess or to furnish other security for such excess acceptable to the Lender. Any amounts so delivered pursuant to the preceding sentence shall be applied to reimburse the Lender for the amount of any drawings honored under Letters of Credit; provided, however, that if subsequent to any such deposit such excess is reduced to an amount less than the amount of such deposited amounts and no Default or Event of Default is then continuing, the Borrower shall be entitled to receive such excess collateral if requested by it. (i) Notwithstanding the termination of the Commitment and the payment of the Loans, the obligations of the Borrower under this Section 2.14 shall remain in full force and effect until the Lender shall have been irrevocably released from its obligations with regard to any and all Letters of Credit. (j) On the Closing Date, the parties hereto agree that that certain Irrevocable Letter of Credit, L/C No. P-397200, issued by the Lender on September 24, 1997 at the request of the Borrower for the benefit of Amwest Surety Insurance Company, shall be deemed to have 37 44 been issued under this Credit Agreement, and such Letter of Credit shall, as of the Closing Date, be subject to and governed by the terms and conditions set forth herein. 3. REPRESENTATIONS AND WARRANTIES OF CREDIT PARTIES In order to induce the Lender to enter into this Credit Agreement and to make the Loans and issue Letters of Credit provided for herein, the Credit Parties, jointly and severally, make the following representations and warranties to, and agreements with, the Lender, all of which shall survive the execution and delivery of this Credit Agreement, the issuance of the Note, the making of the Loans and the issuance of the Letters of Credit: SECTION 3.1. Corporate Existence and Power. Each of the Credit Parties is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, is in good standing as a foreign corporation in all jurisdictions where the failure to be in good standing as a foreign corporation would render Eligible Receivables which are included in the Borrowing Base unenforceable or would give rise to a material liability of any Credit Party. Each of the Credit Parties has the corporate power and authority to own its respective properties and carry on its respective businesses as now being conducted, to execute, deliver and perform, as applicable, its obligations under this Credit Agreement, the Note and the other Fundamental Documents and other documents contemplated hereby to which it is or will be a party as provided herein and to grant to the Lender a security interest in the Collateral as contemplated by Article 8 hereof and in the Pledged Securities as contemplated by Article 10 hereof and in the case of each Corporate Guarantor to guaranty the Obligations as contemplated by Article 9 hereof. SECTION 3.2. Corporate Authority and No Violation. (a) The execution, delivery and performance of this Credit Agreement and the other Fundamental Documents to which it is a party, by each Credit Party and, in the case of the Borrower, the Borrowings hereunder and the execution and delivery of the Note and, in the case of each Credit Party, the grant to the Lender of the security interest in the Collateral and the Pledged Securities as contemplated herein and by the other Fundamental Documents and, in the case of each Corporate Guarantor, the guaranty of the Obligations as contemplated in Article 9 hereof (i) have been duly authorized by all necessary corporate action on the part of each such Credit Party, (ii) will not constitute a violation by such Credit Party in any material respect of any provision of Applicable Law or any order of any court or other agency of the United States or any state thereof applicable to such Credit Party or any of its properties or assets, (iii) will not violate any provision of the Certificate or Articles of Incorporation or By-Laws of such Credit Party, or any material provision of any Material Agreement or any other material indenture, agreement, bond, note or other similar instrument to which such Credit Party is a party or by which such Credit Party or its properties or assets are bound, (iv) will not be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under or create any right to terminate any Material Agreement, or any other material indenture, agreement, bond, note or other instrument, and (v) will not result in the creation or imposition of any Lien, charge or encumbrance of any 38 45 nature whatsoever upon any of the properties or assets of any of the Credit Parties other than pursuant to this Credit Agreement or the other Fundamental Documents to which it is a party. (b) There are no restrictions on the transfer of any of the Pledged Securities other than as a result of this Credit Agreement or applicable securities laws and the regulations promulgated thereunder. SECTION 3.3. Governmental Approval. All authorizations, approvals, registrations or filings with any governmental or public regulatory body or authority of the United States or any state thereof (other than UCC financing statements and the Copyright Security Agreement which will be delivered to the Lender prior to the making of the initial Loan hereunder, in form suitable for recording or filing with the appropriate filing office) required for the execution, delivery and performance by any Credit Party of this Credit Agreement and the other Fundamental Documents to which it is a party, and the execution and delivery by the Borrower of the Note, have been duly obtained or made, or duly applied for and are in full force and effect. SECTION 3.4. Binding Agreements. This Credit Agreement and the other Fundamental Documents when executed will constitute the legal, valid and binding obligations of the respective Credit Parties, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights and general principles of equity. SECTION 3.5. Financial Statements. The audited consolidated balance sheets of the Borrower and its Consolidated Subsidiaries at December 31, 1996, and the unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries at June 30, 1997, together with the related statements of income, cash flows and Shareholders' Equity and the related notes and supplemental information for the reviewed statements, in the forms which have previously been provided to the Lender, have been prepared in accordance with GAAP, except as otherwise indicated in the notes to such financial statements. All of such financial statements fairly present the consolidated financial condition or the results of operations of the Borrower and its Consolidated Subsidiaries at the dates or for the periods indicated, subject (in the case of unaudited statements) to changes resulting from normal year-end and audit adjustments, and, in the case of balance sheets (including the notes thereto), reflect all known liabilities, contingent or otherwise, as of such dates required in accordance with GAAP to be shown or reserved against, or disclosed in the notes to the financial statements. SECTION 3.6. No Material Adverse Change (a) There has been no material adverse change with respect to the business, operations, performance, assets, properties, condition or prospects (financial or otherwise) of the Credit Parties taken as a whole from June 30, 1997, except for changes due to seasonality that are consistent with the corresponding periods in prior years. 39 46 (b) No Credit Party has entered or is entering into the arrangements contemplated hereby and by the other Fundamental Documents, or intends to make any transfer or incur any obligations hereunder or thereunder, with actual intent to hinder, delay or defraud either present or future creditors. On and as of the Closing Date, on a pro forma basis after giving effect to all Indebtedness (including the Loans) (i) each Credit Party expects the cash available to such Credit Party, after taking into account all other anticipated uses of the cash of such Credit Party (including the payments on or in respect of debt referred to in clause (iii) of this Section 3.6(b)), will be sufficient to satisfy all final judgments for money damages which have been docketed against such Credit Party or which may be rendered against such Credit Party in any action in which such Credit Party is a defendant (taking into account the reasonably anticipated maximum amount of any such judgment and the earliest time at which such judgment might be entered); (ii) the sum of the present fair saleable value of the assets of each Credit Party will exceed the probable liability of such Credit Party on its debts (including its Guaranties); (iii) no Credit Party will have incurred or intends to, or believes that it will, incur debts beyond its ability to pay such debts as such debts mature (taking into account the timing and amounts of cash to be received by such Credit Party from any source, and of amounts to be payable on or in respect of debts of such Credit Party and the amounts referred to in clause (ii)); and (iv) each Credit Party believes it will have sufficient capital with which to conduct its present and proposed business and the property of such Credit Party does not constitute unreasonably small capital with which to conduct its present or proposed business. For purposes of this Section 3.6, "debt" means any liability or a claim, and "claim" means (x) any right to payment whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, or (y) any right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured. SECTION 3.7. Ownership of Pledged Securities, etc. (a) Annexed hereto as Schedule 3.7(a) is a correct and complete list as of the date hereof, of each corporate Subsidiary of the Borrower showing, as to each such Subsidiary, its name, the jurisdiction of incorporation, its authorized capitalization, the number of shares of its capital stock outstanding and the ownership of the capital stock of each such Credit Party; and (b) Except as noted on Schedule 3.7(b), no Credit Party owns any Voting Stock or beneficial interest, directly or indirectly, in any Person other than in the Subsidiaries of the Borrower. (c) All of the outstanding shares of capital stock of each Subsidiary of the Borrower have been validly issued and are fully paid and non-assessable and, with respect to shares which are owned by a Credit Party (set forth on Schedule 3.7(a)), are free and clear of all liens, charges or encumbrances except as contemplated herein. SECTION 3.8. Copyrights and Other Rights. On the date hereof, the items of Product listed on Schedule 3.8 comprise all of the Product in which any Credit Party has any 40 47 right, title or interest (either directly or through a joint venture or partnership). The copyright registration number and the character of the interests held by the Credit Party for such items of Product for which filing in the United States Copyright Office is applicable are set forth across from the description of such item of Product and as to each item listed on Schedule 3.8 hereto and, to the extent applicable, the Credit Party holding such interests has duly recorded its interests in the United States Copyright Office and has delivered copies of all such recordation to the Lender. Schedule 3.8 shall identify the location of the best available Physical Materials related to each item of Product owned by the Credit Parties. To the best of each Credit Party's knowledge, all items of Product and all component parts thereof do not and will not violate or infringe upon any copyright, right of privacy, trademark, patent, trade name, performing right or any literary, dramatic, musical, artistic, personal, private, contract or copyright right or any other similar right of any Person or contain any libelous or slanderous material other than to an extent which is either not material or for which coverage is provided in existing insurance policies. Except as set forth on Schedule 3.12, there is no claim, suit, action or, to the best of each Credit Party's knowledge, proceeding pending or threatened against any Credit Party that involves a claim of infringement of any copyright with respect to any item of Product listed on Schedule 3.8 and no Credit Party has knowledge of any existing infringement by any other Person of any copyright held by any Credit Party with respect to any item of Product listed on Schedule 3.8. SECTION 3.9. Fictitious Names. Except as disclosed on Schedule 3.9, none of the Credit Parties are doing business or intend to do business other than under its full corporate name, including, without limitation, under any trade name or other doing business name. SECTION 3.10. Title to Properties. As of the Closing Date, the Credit Parties have good title to each of the properties and assets reflected on the latest balance sheets referred to in Section 3.5 (other than such properties or assets disposed of in the ordinary course of business since the date of such balance sheets) and all such properties and assets are free and clear of Liens, except Permitted Encumbrances. SECTION 3.11. Places of Business. The chief executive office of each Credit Party is, on the Closing Date, as set forth on Schedule 3.11 hereto, which offices in the United States are the places where each Credit Party is "located" for the purpose of the UCC and the Uniform Commercial Code in effect in any state in which any Credit Party is so located. All of the places where each Credit Party keeps the records concerning the Collateral on the date hereof or regularly keeps any goods included in the Collateral on the date hereof are also listed on Schedule 3.11 hereto. SECTION 3.12. Litigation. Except as set forth on Schedule 3.12 hereto, there are no actions, suits or other proceedings at law or in equity by or before any arbitrator or arbitration panel, or any Governmental Authority (including, but not limited to, matters relating to environmental liability) or, to the knowledge of any Credit Party, any investigation by any Governmental Authority of the affairs of, or threatened action, suit or other proceedings against or affecting, any Credit Party or of any of their respective properties or rights which either (A) would have a significant likelihood of materially and adversely affecting (i) the ability of any 41 48 Credit Party to perform its obligations under the Fundamental Documents to which it is a party, (ii) the ability of any Credit Party to carry on its business, (iii) the security interests granted to the Lender under the Fundamental Documents, (iv) the financial condition or business of the Credit Parties taken as a whole or (v) the Collateral, or (B) involve this Credit Agreement or any of the transactions contemplated hereby. No Credit Party is in default with respect to any order, writ, injunction, decree, rule or regulation of any Governmental Authority binding upon such Person, which default would have a material adverse effect upon the financial condition or the business of the Credit Parties taken as a whole. SECTION 3.13. Federal Reserve Regulations. No Credit Party is engaged principally or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. No part of the proceeds of the Loans will be used, directly or indirectly, whether immediately, incidentally or ultimately (i) to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock, or (ii) for any other purpose, in each case, violative of or inconsistent with any of the provisions of any regulation of the Board, including, without limitation, Regulations G, T, U and X thereto. SECTION 3.14. Investment Company Act. No Credit Party is, or will during the term of this Credit Agreement be, (i) an "investment company", within the meaning of the Investment Company Act of 1940, as amended, or (ii) subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or, to the best of each Credit Party's knowledge, any foreign, federal or local statute or any other Applicable Law of the United States of America or, to the best of each Credit Party's knowledge, any other jurisdiction, in each case limiting its ability to incur indebtedness for money borrowed as contemplated hereby or by any other Fundamental Document. SECTION 3.15. Taxes. Each Credit Party has filed or caused to be filed all federal, state, local and foreign tax returns which are required to be filed with any Governmental Authority after giving effect to applicable extensions, and has paid or has caused to be paid all taxes as shown on said returns or on any assessment received by them in writing, to the extent that such taxes have become due, except as permitted by Section 5.14 hereof. No Credit Party knows of any material additional assessments or any basis therefor. The Credit Parties reasonably believe that the charges, accrual and reserves on its books in respect of taxes or other governmental charges are adequate. SECTION 3.16. Compliance with ERISA. Each Credit Party 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, no Credit Party 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 material liability to the PBGC has been or is expected to be incurred with respect to the Plans (other than for premiums not yet due) and there has been no Reportable Event and no other event or condition that presents a 42 49 material risk of termination of a Plan by the PBGC. No Credit Party has engaged in a transaction which would result in the incurrence by such Credit Party of any liability under Section 4069 of ERISA. No Credit Party has taken any action and no event has occurred with respect to any Multiemployer Plan which would subject any Credit Party to material liability under either Section 4201 or 4204 of ERISA. SECTION 3.17. Agreements. (a) No Credit Party is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Material Agreement or any other material indenture, agreement, bond, note or other instrument to which it is a party which would reasonably be expected to result in any material adverse change in the business, properties, assets, operations or condition (financial or otherwise) of the Credit Parties taken as a whole. (b) Schedule 3.17 is a true and complete listing as of the date on which this Credit Agreement is executed by the Borrower of (i) all credit agreements, indentures, and other agreements related to any Indebtedness for borrowed money of the Credit Parties, (ii) all material joint venture agreements to which the Credit Parties are a party (iii) all material Distribution Agreements and (iv) all other contractual arrangements which are material to any Credit Party, including but not limited to, guarantees and employment agreements. The Credit Parties have delivered or made available to the Lender a true and complete copy of each agreement described on Schedule 3.17, including all exhibits and schedules. For purposes of this Section 3.17, a Distribution Agreement or other contract or agreement shall be deemed "material" if the Credit Parties reasonably expect that any Credit Party would, pursuant to the terms thereof, (A) recognize future revenues in excess of $500,000, (B) incur liabilities or obligations in excess of $500,000 or (C) suffer damages or losses in excess of $250,000 by reason of the breach or termination thereof. SECTION 3.18. Security Interest; Other Security. This Credit Agreement and the other Fundamental Documents, when executed and delivered and, upon the making of the initial Loan hereunder and upon (i) the filing of the appropriate UCC-1 financing statements, with the Secretary of State of the States of California, Florida and Tennessee, (ii) the filing of the Copyright Security Agreement with the U.S. Copyright Office and (iii) the delivery of the Pledged Securities, together with appropriate stock powers, to the Lender, will create and grant to the Lender a valid and first priority perfected security interests in the Collateral and the Pledged Securities in existence on the Closing Date as to which security interests may be perfected by such filings or delivery, subject only to Permitted Encumbrances. SECTION 3.19. Disclosure. Neither this Credit Agreement nor any other Fundamental Document nor any agreement, document, certificate or statement furnished to the Lender by any Credit Party in connection with the transactions contemplated hereby, at the time it was furnished or delivered contained any untrue statement of a material fact regarding the Credit Parties or, when taken together with such other agreements, documents, certificates and statements omitted to state a material fact necessary under the circumstances under which it was made in order to make the statements contained herein or therein not misleading. There is no 43 50 fact known to any Credit Party not constituting general industry conditions or not disclosed in such agreements, documents, certificates and statements which materially and adversely affects, or could reasonably be expected in the future to materially and adversely affect, the business, assets or condition, financial or otherwise of the Credit Parties taken as a whole. SECTION 3.20. Distribution Rights. Each Credit Party has sufficient right, title and interest in each item of Product to enable it (i) to enter into and perform all of the material Distribution Agreements to which it is a party and other agreements generating Eligible Receivables and accounts receivable reflected on the most recent balance sheet and the most recent Borrowing Base Certificate delivered to the Lender pursuant hereto, and (ii) to charge, earn, realize and retain all fees and profits to which such Credit Party is entitled thereunder, and is not in breach of any of its obligations under such agreements, nor does any Credit Party have any knowledge of any breach or anticipated breach by any other parties thereto, which breach in either case either individually or when aggregated with all other such breaches would have a material adverse effect on the Credit Parties taken as a whole. SECTION 3.21. Environmental Liabilities. (a) Except as set forth on Schedule 3.21 hereto, no Credit Party has used, stored, treated, transported, manufactured, refined, handled, produced or disposed of any Hazardous Materials on, under, at or from any of its properties or assets owned or leased by a Credit Party, 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 which violation would have a material adverse effect on the business or financial condition of the Credit Parties taken as a whole and to the best of the Credit Parties' 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 each Credit Party's knowledge (i) no Credit Party has any obligations or liabilities, known or unknown, matured or not matured, absolute or contingent, assessed or unassessed, which would reasonably be expected to have a materially adverse effect on the business or condition (financial or otherwise) of the Credit Parties taken as a whole and (ii) no claims have been made against any of the Credit Parties during the past five years and no presently outstanding citations or notices have been issued against any of the Credit Parties, which could reasonably be expected to have a materially adverse effect on the business or condition (financial or otherwise) of the Credit Parties taken as a whole 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 any Credit Party, or any of its employees or predecessors in interest in connection with or in any way arising from or relating to any of the Credit Parties or any of their respective owned or leased properties, or 44 51 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 any of the Credit Parties or any other location where such could have a materially adverse effect on the business or condition (financial or otherwise) of the Credit Parties taken as a whole. SECTION 3.22. Pledged Securities. All of the Pledged Securities are duly authorized, validly issued, fully paid and non-assessable, and are owned and held by the Pledgors, free and clear of any liens, encumbrances, or security interests whatsoever other than those created pursuant to this Credit Agreement or Permitted Encumbrances and there are no restrictions on the transfer of the Pledged Securities other than as a result of this Credit Agreement or applicable securities laws. Except as set forth on Schedule 3.22, there are no outstanding rights, warrants, options, or agreements to purchase or otherwise acquire any shares of the stock or securities or obligations of any kind convertible into any shares of capital stock of the issuers of the Pledged Securities. The Pledged Securities are owned by the Persons specified on Schedule 3.7(a). SECTION 3.23. Compliance with Laws. No Credit Party is in violation of any Applicable Law except for such violations in the aggregate which would not have a material adverse effect on the business condition (financial or otherwise) of the Credit Parties taken as a whole. The Borrowings hereunder, the intended use of the proceeds of the Loans as described in the preamble hereto and as contemplated by Section 5.19 and any other transactions contemplated hereby will not violate any Applicable Law. SECTION 3.24. Projected Financial Information. The Borrower has delivered to the Lender certain projections relating to the Borrower and its Consolidated Subsidiaries consisting of statements of income, cash flows, balance sheets and an initial projected borrowing base. Such projected statements cover a period commencing on the Closing Date and ending at fiscal year end 2002 and prepared on a basis consistent with Borrower's past practices. All of the foregoing shall have been prepared in good faith and shall represent the good faith opinion of the senior management of the Borrower of the likely course of its business as of the date of delivery of such projections to the Lender, it being recognized by the Lender that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such other projections may differ from the projected results. 4. CONDITIONS OF LENDING SECTION 4.1. Conditions Precedent to Initial Loans or Letter of Credit. The obligation of the Lender to issue the initial Letter of Credit and to make the initial Loan is subject to the following conditions precedent: (a) Corporate Documents. At the time of the making of the initial Loan, the Lender shall have received: 45 52 (i) a copy of the articles or certificate of incorporation of each Credit Party, certified as of a recent date by the Secretary of State of such Credit Party's jurisdiction of incorporation or organization, as the case may be; (ii) a certificate of such Secretary of State and of the franchise tax entity of such jurisdiction of incorporation, if applicable, dated as of a recent date as to the good standing of and payment of taxes by each Credit Party which lists the charter documents on file in the office of such Secretary of State; (iii) a certificate dated as of a recent date as to the good standing of each Credit Party issued by the Secretary of State of each jurisdiction in which each Credit Party is qualified as a foreign corporation; and (iv) a certificate of the Secretary of each Credit Party dated the date of the initial Loan and certifying (A) that attached thereto is a true and complete copy of the By-Laws of such party as in effect on the date of such certification, (B) that attached thereto is a true and complete copy of resolutions adopted by the Board of Directors of such party authorizing (to the extent applicable) the Borrowings hereunder, the execution, delivery and performance in accordance with its respective terms of this Credit Agreement, the Note (if any) to be executed by it, and any other documents required or contemplated hereunder or thereunder and that such resolutions have not been amended, rescinded or supplemented and are currently in effect, (C) that the certificate of incorporation of such party has not been amended since the date of the last amendment thereto indicated on the certificate of the Secretary of State furnished pursuant to clause (i) above except to the extent specified in such Secretary's certificate and (D) as to the incumbency and specimen signature of each officer of such party executing (as applicable) this Credit Agreement, the Note or any other document delivered by it in connection herewith or therewith (such certificate to contain a certification by another officer of such party as to the incumbency and signature of the officer signing the certificate referred to in this clause (iv)); and (v) such additional supporting documents as the Lender or its counsel may reasonably request. 46 53 (b) Credit Agreement; Note. On or before the date of the making of the initial Loans, the Lender shall have received the Credit Agreement executed by the Credit Parties and the Note executed by the Borrower. (c) Opinion of Counsel. The Lender shall have received the written opinions of Hughes, Hubbard & Reed, special counsel to the Credit Parties, and Robert Murray, general counsel of the Borrower, each dated the Closing Date and addressed to the Lender substantially in the form attached hereto as Exhibits B-1 and B-2 respectively and in form and substance satisfactory to Morgan, Lewis & Bockius LLP. (d) No Material Adverse Change. No material adverse change shall have occurred with respect to the business, operations, performance, assets, properties, condition (financial or otherwise) or prospects of the Credit Parties taken as a whole from June 30, 1997. (e) Insurance. The Borrower shall have furnished the Lender with (i) a summary of all existing insurance coverage, (ii) evidence acceptable to the Lender that the insurance policies required by Section 5.5 have been obtained and are in full force and effect and (iii) Certificates of Insurance with respect to all existing insurance coverage which certificates shall name The Chase Manhattan Bank, as the Certificate holder and shall evidence the Borrower's compliance with Section 5.5(f) with respect to all insurance coverage existing as of the Closing Date. (f) Borrowing Base Certificate. The Lender shall have received an initial Borrowing Base Certificate substantially in the form of Exhibit C hereto, signed by an Authorized Officer of the Borrower. (g) Security and Other Documentation. On or prior to the Closing Date, the Lender shall have received fully executed copies of (i) a Pledgeholder Agreement for each item of Product for which a Credit Party has control over any physical elements thereof as listed on Schedule 3.8 hereto; (ii) a Copyright Security Agreement listing each item of Product in which any Credit Party has a copyrightable interest (as listed on Schedule 3.8 hereto) executed by such Credit Parties; (iii) a Laboratory Access Letter addressed to each Laboratory where a Credit Party has access rights to any physical elements of Product; (iv) appropriate UCC-1 financing statements relating to the Collateral; and (v) the Pledged Securities with appropriate undated stock powers executed in blank. (h) Security Interests in Copyrights and other Collateral. On or prior to the Closing Date, the Lender shall have received evidence satisfactory to it that each Credit Party has sufficient right, title and interest in and to the Collateral and other assets which it purports to own (including appropriate licenses under copyright), as set forth in its financial statements and in the other documents presented to the Lender to enable each such Credit Party to perform the Distribution Agreements to which each such Credit Party is a party and as to each Credit Party to grant to the Lender the security interests contemplated by the Fundamental Documents, and that all financing statements, copyright filings and other filings under Applicable Law necessary to 47 54 provide the Lender with a first priority perfected security interest in the Pledged Securities and Collateral (subject, as to the Collateral, to Permitted Encumbrances) have been filed or delivered to the Lender in satisfactory form for filing. (i) Payment of Fees. All fees and expenses then due and payable by any Credit Party in connection with the transactions contemplated hereby shall have been paid. (j) Certificate from the Borrower. The Lender shall have received a certificate, signed by an Authorized Officer on behalf of Borrower, confirming that the Borrower has determined that the projected availability of the Loans as determined by the Borrowing Base, together with funds from internally generated sources and other available sources that are acceptable to the Lender, is sufficient to finance the Borrower in a manner compatible with the forecasted financial statements previously delivered to the Lender. (k) Litigation. Except as set forth on Schedule 3.12, no litigation, inquiry, injunction or restraining order shall be pending, entered or threatened which in the Lender's good faith judgment could reasonably be expected to materially and adversely affect (i) the assets, operations, business, condition or prospects (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower and its Subsidiaries to perform their respective Obligations hereunder or (iii) the rights and remedies of the Lender. (l) Existing Indebtedness. Simultaneously with the making of the initial Loans, all Indebtedness of the Borrower under the Sanwa Credit Agreement and all other Indebtedness identified on Schedule 3.17 as to be paid at Closing shall have been paid in full, the commitments of the lenders thereunder shall have been terminated and all security interests, liens and other encumbrances granted thereunder shall have been released. (m) UCC Searches. The Lender shall have received UCC searches satisfactory to it indicating that no other filings (other than in connection with Permitted Encumbrances) with regard to the Collateral are of record in any jurisdiction in which it shall be necessary or desirable for the Lender to make a UCC filing in order to provide the Lender with a perfected security interest in the Collateral. (n) Financial Statements. The Lender shall have received and be satisfied with the true and complete copies of all of the financial statements referred to in Section 3.5. (o) ERISA. The Lender shall have received copies of all Plans of the Credit Parties that are in existence on the Closing Date, and descriptions of those that are committed to on the Closing Date. (p) Delivery of Agreements. The Lender shall have received and be satisfied with the terms and provisions of (i) the Borrower's standard form of Distribution Agreement and all significant existing Distribution Agreements listed on Schedule 3.17 which are not on such 48 55 standard form, (ii) all joint venture or partnership agreements to which any Credit Party is a party and (iii) all other agreements listed on Schedule 3.17 to the extent requested by the Lender. (q) Contribution Agreement. The Lender shall have received a fully executed Contribution Agreement duly executed by all parties thereto. (r) Compliance with Laws. The Lender shall be satisfied that the transactions contemplated hereby will not violate any provision of Applicable Law. (s) Required Consents and Approvals. The Lender shall be satisfied that all required consents and approvals have been obtained with respect to the transactions contemplated hereby from all Governmental Authorities with jurisdiction over the business and activities of any Credit Party as of the date hereof, and from any other entity, foreign or domestic, whose consent or approval the Lender in its reasonable discretion deems necessary to effect the transactions contemplated hereby. (t) Federal Reserve Regulations. The Lender shall be satisfied that the provisions of Regulations G, T, U and X of the Board will not be violated by the transactions contemplated hereby. (u) Pro-forma Compliance. The Lender shall have received a pro-forma compliance report dated the Closing Date or on the date on which the most recent data was available confirming that the Borrower and its Subsidiaries are in pro-forma compliance with all covenants set forth in Article 5 and Article 6 hereof and in the other Fundamental Documents. (v) Subordination Agreements. The Lender shall have received from each Affiliate who has made advances to a Credit Party which will not be required to be repaid on or before the Closing Date, a subordination agreement in form and substance acceptable to the Lender, pursuant to which the obligations of such Credit Party to such Affiliate is subordinated to the repayment in full of the Obligations. (w) Guaranty Agreement. The Lender shall have received a copy of the Guaranty Agreement duly executed by all parties thereto. (x) Notices of Assignment and Irrevocable Instructions. The Lender shall have received, with respect to each material Eligible Receivable included in the initial Borrowing Base Certificate, fully executed copies of the Notice of Assignment and Irrevocable Instructions. (y) Approval of Counsel to the Lender. All legal matters incident to this Credit Agreement and the transactions contemplated hereby shall be reasonably satisfactory to Morgan, Lewis & Bockius LLP, counsel to the Lender. (z) Other Documents. The Lender shall have received such other documentation as the Lender may reasonably request. 49 56 SECTION 4.2. Conditions Precedent to Each Loan and Letter of Credit. The obligations of the Lender to issue each Letter of Credit and make each Loan (including the initial Loans and Letter of Credit) are subject to the following conditions precedent: (a) Notice. The Lender shall have received a notice with respect to such Borrowing or with respect to such Letter of Credit as required by Article 2 hereof. (b) Borrowing Certificate. The Lender shall have received a Borrowing Certificate with respect to such Borrowing, duly executed by an Authorized Officer of the Borrower. (c) Representations and Warranties. The representations and warranties set forth in Article 3 hereof and in the other Fundamental Documents shall be true and correct in all material respects on and as of the date of each Borrowing and issuance of a Letter of Credit hereunder (except to the extent that such representations and warranties expressly relate to an earlier date) with the same effect as if made on and as of such date. (d) No Event of Default. On the date of each Borrowing or the issuance of each Letter of Credit hereunder, each Credit Party shall be in compliance with all of the terms and provisions set forth herein to be observed or performed and no Event of Default or Default shall have occurred and be continuing. (e) Additional Documents. The Lender shall have received from the Borrower on the date of each Borrowing and issuance of each Letter of Credit such documents and information as they may reasonably request relating to the satisfaction of the conditions in this Section 4.2. Each request for a Borrowing or for issuance of a Letter of Credit shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing or issuance of such Letter of Credit as to the matters specified in paragraphs (c) and (d) of this Section. 5. AFFIRMATIVE COVENANTS From the Closing Date and for so long as the Commitment shall be in effect or any amount remains outstanding under the Note or any Letter of Credit shall remain outstanding or any Obligations remain unpaid or unsatisfied, each Credit Party agrees that, unless the Lender shall otherwise consent in writing, each of them will: SECTION 5.1. Financial Statements and Reports. Furnish or cause to be furnished to the Lender: (a) Within 120 days after the end of each fiscal year of the Borrower, commencing with the fiscal year ending December 31, 1997, the audited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as at the end of, and the related 50 57 statements of income, Shareholders' Equity and cash flows (along with the related notes and supplemental information) for such year, and the corresponding figures as at the end of, and for, the preceding fiscal year, accompanied by an auditor's report and opinion of KPMG Peat Marwick LLP or such other independent public accountants of nationally recognized standing as shall be retained by the Borrower and be reasonably satisfactory to the Lender, which report and opinion shall be prepared in accordance with generally accepted auditing standards relating to reporting and which report and opinion shall contain no material exceptions or qualifications except for qualifications relating to accounting changes (with which such independent public accountants concur) in response to FASB releases or other authoritative pronouncements; (b) Within 60 days after the end of each of the first three fiscal quarters of each of its fiscal years the unaudited consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as at the end of, and the related unaudited consolidated statements of income, cash flow and shareholders' equity for, such quarter, and the corresponding figures as at the end of, and for, the corresponding period in the preceding fiscal year, together with a certificate signed by an Authorized Officer of the Borrower, on behalf of the Borrower, to the effect that such financial statements, while not examined by independent public accountants, reflect, in the opinion of the Borrower, all adjustments necessary to present fairly the financial position of the Borrower and its Consolidated Subsidiaries as at the end of the fiscal quarter and the results of its operations for the quarter then ended are in conformity with GAAP, subject to normal year-end audit adjustments; (c) Simultaneously with the delivery of the statements referred to in paragraphs (a) and (b) of this Section 5.1, a certificate of an Authorized Officer of the Borrower, on behalf of the Borrower, in form and substance satisfactory to the Lender (i) stating whether or not such Authorized Officer has knowledge, after due inquiry, of any condition or event which would constitute an Event of Default or Default has occurred and, if so, specifying each such condition or event and the nature thereof, (ii) demonstrating in reasonable detail compliance with the provisions of Sections 6.14 through 6.18 and 6.21 hereof and (iii) certifying that all filings required under Section 5.8 hereof have been made and listing each such filing that has been made since the date of the last certificate delivered in accordance with this Section 5.1(c); (d) Together with each set of audited financial statements required by paragraph (a) above, a report from the independent public accountants rendering the report thereon (i) stating that such Person has made such examination or investigation as is necessary to enable it to express an informed opinion as to the matters referred to in clause (ii) of this Section 5.1(d), it being understood that no special audit procedures are required hereby and (ii) stating whether, in connection with their audit examination, any condition or event, at any time during or at the end of the accounting period covered by such financial statements, which constitutes an Event of Default under covenants relating to accounting matters has come to their attention, and if such a condition or event has come to their attention, specifying the nature and period, if known, of existence thereof; 51 58 (e) On or prior to the twentieth day of each month, a certificate ("Borrowing Base Certificate") in the form of Exhibit C hereto, setting forth the amount of each component included in the Borrowing Base as of the last Business Day of the preceding month, attached to which shall be detailed information including the calculation of each such component (the Borrower, at its option, may furnish additional Borrowing Base Certificates setting forth such information as of such other dates as it may deem appropriate), together with an aging report of the Eligible Receivables included in the Borrowing Base; (f) Promptly upon their becoming available, copies of (i) all management projections, studies or evaluations prepared by consultants for or presented to any Credit Party's Board of Directors and (ii) all audits, studies, reports or evaluations prepared for or submitted to any of the Credit Parties by any outside professional firm or service, including, without limitation, the final comment letter submitted by the Credit Parties' accountants to the Board of Directors or the audit committee of the Board of Directors of the Borrower in connection with their annual audit; (g) Within 10 days of the Borrower's receipt thereof, copies of all management letters issued to the Borrower by its auditors; (h) Promptly upon their becoming available, copies of (i) all registration statements, proxy statements, and all reports which the Borrower or any other Credit Party shall file with any securities exchange or with the Securities and Exchange Commission or any successor agency and (ii) all reports, financial statements, press releases and other information which the Borrower or any other Credit Party shall release, send or make available to its common stockholders generally; (i) Notice of (i) any substantive action taken by any Credit Party in connection with the proposed issuance of any additional debt or equity securities other than the issuance of securities to employees in connection with the exercise of options and (ii) the date on which such Credit Party expects to receive the net cash proceeds from the issuance of such additional debt or equity securities; (j) Simultaneously with the delivery of the statements referred to in paragraph (a) of this Section 5.1, the calculation of the Eligible Library Amount computed as of the last Business Day of the prior fiscal year as contemplated by the definition of "Eligible Library Amount"; and (k) From time to time such additional information regarding the financial condition or business of the Credit Parties or otherwise regarding the Collateral, as the Lender may reasonably request for the purpose of assuring itself as to compliance by the Credit Parties with the terms hereof. SECTION 5.2. Corporate Existence. Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its corporate existence, rights, material 52 59 licenses, material permits and material franchises, and comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, any Governmental Authority, except as otherwise permitted under Section 6.7 and except that any Subsidiary of the Borrower may be liquidated or dissolved if in the reasonable judgment of the Board of Directors of the Borrower such Subsidiary is no longer necessary for the proper conduct of the business of the Borrower. SECTION 5.3. Maintenance of Properties. Keep its tangible properties which are material to its business in good repair, working order and condition (ordinary wear and tear excepted) and, from time to time (i) make all necessary and proper repairs, renewals, replacements, additions and improvements thereto and (ii) comply at all times with the provisions of all material leases and other material agreements to which it is a party so as to prevent any loss or forfeiture thereof or thereunder unless compliance therewith is being currently contested in good faith by appropriate proceedings; provided, however, that nothing in this Section 5.3 shall prevent any Credit Party from discontinuing the use, operation or maintenance of such properties or disposing of them if such discontinuance or disposal is, in the judgment of its Board of Directors, desirable in the conduct of the business. SECTION 5.4. Notice of Material Events. (a) Promptly upon any Authorized Officer of any Credit Party obtaining knowledge of (i) any Default or Event of Default, (ii) any material adverse change in the condition or operations of the Borrower and its Subsidiaries taken as a whole, financial or otherwise, (other than changes due to seasonality that are consistent with the corresponding periods in prior years), (iii) any action or event which could reasonably be expected to materially and adversely affect the performance of the Credit Parties' obligations under this Credit Agreement, the repayment of the Note, or the security interests granted to the Lender under this Credit Agreement or any other Fundamental Document, (iv) the opening of any office of any Credit Party or the change of the executive office or the principal place of business of any Credit Party or of the location of any Credit Party's books and records with respect to the Collateral, (v) any change in the name of any Credit Party, (vi) any other event which could reasonably be expected to materially and adversely impact upon the amount or collectibility of accounts receivable of the Credit Parties or otherwise materially decrease the value of the Collateral or (vii) any Person giving any notice to any Credit Party or taking any other action to enforce remedies with respect to a claimed default or event or condition of the type referred to in paragraph (d) of Article 7, such Credit Party shall promptly give written notice thereof to the Lender specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken and the nature of such claimed Event of Default or condition and what action such Credit Party has taken, is taking and proposes to take with respect thereto. (b) Promptly upon any Authorized Officer of any Credit Party obtaining knowledge of (i) the institution of, or threat of, any action, suit, proceeding, investigation or arbitration by any Governmental Authority or other Person against or affecting any Credit Party or any of its assets, or (ii) any material development in any such action, suit, proceeding, investigation or arbitration (whether or not previously disclosed to the Lender), which, in the case of (i) or (ii), could reasonably be expected to materially and adversely affect the Borrower and its Subsidiaries taken as a whole, such Credit Party shall promptly give notice thereof to the Lender 53 60 and provide such other information as may be available to it to enable the Lender to evaluate such matters; and, in addition to the requirements set forth in clauses (i) and (ii) of this subsection (b), such Credit Party upon request shall promptly give notice of the status of any action, suit, proceeding, investigation or arbitration covered by a report delivered to the Lender pursuant to clause (i) and (ii) above to the Lender and provide such other information as may be reasonably available to it to enable the Lender to evaluate such matters. SECTION 5.5. Insurance. (a) Keep its assets which are of an insurable character insured (to the extent and for the time periods consistent with normal industry practices) by financially sound and reputable insurers against loss or damage by fire, explosion, theft or other hazards which are included under extended coverage in amounts not less than the insurable value of the property insured or such lesser amounts, and with such self-insured retention or deductible levels, as are consistent with normal industry practices. (b) Maintain with financially sound and reputable insurers, insurance against other hazards and risks and liability to Persons and property to the extent and in the manner customary for companies in similar businesses. (c) Maintain, or cause to be maintained, in effect during the period from the commencement of principal photography of each item of Product produced by any Credit Party, through the third anniversary of the date on which such item of Product is Completed and/or as otherwise required by applicable contracts, a so-called "Errors and Omissions" policy with respect to all items of Product for which principal photography has commenced, and cause such Errors and Omissions policy to provide coverage to the extent and in such manner as is customary for items of Product of like type but, at minimum, to the extent and in such manner as is required under all applicable contracts relating thereto. (d) Maintain, or cause to be maintained, in effect during the period from the commencement of principal photography of each item of Product produced by any Credit Party, or from the date of acquisition of each item of Product acquired by any Credit Party (i) until such time as the Lender shall have been provided with satisfactory evidence of the existence of one negative or master tape in one location and an interpositive or internegative or duplicate master tape in another location of the final version of the Completed Product, insurance on the negatives and sound tracks or master tapes of such item of Product in an amount not less than the cost of re-shooting the principal photography of the item of Product, and (ii) until principal photography of such item of Product has been concluded, a cast insurance policy with respect to such item of Product, which provides coverage to the extent and in such manner as is customary for a like type of Product, but at minimum, to the extent required under all applicable contracts relating thereto. (e) Maintain, or cause to be maintained, in effect distributor's and/or publisher's "Errors and Omissions" insurance to the extent and in amounts customary for companies in similar businesses. 54 61 (f) Cause all such above-described insurance (excluding worker's compensation insurance) to (i) provide for the benefit of the Lender that 30 days' prior written notice of suspension, cancellation, termination, modification, non-renewal or lapse or material change of coverage shall be given to the Lender; (ii) name the Lender as the loss payee as its interests may appear (except for "Errors and Omissions" insurance and other third party liability insurance), provided, however, that production insurance recoveries received prior to Completion or abandonment of an item of Product may be utilized to finance the production of such item of Product and property insurance proceeds may be used to repair damage in respect of which such proceeds were received; and (iii) to the extent that the Lender shall not be liable for premiums or calls, name the Lender as an additional insured including, without limitation, under any "Errors and Omissions" policy. (g) Upon the request of the Lender, the Borrower will render to the Lender a statement in such detail as the Lender may request as to all such insurance coverage. SECTION 5.6. Production. Cause each item of Product being produced by any Credit Party to be produced in all material respects in accordance with the standards set forth in, and within the time period established in, all agreements with respect to such item of Product to which such Credit Party is a party, subject to the terms and conditions of such agreements. SECTION 5.7. Music. When an item of Product has been scored, if requested by the Lender, deliver to the Lender within a reasonable period of time after such request (a) written evidence of the music synchronization rights obtained from the composer or the licensor of the music and (b) copies of all music cue sheets with respect to such item of Product. SECTION 5.8. Copyright. (a) Within 90 days after the initial release or broadcast of each item of Product, to the extent any Credit Party is or becomes the copyright proprietor thereof or to the extent such interest is obtained by any Credit Party, or any Credit Party otherwise acquires a copyrightable interest, take any and all actions necessary to register the copyright for such item in the name of such Credit Party (subject to a Lien in favor of the Lender pursuant to the Copyright Security Agreement) in conformity with the laws of the United States and such other jurisdictions as the Lender may reasonably specify, and immediately deliver to the Lender (i) written evidence of the registration of any and all such copyrights for inclusion in the Collateral under this Credit Agreement and (ii) a Copyright Security Agreement Supplement relating to such item executed by such Credit Party. (b) Obtain instruments of transfer or other documents evidencing the interest of any Credit Party with respect to the copyright relating to items of Product in which such Credit Party is not entitled to be the initial copyright proprietor, and promptly record such instruments of transfer on the United States Copyright Register and such other jurisdictions as the Lender may specify. SECTION 5.9. Books and Records. (a) Maintain or cause to be maintained at all times true and complete books and records of its financial operations and provide the Lender and 55 62 its representatives access to such books and records and to any of its properties or assets upon reasonable notice and during regular business hours in order that the Lender may make such audits and examinations and make abstracts from such books, accounts, records and other papers pertaining to the Collateral (including, but not limited to, Eligible Receivables included in the Borrowing Base) and upon notification to the Borrower may discuss the affairs, finances and accounts with, and be advised as to the same by, officers and independent accountants, all as the Lender may deem appropriate for the purpose of verifying the accuracy of the Borrowing Base Certificate and the various other reports delivered by any Credit Party to the Lender pursuant to this Credit Agreement or for otherwise ascertaining compliance with this Credit Agreement or any other Fundamental Document. (b) If, prior to an Event of Default, the Lender wishes to confirm with account debtors and other payors the amounts and terms of any or all Eligible Receivables included in the Borrowing Base, the Lender will so notify the Borrower; provided, that so long as an Event of Default has not occurred and is continuing, the Lender shall be entitled to exercise such right no more than once per year. Within 10 days after receipt of such notice from the Lender, the Borrower may, upon written notice to the Lender, elect to have such confirmation made through the Credit Parties' auditors. If the Borrower fails to timely make such election, the Lender may proceed to make such confirmations directly with account debtors and other payors. Each of the Credit Parties hereby agrees that, upon the occurrence and during the continuance of an Event of Default, the Lender shall be entitled to confirm directly with account debtors the amounts and terms of all accounts receivable. SECTION 5.10. Third Party Audit Rights. Promptly notify the Lender of, and allow the Lender access to the results of, all audits conducted by any Credit Party of any third party licensee, partnership and joint venture under any agreement with respect to any item of Product included in the Collateral. The Credit Parties will exercise their audit rights with respect to any third party licensees, partnerships and joint ventures under any agreement with respect to an item of Product included in the Collateral upon the reasonable written request of the Lender, to the extent such rights are available to the Credit Parties; provided, that so long as an Event of Default has not occurred and is continuing, the Lender shall be entitled to cause the Credit Parties to exercise such audit rights no more than once per year. After an Event of Default has occurred and is continuing, the Lender shall have the right to exercise through any Credit Party such Credit Party's right to audit any obligor under an agreement with respect to any item of Product included in the Collateral. SECTION 5.11. Observance of Agreements. Duly observe and perform all material terms and conditions of all material agreements with respect to the exploitation of items of Product and diligently protect and enforce the rights of the Credit Parties under all such agreements in a manner consistent with prudent business judgment and subject to the terms and conditions of such agreements. SECTION 5.12. Film Properties and Rights; Credit Parties to Act as Pledgeholder. Act as pledgeholder for the Lender with the same effect as if the Lender were a 56 63 pledgee in possession of all property relating to items of Product which are now or hereafter in the (actual or constructive) possession of any Credit Party, subject to such access as shall be necessary to distribute such items of Product. SECTION 5.13. Laboratories; No Removal. (a) To the extent any Credit Party has control over or rights to receive any of the Physical Materials relating to any item of Product, deliver or cause to be delivered to a Laboratory or Laboratories all negative and preprint material, master tapes and all sound track materials with respect to each such item of Product and deliver to the Lender a fully executed Pledgeholder Agreement with respect to such materials. To the extent that any Credit Party has only rights of access to preprint material or master tapes then the Credit Parties will deliver to the Lender a fully executed Laboratory Access Letter covering such materials. Prior to requesting any such Laboratory to deliver such negative or other preprint or sound track material or master tapes to another laboratory, any such Credit Party shall provide the Lender with a Pledgeholder Agreement or Laboratory Access Letter, as appropriate, executed by such other laboratory and all other parties to such Pledgeholder Agreement (including the Lender). Each Credit Party hereby agrees not to remove or cause the removal of the original negative and film or sound materials with respect to any item of Product owned by such Credit Party or in which such Credit Party has an interest (i) to a location outside the United States or (ii) to any state or jurisdiction where UCC-1 financing statements (or in the case of jurisdictions outside the United States, documentation similar in purpose and effect satisfactory to the Lender) have not been filed against such Credit Party holding any rights to such item of Product. (b) During production of any item of Product produced by any Credit Party, such Credit Party shall promptly deliver the daily rushes for such item of Product to the appropriate Laboratory. (c) With respect to items of Product completed after the Closing Date, as soon as practicable after completion, deliver to the Lender and the Laboratories which are signatories to Pledgeholder Agreements a revised schedule of Product on deposit with such Laboratories. SECTION 5.14. Taxes and Charges; Indebtedness in Ordinary Course of Business. Duly pay and discharge, or cause to be paid and discharged, before the same shall become in arrears (after giving effect to applicable extensions), all taxes, assessments, levies and other governmental charges, imposed upon any Credit Party or its properties, sales and activities, or any part thereof, or upon the income or profits therefrom, as well as all claims for labor, materials, or supplies which if unpaid might by law become a Lien upon any property of any Credit Party; provided, however, that any such tax, assessment, charge, levy or claim need not be paid if the validity or amount thereof shall currently be contested in good faith by appropriate proceedings and if such Credit Party shall have set aside on its books reserves (the presentation of which is segregated to the extent required by GAAP) adequate with respect thereto if reserves shall be deemed necessary; and provided, further, that such Credit Party will pay all such taxes, assessments, levies or other governmental charges forthwith upon the commencement of proceedings to foreclose any Lien which may have attached as security therefor. The Credit Parties will promptly pay when due, or in conformance with customary trade terms, all other 57 64 indebtedness incident to its operations in a manner consistent with such Credit Party's past business practices. SECTION 5.15. Liens. Defend the Collateral against any and all Liens howsoever arising, other than Permitted Encumbrances, and in any event defend against any attempted foreclosure. SECTION 5.16. Further Assurances; Security Interests. (a) Upon the request of the Lender, duly execute and deliver, or cause to be duly executed and delivered, at the cost and expense of the Credit Parties, such further instruments as may be appropriate in the reasonable judgment of the Lender to carry out the provisions and purposes of this Credit Agreement and the other Fundamental Documents. (b) Upon the request of the Lender, promptly execute and deliver or cause to be executed and delivered, at the cost and expense of the Credit Parties, such further instruments as may be appropriate in the reasonable judgment of the Lender, to provide the Lender a first perfected Lien in the Collateral and any and all documents (including, without limitation, the execution, amendment or supplementation of any financing statement and continuation statement or other statement) for filing under the provisions of the UCC and the rules and regulations thereunder, or any other statute, rule or regulation of any applicable foreign, federal, state or local jurisdiction, and perform or cause to be performed such other ministerial acts which are necessary or advisable, from time to time, in order to grant and maintain in favor of the Lender the security interest in the Collateral contemplated hereunder and under the other Fundamental Documents, subject only to Permitted Encumbrances. (c) Promptly undertake to deliver or cause to be delivered to the Lender from time to time such other documentation, consents, authorizations and approvals in form and substance reasonably satisfactory to the Lender, as the Lender shall deem reasonably necessary or advisable to perfect or maintain the Liens of the Lender. SECTION 5.17. ERISA Compliance and Reports. Furnish to the Lender (a) as soon as possible, and in any event within 30 days after any Credit Party knows that (i) any Reportable Event with respect to any Plan has occurred, a statement of an executive officer of the Credit Party, setting forth on behalf of such Credit Party details as to such Reportable Event and the action which it proposes to take with respect thereto, together with a copy of the notice, if any, required to be filed by the applicable Credit Party of such Reportable Event given to the PBGC or (ii) an accumulated funding deficiency has been incurred or an application has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard or an extension of any amortization period under Section 412 of the Code with respect to a Plan, a Plan or Multiemployer Plan has been or is proposed to be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA, proceedings have been instituted to terminate a Plan, a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Multiemployer Plan, or the Borrower or such Credit Party will incur any liability (including any contingent or secondary liability) to or on account of the termination 58 65 of or withdrawal from a Plan or Multiemployer Plan under Sections 4062, 4063, 4201 or 4204 of ERISA, if the occurrence of any of the foregoing events would result in a liability which is materially adverse to the financial condition of the Borrower and its Subsidiaries taken as a whole or would materially and adversely affect the ability of the Borrower to perform its obligations under this Credit Agreement or the Note, a statement of an executive officer of the Borrower, setting forth details as to such event and the action the applicable Credit Party proposes to take with respect thereto, (b) promptly upon reasonable request of the Lender, copies of each annual and other report with respect to each Plan and (c) promptly after receipt thereof, a copy of any notice any Credit Party may receive from the PBGC relating to the PBGC's intention to terminate any Plan or to appoint a trustee to administer any Plan. SECTION 5.18. Environmental Laws. (a) Promptly notify the Lender upon any Credit Party becoming aware of any violation or, to the best of each Credit Party's knowledge, potential violation, or non-compliance with, or liability or, to the best of each Credit Party's knowledge, potential liability, under any Environmental Laws which, when taken together with all other pending violations would reasonably be expected to have a materially adverse effect on the Borrower and its Subsidiaries taken as a whole, and promptly furnish to the Lender all notices of any nature which any Credit Party may receive from any Governmental Authority or other Person with respect to any violation, or potential violation or non-compliance with, or liability or potential liability under any Environmental Laws which, in any case or when taken together with all such other notices, could reasonably be expected to have a materially adverse effect on the Borrower and its Subsidiaries taken as a whole. (b) Comply with and use reasonable efforts to ensure compliance by all tenants and subtenants with all Environmental Laws, and obtain and comply in all material respects with and maintain and use reasonable efforts to ensure that all tenants and subtenants obtain and comply in all material respects with and maintain any and all licenses, approvals, registrations or permits required by Environmental Laws, except where failure to do so would not have a materially adverse effect on the Borrower and its Subsidiaries taken as a whole. (c) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under all Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities, except where failure to do so would not have a materially adverse effect on the Borrower and its Subsidiaries taken as a whole. Any order or directive whose lawfulness is being contested in good faith by appropriate proceedings shall be considered a lawful order or directive when such proceedings, including any judicial review of such proceedings, have been finally concluded by the issuance of a final non-appealable order; provided, however, that the appropriate Credit Party shall have set aside on its books reserves (the presentation of which is segregated to the extent required by GAAP) adequate with respect thereto if reserves shall be deemed necessary. (d) Defend, indemnify and hold harmless the Lender and its employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, 59 66 settlements, damages, costs and expenses of whatever kind or nature, known or unknown, contingent or otherwise, arising out of, or in any way related to the violation of or noncompliance by any Credit Party with any Environmental Laws, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, reasonable attorney and consultant fees, investigation and laboratory fees, court costs and litigation expenses, but excluding therefrom all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses arising out of or resulting from (i) the gross negligence or willful misconduct of any indemnified party or (ii) any acts or omissions of any indemnified party occurring after any indemnified party is in possession of, or controls the operation of, any property or asset. SECTION 5.19. Use of Proceeds. Use the proceeds of the Loans solely for the Borrower (i) to finance the development, production, distribution or acquisition of audio books, books, television product and film product (other than the production and distribution of motion pictures in theaters) and production and distribution expenses of the motion picture entitled "Wilde"; (ii) to refinance the Sanwa Credit Agreement and the MEI Line of Credit; and (iii) for other general corporate purposes. SECTION 5.20. Security Agreements with the Guilds. Furnish to the Lender duly executed copies of (i) each security agreement relating to an item of Product entered into by a Credit Party with any guild and (ii) a subordination agreement (in form and substance satisfactory to the Lender) from the applicable guild with respect to the security interest and other rights granted to it pursuant to each such security agreement delivered to the Lender pursuant to clause (i) above. SECTION 5.21. Uncompleted Product. With respect to all items of Product (other than audio books and books) for which any Credit Party is the producer (but not a producer-for-hire) or has a financial interest which is subject to a completion risk (i.e. payment by a Credit Party is not conditioned upon delivery), deliver to the Lender, not later than (A) five (5) days prior to the commencement of principal photography of such item of Product and (B) five (5) days prior to payment of the acquisition cost for a negative pick-up, each of the following to the extent applicable (it being understood that for purposes of clause B clauses (viii) and (ix) below shall not be applicable), (i) the budget for such item of Product, (ii) a schedule identifying all agreements executed by a Credit Party in connection with such item of Product which provide for deferments of compensation or a gross or net profit participation, (iii) copies of such of the foregoing agreements as the Lender may reasonably request, (iv) certificates or binders of insurance with respect to such item of Product (and policies of insurance if requested by the Lender), including all forms of insurance coverage required by Section 5.5 hereof, (v) copies of all instruments of transfer or other instruments (in recordable form) ("Chain of Title" documents) necessary to establish, to the reasonable satisfaction of the Lender, in the appropriate Credit Party ownership of sufficient copyright rights in the literary properties upon which such item of Product is to be based to enable such Credit Party to produce and/or distribute such item of Product and to grant the Lender the security interests therein which are contemplated by this Credit Agreement which documents shall evidence to the Lender's satisfaction the Credit Party's rights in, and with respect to, such item of Product, (vi) an executed Copyright Security 60 67 Agreement Supplement with respect to such item of Product, (vii) executed Pledgeholder Agreements with respect to such item of Product, (viii) a schedule of sources and uses demonstrating in detail that all cash necessary to complete and deliver such item of Product will be available as and when needed from sources acceptable to the Lender, and (ix) a Completion Guarantee with respect to such item of Product in form and substance satisfactory to the Lender naming the Lender as a beneficiary thereof; provided, however, that subclause (ix) shall not be applicable to items of Product for which a major television network has committed to provide financing in an amount equal to at least 70% of the Budgeted Negative Cost for such item of Product. SECTION 5.22. Governmental Approval. If any further authorizations, approvals, registrations or filings with any governmental or public regulatory body or authority of the United States or any state thereof required for the execution, delivery and performance by any Credit Party of this Credit Agreement and the other Fundamental Documents to which it is a party should hereafter become necessary, the Credit Parties shall obtain or make all such authorizations, approvals, registrations or filings. 6. NEGATIVE COVENANTS From the date hereof and for so long as the Commitment shall be in effect or any amount remains outstanding under the Note or any Letter of Credit shall remain outstanding or any Obligations remain unpaid or unsatisfied, each Credit Party agrees that, unless the Lender shall otherwise consent in writing, it will not and will not allow any of its Subsidiaries to: SECTION 6.1. Limitations on Indebtedness. Incur, create, assume or suffer to exist any preferred stock or Indebtedness or permit any partnership or joint venture in which any Credit Party is a general partner to incur create, assume or suffer to exist any Indebtedness other than: (a) the Indebtedness represented by the Note and the other Obligations; (b) Indebtedness in respect of secured purchase money financing, including Capital Leases, to the extent permitted by Section 6.2(b) and not to exceed $250,000 in the aggregate at any one time outstanding; (c) unsecured liabilities for acquisitions of rights or product incurred in the ordinary course of business and not otherwise prohibited hereunder; (d) liabilities relating to net or gross profit participations, deferments and guild residuals with respect to the production or acquisition of items of Product; (e) existing Indebtedness listed on Schedule 3.17 hereto but no increases, extensions or renewals thereof unless otherwise noted on Schedule 3.17; 61 68 (f) in the case of the Corporate Guarantors, the guarantees of the Obligations pursuant to Article 9 hereof; (g) Indebtedness incurred in connection with inter-company advances permitted under Section 6.4(v) hereof; (h) Subordinated Debt that does not require any cash payments at any time prior to six months after the Commitment Termination Date; (i) Indebtedness incurred in connection with the refinancing of the Borrower's existing loan in connection with the acquisition of its office building referenced in Note 6 of the Borrower's quarterly report for the period ended June 30, 1997, provided that (i) the principal amount then outstanding and being refinanced is not increased to an amount greater than $3,300,000, (ii) the Lien(s) provided therefor are not extended to cover any additional property or assets of the Borrower, and (iii) the Weighted Average Life to Maturity of such Indebtedness is not decreased; (j) Indebtedness incurred in connection with the financing of television programming for which the Lender has previously provided written consent; and (k) preferred stock without any mandatory redemption provisions. SECTION 6.2. Limitations on Liens. Incur, create, assume or suffer to exist any Lien on its revenue stream, property or assets, whether now owned or hereafter acquired, except: (a) Liens pursuant to written security agreements (in form and substance reasonably acceptable to the Lender) in favor of guilds required pursuant to terms of collective bargaining agreements; provided, that such guilds have entered into an intercreditor agreement with the Lender reasonably satisfactory in all respects to the Lender; (b) Liens granted to the Person financing the acquisition of property, plant or equipment if (i) limited to the particular assets acquired; (ii) the debt secured by the Lien does not exceed the acquisition cost of a particular asset for which the Lien is granted; (iii) such transaction does not otherwise violate this Credit Agreement and (iv) the aggregate amount of all Indebtedness secured by Liens permitted under this paragraph (excluding the Indebtedness incurred in connection with the refinancing of the Borrower's office building permitted by Section 6.1(i)) does not exceed $250,000 at any one time outstanding; (c) Liens to secure distribution, exhibition and/or exploitation rights of licensees pursuant to Distribution Agreements on terms satisfactory to the Lender; (d) deposits under worker's compensation, unemployment insurance, old-age pensions and other Social Security laws or to secure the performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases or to secure statutory obligations or 62 69 surety or appeal bonds or performance or other similar bonds incurred in the ordinary course of business (other than Completion Guarantees); (e) Liens for taxes, assessments or other governmental charges or levies due and payable, the validity or amount of which is currently being contested in good faith by appropriate proceedings pursuant to the terms of Section 5.14 hereof; (f) Liens incurred in the ordinary course of business with regard to services rendered by laboratories and post-production houses, and suppliers of materials and equipment which secure trade payables in amounts not exceeding $500,000 in the aggregate; (g) Liens arising out of attachments, judgments or awards as to which an appeal or other appropriate proceedings for contest or review are promptly commenced (and as to which foreclosure and other enforcement proceedings shall not have been commenced (unless fully bonded or otherwise effectively stayed)) and as to which appropriate reserves have been established in accordance with GAAP; (h) the Liens of the Lender under this Credit Agreement, the other Fundamental Documents and other documents contemplated hereby; (i) existing Liens set forth on Schedule 6.2 hereto; (j) customary Liens in favor of Approved Completion Guarantors in connection with Completion Guarantees; (k) possessory Liens (other than those of Laboratories and production houses) which (i) occur in the ordinary course of business, (ii) secure normal trade debt which is not yet due and payable and (iii) do not secure Indebtedness for borrowed money; (l) Liens arising by virtue of any statutory or common law provision relating to banker's liens, rights of setoff or similar rights with respect to deposit accounts of the Credit Parties; (m) statutory Liens of landlords and other Liens imposed by law, such as carriers', warehouseman's or mechanic's Liens, incurred in good faith in the ordinary course of business and deposits made or bonds filed in the ordinary course of business to obtain the release of such Liens in amounts not exceeding $250,000 in the aggregate; (n) Liens granted to third parties securing Indebtedness permitted to be incurred under Section 6.1(j); and (o) Liens in favor of third-party lenders in respect of particular items of Product pursuant to production financing arrangements approved by the Lender; provided, that 63 70 each such third-party lender shall have entered into an intercreditor agreement with the Lender in form and substance satisfactory to the Lender. SECTION 6.3. Limitation on Guarantees. Provide any Guaranty, either directly or indirectly, except (i) negative pickup agreements and minimum guarantees to acquire items of Product in the ordinary course of business to the extent otherwise permitted under Section 6.21 and the other provisions hereof, (ii) guarantees to the Lender in accordance with Article 9 hereof and (iii) existing Guarantees listed on Schedule 6.3 hereto. SECTION 6.4. Limitations on Investments. Create, make or incur any Investment other than (i) to acquire Product in the ordinary course of business to the extent otherwise permitted under Section 6.21 and the other provisions hereof, (ii) purchase of Cash Equivalents, (iii) inter-company advances among Credit Parties, (iv) Investments as of the Closing Date set forth on Schedule 6.4, (v) Guarantees permitted pursuant to Section 6.3, (vi) the acquisition or creation of new Subsidiaries in accordance with Section 6.22 hereof, and (vii) additional investments in Empire Burbank in an aggregate amount not to exceed $100,000 per annum. SECTION 6.5. Restricted Payments. Declare, make or incur any liability to make any Restricted Payments; provided that the Borrower may declare cash dividends to its stockholders if, and only if, the EBIT Ratio calculated pursuant to Section 6.17 is at least 20 to 1. SECTION 6.6. Limitations on Leases. Create, incur or assume combined lease expense (but specifically excluding amounts included in the Budgeted Negative Cost of an item of Product) for any twelve consecutive calendar months in excess of $100,000. SECTION 6.7. Consolidation, Merger, Sale or Purchase of Assets, etc. Whether in one transaction or a series of transactions, (i) wind up, liquidate or dissolve its affairs, or enter into any transaction of merger or consolidation, (ii) sell or otherwise dispose of all or substantially all of its property, stock or assets, (iii) except to the extent permitted by Sections 6.4 and 6.22 hereof, acquire all or substantially all of the stock or assets of any other Person in amounts exceeding $500,000 in the aggregate, or (iv) agree to do or suffer any of the foregoing, except that any Subsidiary of the Borrower may merge with and into, or transfer assets to, another Subsidiary of the Borrower or with and into, or transfer assets to, the Borrower; provided that if any such transaction involves the Borrower, then the Borrower must be the surviving entity in each such transaction. SECTION 6.8. Receivables. Sell, discount or otherwise dispose of notes, accounts receivable or other obligations owing to any Credit Party except for the purpose of collection in the ordinary course of business. SECTION 6.9. Sale and Leaseback. Enter into any arrangement with any Person or Persons, whereby in contemporaneous transactions any Credit Party sells essentially all of its right, title and interest in an item of Product and acquires or licenses the right to distribute or 64 71 exploit such item of Product in media and markets accounting for substantially all the value of such item of Product, unless such arrangement does not impair the collateral position of the Lender and is evidenced by documentation acceptable to the Lender. SECTION 6.10. Places of Business; Change of Name. Change the location of its chief executive office or principal place of business or any of the locations where it keeps any material portion of the Collateral or its books and records with respect to the Collateral or change its name without in each case (i) giving the Lender 30 days' prior written notice of such change and (ii) filing any additional Uniform Commercial Code financing statements, and such other documents requested by the Lender or which are otherwise necessary or desirable to maintain perfection of the security interest of the Lender in the Collateral. SECTION 6.11. Limitations on Capital Expenditures. Make or incur on a consolidated basis any obligation to make Capital Expenditures (other than amounts included in the Budgeted Negative Cost of an item of Product) for any fiscal year in excess of $250,000. SECTION 6.12. Transactions with Affiliates. Effect any transaction with an Affiliate other than a Credit Party on a basis less favorable to such Credit Party than would have been the case if such transaction had been effected on an arms-length basis (and if involving more than $100,000, without a resolution approving each such transaction from the Board of Directors of each Credit Party involved). SECTION 6.13. Prohibition of Amendments or Waivers. Amend, alter, modify, terminate or waive, or consent to any amendment, alteration, modification or waiver of (x) any material agreement to which any Credit Party is a party, including, without limitation, the Material Agreements, or the terms thereof in any manner which would change, alter or waive any material term thereof and which could reasonably be expected to (i) materially and adversely affect the collectibility of accounts receivable that form part of the Borrowing Base, (ii) materially and adversely affect the financial condition of any Credit Party, (iii) materially and adversely affect the rights of the Lender under this Credit Agreement, the other Fundamental Documents and any other agreements contemplated hereby, (iv) materially decrease the value of the Collateral, or (v) decrease the amount of the sum of (i) the Borrowing Base plus (ii) the Maximum Guaranty Amount plus (iii) amounts currently held in the Collection Account, to less than the sum of then outstanding principal amount of the Loans and the then current L/C Exposure, or (y) any indenture or note purchase agreement governing any Subordinated Debt in any manner whatsoever. 65 72 SECTION 6.14. Development Costs. Permit unfunded development costs (which have not been sold, written off or allocated to an item of Product for which active preproduction has commenced) to exceed $100,000 for any item of Product. SECTION 6.15. Overhead Expense. Permit aggregate allocated and unallocated overhead expenses to exceed $1,100,000 in the fourth quarter of fiscal year 1997, $3,750,000 in fiscal 1998 or to exceed in any subsequent fiscal year 110% of the maximum amount permitted for the immediately preceding fiscal year. SECTION 6.16. Consolidated Capital Base. Permit Consolidated Capital Base at the end of any quarter to be less than the sum of $8,000,000 plus 80% of all net new equity invested plus 80% of accumulated net earnings, if any, for each fiscal quarter ending after the Closing Date and prior to the date at which compliance is being determined. SECTION 6.17. EBIT Ratio. Permit the ratio of (i) the sum of EBIT on the last day of each fiscal quarter plus amortization of goodwill and capitalized financing costs on the last day of each fiscal quarter to (ii) Total Interest on the last day of each fiscal quarter to be less than 1.5 to 1 as of fiscal year end 1998 and 2.0 to 1 for for any rolling four quarter period thereafter. SECTION 6.18. Liquidity Ratio. Permit the ratio of (i) all projected known cash sources (including cash on hand, borrowing under the Credit Agreement (taking into account projected Borrowing Base availability plus the Maximum Guaranty Amount), cash receipts from operations, overhead reimbursements, and cash received from permitted Subordinated Debt and third party investors) to (ii) all projected known cash uses (including debt service, amounts to be spent to acquire film inventory, overhead, and all other cash expenditures), all as determined as of each quarter end and as projected in good faith by the Borrower for the ensuing 24 months, to be less than 1.0 to 1. SECTION 6.19. No Change in Business. Engage in any business activities other than production, distribution and other exploitation of audio books, books, television product and film product (other than the production and distribution of motion pictures in theaters) and the production and distribution of the motion picture entitled "Wilde", in each case including ancillary rights (e.g., music publishing, soundtrack album, merchandising and publishing). SECTION 6.20. ERISA Compliance. Engage in a "prohibited transaction", as defined in Section 406 of ERISA or Section 4975 of the Code, with respect to any Plan or Multiemployer Plan or knowingly consent to any other "party in interest" or any "disqualified person", as such terms are defined in Section 3(14) or ERISA and Section 4975(e)(2) of the Code, respectively, engaging in any "prohibited transaction", with respect to any Plan or 66 73 Multiemployer Plan maintained or contributed to by any Credit Party; or permit any Plan maintained by any Credit Party to incur any "accumulated funding deficiency", as defined in Section 302 of ERISA or Section 412 of the Code, unless such incurrence shall have been waived in advance by the Internal Revenue Service; or terminate any Plan in a manner which could result in the imposition of a Lien on any property of any Credit Party pursuant to Section 4068 of ERISA; or breach or knowingly permit any employee or officer or any trustee or administrator of any Plan maintained by any Credit Party to breach any fiduciary responsibility imposed under Title I of ERISA with respect to any Plan; engage in any transaction which would result in the incurrence of a liability under Section 4069 of ERISA; or fail to make contributions to a Plan or Multiemployer Plan which results in the imposition of a Lien on any property of any Credit Party pursuant to Section 302(f) of ERISA or Section 412(n) of the Code, if the occurrence of any of the foregoing events (alone or in the aggregate) would result in a liability which is materially adverse to the financial condition of the Credit Parties taken as a whole or would materially and adversely affect the ability of the Borrower to perform its obligations under this Credit Agreement or the Note. SECTION 6.21. Additional Limitations on Production and Acquisition of Product. (a) Permit production and acquisition deficits (net of pre-sale guarantees and completed pre-sales payable within 1 year after delivery) to exceed: $5,000,000 in the aggregate at any time outstanding for all (i) television series in production or acquired, which shall not exceed $300,000 for any single episode of any television series; and (ii) for all movies-of-the- week or mini-series, which shall not exceed $600,000 for any single movie-of-the-week and $1,200,000 for any mini-series. (b) Begin production on (i) any television series with a pattern budget in excess of $1,200,000 per episode; (ii) any movie-of-the-week having a budget in excess of $3,500,000; provided, however, that with respect to movies-of-the-week, no more than $10,500,000 in the aggregate shall be outstanding at any one time; or (iii) any television miniseries which would result in the aggregate amount outstanding at any one time in respect of all mini-series currently in production to exceed $7,000,000; in each case where a Credit Party is the producer or has a financial interest which is subject to a completion risk (i.e. payment by a Credit Party is not conditioned upon delivery). SECTION 6.22. Subsidiaries. Acquire or create any new direct or indirect Subsidiary; provided however that a Credit Party may acquire or create additional Subsidiaries if (i) each such Subsidiary executes an Instrument of Assumption and Joinder in the form attached hereto as Exhibit I whereby such Subsidiary becomes a Credit Party hereunder and the certificates representing 100% of the shares of capital stock of such Subsidiary held by such Credit Party becomes part of the Pledged Securities hereunder and are delivered to the Lender together with stock powers for each such certificate executed in blank, and/or (ii) such Credit Party takes such other action in connection with the stock of such Subsidiary as is deemed appropriate by the Lender to protect the Lender's security interest therein. 67 74 SECTION 6.23. Bank Accounts. After the date hereof, open or maintain any bank account other than (a) at the office of the Lender as contemplated by Section 8.3 hereof, (b) those accounts listed on Schedule 6.23 or as to which the Lender shall have received notice, or (c) one or more Production Accounts, as to which the Lender shall have received notice. SECTION 6.24. Hazardous Materials. Except as set forth on Schedule 3.21, cause or permit any of its properties or assets to be used to generate, manufacture, refine, transport, treat, store, handle, dispose, transfer, produce or process Hazardous Materials, except in compliance in all material respects with all applicable Environmental Laws, nor release, discharge, dispose or of permit or suffer any release or disposal as a result of any intentional act or omission on its part of Hazardous Materials onto any such property or asset in material violation of any Environmental Law. SECTION 6.25. Use of Proceeds of Loans and Requests for Letters of Credit. Use the proceeds of Loans or request any Letter of Credit hereunder other than for the purposes set forth in, and as required by, Section 5.19 hereof. SECTION 6.26. Interest Rate Protection Agreements, etc. Enter into any Interest Rate Protection Agreement or Currency Agreement for other than bona fide hedging purposes. SECTION 6.27. Amortization Method. Change the method of amortization of film/television inventory used by any of the Credit Parties, unless required to do so under GAAP. 7. EVENTS OF DEFAULT In the case of the happening and during the continuance of any of the following events (herein called "Events of Default"): (a) any representation or warranty made by any Credit Party in this Credit Agreement or any other Fundamental Document or in connection with this Credit Agreement or with the execution and delivery of the Note or the Borrowings hereunder, or any statement or representation made in any report, financial statement, certificate or other document furnished by or on behalf of any Credit Party to the Lender under or in connection with this Credit Agreement or any Fundamental Document shall prove to have been false or misleading in any material respect when made, deemed to be made or delivered; (b) default shall be made in the payment of any principal of or interest on the Note or of any fees or other amounts payable by the Borrower hereunder, when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise and, in the case of payments of any amounts other than principal, such default shall continue unremedied for three (3) Business Days after receipt by the Borrower of an invoice therefor; 68 75 (c) default shall be made by any Credit Party in the due observance or performance of any covenant, condition or agreement contained in Section 5.4 or Article 6 of this Credit Agreement; (d) default shall be made with respect to any payment of any Indebtedness of any Credit Party in excess of $250,000 when due or the performance of any other obligation incurred in connection with any such Indebtedness, if the effect of such default is to accelerate the maturity of such Indebtedness or to permit the holder thereof to cause such Indebtedness to become due prior to its stated maturity and such default shall not be remedied, cured, waived or consented to within the period of grace with respect thereto; (e) any Credit Party shall generally not pay its debts as they become due or shall admit in writing its inability to pay its debts, or shall make a general assignment for the benefit of creditors; or any Credit Party shall commence any case, proceeding or other action seeking to have an order for relief entered on its behalf as debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property or shall file an answer or other pleading in any such case, proceeding or other action admitting the material allegations of any petition, complaint or similar pleading filed against it or consenting to the relief sought therein; or any Credit Party shall take any action to authorize any of the foregoing; (f) any involuntary case, proceeding or other action against any Credit Party shall be commenced seeking to have an order for relief entered against it as debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (i) results in the entry of any order for relief against it or (ii) shall remain undismissed for a period of thirty (30) days; (g) final judgment(s) for the payment of money in excess of $250,000 shall be rendered against any Credit Party which within thirty (30) days from the entry of such judgment shall not have been discharged or stayed pending appeal or which shall not have been discharged or bonded in full within thirty (30) days from the entry of a final order of affirmance on appeal; (h) failure to deliver a Borrowing Base Certificate to the Lender within 10 Business Days of the date such Certificate was due pursuant to Section 5.1(e) hereof, provided, however, that any failure to deliver a Borrowing Base Certificate shall not give rise to an Event of Default under this clause (h) in the event there are no outstanding Loans and Letters of Credit; (i) a Change in Control or a Change in Management shall occur; 69 76 (j) the Guaranty Agreement shall for any reason, not be or shall cease to be in full force and effect, or shall be declared null and void, or become unenforceable, or it shall be terminated, or disaffirmed by any Individual Guarantor thereunder; (k) default shall be made by any Credit Party in the due observance or performance of any other covenant, condition or agreement to be observed or performed pursuant to the terms of this Credit Agreement, or any other Fundamental Document, and such default shall continue unremedied for thirty (30) consecutive days after any Credit Party obtains knowledge of such occurrence; (l) a Reportable Event relating to a failure to meet minimum funding standards or an inability to pay benefits when due shall have occurred with respect to any Plan under the control of any Credit Party and shall not have been remedied within thirty (30) days after the occurrence of such Reportable Event; or a trustee shall be appointed by a United States District Court to administer such Plan, or the PBGC shall institute proceedings to terminate such Plan, and the Lender shall have notified the Borrower that the Lender has determined that on the basis of such Reportable Event, appointment of trustee or commencement of proceedings, there are reasonable grounds to believe that such occurrence would have a material adverse effect to the financial condition of the Credit Parties taken as a whole or would materially and adversely affect the ability of the Borrower to perform its obligations under this Credit Agreement or the Note; or (m) any Fundamental Document shall, for any reason, not be or shall cease to be in full force and effect except as provided herein or therein or shall be declared null and void or any of the Fundamental Documents shall not give or shall cease to give the Lender the Liens, rights, powers and privileges purported to be created thereby in favor of the Lender superior to and prior to the rights of all third Persons (except to the extent expressly permitted herein or therein) and subject to no other Liens (except to the extent expressly permitted herein or therein) other than by actions of the Lender, provided that no such defect in the Fundamental Documents shall give rise to an Event of Default under this paragraph (m) unless such defect or such failure shall affect Collateral that is or should be subject to a Lien in favor of the Lender having an aggregate value in excess of $250,000; then, in every such event and at any time thereafter during the continuance of such event, the Lender may take either or both of the following actions, at the same or different times: terminate forthwith the Commitment and/or declare the principal of and the interest on the Loans and the Note and all other amounts payable hereunder or thereunder to be forthwith due and payable, whereupon the same shall become and be forthwith due and payable, without presentment, demand, protest, or other notice of any kind, all of which are hereby expressly waived, anything in this Credit Agreement or in the Note to the contrary notwithstanding. If an Event of Default specified in paragraphs (e) or (f) above shall have occurred, the Commitment shall automatically terminate and the Loans and the Note shall automatically become due and payable, both as to interest and principal, without presentment, demand, protest, or other notice of any kind, all of which are hereby expressly waived, anything in this Credit Agreement or the Note to the contrary 70 77 notwithstanding. Such remedies shall be in addition to any other remedy available to the Lender pursuant to Applicable Law or otherwise. 8. GRANT OF SECURITY INTEREST; REMEDIES SECTION 8.1. Security Interests. The Borrower, as security for the due and punctual payment of the Obligations, and the Corporate Guarantors, as security for their obligations under Article 9 hereof, hereby mortgage, pledge, assign, transfer, set over, convey and deliver to the Lender and grant to the Lender a security interest in the Collateral. SECTION 8.2. Use of Collateral. So long as no Event of Default shall have occurred and be continuing, and subject to the various provisions of this Credit Agreement and the other Fundamental Documents, a Credit Party may use the Collateral in any lawful manner permitted hereunder. SECTION 8.3. Collection Accounts. (a) The Borrower will establish a lockbox arrangement and related collection bank accounts (each, a "Collection Account") and will direct all Persons who become licensees, buyers or account debtors under receivables with respect to any item included in the Collateral (other than de minimis amounts and proceeds of particular items of Product which are assigned by a Credit Party to third-party lenders as collateral for its obligations to make certain payments upon Completion and delivery of such items of Product pursuant to production financing arrangements permitted hereunder; provided that such third-party lender shall have entered into an intercreditor agreement with the Lender in form and in substance satisfactory to the Lender; and provided further that the Borrower may only assign proceeds of Distribution Agreements which relate solely to the particular item of Product whose production is being financed by such third-party lender) to make payments under or in connection with the license agreements, sales agreements or receivables directly to the appropriate lockbox or Collection Account. To the extent practicable, the Credit Parties, will amend existing agreements to direct all Persons who are licensees, buyers or account debtors under receivables with respect to any item included in the Collateral, to make payments under or in connection with the license agreements, sales agreements or receivables directly to the appropriate lockbox or Collection Account. (b) The Credit Parties will execute such documentation as may be reasonably required by the Lender in order to provide for the deposit into the Collection Accounts of all items received in the lockbox and to otherwise effectuate the provisions of this Section 8.3. (c) In the event a Credit Party receives payment from any Person or proceeds under an Acceptable L/C, which payment should have been remitted directly to a Collection Account, such Credit Party shall promptly remit such payment or proceeds to a Collection Account to be applied in accordance with the terms of this Credit Agreement. (d) All such lockboxes and Collection Accounts shall be maintained with the Lender or with such other financial institutions as may be approved by the Lender, subject to the 71 78 right of the Lender to at any time withdraw such approval and transfer any such lockboxes and/or Collection Account(s) to the Lender or another approved financial institution. (e) The Lender is hereby authorized and directed to invest and reinvest the funds from time to time deposited in the Collection Accounts, so long as no Event of Default has occurred and is continuing, on the instructions of the Borrower (provided that such notice may be given verbally to be confirmed promptly in writing) or, if the Borrower shall fail to give such instruction upon delivery of any such funds, in the sole discretion of the Lender, provided that in no event may the Borrower give instructions to the Lender to, or may the Lender in its discretion, invest or reinvest funds in the Collection Accounts in other than Cash Equivalents described in clause (i) of the definition of Cash Equivalents, or described in clauses (ii) and (iii) of the definition of Cash Equivalents to the extent issued by The Chase Manhattan Bank. (f) Any net income or gain on the investment of funds from time to time held in the Collection Accounts, shall be promptly reinvested by the Lender at the direction of the Borrower as a part of the Collection Accounts and any net loss on any such investment shall be charged against the Collection Accounts. (g) The Lender shall not be a trustee for the Credit Parties, or shall have any obligations or responsibilities, or shall be liable for anything done or not done, in connection with the Collection Accounts, except as expressly provided herein and except that the Lender shall have the obligations of a secured party under the UCC. The Lender shall not have any obligation or responsibilities and shall not be liable in any way for any investment decision made pursuant to this Section 8.3(g) or for any decrease in the value of the investments held in the Collection Accounts except for the gross negligence or wilful misconduct of Lender in carrying out the written instructions of Borrower. (h) For value received and to induce the Lender to issue Letters of Credit and to make Loans from time to time to the Borrower as provided for in this Credit Agreement, as security for the payment of all of the Obligations, the Credit Parties hereby assign to the Lender and grant to the Lender, a first and prior Lien upon all the Credit Parties' rights in and to the Collection Accounts, all cash, documents, instruments and securities from time to time held therein, and all rights pertaining to investments of funds in the Collection Accounts and all products and proceeds of any of the foregoing. All cash, documents, instruments and securities from time to time on deposit in the Collection Accounts, and all rights pertaining to investments of funds in the Collection Accounts shall immediately and without any need for any further action on the part of any of the Credit Parties or the Lender, become subject to the Lien set forth in this Section 8.3(h), be deemed Collateral for all purposes hereof and be subject to the provisions of this Credit Agreement. (i) At any time after the Loans have been accelerated in accordance with Article 7 hereof, the Lender may sell any documents, instruments and securities held in the Collection Accounts and may immediately apply the proceeds thereof and any other cash held in the Collection Accounts in accordance with Section 10.5 hereof. 72 79 SECTION 8.4. Credit Parties to Hold in Trust. Upon the occurrence and during the continuance of an Event of Default, the Credit Parties will, upon receipt by them of any revenue, income, profits or other sums in which a security interest is granted by this Article 8, payable pursuant to any agreement or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the sum in trust for the Lender, and forthwith, without any notice or demand whatsoever (all notices, demands, or other actions on the part of the Lender being expressly waived), endorse, transfer and deliver any such sums or instruments or both, to the Lender to be applied to the repayment of the Obligations in accordance with the provisions of Section 8.7 hereof. SECTION 8.5. Collections, etc. Upon the occurrence and during the continuance of an Event of Default, the Lender may, in its sole discretion, in its name or in the name of any Credit Party or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to, any of the Collateral, but shall be under no obligation so to do, or the Lender may extend the time of payment, arrange for payment in installments, or otherwise modify the terms of, or release, any of the Collateral, without thereby incurring responsibility to, or discharging or otherwise affecting any liability of, any Credit Party. The Lender will not be required to take any steps to preserve any rights against prior parties to the Collateral. If any Credit Party fails to make any payment or take any action required hereunder, the Lender may make such payments and take all such actions as the Lender reasonably deems necessary to protect the Lender's security interests in the Collateral and/or the value thereof, and the Lender is hereby authorized (without limiting the general nature of the authority herein above conferred) to pay, purchase, contest or compromise any Liens that in the judgment of the Lender appear to be equal to, prior to or superior to the security interests of the Lender in the Collateral and any Liens not expressly permitted by this Credit Agreement. SECTION 8.6. Possession, Sale of Collateral, etc. Upon the acceleration of the Loans in accordance with Article 7 hereof, the Lender may enter upon the premises of any Credit Party or wherever the Collateral may be, and take possession of the Collateral, and may demand and receive such possession from any Person who has possession thereof, and the Lender may take such measures as it may deem necessary or proper for the care or protection thereof, including the right to remove all or any portion of the Collateral, and with or without taking such possession may sell or cause to be sold, whenever the Lender shall decide, in one or more sales or parcels, at such prices as the Lender may deem best, and for cash or on credit or for future delivery, without assumption of any credit risk, all or any portion of the Collateral, at any broker's board or at public or private sale, without demand of performance or notice of intention to sell or of time or place of sale (except the Lender shall provide 15 days' written notice to the Credit Parties of the time and place of any such public sale or sales and such other notices as may be required by Applicable Law and cannot be waived), and the Lender or any other Person may be the purchaser of all or any portion of the Collateral so sold and thereafter hold the same absolutely, free (to the fullest extent permitted by Applicable Law) from any claim or right of whatever kind, including any equity of redemption, of any Credit Party, any such demand, notice, claim, right or equity being hereby expressly waived and released. At any sale or sales made 73 80 pursuant to this Article 8, the Lender may bid for or purchase, free (to the fullest extent permitted by Applicable Law) from any claim or right of whatever kind, including any equity of redemption, of any Credit Party, any such demand, notice, claim, right or equity being hereby expressly waived and released, any part of or all of the Collateral offered for sale, and may make any payment on account thereof by using any claim for moneys then due and payable to the Lender by any Credit Party hereunder as a credit against the purchase price. The Lender shall in any such sale make no representations or warranties with respect to the Collateral or any part thereof, and the Lender shall not be chargeable with any of the obligations or liabilities of any Credit Party. Each Credit Party hereby agrees (i) that it will indemnify and hold the Lender harmless from and against any and all claims with respect to the Collateral asserted before the taking of actual possession or control of the relevant Collateral by the Lender pursuant to this Article 8, or arising out of any act of, or omission to act on the part of, any party (other than the Lender) prior to such taking of actual possession or control by the Lender (whether asserted before or after such taking of possession or control), or arising out of any act on the part of any Credit Party, or its agents before or after the commencement of such actual possession or control by the Lender except for claims arising out of Lender's gross negligence or willful misconduct; and (ii) the Lender shall not have liability or obligation to any Credit Party arising out of any such claim except for acts of willful misconduct or gross negligence or not taken in good faith. Subject only to the lawful rights of third parties, any Laboratory which has possession of any of the Collateral is hereby constituted and appointed by the Credit Parties as pledgeholder for the Lender and, upon the acceleration of the Loans in accordance with Article 7 hereof, each such pledgeholder is hereby authorized (to the fullest extent permitted by Applicable Law) to sell all or any portion of the Collateral upon the order and direction of the Lender, and each Credit Party hereby waives any and all claims, for damages or otherwise, for any action taken by such pledgeholder in accordance with the terms of the UCC not otherwise waived hereunder. In any action hereunder, the Lender shall be entitled if permitted by Applicable Law to the appointment of a receiver without notice, to take possession of all or any portion of the Collateral and to exercise such powers as the court shall confer upon the receiver. Notwithstanding the foregoing, upon the occurrence of an Event of Default, and during the continuation of such Event of Default, the Lender shall be entitled to apply, without prior notice to the Credit Parties, any cash or cash items constituting Collateral in the possession of the Lender to payment of the Obligations. SECTION 8.7. Application of Proceeds on Default. During the continuance of an Event of Default, the balances in the Collection Account(s), or in any account of any Credit Party with the Lender, all other income on the Collateral, and all proceeds from any sale of the Collateral pursuant hereto shall be applied first toward payment of the reasonable out-of-pocket costs and expenses paid or incurred by the Lender in enforcing this Credit Agreement, in realizing on or protecting any Collateral and in enforcing or collecting any Obligations or any Guaranty thereof, including, without limitation, court costs and the reasonable attorney's fees and expenses incurred by the Lender, and then to the payment in full of the Obligations in such order as determined by the Lender, provided, however, that, the Lender may in its discretion apply funds comprising the Collateral to pay the cost (i) of completing any item of Product owned in whole or in part by any Credit Party in any stage of production and (ii) of making delivery to the 74 81 distributors of such item of Product. Any amounts remaining after such indefeasible payment in full shall be remitted to the appropriate Credit Party or as a court of competent jurisdiction may otherwise direct. SECTION 8.8. Power of Attorney. Each Credit Party does hereby irrevocably make, constitute and appoint the Lender or any of its officers or designees its true and lawful attorney-in-fact with full power in the name of the Lender or any Credit Party, (a) after the acceleration of the Loans in accordance with Article 7 hereof, to receive, open and dispose of all mail addressed to any Credit Party, and to endorse any notes, checks, drafts, money orders or other evidences of payment relating to the Collateral that may come into the possession of the Lender with full power and right to cause the mail of such Persons to be transferred to the Lender's own offices or otherwise, and to do any and all other acts necessary or proper to carry out the intent of this Credit Agreement and the grant of the security interests hereunder and under the Fundamental Documents, and each Credit Party hereby ratifies and confirms all that the Lender or its substitutes shall properly do by virtue hereof; (b) upon the occurrence of an Event of Default which is not waived in writing by the Lender, (i) to enforce all of each Credit Party's rights under and pursuant to all agreements with respect to the Collateral, all for the sole benefit of the Lender and to enter into such other agreements as may be necessary or appropriate in the judgment of the Lender to complete the production, distribution or exploitation of any item of Product which is included in the Collateral, (ii) to enter into and perform such agreements as may be necessary in order to carry out the terms, covenants and conditions of the Fundamental Documents that are required to be observed or performed by any Credit Party, (iii) to execute such other and further mortgages, pledges and assignments of the Collateral, and related instruments or agreements, as the Lender may reasonably require for the purpose of perfecting, protecting, maintaining or enforcing the security interests granted to the Lender hereunder, and (iv) to do any and all other things necessary or proper to carry out the intention of this Credit Agreement and the grant of the security interests hereunder and under the other Fundamental Documents. The Credit Parties hereby ratify and confirm in advance all that the Lender as such attorney-in-fact or its substitutes shall properly do by virtue of this power of attorney. In the event the Lender exercises the power of attorney granted herein, the Lender shall, concurrently with such exercise, provide written notice to the Borrower and the Lender in accordance with Section 12.1. SECTION 8.9. Financing Statements, Direct Payments. Each Credit Party hereby authorizes the Lender to file UCC financing statements and any amendments thereto or continuations thereof, any Copyright Security Agreement, any Copyright Security Agreement Supplement, and any other appropriate security documents or instruments and to give any notices necessary or desirable to perfect the Lien of the Lender on the Collateral, in all cases without the signatures of any Credit Party or to execute such items as attorney-in-fact for any Credit Party. Each Credit Party further authorizes the Lender upon the occurrence of an Event of Default, and during the continuation of such Event of Default, to notify any account debtors that all sums payable to any Credit Party relating to the Collateral shall be paid directly to the Lender. 75 82 SECTION 8.10. Further Assurances. Upon the reasonable request of the Lender, each Credit Party hereby agrees to duly and promptly execute and deliver, or cause to be duly executed and delivered, at the cost and expense of the Credit Parties, such further instruments as may be necessary or proper, in the judgment of the Lender, to carry out the provisions and purposes of this Article 8, necessary, in the judgment of the Lender, to perfect and preserve the Liens of the Lender hereunder and under the Fundamental Documents, and in the Collateral or any portion thereof. SECTION 8.11. Termination. The security interests granted under this Article 8 shall terminate when all the Obligations have been paid in full and performed and the Commitment shall have terminated and all Letters of Credit shall have expired or been terminated or canceled. Upon request by the Credit Parties (and at the sole expense of the Credit Parties) after such termination, the Lender will take all reasonable action and do all things reasonably necessary, including executing UCC terminations, Pledgeholder Agreement terminations, termination letters to account debtors and copyright reassignments, to release the security interest granted to it hereunder. SECTION 8.12. Remedies Not Exclusive. The remedies conferred upon or reserved to the Lender in this Article 8 are intended to be in addition to, and not in limitation of, any other remedy or remedies available to the Lender. Without limiting the generality of the foregoing, the Lender shall have all rights and remedies of a secured creditor under Article 9 of the UCC. SECTION 8.13. Quiet Enjoyment. The Lender acknowledges that its security interest hereunder is subject to the rights of Quiet Enjoyment of parties to Distribution Agreements, license agreements and other similar agreements, whether existing on the date hereof or hereafter executed. For the purpose hereof, "Quiet Enjoyment" shall mean in connection with the rights of licensees under license agreements and distributors under Distribution Agreements, the Lender's agreement that its rights under this Credit Agreement and the Fundamental Documents and in the Collateral are subject to the rights of such parties to distribute, exhibit and/or to exploit the item of Product licensed to them, and to receive prints or tapes or have access to preprint material or master tapes in connection therewith and that even if the Lender shall become the owner of the Collateral in case of an Event of Default, the Lender's ownership rights shall be subject to the rights of said parties under such agreements, provided, however, that such licensee or such distributor shall not be in default under the relevant license agreement or Distribution Agreement and, provided, further that the Lender shall not be responsible for any liability or obligation of any Credit Party under any license agreement. SECTION 8.14. Continuation and Reinstatement. Each Credit Party further agrees that the security interest granted hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment or any part thereof, of principal or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or reorganization of any Credit Party or otherwise. 76 83 9. GUARANTY SECTION 9.1. Guaranty. (a) Each Corporate Guarantor unconditionally and irrevocably guarantees to the Lender the due and punctual payment by, and performance of, the Obligations (including interest accruing on and after the filing of any petition in bankruptcy or of reorganization of the obligor whether or not post filing interest is allowed in such proceeding). Each Corporate Guarantor further agrees that the Obligations may be extended or renewed, in whole or in part, without notice or further assent from it (except as may be otherwise required herein), and it will remain bound upon this guaranty notwithstanding any extension or renewal of any Obligation. (b) Each Corporate Guarantor waives presentation to, demand for payment from and protest to, as the case may be, the Credit Parties or any other Corporate Guarantor of any of the Obligations, and also waives notice of protest for nonpayment. The obligations of each Corporate Guarantor hereunder shall not be affected by (i) the failure of the Lender to assert any claim or demand or to enforce any right or remedy against the Borrower, Corporate Guarantor, any Individual Guarantor or any other guarantor under the provisions of this Credit Agreement or any other agreement or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) the failure of the Lender to obtain the consent of the Corporate Guarantor with respect to any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of this Credit Agreement, the Note or of any other agreement; (iv) the release, exchange, waiver or foreclosure of any security held by the Lender for the Obligations or any of them; (v) the failure of the Lender to exercise any right or remedy against any other Corporate Guarantor, any Individual Guarantor or any other guarantor of the Obligations; or (vi) the release or substitution of any Corporate Guarantor, any Individual Guarantor or other guarantor of the Obligations. Without limiting the generality of the foregoing or any other provision hereof, to the extent permitted by applicable law, each Corporate Guarantor hereby expressly waives any and all benefits which might otherwise be available to it under California Civil Code Sections 2799, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2838, 2839, 2845, 2848, 2849, 2850, 2899 and 3433. (c) Each Corporate Guarantor further agrees that this Guaranty constitutes a guaranty of performance and of payment when due and not just of collection, and waives any right to require that any resort be had by the Lender to any security held for payment of the Obligations or to any balance of any deposit, account or credit on the books of the Lender in favor of the Borrower, any other Corporate Guarantor, any Individual Guarantor or to any other Person. (d) Each Corporate Guarantor hereby expressly assumes all responsibilities to remain informed of the financial condition of the Borrower, the Corporate Guarantors, the Individual Guarantors and any other guarantors and any circumstances affecting the ability of the Borrower to perform under this Credit Agreement. 77 84 (e) Each Corporate Guarantor's obligations under the guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Obligations, the Note or any other instrument evidencing any Obligations, or by the existence, validity, enforceability, perfection, or extent of any collateral therefor or by any other circumstance relating to the Obligations which might otherwise constitute a defense to this Guaranty. The Lender makes no representation or warranty with respect to any such circumstances and has no duty or responsibility whatsoever to each Corporate Guarantor in respect to the management and maintenance of the Obligations or any collateral security for the Obligations. SECTION 9.2. No Impairment of Guaranty, etc. The obligations of each Corporate Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason (except payment of the Obligations), including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Obligations. Without limiting the generality of the foregoing, the obligations of each Corporate Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lender to assert any claim or demand or to enforce any remedy under this Credit Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure or delay, willful or otherwise, in the performance of the Obligations, or by any other act or thing or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of such Corporate Guarantor or would otherwise operate as a discharge of such Corporate Guarantor as a matter of law, unless and until the Obligations are paid in full, the Commitments have terminated and each outstanding Letter of Credit has expired or otherwise been terminated. SECTION 9.3. Continuation and Reinstatement, etc. (a) Each Corporate Guarantor further agrees that its guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or reorganization of Borrower or a Corporate Guarantor, or otherwise. In furtherance of the provisions of this Article 9, and not in limitation of any other right which the Lender may have at law or in equity against the Borrower or a Corporate Guarantor by virtue hereof, upon failure of the Borrower to pay any Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, each Corporate Guarantor hereby promises to and will, upon receipt of written demand by the Lender, forthwith pay or cause to be paid to the Lender in cash an amount equal to the unpaid amount of all the Obligations with interest thereon at a rate of interest equal to the rate specified in Section 2.7(a) hereof, and thereupon the Lender shall assign such Obligation, together with all security interests, if any, then held by the Lender in respect of such Obligation, to the Corporate Guarantors making such payment; such assignment to be subordinate and junior to the rights of the Lender with regard to amounts payable by the Borrower in connection with the remaining unpaid Obligations and to be pro tanto to the extent to which the Obligation in question was discharged by the Corporate Guarantor or Corporate Guarantors making such payments. 78 85 (b) All rights of the Corporate Guarantors against the Borrower, arising as a result of the payment by any Corporate Guarantor of any sums to the Lender or directly to the Lender hereunder by way of right of subrogation or otherwise shall in all respects be subordinated and junior in right of payment to, and shall not be exercised by such Corporate Guarantor until and unless, the prior final and indefeasible payment in full of all the Obligations. If any amount shall be paid to such Corporate Guarantor for the account of the Borrower, such amount shall be held in trust for the benefit of the Lender, segregated from such Corporate Guarantor's own assets, and shall forthwith be paid to the Lender to be credited and applied to the Obligations, whether matured or unmatured. SECTION 9.4. Limitation on Guaranteed Amount etc. Notwithstanding any other provision of this Article 9, the amount guaranteed by each Corporate Guarantor hereunder shall be limited to the extent, if any, required so that its obligations under this Article 9 shall not be subject to avoidance under Section 548 of the Bankruptcy Code or to being set aside or annulled under any applicable state law relating to fraud on creditors. In determining the limitations, if any, on the amount of any Corporate Guarantor's obligations hereunder pursuant to the preceding sentence, it is the intention of the parties hereto that any rights of subrogation or contribution which such Corporate Guarantor may have under this Article 9 (or as a result of the operation of Article 8 with regard to assets of other Credit Parties) or any other agreement or under Applicable Law shall be taken into account. 10. PLEDGE SECTION 10.1. Pledge. As security for the Obligations, each Pledgor hereby pledges, hypothecates, assigns, transfers, sets over and delivers unto the Lender, a security interest in all Pledged Securities now owned or hereafter acquired by it. On the Closing Date, the Pledgors shall deliver to the Lender the definitive instruments representing all Pledged Securities, accompanied by executed undated stock powers, duly endorsed or executed in blank by the appropriate Pledgor, and such other instruments or documents as the Lender or its counsel shall reasonably request. SECTION 10.2. Covenant. Each Pledgor covenants that as stockholder of each of its respective Subsidiaries it will not take any action to allow any additional shares of common stock, preferred stock or other equity securities of any of its respective Subsidiaries or any securities convertible or exchangeable into common or preferred stock of such Subsidiaries to be issued, or grant any options or warrants, unless such securities are pledged to the Lender as security for the Obligations. SECTION 10.3. Registration in Nominee Name; Denominations. Upon the occurrence and during the continuation of an Event of Default, the Lender shall have the right (in its sole and absolute discretion) to hold the certificates representing any Pledged Securities (a) in its own name or in the name of its nominee or (b) in the name of the appropriate Pledgor, endorsed or assigned in blank or in favor of the Lender. The Lender shall have the right to 79 86 exchange the certificates representing Pledged Securities for certificates of smaller or larger denominations for any purpose consistent with this Credit Agreement. SECTION 10.4. Voting Rights; Dividends; etc. (a) The appropriate Pledgor shall be entitled to exercise any and all voting and/or consensual rights and powers accruing to owners of the Pledged Securities or any part thereof for any purpose not inconsistent with the terms hereof, at all times, except as expressly provided in (c) below. (b) Any dividends or distributions of any kind whatsoever (other, so long as an Event of Default is not continuing, than cash) received by a Pledgor, whether resulting from a subdivision, combination, or reclassification of the outstanding capital stock of the issuer or received in exchange for Pledged Securities or any part thereof or as a result of any merger, consolidation, acquisition, or other exchange of assets to which the issuer may be a party, or otherwise, shall be and become part of the Pledged Securities pledged hereunder and shall immediately be delivered to the Lender to be held subject to the terms hereof. (c) Upon the occurrence and during the continuance of an Event of Default and notice from the Lender of the transfer of such rights to the Lender, all rights of the Pledgors to exercise the voting and/or consensual rights and powers and to receive dividends or distributions which it is entitled to pursuant to this Section 10.4 shall cease, and all such rights shall thereupon become vested in the Lender, which shall have the sole and exclusive right and authority to exercise such voting and/or consensual rights and/or receive such dividends or distributions until such time as such Event of Default has been cured. All dividends and distributions which are received contrary to the provisions of this subsection (c) shall be received in trust for the benefit of the Lender and shall be delivered. (d) If the Lender shall receive any cash pursuant to Section 10.4(c) which but for the occurrence of an Event of Default the relevant Pledgor would be entitled to retain for its own account under Section 10.4(b), then after and so long as all Events of Default have been cured and only if the Obligations have not been accelerated, the Lender shall pay over to such Pledgor any such cash retained by it during the continuance of such Event of Default which has not been applied to the Obligations pursuant to the terms hereof. SECTION 10.5. Remedies Upon Default. If the Loans shall have been accelerated in accordance with Article 7 hereof, the Lender may sell the Pledged Securities, or any part thereof, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery as the Lender shall deem appropriate subject to the terms hereof or as otherwise provided in the UCC. The Lender shall be authorized at any such sale (if it deems it advisable to do so) to restrict to the full extent permitted by Applicable Law the prospective bidders or purchasers to Persons who will represent and agree that they are purchasing the Pledged Securities for their own account for investment and not with a view to the distribution or sale thereof, and upon consummation of any such sale the Lender shall have the right to assign, transfer, and deliver to the purchaser or purchasers thereof the Pledged Securities so sold. Each such purchaser at any such sale shall hold the property sold absolutely, free from 80 87 any claim or right on the part of the Pledgors. The Lender shall give ten (10) days' written notice of its intention to make any such public or private sale, or sale at any broker's board or on any such securities exchange, or of any other disposition of the Pledged Securities. Such notice, in the case of public sale, shall state the time and place for such sale and, in the case of sale at a broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Pledged Securities, or portion thereof, will first be offered for sale at such board or exchange. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Lender may fix and shall state in the notice of such sale. At any such sale, the Pledged Securities, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Lender may (in its sole and absolute discretion) determine. The Lender shall not be obligated to make any sale of the Pledged Securities if it shall determine not to do so, regardless of the fact that notice of sale of the Pledged Securities may have been given. The Lender may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case the sale of all or any part of the Pledged Securities is made on credit or for future delivery, the Pledged Securities so sold shall be retained by the Lender until the sale price is paid by the purchaser or purchasers thereof, but the Lender shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Pledged Securities so sold and, in case of any such failure, such Pledged Securities may be sold again upon like notice. At any sale or sales made pursuant to this Section 10.5, the Lender may bid for or purchase, free from any claim or right of whatever kind, including any equity of redemption, of the Pledgors, any such demand, notice, claim, right or equity being hereby expressly waived and released, any or all of the Pledged Securities offered for sale, and may make any payment on the account thereof by using any claim for moneys then due and payable to the Lender by any Credit Party as a credit against the purchase price; and the Lender, upon compliance with the terms of sale, may hold, retain and dispose of the Pledged Securities without further accountability therefor to the Pledgors or any third party (other than the Lender). The Lender shall in any such sale make no representations or warranties with respect to the Pledged Securities or any part thereof, and shall not be chargeable with any of the obligations or liabilities of the Pledgors with respect thereto. Each Pledgor hereby agrees (i) it will indemnify and hold the Lender harmless from and against any and all claims with respect to the Pledged Securities asserted before the taking of actual possession or control of the Pledged Securities by the Lender pursuant to this Credit Agreement or arising out of any act of, or omission to act on the part of, any party prior to such taking of actual possession or control by the Lender (whether asserted before or after such taking of possession or control), or arising out of any act on the part of any Pledgor or Affiliates before or after the commencement of such actual possession or control by the Lender unless due to Lender's gross negligence or wilful misconduct and (ii) the Lender shall have no liability or obligation arising out of any such claim unless due to Lender's gross negligence or wilful misconduct. As an alternative to exercising the power of sale herein conferred upon it, the Lender may proceed by a suit or suits at law or in equity to foreclose upon the Collateral and Pledged Securities under this Credit Agreement and to sell the Pledged Securities, or any portion thereof, pursuant to a judgment or decree of a court or courts having competent jurisdiction. 81 88 SECTION 10.6. Application of Proceeds of Sale and Cash. The proceeds of sale of the Pledged Securities sold pursuant to Section 10.5 hereof shall be applied by the Lender as follows: (i) to the payment of all reasonable out-of-pocket costs and expenses paid or incurred by the Lender in connection with such sale, including, without limitation, all court costs and the reasonable fees and expenses of counsel for the Lender in connection therewith, and the payment of all reasonable out-of-pocket costs and expenses paid or incurred by the Lender in enforcing this Credit Agreement, in realizing or protecting any Collateral and in enforcing or collecting any Obligations or any Guaranty thereof, including, without limitation, court costs and the reasonable attorney's fees and expenses incurred by the Lender in connection therewith; and (ii) to the payment in full of the Obligations in such order as determined by the Lender; provided, however, that the Lender may in its discretion apply funds comprising the Collateral to pay the cost (i) of completing any item of Product owned in whole or in part by any Credit Party in any stage of production and (ii) of making delivery to the distributors of such item of Product. Any amounts remaining after such indefeasible payment in full shall be remitted to the appropriate Pledgor, or as a court of competent jurisdiction may otherwise direct. SECTION 10.7. Securities Act, etc. In view of the position of each Pledgor in relation to the Pledged Securities pledged by it, or because of other present or future circumstances, a question may arise under the Securities Act of 1933, as amended, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being hereinafter called the "Federal Securities Laws"), with respect to any disposition of the Pledged Securities permitted hereunder, each Pledgor understands that compliance with the Federal Securities Laws may very strictly limit the course of conduct of the Lender if the Lender were to attempt to dispose of all or any part of the Pledged Securities, and may also limit the extent to which or the manner in which any subsequent transferee of any Pledged Securities may dispose of the same. Similarly, there may be other legal restrictions or limitations affecting the Lender in any attempt to dispose of all or any part of the Pledged Securities under applicable Blue Sky or other state securities laws, or similar laws analogous in purpose or effect. Under Applicable Law, in the absence of an Agreement to the contrary, the Lender may perhaps be held to have certain general duties and obligations to the Pledgors to make some effort towards obtaining a fair price even though the Obligations may be discharged or reduced by the proceeds of a sale at a lesser price. Each Pledgor waives to the fullest extent permitted by Applicable Law any such general duty or obligation to it, and the Pledgors and/or the Credit Parties will not attempt to hold the Lender responsible for selling all or any part of the Pledged Securities at an inadequate price; provided that the Lender, in good faith, shall have obtained three bids for the purchase of all or part of the Pledged Securities and the Lender shall have accepted the highest offer of such three bids. 82 89 SECTION 10.8. Continuation and Reinstatement. Each Pledgor further agrees that its pledge hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or reorganization of any Pledgor or otherwise. SECTION 10.9. Termination. The pledge referenced herein shall terminate when all of the Obligations shall have been paid in full and the Commitment shall have terminated, and all Letters of Credit shall have expired or been terminated or cancelled, at which time the Lender shall assign and deliver to the appropriate Pledgor, or to such Person or Persons as such Pledgor shall designate, against receipt, such of the Pledged Securities (if any) as shall not have been sold or otherwise applied by the Lender pursuant to the terms hereof and shall still be held by it hereunder, together with appropriate instruments of reassignment and release. Any such reassignment shall be free and clear of all Liens, arising by, under or through the Lender but shall otherwise be without recourse upon or warranty by the Lender and at the expense of the Pledgors. 11. [RESERVED] 12. MISCELLANEOUS SECTION 12.1. Notices. Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or in the case of facsimile communication, if by telegram, delivered to the telegraph company and, if by telex, graphic scanning or other telegraphic or facsimile communications equipment of the sending party hereto, delivered by such equipment) addressed, if to the Lender to it at 270 Park Avenue, 37th Floor, New York, New York 10017, Attn: John J. Huber III, Facsimile No.: (212) 270-4584, with a copy to Chase Securities Inc., 1800 Century Park East, Suite 400, Los Angeles, California 90067, Attn: Kenneth R. Wilson, Facsimile No.: (310) 788-5628 or if to any Credit Party at 8955 Beverly Boulevard, Beverly Hills, California 90048, Attn: Robert Murray, Esq. and Ronald Lighstone, Facsimile No.: (310) 724-7146 or such other address as such party may from time to time designate by giving written notice to the other parties hereunder. Any failure of the Lender giving notice pursuant to this Section 12.1, to provide a courtesy copy to a party as provided herein, shall not affect the validity of such notice. All notices and other communications given to any party hereto in accordance with the provisions of this Credit Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid, return receipt requested, if by mail, or when delivered to the telegraph company, charges prepaid, if by telegram, or upon receipt by such party, if by any telegraphic or facsimile communications equipment, in each case addressed to such party as provided in this Section 12.1 or in accordance with the latest unrevoked written direction from such party. SECTION 12.2. Survival of Agreement, Representations and Warranties, etc. All warranties, representations and covenants made by any of the Credit Parties herein or in any certificate or other instrument delivered by it or on its behalf in connection with this Credit 83 90 Agreement shall be considered to have been relied upon by the Lender and, except for any terminations, amendments, modifications or waivers thereof in accordance with the terms hereof, shall survive the making of the Loans and issuance of the Letters of Credit herein contemplated and the execution and delivery to the Lender of the Note regardless of any investigation made by the Lender and shall continue in full force and effect so long as any amount due or to become due hereunder is outstanding and unpaid and so long as any Letter of Credit remains outstanding and so long as the Commitment has not been terminated. All statements in any such certificate or other instrument shall constitute representations and warranties by the Credit Parties hereunder. SECTION 12.3. Successors and Assigns; Loan Sales; Participations. (a) Whenever in this Credit Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; provided, however, that the Borrower may not assign its rights hereunder without the prior written consent of the Lender, and all covenants, promises and agreements by or on behalf of the Borrower which are contained in this Credit Agreement shall bind and inure to the benefit of the successors and assigns of all such parties. (b) The Lender may, with the consent of the Borrower (such consent not to be unreasonably withheld), assign to one or more banks or other entities, all or a portion of its interests, rights and obligations under this Credit Agreement (including, without limitation, all or a portion of its Commitment and the same portion of the Loans at the time owing to it and the Note held by it). The Lender and such assignee shall execute appropriate documentation (i) evidencing such assignment, which documentation shall set forth the respective rights and obligations of the Lender and such assignee and (ii) to the extent The Chase Manhattan Bank shall retain a portion of the Commitment, appointing The Chase Manhattan Bank as agent for the Lender and such assignee(s). Upon the effectiveness of such assignment, the assignee thereunder shall become a party to this Credit Agreement. (c) Once there has been an assignment by the Lender pursuant to this Section 12.3, the Lender shall maintain at its address at which notices are to be given to it pursuant to Section 12.1 hereof, a register for the recordation of the names and addresses of the assignees of the Lender hereunder and the commitments of, and principal amount of the Loans owing to, each such assignee from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower and any such assignee may treat each Person whose name is recorded in the Register as an assignee of the Lender hereunder for all purposes of the Fundamental Documents. The Register shall be available for inspection by the Borrower or any such assignee at any reasonable time and from time to time upon reasonable prior notice. (d) The Lender shall give prompt written notice to the Borrower of each assignment made hereunder. Within five (5) Business Days after receipt of any such notice, the Borrower, at its own expense, shall execute and deliver to the Lender in exchange for the Note surrendered by the Lender to the Borrower, new Notes to the order of the assignee of the Lender and the Lender in amounts equal to the respective Commitments held by each of them after giving effect to the applicable assignment. Such new Notes shall be in an aggregate principal 84 91 amount equal to the aggregate principal amount of the surrendered Notes, shall be dated the date of the surrendered Notes and shall otherwise be in substantially the form of Exhibit A hereto. In addition the Borrower will promptly, at its own expense, execute such amendments to the Fundamental Documents to which it is a party and such additional documents, and take such other actions as the Lender or the assignee of the Lender may reasonably request in order to give such assignee of the Lender the full benefit of the Liens contemplated by the Fundamental Documents. (e) The Lender may, without the consent of the Borrower, sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Credit Agreement (including, without limitation, all or a portion of its Commitment, the Loans owing to it and the Note held by it); provided, however, that (i) the Lender's obligations under this Credit Agreement shall remain unchanged, (ii) such participant shall not be granted any voting rights under this Credit Agreement, except with respect to proposed changes to interest rates, amounts of Commitments, maturity of any Loans, release of all or substantially all the Collateral and fees (as applicable to such participant), (iii) the Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) the participating banks or other entities shall be entitled to the cost protection provisions contained in Sections 2.9(b), 2.10 and 2.14 hereof; provided, that the aggregate amount that the Borrower shall be obligated to pay to the Lender (for the benefit of itself and any participants) pursuant to such provisions shall be limited to the amount to which the Lender shall be entitled to receive pursuant to such provisions and (v) the Borrower shall continue to deal solely and directly with the Lender in connection with the Lender's rights and obligations under this Credit Agreement. (f) The Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 12.3, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to the Lender by or on behalf of the Borrower; provided that prior to any such disclosure, each such assignee or participant or proposed assignee or participant shall agree (by executing a confidentiality letter) to preserve the confidentiality of any confidential information relating to the Borrower received from the Lender to the same extent as the Lender as set forth in Section 12.16 hereof. (g) The Borrower consents that the Lender may at any time and from time to time pledge or otherwise grant a security interest in any Loan or in any Note evidencing any Loan (or any part thereof) to any Federal Reserve Bank. SECTION 12.4. Expenses; Documentary Taxes. Whether or not the transactions hereby contemplated shall be consummated, the Borrower agrees to pay all reasonable out-of-pocket expenses incurred by the Lender in connection with performance of due diligence by the Lender in connection with the transactions hereby contemplated and the preparation, execution, delivery, waiver or modification and administration of this Credit Agreement and any other documentation contemplated hereby, the Note and the making of the Loans and the Letters of Credit, including but not limited to any internally allocated audit costs, the reasonable fees and 85 92 disbursements of Morgan, Lewis & Bockius LLP, counsel for the Lender and any other counsel that the Lender shall retain, reasonable fees and expenses of technical or other consultants engaged by the Lender. Such payments shall be made on the date of execution of this Credit Agreement and thereafter on demand. In addition, the Borrower agrees to pay all reasonable out-of-pocket expenses incurred by the Lender in the enforcement or protection of the rights of the Lender in connection with this Credit Agreement, the Note or the Letters of Credit, and with respect to any action which may be instituted by any Person other than the Credit Parties against the Lender in respect of the foregoing, or as a result of any transaction, action or non-action arising from the foregoing, including but not limited to the reasonable fees and disbursements of any counsel for the Lender (but excluding any such expenses to the extent incurred by reason of the gross negligence or wilful misconduct of the Lender). Such payments shall be made on demand after the date of execution of this Credit Agreement. The Borrower agrees that it shall indemnify the Lender from and hold it harmless against any documentary taxes, assessments or charges made by any Governmental Authority by reason of the execution and delivery of this Credit Agreement, the Note or the issuance of Letters of Credit. The obligations of the Borrower under this Section 12.4 shall survive the termination of this Credit Agreement and/or the payment of the Loans and/or the expiration of the Letters of Credit. SECTION 12.5. Indemnification of the Lender. The Borrower agrees (a) to indemnify and hold harmless the Lender and its directors, officers, employees, trustees and agents (to the full extent permitted by law) from and against any and all claims, demands, losses, judgments and liabilities (including liabilities for penalties) of whatsoever nature, and (b) to pay to the Lender an amount equal to the amount of all costs and expenses, including reasonable legal fees and disbursements, in each case arising out of or resulting from any litigation, investigation or other proceedings relating to the Collateral, this Credit Agreement, the Copyright Security Agreement, the Pledgeholder Agreements and the Letters of Credit, the making of the Loans, any attempt to audit, inspect, protect or sell the Collateral, or the administration and enforcement or exercise of any right or remedy granted to the Lender hereunder or thereunder but excluding therefrom all claims, demands, losses, judgments, liabilities, costs and expenses arising out of or resulting from (i) the gross negligence or willful misconduct of the Lender and (ii) litigation between the Borrower and the Lender in connection with the Fundamental Documents or in any way relating to the transactions contemplated hereby if, after final non-appealable judgment, the Lender is not the prevailing party in such litigation. The foregoing indemnity agreement includes any reasonable costs incurred by the Lender in connection with any action or proceeding which may be instituted in respect of the foregoing by the Lender or by any other Person either against the Lender or in connection with which any officer, director, agent or employee of the Lender is called as a witness or deponent, including, but not limited to, the reasonable fees and disbursements of Morgan, Lewis & Bockius LLP, counsel to the Lender and any out-of-pocket costs incurred by the Lender in appearing as a witness or in otherwise complying with legal process served upon them. In no event shall the Lender be liable to the Borrower for any matter or thing in connection with this Credit Agreement other than to make Loans and account for moneys actually received by them in accordance with the terms hereof. 86 93 Whenever the provisions of this Credit Agreement or any other Fundamental Document provide that, if any Credit Party shall fail to do any act or thing which it has covenanted to do hereunder or any representation or warranty of any of the Credit Parties shall be breached, the Lender may (but shall not be obligated to) do the same or cause it to be done or remedy any such breach and if the Lender does the same or causes it to be done, there shall be added to the Obligations hereunder the cost or expense incurred by the Lender in so doing, and any and all amounts expended by the Lender in taking any such action shall be repayable to it upon its demand therefor and shall bear interest at 2% in excess of the Alternate Base Rate from time to time in effect from the date advanced to the date of repayment. All indemnities contained in this Section 12.5 shall survive the expiration or earlier termination of this Credit Agreement and shall inure to the benefit of any Person who was a Lender notwithstanding such Person's assignment of all its Loans and Commitment. SECTION 12.6. CHOICE OF LAW. THIS CREDIT AGREEMENT AND THE NOTES SHALL IN ALL RESPECTS BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK WHICH ARE APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE AND, IN THE CASE OF PROVISIONS RELATING TO INTEREST RATES, ANY APPLICABLE LAW OF THE UNITED STATES OF AMERICA. EACH LETTER OF CREDIT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OR RULES DESIGNATED IN SUCH LETTER OF CREDIT, OR IF NO SUCH LAWS OR RULES ARE DESIGNATED, THE UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500 (THE "UNIFORM CUSTOMS") AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM CUSTOMS, THE LAWS OF THE STATE OF NEW YORK. SECTION 12.7. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH CREDIT PARTY HEREBY WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS CREDIT AGREEMENT OR THE SUBJECT MATTER HEREOF OR ANY FUNDAMENTAL DOCUMENT, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. EACH CREDIT PARTY ACKNOWLEDGES THAT IT HAS BEEN INFORMED BY THE LENDER THAT THE PROVISIONS OF THIS SECTION CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDER HAS RELIED, IS RELYING AND WILL RELY IN ENTERING INTO THIS CREDIT AGREEMENT AND ANY OTHER FUNDAMENTAL DOCUMENT. THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 12.7 WITH ANY 87 94 COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE CREDIT PARTIES TO THE WAIVER OF THEIR RIGHTS TO TRIAL BY JURY. SECTION 12.8. No Waiver. No failure on the part of the Lender to exercise, and no delay in exercising, any right, power or remedy hereunder, under the Note or any other Fundamental Document or with regards to Letters of Credit shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law. SECTION 12.9. Extension of Payment Date. Should any payment of principal of or interest on the Note or any other amount due hereunder become due and payable on a day other than a Business Day, the due date of such payment thereof shall be extended to the next succeeding Business Day and, in the case of principal, interest shall be payable thereon at the rate herein specified during such extension. SECTION 12.10. Amendments, etc. No modification, amendment or waiver of any provision of this Credit Agreement, and no consent to any departure by the Credit Parties herefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any of the Credit Parties shall entitle such Credit Party to any other or further notice or demand in the same, similar or other circumstances. Each holder of a Note shall be bound by any amendment, modification, waiver or consent authorized as provided herein, whether or not a Note shall have been marked to indicate such amendment, modification, waiver or consent and any consent by any holder of a Note shall bind any Person subsequently acquiring a Note, whether or not a Note is so marked. SECTION 12.11. Severability. Any provision of this Credit Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 12.12. SERVICE OF PROCESS. EACH CREDIT PARTY (EACH A "SUBMITTING PARTY") HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK AND TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS CREDIT AGREEMENT (INCLUDING, BUT NOT LIMITED TO THE LETTERS OF CREDIT) OR THE SUBJECT MATTER HEREOF BROUGHT BY THE LENDER OR ANY OF ITS SUCCESSORS OR ASSIGNS IN EITHER OF THE ABOVE-REFERENCED FORUMS AT THE SOLE OPTION OF THE LENDER. EACH SUBMITTING PARTY TO THE EXTENT PERMITTED BY APPLICABLE LAW (A) 88 95 HEREBY WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH COURTS, ANY CLAIM THAT IT IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER OR THAT THIS CREDIT AGREEMENT OR THE SUBJECT MATTER HEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, (B) HEREBY WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION, SUIT OR PROCEEDING INSTITUTED BY THE LENDER IN STATE COURT TO FEDERAL COURT AND (C) HEREBY WAIVES THE RIGHT TO ASSERT IN ANY SUCH ACTION, SUIT OR PROCEEDING ANY OFFSETS OR COUNTERCLAIMS EXCEPT COUNTERCLAIMS THAT ARE COMPULSORY OR OTHERWISE ARISE FROM THE SAME SUBJECT MATTER. THE SUBMITTING PARTY HEREBY CONSENTS TO SERVICE OF PROCESS BY MAIL AT ITS ADDRESS TO WHICH NOTICES ARE TO BE GIVEN PURSUANT TO SECTION 12.1 HEREOF. THE SUBMITTING PARTY AGREES THAT ITS SUBMISSION TO JURISDICTION AND CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE LENDER. FINAL JUDGMENT AGAINST THE SUBMITTING PARTY IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN ANY OTHER JURISDICTION (A) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND THE AMOUNT OF INDEBTEDNESS OR LIABILITY OF THE SUBMITTING PARTY THEREIN DESCRIBED OR (B) IN ANY OTHER MANNER PROVIDED BY OR PURSUANT TO THE LAWS OF SUCH OTHER JURISDICTION, PROVIDED, HOWEVER, THAT THE LENDER MAY AT ITS OPTION BRING SUIT, OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE SUBMITTING PARTY OR ANY OF ITS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE SUBMITTING PARTY OR SUCH ASSETS MAY BE FOUND. SECTION 12.13. Headings. Section headings used herein and the Table of Contents are for convenience only and are not to affect the construction of or be taken into consideration in interpreting this Credit Agreement. SECTION 12.14. Execution in Counterparts. This Credit Agreement may be executed in any number of counterparts, each of which shall constitute an original, but all of which taken together shall constitute one and the same instrument. SECTION 12.15. Subordination of Intercompany Advances. (a) Each Credit Party hereby agrees that any Indebtedness or other intercompany receivables or advances of any other Credit Party, directly or indirectly, in favor of such Credit Party of whatever nature at any time outstanding shall be completely subordinate in right of payment to the prior payment in full 89 96 of the Obligations, and that no payment on any such Indebtedness shall be made (i) except intercompany receivables and advances permitted pursuant to the terms hereof may be repaid in the ordinary course of business so long as no Default or Event of Default, shall have occurred and be continuing and (ii) except as specifically consented to by the Lender in writing, until the prior payment in full all Obligations and termination of the Commitment. (b) In the event that any payment on any such Indebtedness shall be received by such Credit Party other than as permitted by Section 12.15(a) before payment in full of all Obligations and termination of the Commitment, such Credit Party shall receive such payments and hold the same in trust for, segregate the same from its own assets and shall immediately pay over to, the Lender all such sums to the extent necessary so that the Lender shall have been paid all Obligations owed or which may become owing. SECTION 12.16. Confidentiality. The Lender understands that certain information furnished to it pursuant to this Agreement will be received by it prior to the time that such information shall have been made public, and the Lender hereby agrees that it will keep, and will direct its officers and employees to keep, all the information provided to it pursuant to this Credit Agreement confidential prior to its becoming public except that the Lender shall be permitted to disclose such information (i) to officers, directors, employees, representatives, agents, auditors, accountants, consultants, advisors, lawyers and affiliates of the Lender necessary for the administration of this Credit Agreement, in the ordinary course of business who have been made aware of the confidential nature of the information; (ii) to prospective assignees or participants and their respective officers, directors, employees, agents and representatives in accordance with Section 12.3(h) herein; (iii) as required by Applicable Law, or pursuant to subpoenas or other legal process, or as requested by governmental agencies and examiners; (iv) in proceedings to enforce the Lender's rights and remedies hereunder or under any other Fundamental Document or in any proceeding against the Lender in connection with this Credit Agreement or under any other Fundamental Document or the transactions contemplated hereunder; (v) to the extent such information (A) becomes publicly available other than as a result of a breach of this Credit Agreement or (B) becomes available to the Lender or a participant on a non-confidential basis, not in breach of any agreement or other obligation to Borrower, from a source other than Borrower; or (vi) to the extent Borrower shall have consented to such disclosure in writing. SECTION 12.17. Entire Agreement. This Credit Agreement represents the entire agreement of the parties with regard to the subject matter hereof, and the terms of any letters and other documentation entered into between any of the parties hereto (other than the Commitment Letter) prior to the execution of this Credit Agreement which relate to Loans to be made hereunder shall be replaced by the terms of this Credit Agreement. 90 97 IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be duly executed as of the day and the year first written. BORROWER: DOVE ENTERTAINMENT, INC. By: /s/ NEIL TOPHAM ------------------------------------- Name: Neil Topham Title: Vice President & Chief Financial Officer CORPORATE GUARANTORS: DOVE INTERNATIONAL, INC. By: /s/ NEIL TOPHAM ------------------------------------- Name: Neil Topham Title: Vice President & Treasurer DOVE FOUR POINT, INC. By: /s/ NEIL TOPHAM ------------------------------------- Name: Neil Topham Title: Vice President LENDER: THE CHASE MANHATTAN BANK By: /s/ MITCHELL J. GERVIS ------------------------------------- Name: Mitchell J. Gervis Title: Vice President 91 98 SCHEDULE 1 MEI OWNERSHIP INTEREST
Individual Guarantor Interest - -------------------- -------- Terrence Elkes 33.57% Kenneth Gorman 33.57% Bruce Maggin 14.11% John Healy 7.05% Ronald Lightstone 11.70%
92 99 SCHEDULE 3.7(a) CORPORATE GUARANTORS/PLEDGED SECURITIES
NUMBER OF SHARES OF JURISDICTION OF AUTHORIZED OUTSTANDING NAME INCORPORATION CAPITALIZATION CAPITAL STOCK OWNERSHIP OF CAPITAL STOCK - ---- --------------- -------------- ------------- -------------------------- Dove Four Point, Inc. Florida 10,000 shares 100 shares 100% by Dove Entertainment, Inc. common stock common stock 10,000 shares preferred stock Dove International, Inc. Calfornia 1,000 shares 100 shares 100% by Dove Entertainment, Inc. common stock common stock
93 100 SCHEDULE 3.7(b) BENEFICIAL INTERESTS
NAME OWNERSHIP BY CREDIT PARTY - ---- ------------------------- Empire Burbank Studios, Inc. 33% by Dove Four Point, Inc.
94 101 SCHEDULE 3.9 FICTITIOUS NAMES Dove* Dove Entertainment* Dove Four Point* Dove International* Four Point Dove Books* Dove Audio* Dove Television* Dove Frontlist Audio Select Dove Books on Tape Dove Kids Olive Branch Dove Pictures, Inc. *Names with an asterisk are names currently used by the Credit Parties. 95 102 SCHEDULE 3.11 PRINCIPAL EXECUTIVE OFFICE/ LOCATION OF COLLATERAL/FILING OFFICES Chief Executive Office and office 8955 Beverly Boulevard where "located" for purposes of UCC: Los Angeles, CA 90048 Dove Four Point, Inc. 8955 Beverly Boulevard Los Angeles, CA 90048 Dove International, Inc. 8955 Beverly Boulevard Los Angeles, CA 90048 Places where records of Collateral 8955 Beverly Boulevard are regularly kept: Los Angeles, CA 90048 Places where goods included in the 8955 Beverly Boulevard Collateral are regularly kept: Los Angeles, CA 90048 301 North Canon Drive, Suite 203 Beverly Hills, California 90210 International Cine Service, Inc. 920 Allen Avenue Glendale, California 91201 Bonded Archives 3205 Burton Avenue Burbank, California 91504 Penguin USA Returns 100 Fabrite Road Newbern, TN 38059-1334 Laser Pacific Media Corp. 809 N. Cahuenga Blvd. Hollywood, CA 90038 96 103 American Direct Mail 3688 Beverly Boulvard Los Angeles, CA 90069 GES Exposition Services 13861 Rosencrans Avenue Santa Fe Springs, CA 90670 Gilbert Productions Services, Inc. 4571 Electonics Place Los Angeles, CA 90039 Keep It Self Storage 6827 Woodley Avenue Van Nuys, CA 91406 Select Storage 135 West Avenue 34 Los Angeles, CA 90031 97 104 SCHEDULE 3.12 LITIGATION 1. In August 1993, the trial court confirmed an arbitration award in favor of the Borrower, Michael Viner and Jerry Leider and against Steven Stern and Sharmhill Productions in the approximate amount of $4.5 million (plus interest accruing thereon from September 1992 and attorney's fees) relating to the film "Morning Glory." In March 1995, defendants appealed the judgment to the California Court of Appeals. In June 1995, the Court of Appeals affirmed the judgment, and that judgment is now final. In a related matter, the Borrower sought to restore certain fraudulent conveyances that Mr. Stern had made. In August 1995, Mr. Stern filed for bankruptcy protection. The United States Trustee is pursuing the fraudulent conveyance action on behalf of the bankruptcy estate, of which the Borrower comprises approximately 80%, and the Borrower, Mr. Viner and Mr. Leider are separately pursuing their own adversary proceeding for conspiracy against Mr. Stern and others in the bankruptcy case. The Borrower is also objecting to Mr. Stern's discharge in bankruptcy. 2. In February 1993, Mr. Stern filed a complaint against the Borrower, Mr. Viner and Mr. Leider entitled Steven A. Stern and Steven A. Stern as assignee of the claims of Sharmhill Productions (B.C.), Inc., a bankrupt company v. Dove Audio, Inc. et al. (British Columbia Supreme Court, Vancouver Registry No. C930935) (the "Canadian Stern Action") claiming that he had been fraudulently induced to enter into the agreement underlying the arbitration award and seeking as damages the amount of the judgment. 3. In February 1996, the Borrower was served with a complaint in an action entitled Robert H. Tourtelot v. Dove Audio, Inc. etc. et al. (Los Angeles Superior Court Case No. SC040739) (the "Tourtelot Action"). Mr. Tourtelot seeks in excess of a million dollars in damages claiming that he had an oral agreement with the Company to write a book that the Company would publish, and that information he provided to the Company was used in another book published by the Company, "Legacy of Deception." Mr. Tourtelot alleged causes of action for breach or oral contract, fraud, suppression of fact, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, infringement of common law copyright, conversion, conspiracy and accounting. The Company successfully removed the action to the United States District Court for the Central District of California, and successfully moved to have the claims for infringement of common law copyright, breach of fiduciary duty, conversion, conspiracy and accounting dismissed. The Tourtelot Action was then remanded to the Los Angeles Superior Court, which has permitted Mr. Tourtelot to pursue claims for breach of oral contract, fraud, suppression of fact, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, conversion, conspiracy and quantum merit. 98 105 4. In March 1996, the Company was served with a complaint in an action entitled Alexandra D. Datig v. Dove Audio, et al. (Los Angeles Superior Court Case No. BC145501) (the "Datig Action"). The Datig Action was brought by a contributor to, and relates to, the book "You'll Never Make Love In This Town Again." The Datig complaint sought in excess of a million dollars in monetary damages. In October 1996, the Company obtained a judgment of dismissal of the entire Datig Action, which judgment also awarded the Company its attorney's fees and costs in defending the matter. Thereafter, the Company sued Ms. Datig for malicious prosecution. Ms. Datig, however, has appealed the judgment. 5. In June 1996, the Company was served with a complaint in an action entitled Shukri Ghalayini v. Dove etc. et al. (Los Angeles Superior Court Cast No. BC152129) (the "Ghalayini Action"). The complaint alleges among other things: (i) breach of employment contract against Four Point Entertainment, Inc. ("Four Point") due to termination of Mr. Ghalayini's employment without good cause, adequate notice or opportunity to cure any alleged breaches and (ii) fraud in the defendants allegedly never intended to honor the terms of the employment agreement. The complaint seeks damages under the employment agreement of not less than $900,000, loss of future earnings estimated at $20,000,000 and damage to his reputation, mental and emotional distress, punitive damages and attorney's fees. On the same day, the Company filed an action against Mr. Ghalayini in the Los Angeles Superior Court alleging, among other things, that (i) Ghalayini breached his fiduciary duty to the Company by diverting corporate assets to pay his personal expenses, (ii) that in order to induce the Company into closing the Four Point acquisition, Mr. Ghalayini made false representations, including misrepresenting the tangible shareholder's equity of Four Point as of the closing, diverted production and other funds and held checks previously drawn to pay accounts payable in order to meet a closing condition that outstanding bank debt be below a specified level, and that Mr. Ghalayini made false representations to induce Dove Four Point to enter into his employment agreement. In May 1997, the Company was served with a complaint in a related action entitled Shukri Ghalayini v. Dove Audio, Inc., et al. (Los Angeles Superior Court Case No. BC170340) (the "Ghalayini Defamation Action"). The Complaint alleges that Mr. Ghalayini was defamed at a Company shareholders meeting and seeks damages accorded to proof. In September 1997, the Company entered into an agreement with Mr. Ghalayini providing for settlement of all claims by the Company against Mr. Ghalayini and settlement of all claims by Mr. Ghalayini against the Company. The settlement agreement provides for the Company to issue 66,667 shares of common stock to Mr. Ghalayini. 99 106 6. In July 1996, the Company was served with a complaint in an action entitled Terrie Maxine Frankle and Jennie Louise Frankle v. Dove Audio (U.S. District Court, Central District of California Cast No. 96-4073 RSWL) (the "Frankle Action"). The Frankles claim to be the authors of "You'll Never Make Love In This Town Again," and have alleged claims for copyright infringement and fraud. The Frankles' application for a preliminary injunction was denied because they could not demonstrate a likelihood of success on the merits of their claims. 7. In January 1997, the Company was served with a complaint in an action entitled Greer v. Dove (Los Angeles Superior Court Case No. BC160871) (the "Greer Action"). Ms. Greer is another contributor to the book "You'll Never Make Love In This Town Again" and has sought damages in excess of one million dollars alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, fraud, imposition of constructive trust and an accounting recession, declamatory relief, conspiracy, unfair competition, and false advertising. 8. In May 1997, the Company was served with a complaint in an action entitled Kenneth Raskoff v. Dove (Los Angeles Superior Court Case No. BC171355) (the "Raskoff Action"). Mr. Raskoff is a former employee of Dove Four Point. The complaint seeks unspecified damages and other relief for breach of Mr. Raskoff's alleged employment contract, breach of the implied covenant of good faith and fair dealing, breach of implied-in-fact contract, promissory estoppel, and fraudulent inducement. The complaint also seeks an injunction requiring that Mr. Raskoff receive producer credit with respect to the television program entitled "Unwed Father" and other unnamed projects. 9. In June 1997, the Company was served with a complaint in an action entitled Michael Bass v. Penguin USA Inc., et al. (New York Superior Court Case No. 97-11143) (the "Bass Action"). The complaint alleges among other things that Ms. Greer's contribution to the book "You'll Never Make Love In This Town Again" defames Mr. Bass and violates his rights of publicity under New York statutes. The complaint seeks damages of $70,000 for defamation and $20,000,000 for violation of the New York right of publicity statutes and an injunction taking the book out of circulation and prohibiting the use of Mr. Bass' name. As a result of the Bass Action, the Company has brought a cross-complaint against Ms. Greer in the Greer Action. 10. In July 1997, the Michael Viner and Deborah Raffin Viner (the "Former Principals") commenced an arbitration against the Company. In their arbitration demand, the Former Principals claim that they are owed in excess of $1 million by the Company relating to the motion picture entitled "Morning Glory." The Former Principals claim that they are also entitled to the repayment of certain deferred amounts for producing and acting services rendered by them in connection with "Morning Glory" and to 50% of the profits. They claim that a director of the Company, Gerald Leider, is entitled to 100 107 the other 50% of the profits (although Mr. Leider's claim is not the subject of any present proceeding). The Former Principals have also asserted that from any recovery of a judgment confirming an arbitration award against Steven Stern and/or Sharmhill Productions relating to "Morning Glory" (the "Stern Judgment") they are entitled to receive $1 million, as well as the deferred amounts and 50% of the profits. Present management believes it has good and sufficient defenses to the claims, including, but not limited to the Former Principals' waiver of their claims that any amounts are owed to them as debt, as profit participation's or as deferred compensation and that the Company has not yet recouped its investment in the Picture. The Company has also asked the arbitrator to determine that the Former Principals are not entitled to any monies or rights with respect to "Morning Glory," including from the proceeds of the Stern Judgment. 11. In July 1997, the Former Principals advised the Company that they intend to refer certain matters arising from the Securities Purchase Agreement and Termination Agreement to arbitration. The Former Principals have identified in writing their intention to arbitrate a variety of miscellaneous claims, including the Company's alleged failure to reimburse charitable contributions, business expenses, medical expenses, to return certain personal property, to account for sales with respect to certain titles, and other matters. They have also suggested to the arbitrator their intention to seek unpaid consulting fees under the Termination Agreement. On October 16, 1997, however, the Former Principals filed an action in the Los Angeles Superior Court (Case No BC179639) for "Breach of Written Contract; Specific Performance; Temporary Restraining Order, Preliminary and Permanent Injunctive Relief" which appears to seek damages for the same claims identified (either in writing or orally) as the Former Principals' claims in arbitration, as well as for Producer and Executive Producer fees on "Unwed Father." In this action the Former Principals claim that, in addition to other damages, they are entitled to accelerate all payments to become due under the Termination Agreement, in the aggregate amount of $1,511,823.79 and to the rights to certain titles. This action appears to have been filed for purposes of obtaining an attachment. 12. In July 1997, the Company was served with a complaint in an action entitled Alan Fields v. Dove Entertainment, Inc., et al. (Los Angeles Superior Court No. BC 174659) (the "Fields Action"). The Fields Action was brought by an alleged purchaser of Common Stock against the Company and the Former Principals as a putative class action on behalf of all persons who acquired Common Stock between July 25, 1995 and August 20, 1996. The complaint alleges a cause of action for violation of Section 25400(d) of the California Corporations Code based on the alleged dissemination of false and misleading statements about, among other things, the success of the Company's printed book operations, financial results, business condition and future prospects. The plaintiff seeks unspecified damages and other relief. The Company has not yet filed a response to the complaint. While the Company believes it has good and meritorious defenses against the claim, the 101 108 Company has taken a charge of $150,000 in the quarter ended September 30, 1997 in respect of potential costs associated with the claim. In July 1997, the Company was served with a complaint in an action entitled Alan Fields v. Dove Entertainment, Inc., et al. (Los Angeles Superior Court No. BC174659) (the "Fields Action"). The Fields Action was brought by an alleged purchaser of Common Stock against the Company and the Former Principals as a putative class action on behalf of all persons who acquired Common Stock between July 25, 1995 and August 20, 1996. The complaint alleges a cause of action for violation of Section 25400(d) of the California Corporations Code based on the alleged dissemination of false and misleading statements about, among other things, the success of the Company's printed book operations, financial results, business condition and future prospect. The plaintiff seeks unspecified damages and other relief. In August 1997, an action entitled Global Asset Allocation Consultants, L.L.C. v. Dove Entertainment, Inc., et al. (Civil Action NO. 97-6253-WDK) (the "Global Asset Action"), was commenced against the Company and the Former Principals in the United States District Court for the Central District of California. The Global Asset Action was brought by an alleged purchaser of Common Stock as a putative class action on behalf of all persons who acquired Common Stock between July 25, 1995 and August 20, 1996. The complaint alleges a cause of action for violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder based on the conduct at issue in the Fields Action. The plaintiff seeks unspecified damages and other relief. The Company has learned that another putative federal securities class action was filed in the United States District Court for the Central District of California by an alleged purchase of Common Stock represented by the law firm of Berman, DeValerio & Pease LLP (the "Berman Action"; and collectively with the Fields Action and the Global Asset Action, the "Securities Actions"). The complaint is reported be brought on behalf of all persons who acquired Common Stock between April 15, 1996 and October 10, 1996 and to allege a cause of action against the Company and certain of its officers for violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder. To date, the Company has not been served with the complaints in the Global Asset Action or the Berman Action. The Company has not yet filed a response to the complaints in the Securities Actions. While the Company believes it has good and meritorious defenses against the claims, the Company took a charge of $150,000 in the quarter ended June 30, 1997 in respect of potential costs associated with the claims. 13. In July 1997, the Company was served with a complaint in an action entitled Steven A. Soloway v. Dove Entertainment, Inc., etc. et al. (Los Angeles Superior Court Case No. BC 175516) (the "Soloway Action"). Mr. Soloway is a former director and employee of the Company and has sought damages of approximately $350,000 for breach of contract. Mr. Soloway claims that as a result of the Securities Purchase Agreement he was entitled to declare his employment agreement terminated without cause and to receive his base salary through September 1999. In September 1997, Mr. Soloway obtained a writ of attachment for approximately $350,000 in respect of 102 109 his claims, for which the Borrower has substituted an undertaking for the amount of the attachment. The Borrower has filed a cross-complaint against Mr. Soloway for breach of fiduciary duty and legal malpractice. THREATENED LITIGATION 1. Jerry Leider, a director and former officer of the Borrower, has informed the Borrower that he intends to commence litigation in connection with a dispute between the Borrower and Mr. Leider over a purported key executives severance agreement. The amount of the dispute is currently approximately $250,000. 2. A Mr. A.J. Goldman has informed the Borrower that he may commence litigation in connection with alleged defamatory statements in the book "Worse Than He Says He Is." The Company is a party to various other routine legal proceedings and claims incidental to its business. The Company believes that the ultimate resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon the Company's financial position. 103 110 SCHEDULE 3.17 EXISTING INDEBTEDNESS/MATERIAL AGREEMENTS (i) Existing Indebtedness 1. Line of Credit pursuant to Loan Agreement, dated as of September 26, 1997, between Dove Entertainment, Inc. and Dove Four Point, Inc., as Borrowers, and Media Equities International, LLC. TO BE REPAID AT CLOSING. 2. Loan pursuant to Term Loan Agreement, dated as of August 16, 1996, between Dove Entertainment, Inc. and Sanwa Bank California. TO BE REPAID AT CLOSING. 3. Mortgage Note in the amount of $1,800,000 to Asahi Bank of California (8% interest per annum, maturing on April 2001). This mortgage note may be extended, renewed or increased to an amount not to exceed $3.2 million. 4. Auto loan on Mercedes 500 SL. (ii) Material Joint Venture Agreements None (iii) Material Distribution Agreements 1. Letter Agreement, dated July 1, 1994, between Penguin Books USA, Inc. and Dove Audio, Inc. 2. Letter Agreement, dated as of February 15, 1995 between Buena Vista Television and Four Point Entertainment re: "Make Me Laugh." 104 111 3. Letter Agreement, dated October 21, 1996, between Discovery Communications, Inc. and Dove Four Point Entertainment, re: "Unnatural History." (iv) Material Contractual Arrangements 1. Stock Purchase Agreement, dated as of March 27, 1997, among Dove Entertainment, Inc., and the Purchasers named therein and the following related agreements: a. Warrant to Purchase Shares of Common Stock of Dove Entertainment, in favor of Media Equities International, LLC (1,500,000 shares). b. Warrant to Purchase Shares of Common Stock of Dove Entertainment, in favor of Media Equities International LLC (500,000 shares). c. Warrant to Purchase Shares of Common Sock of Dove Entertainment, Inc., in favor of MEI (500,000 shares). d. Warrant to Purchase Shares of Common Sock of Dove Entertainment, Inc., in favor of MEI (500,000 shares). e. Registration Rights Agreement, dated as of March 27, 1997, by and among Dove Entertainment, Inc., Media Equities International, LLC, Michael Viner and Deborah Raffin. f. Pledge Agreement, dated as of March 27, 1997, among Michael Viner, Deborah Raffin, Media Equities International, LLC and Dove Entertainment, Inc. 105 112 g. Shareholders Voting Agreement, dated as of March 27, 1997, by and between Michael Viner and Deborah Raffin, on the one hand, and Media Equities International, LLC, on the other hand. h. Escrow Agreement, dated June 10, 1997, by and between Dove Entertainment, Inc., Michael Viner and Deborah Raffin. 2. Employment Termination Agreement, dated June 10, 1997 among Dove Entertainment, Inc., Michael Viner and Deborah Raffin. 3. Key Executive Severence Agreement between Dove Entertainment, Inc. and Gerald Leider, dated September 4, 1996. 4. Employment Agreement between Dove Entertainment, Inc. and Ron Ziskin dated April 29, 1996. 5. Employment Agreement between Dove Entertainment, Inc. and Steven Soloway, dated September 4, 1996. 6. Dove Four Point, Inc. is a signatory with the Directors Guild of America. 7. Registration Rights Agreements, between the various purchasers in the private placement conducted through Whale Securities Co., L.P. and Dove Audio, Inc. The agreements provide for piggyback registration rights beginning January 1, 1996 and an automatic registration on or prior to June 14, 1996. 8. Registration provisions in the Warrant Agreements between Dove Audio, Inc. and Whale Securities Co., L.P. 106 113 9. Registration Rights Agreement, dated as of April ____, 1996, between Shukri Ghalayini and Dove Audio, Inc. 10. Registration Rights Agreement, dated as of April ____, 1996, between Ronald Ziskin and Dove Audio, Inc. 11. Warrant Certificates of Dove Audio, Inc. to Morgan Fuller Capital Group, LLC and others, each dated October 1, 1996. 12. Employment Agreement with Ronald Lightstone. 13. Employment Agreement with Neil Topham. 14. Insurance Policies. 15. Agreement and Plan of Merger, made and entered into as of April 12, 1996, by and among Dove Audio, Inc., Dove Four Point, Inc. and Four Point Entertainment Inc. 16. Stock Option Award Agreement, dated April 1996, by and between Dove Audio, Inc. and Ron Ziskin, as amended. 107 114 SCHEDULE 3.21 ENVIRONMENTAL LIABILITIES Nothing is to be reported on this Schedule 3.21 108 115 SCHEDULE 3.22 OUTSTANDING RIGHTS RE: PLEDGED SECURITIES Nothing is to be reported on this Schedule 3.22 109 116 SCHEDULE 6.2 EXISTING LIENS 1. First Deed of Trust on 8955 Beverly Boulevard, Los Angeles, California in favor of Asahi Bank of California 2. Mercedes Benz Credit Corporation - security interest in Mercedes Benz 500 SL 3. Lien in favor of Guinness Mahon in connection with the film "Wilde"securing an obligation in the amount of $15,000. 4. Operating Leases: Fletcher Jones Motorcars, Inc. - Mercedes 94 C280W Miller Infinity - Infinity QX4 Truck Various operating leases for Apple Computers, photocopiers and telephone systems. 5. Liens in favor of Individual Guarantors securing amounts paid pursuant to the Guaranty. Such Liens will be subordinate to the Liens of the Lender. 6. UCC-1 naming Dove International as Debtor and BWE Distribution, Inc., covering a security interest in Debtor's rights under the motion picture "Unwed Father," to be filed. 7. Liens evidenced by the following UCC-1 financing statements: (a) Where Filed: California Secretary of State Debtor: Dove International, Inc. Secured Party: Paramount Pictures Corporation File No.: 9617660715 (b) Where Filed: California Secretary of State Debtor: Dove International, Inc. Secured Party: Paramount Pictures Corporation File No.: 9617660730 110 117 (c) Where Filed: California Secretary of State Debtor: Dove International, Inc. Secured Party: Paramount Pictures Corporation File No.: 9625060583 (d) Where Filed: California Secretary of State Debtor: Dove International, Inc. Secured Party: Michael Viner File No.: 9631061125 (e) Where Filed: California Secretary of State Debtor: Dove International, Inc. Secured Party: Paramount Pictures Corporation File No.: 9635360269 (f) Where Filed: California Secretary of State Debtor: Dove International, Inc. Secured Party: Guinness Mahon & Co. Limited File No.: 9635360521 111 118 SCHEDULE 6.3 GUARANTEES Nothing is to be reported on this Schedule 6.3 112 119 SCHEDULE 6.4 Dove Four Point, Inc. has a 33% ownership interest in Empire Burbank Studios. 113 120 SCHEDULE 6.23 BANK ACCOUNTS Nothing is to be reported on this Schedule 6.23 114 121 EXHIBIT B-1 November 10, 1997 The Chase Manhattan Bank, as Lender under the Credit Agreement referred to below 270 Park Avenue New York, New York 10017 Re: Credit, Security, Guaranty and Pledge Agreement, dated as of November 4, 1997 (the "Credit Agreement") among DOVE ENTERTAINMENT, INC., a California corporation ("Borrower"), the Corporate Guarantors named therein and THE CHASE MANHATTAN BANK, a New York banking corporation, as Lender ("Lender) Ladies and Gentlemen: We have acted as special counsel to (i) Borrower and (ii) Dove International, Inc., a California corporation ("DII"), and Dove Foup Point, Inc. a Florida corporation ("DFP" and, together with DII, the "Corporate Guarantors"), in connection with the Credit Agreement and the transactions contemplated thereby (the "Transactions"). This opinion letter is given at the request of Borrower and the Corporate Guarantors pursuant to Section 4.1(c) of the Credit Agreement. Capitalized terms not otherwise defined in this opinion letter shall have the meanings ascribed to them in the Credit Agreement. The term "Collateral", as used herein shall include the "Pledged Stock", the "copyrights" and the "collateral", as each such term is hereinafter defined. We have delivered this opinion letter as counsel admitted to practice in the States of California, Florida and New York, and we shall not be understood to have expressed any opinion herein under or with respect to the laws of any jurisdiction other than the State of New York, the State of California (with respect to paragraphs 2 (other than the first sentence thereof), 5 and 6 of this opinion letter), the State of Florida (with respect to paragraph 6 of this opinion letter) and the Federal laws of the United States of America (with respect to paragraph 5 of this opinion letter). In addition, except as specifically set forth in this opinion letter, we are not rendering any opinion herein as to any legal issue that would be excluded by Section 19 of the Legal Opinion Accord of the ABA Section of Business Law (1991) were it to govern this opinion letter. 122 In connection with this opinion letter, we have reviewed executed copies of the following documents: (i) the Credit Agreement; (ii) the Note; (iii) the agreement dated as November 4, 1997 made by Borrower and the Corporate Guarantors in favor of Lender (the "Copyright Security Agreement"); (iv) the Uniform Commercial Code Form UCC-1 Financing Statement to be filed with the Secretary of State of California, naming Borrower as debtor and Lender as secured party ("Borrower Financing Statement"); (v) the Uniform Commercial Code Form UCC-1 Financing Statement to be filed with the Secretary of State of California, naming DII as debtor and Lender as secured party (the "DII Financing Statement"); (vi) the Uniform Commercial Code Form UCC-1 Financing Statement to be filed with the Secretary of State of California, naming DFP as debtor and Lender as secured party (the "DFP Financing Statement" and, together with the Borrower Financing Statement and the DII Financing Statement, the "Financing Statements"); (vii) the Articles of Incorporation and Bylaws of DFP; (viii) a good standing certificate issued on October 31, 1997 by the Office of the Secretary of State of the State of Florida with respect to DFP (the "DFP Florida Good Standing Certificate); and (ix) a good standing certificate issued on October 31, 1997 by the Office of the Secretary of State of the State of California with respect to DFP (the "DFP California Good Standing Certificate and, together with the DFP Florida Good Standing Certificate, the "DFP Good Standing Certificates"). The documents listed in subparagraphs (i) through (iii) above are hereinafter sometimes referred to collectively as the "Documents." We have not participated in the negotiations relating to the Documents or the Transactions and have undertaken no review or investigation in connection with the opinions expressed herein other than to read each of the Documents. As to factual matters relevant to such opinions, we have relied with your permission solely upon the representations and warranties contained in the Documents and have not made any 2 123 independent verification thereof. We have made such examinations of law as we have deemed appropriate in order to render such opinions. In rendering the opinions set forth herein, we have assumed (a) the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to authentic originals of all documents submitted to us as copies; (b) that the Financing Statements have been properly filed with the California Secretary of State, and that the Copyright Security Agreement has been properly filed in the United States copyright office within thirty days after its execution; (c) the legal capacity of each natural person; (d) that each of Lender and each Credit Party (other than DFP) is a corporation duly organized and validly existing in good standing under applicable law; (e) that each Person has all requisite power and authority to execute, deliver and perform each document executed and delivered by such Person and to do each other act done or to be done by such Person; (f) the due execution and delivery by each Person of each document executed and delivered or to be executed and delivered by such Person; (g) except as specifically set forth in paragraph 1 of this opinion letter with respect to the Credit Parties, the legality, validity, binding effect and enforceability against each party thereto of each document executed and delivered or to be executed and delivered in connection with the Transactions; (h) that the execution and delivery of each such document do not breach the certificate or articles of incorporation, by-laws and other constituent documents of each such party and, except as specifically set forth in paragraph 3 of this opinion letter, do not violate any law, rule or regulation applicable to such party or breach any instrument or agreement to which such party is a party; (i) that all conditions precedent set forth in Article 4 of the Credit Agreement required as of the Closing Date have been fully complied with or waived; (j) that Lender has given value, has acted in good faith without notice of adverse claims or defenses against enforcement of any rights created by the Documents, has complied with all laws applicable to it that affect the Transactions or the Documents and has paid all taxes and fees required to be paid by it in connection therewith; (k) that all statutes, judicial and administrative decisions and rules and regulations of governmental agencies constituting the law with respect to which we are rendering opinions herein are published or otherwise generally accessible; (l) that, with respect to the Documents or the Transactions, there has been no mutual mistake of fact, fraud or duress; (m) the constitutionality and validity of all relevant laws, regulations and governmental actions; (n) that routine procedural matters such as service of process will be satisfied by the parties seeking to enforce any right created by the Documents; (o) that the Credit Parties own, free and clear of any liens or options, the Collateral that they purport to own; and (p) that the DFP Good Standing Certificates have remained accurate through and including the date of this opinion letter. Various issues are addressed in the opinion letter of Robert Murray, Esq., general counsel of Borrower, a copy of which is attached hereto as Exhibit A, and we express no opinion with respect to the matters which are addressed in such opinion letter. To the 3 124 extent any of the opinions expressed therein are relevant to this opinion letter, we have, with your permission, relied thereon together with and subject to any and all assumptions, qualifications and limitations expressed therein and herein which are relevant to those opinions upon which we have relied. Based upon the foregoing and subject to the exceptions, qualifications, limitations and other statements contained herein, it is our opinion that: 1. Under New York law, each of the Documents to which a Credit Party is a party constitutes the legal, valid and binding obligation of such Credit Party and is enforceable against such Credit Party in accordance with its terms. 2. The Credit Agreement creates in favor of Lender a valid security interest in that portion of the collateral in which the creation and attachment of security interests or liens are governed by Article 9 of the New York Uniform Commercial Code (the "NYUCC"), as security for the obligations of the Credit Parties under the Credit Agreement. Upon the filing of the Financing Statements with the California Secretary of State (the "Filing Office"), Lender will have a perfected security interest (to the extent that perfection may be accomplished by filing the Financing Statement in the Filing Office) in that portion of the collateral described in the Financing Statement other than fixtures (the "UCC Property") in which the perfection of security interests is governed by Division 9 of the California Uniform Commercial Code ("CAUCC"). Whenever used in this opinion letter, the term "collateral" shall be limited to "accounts", "general intangibles", "inventory", "equipment" and "goods" as each of such terms is defined in Article 9 of the NYUCC and Division 9 of the CAUCC. The Financing Statements are in appropriate form for filing in the Filing Office. 3. The execution and delivery of the Documents by each Credit Party that is a party thereto and the performance by such Credit Party of its obligations thereunder, the grant to Lender of the security interests as provided in the Credit Agreement and the pledge to Lender of the Pledged Stock (as hereinafter defined) as provided in the Credit Agreement do not violate any New York law, statute, rule or regulation applicable to such Credit Party, and no governmental authorizations, consents, approvals, registrations or filings by or in the State of New York are required in connection with the execution, delivery and performance of the Documents by such Credit Party. 4. The delivery in the State of New York to Lender of the certificates evidencing the shares of stock described in Exhibit B hereto (the "Pledged Stock"), duly endorsed in the name of Lender or in blank (or accompanied by stock powers or separate documents of assignment duly executed in favor of Lender or in blank), together with the execution and delivery by the Credit Parties of the Credit Agreement, creates in favor of Lender a valid and perfected security interest in such Pledged Stock 4 125 as security for the obligations of the Credit Parties under the Credit Agreement, which security interest will remain perfected for as long as possession of the Pledged Stock is continuously maintained by Lender in the State of New York. 5. The Copyright Security Agreement creates in favor of Lender a valid and enforceable security interest in that portion of the collateral (the "copyrights") in which the creation and attachment of security interests or liens are governed by 17 U.S.C. Section 205 and Article 9 of the NYUCC, and such security interest will become effective against third parties at the later of the execution and delivery of the Copyright Security Agreement and the filing of the Financing Statements in the Filing Office. 6. DFP is a corporation duly organized, validly existing and, based solely on the DFP Good Standing Certificates, in good standing under the laws of the State of Florida and as a foreign corporation under the laws of the State of California. The opinions set forth above in this opinion letter are subject, in all respects, to the following exceptions, qualifications and limitations: (a) Our opinion concerning the legality, validity, binding effect and enforceability of the Documents in accordance with their terms does not mean that (1) any particular remedy is available upon a material default or (2) every provision of the Documents will be upheld or enforced in any or each circumstance by a court. Certain provisions of the Documents may be or are unenforceable in whole or in part, but in each case the inclusion of such provisions does not affect the validity of each such Documents taken as whole, and each such Document taken as a whole contains adequate provisions for the practical realization of the benefits purported to be created thereby (subject to the consequences of any judicial, administrative or other delay which may be imposed by, be related to or arise from applicable laws or equitable principles). Furthermore, the validity, binding effect and enforceability of the Documents may be limited or otherwise affected by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws, rules or regulations affecting the enforcement of creditors' rights and remedies generally and the unavailability of, or limitation of the availability of, a particular right or remedy (whether in a proceeding in equity or at law) because of an equitable principle or a requirement as to commercial reasonableness, conscionability or good faith. The provisions of any Document which permit any Person to take action or make determinations (and/or to have such determinations be binding on other parties to any degree), or to benefit from indemnities, contributions or similar undertakings, or waivers, exculpatory provisions or similar provisions, may be subject to limitations imposed by law or by public policy considerations, including, without limitation, a requirement that such action be taken or such determination be made, or that any action or inaction by any Person in respect of which such an indemnity, right of contribution or similar undertaking, or such a 5 126 waiver, exculpatory provision or similar provision, be called upon or raised, or be taken or not taken, as the case may be, on a reasonable and lawful basis and in good faith. (b) The use of the term "enforceable" shall not imply any opinion as to the availability of equitable remedies, including, without limitation, the remedies of specific performance or injunctive relief, nor is any opinion regarding the same intended to be expressed herein, and no opinion is expressed that any particular provision of any of the Documents may not be limited by defenses such as estoppel, waiver and other equitable considerations. (c) Under certain circumstances the requirement that the provision of a Document may be modified or waived only in writing or only in a specific instance and the provision that failure or delay in exercising any power, right, privilege or remedy will not impair or waive such power, right, privilege or remedy may be unenforceable to the extent that an oral agreement has been effected or a course of dealing has occurred modifying such provisions. (d) With respect to any Document creating a security interest in UCC Property, we express no opinion as to the enforceability of the rights and remedies under such Documents against property located in the State of California unless the procedural requirements under the CAUCC are followed. (e) We express no opinion with respect to any security interest in any Collateral described in the Financing Statements to which the provisions of Article 9 of the NYUCC or Division 9 of the CAUCC do not apply. (f) The continuation and perfection of security interests in proceeds is limited to the extent set forth in Sections 9-306 through 9-309 of the NYUCC and Sections 9306 through 9309 of the CAUCC. (g) We express no opinion with respect to the creation, attachment, validity, perfection or priority of any security interest, except as specifically set forth in paragraphs 2, 4 and 5 of this opinion letter. (h) We express no opinion as to (1) the impact of any laws regulating the type of investments that can be made by, or the legal lending limits of, Lender or (2) the effect of the laws of any jurisdiction in which Lender or any Credit Party is located (other than the State of New York) that limit the interest, fees or other charges Lender may impose. 6 127 (i) We express no opinion with respect to the enforceability of any provision of the Documents which provides for (1) acceleration of future amounts due (other than principal) without appropriate discount to present value, (2) late charges or (3) increased interest rates upon default, to the extent that any such provision is determined to be penalty, or which purports to bind a Person not a party or signatory thereto. (j) We expressed no opinion as to any Credit Party's rights in, or title to, any Collateral, the value thereof or the interest of Lender in any after-acquired property. We call to your attention the fact that Section 552 of the Federal Bankruptcy Code limits the extent to which property acquired by a debtor after the commencement of a case under the Federal Bankruptcy Code may be subject to a security interest arising from a security agreement entered into by such debtor before the commencement of such case. Our opinions are subject to the provisions of Sections 9-203 and 9-204 of the NYUCC relating to the time of attachment of a security interest in an item of Collateral in which the Person granting the security interest does not presently have rights. (k) We express no opinion with respect to any provisions in the Documents (1) authorizing the unilateral appointment of a receiver or (2) which provide that Lender is appointed as any Credit Party's attorney-in-fact or that Lender may otherwise act on behalf of in the name of a Credit Party. (l) We express no opinion as to any Document provision contrary to Section 9-311 or Part V of Article 9 of the NYUCC or Section 9311 or Chapter 5 of Division 9 of the CAUCC. (m) We express no opinion as to the enforceability or perfection of any interest of any Person other than Lender in any property included in the UCC Property. Our opinion as to the enforceability of an governing law provision contained in any Document is qualified by the effects of subsection (2) of Section 1-105 of the NYUCC. (n) We express no opinion regarding any items of Collateral which are (1) accessioned to, or commingled or processed with, other goods to the extent the security interest of Lender is limited by Section 9-314 or 9-315 of the NYUCC or Section 9314 or 9315 of the CAUCC or (2) subject to or represented by a certificate of title or a document of title. (o) Except as specifically set forth in paragraph 5 of this opinion letter, we express no opinion regarding any items of Collateral which are subject to a statute, regulation or treaty of the United States which provides for a national or international registration or a national or international certificate of title for the perfection of a security interest therein or which specifies a place of filing different from the place specified in the CAUCC. 7 128 (p) We express no opinion regarding any Collateral consisting of claims against any government or governmental agency (including, without limitation, the United States or any state thereof or any agency or department of the United States or any state thereof). (q) In the case of any chattel paper, account or general intangible which is itself secured by other property, we express no opinion with respect to Lender's rights in and to such other property. (r) We express no opinion with respect to Collateral consisting of mobile goods, goods in possession of a third party, equipment used in farming operations, farm products, consumer goods, crops growing or to be grown, timber to be cut or minerals or the like (including oil and gas), accounts subject to Section 9-103(5) of the NYUCC of Section 9103(5) of the CAUCC, goods which are or are to become fixtures, an ownership interest in a corporation or partnership formed for the purpose of cooperative ownership of real estate, policies of insurance, beneficial interests in a trust or decedent's estate, letters of credit, instruments, money, cash, deposit accounts (and any items of property in such accounts), collection accounts (and any items of property in such accounts), lockboxes, intellectual property (except as specifically set forth in paragraph 5 of this opinion letter) or securities (except as specifically set forth in paragraph 4 of this opinion letter). (s) We have assumed that the collateral, other than accounts and general intangibles, is located in the State of California and that any part of such collateral that was brought into the State of California within the last four months is not subject to a security interest perfected under the law of the jurisdiction from which such part of the collateral was removed. (t) We call to your attention that the security interest of Lender in the collateral and the copyrights may be subject to the rights of lessees, licensees, assignees or other account debtors, the claims and defenses of such lessees, licensees, assignees and account debtors and the terms of any leases or other agreements with such lessees, licensees, assignees and account debtors. (u) We call to your attention that the perfection and the effect of perfection and non-perfection of the security interest of Lender may be governed by laws other than those of the State of California to the extent either the collateral or a Credit Party is or becomes located in a jurisdiction other than the State of California. (v) We call to your attention that the perfection of the security interest in any UCC Property may be terminated as to any UCC Property acquired more than four months subsequent to a change in the nature, corporate structure or identity of a Credit 8 129 Party and that a continuation statement is required to be filed under the CAUCC within six months prior to the expiration of five-years from the date of filing of a financing statement and within six months prior to each fifth anniversary of the expiration of such five-year period in order to maintain the continuous perfection of the security interests referred to therein. (w) We call to your attention that provisions of the Documents which provide that a guaranty by a party thereto or the grant of a lien or security interest by a party thereto to secure the obligations of a third party shall not be affected by changes in or amendments to the Documents or other relevant documents might be enforceable only to the extent such changes or amendments are not so material as to constitute a new agreement among the parties to such documents. (x) We call to your attention that a court may modify or limit contractual awards of attorneys' fees. (y) We express no opinion with respect to any provision contained in the Documents concerning waiver of inconvenient forum, venue, forum non conveniens or subject matter jurisdiction, in each case with respect to Federal courts. (z) We express no opinion as to the enforceability of any provision of any Document that purports to establish (or may be construed to establish) evidentiary standards. (aa) We express no opinion as to the last sentence of Section 9.1(b) of the Credit Agreement, the last sentence of the first paragraph of Section 12.5 of the Credit Agreement, the last sentence of Section 12.6 of the Credit Agreement, Sections 12.7 and 12.11 of the Credit Agreement, the third sentence of Section 12.12 of the Credit Agreement (unless a reasonable time for appearance is allowed in connection with any such service of process) or the fifth sentence of Section 12.12 of the Credit Agreement. (bb) We express no opinion herein as to the legality, validity or enforceability of any provisions of the Documents precluding oral waivers or modifications of provisions of the Documents, precluding waivers of equitable rights and defenses by the Credit Parties or precluding the Credit Parties from asserting certain claims or defenses or from obtaining certain rights and remedies. The opinions set forth herein are based upon those statutes, rules and regulations that, in our experience, are normally applicable to transactions of the type provided for in the Documents, but without our having made any independent investigation of any other statute, rule or regulation. 9 130 This opinion is issued as of the date hereof, and we disclaim any obligation to advise you of changes of law or fact that occur after the date hereof. This opinion is solely for your benefit in connection with the Transactions and may not be relied upon for any other purpose or furnished, circulated or quoted to, or used or referred to by, any other Person without our prior written consent in each instance. Very truly yours, 131 EXHIBIT A November 10, 1997 The Chase Manhattan Bank 270 Park Avenue New York, NY 10017 Hughes Hubbard & Reed One Battery Park Plaza New York, New York 10004-1482 Ladies and Gentlemen: I am Vice President and General Counsel of Dove Entertainment, Inc. (the "Company"), a California corporation. I am providing this opinion to you pursuant to Section 4.1(c) of the Credit, Security, Guaranty and Pledge Agreement (the "Credit Agreement"), dated as of November 4, 1997, among the Company, the Corporate Guarantors named therein and The Chase Manhattan Bank (the "Lender"). Except as otherwise indicated, capitalized terms used in this opinion and defined in the Credit Agreement will have the meanings given in the Credit Agreement. In my capacity as General Counsel, I have examined originals or copies of those corporate and other records and documents I considered appropriate. I have obtained and relied upon those certificates of public officials I considered appropriate. I have assumed the genuineness of all signatures (other than with respect to the Credit Parties), the authenticity of all documents submitted as originals and the conformity with originals of all documents submitted as copies. To the extent any Credit Parties' obligations depend on the due authorization, execution and delivery of any Fundamental Document by any other person, I have assumed that such Fundamental Document has been so authorized, executed and delivered by such other person. The "Individual Guaranty Agreements" are the guaranty agreements, each dated as of November 4, 1997, between Terrence Elkes, Bruce Maggin, Kenneth Gorman, John Healy and Ronald Lightstone and the Lender. On the basis of such examination, my reliance upon the assumptions in this opinion and my consideration of those questions of law I considered relevant, and subject to the limitations and qualifications in this opinion, I am of the opinion that: -1- 132 1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of California. 2. Dove International, Inc. ("Dove International") is a corporation duly organized, validly existing and in good standing under the laws of the State of California. 3. The Borrower has the power and authority (i) to own and operate its assets and properties and to carry on its business as now being conducted, (ii) to execute, deliver and perform its obligations under the Credit Agreement and other Fundamental Documents to which it is a party and any other documents contemplated thereby to which it is a party, (iii) to borrow under the Credit Agreement, (iv) to grant to the Lender the security interests contemplated by the Fundamental Documents and (v) to pledge to the Lender the Pledged Securities as contemplated by the Credit Agreement. 4. Each of Dove International and Dove Four Point, Inc. ("Dove Four Point") has the corporate power and authority (i) to own and operate its assets and properties and to carry on its business as now being conducted, (ii) to execute, deliver and perform its obligations under the Fundamental Documents to which it is a party, (iii) to guarantee the obligations of the Borrower and (iv) to grant to the Lender the security interests contemplated by the Fundamental Documents. 5. The execution, delivery and performance of the Fundamental Documents to which it is a party by each Credit Party, the grant to the Lender of the security interest as contemplated by the Credit Agreement and the pledge to the Lender of the Pledged Securities as contemplated by the Credit Agreement: (a) have been duly authorized by all requisite corporate action on the part of each Credit Party, (b) will not violate any provision of any State of California or United States federal law, statute, governmental rule or regulation, or treaty that I, in the exercise of customary professional diligence, recognized as applicable to the Credit Parties or to transactions of the type contemplated in the Fundamental Documents, (c) will not violate any provision of the Articles of Incorporation or By-laws of any Credit Party, (d) will not violate any provision of any material indenture, agreement, bond, note or other instrument to which any Credit Party or by which any Credit Party or any of their respective properties or assets are bound, or be in conflict with, result in a breach or termination of, or constitute (with due notice or lapse of time or both) a default under, or accelerate any performance required by, any such indenture, agreement, bond, note or other instrument and (e) will not result in the creation or imposition of (or the obligation to create or impose) any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of any of any Credit Party, other than pursuant to of the Fundamental Documents to which such Credit Party is a party. -2- 133 6. Each Credit Party has duly executed and delivered to the Lender all of the Fundamental Documents to which it is a party. 7. No authorizations, consents, approvals, registrations or filings from or with any California or United States federal governmental authority that I have, in the exercise of customary professional diligence, recognized as applicable to the Credit Parties or to transactions of the type contemplated by the Fundamental Documents, is required in connection with the execution, delivery and performance by any Credit Party of the Fundamental Documents to which it is a party. 8. There is no judgment, order, action, suit or other proceeding at law or in equity, or before any arbitrator or arbitration panel, of any California state or United States federal governmental authority (and, to my knowledge, any other Governmental Authority), or, to my knowledge, any investigation of the affairs of, any Credit Party, or any of their respective properties or rights which (i) if adversely determined, could reasonably be expected to materially affect (a) the ability of any Credit Party to carry on its business, (b) the ability of any Credit Party to perform its respective obligations under the Fundamental Documents to which it is a party or any other material contract to which it is a party, (c) the validity or enforceability or priority of the security interests, rights, remedies or benefits available to the Lender under any of the Fundamental Documents, or (d) the Collateral or the Pledged Securities; or (ii) involves any of the transactions contemplated by the Fundamental Documents. 9. The authorized, issued and outstanding capital stock of Dove Four Point and Dove International is as set forth on Schedule 3.7(a) to the Credit Agreement (the "Pledged Securities") and such issued and outstanding capital stock has been duly authorized, validly issued, is fully paid and nonassessable and is owned of record by the Borrower. 10. There are no restrictions on the transfer of any Pledged Securities other than under the Credit Agreement. There are no outstanding rights, warrants, options or agreements to purchase or otherwise acquire any shares of stock or securities or obligations of any kind convertible into any shares of capital stock of Dove International or Dove Four Point. 11. None of the Credit Parties is (a) and "investment company", within the meaning of the Investment Company Act of 1940, as amended or (b) subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or any federal statute or regulation limiting such corporation's ability to incur indebtedness for money borrowed as contemplated by the Credit Agreement or by any other Fundamental Document. The making of the Loans and the application of the proceeds thereof as contemplated by the Fundamental Documents do not violate any of -3- 134 Regulations G, T, U or X of the Board of Governors of the Federal Reserve System, as amended. 12. Assuming that New York law is identical to California law, each Individual Guaranty Agreement constitutes the legal, valid and binding obligation of the Individual Guarantor party thereto and is enforceable against such Individual Guarantor in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors rights generally (including, without limitation, fraudulent conveyance laws) and by general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. 13. You have received an opinion letter of Hughes, Hubbard & Reed (a copy of which is attached hereto) (the "HHR Opinion") with respect to the creation and perfection of a security interest in the Pledged Stock (as defined therein). Assuming that New York law is identical with California law, and in reliance on the HHR Opinion and subject to any and all assumptions, qualifications and limitations expressed therein, the perfected security interest of the Lender in the Pledged Stock will be prior to any other security interest in such Pledged Stock that may be created by the Company under the Uniform Commercial Code. I express no opinion as to the effect of non-compliance by the Lender with any state or federal laws or regulations applicable to the transactions contemplated by any of the Fundamental Documents because of the nature of its business. The law covered by this opinion is limited to the present federal law of the United States and the present law of the State of California. I express no opinion as to the laws of any other jurisdiction and no opinion regarding the statutes, administrative decisions, rules, regulations or requirements of any county, municipality, subdivision or local authority of any jurisdiction. This opinion is issued as of the date hereof, and I disclaim any obligation to advise you of changes in law or fact that occur after the date hereof. This opinion may be relied upon by you only in connection with the execution and delivery of the Credit Agreement and the other Fundamental Documents. It may not be used or relied upon by you for any other purpose or by any other person, nor may copies be delivered to any other person, without in each instance my prior written consent. You may, however, deliver a copy of this opinion to your accountants, attorneys, and other professional advisors, to governmental regulatory agencies having jurisdiction over you and to successors and permitted transferees under the Credit -4- 135 Agreement, and such successors and transferees may rely on this opinion as if it were addressed and had been delivered to them on the date of this opinion. Very truly yours, /s/ ROBERT C. MURRAY - ------------------------ Robert C. Murray RCM:kms -5- 136 EXHIBIT B
NAME OF ISSUER NUMBER OF SHARES -------------- ---------------- Dove International, Inc. 100 Dove Four Point, Inc. 100
137 EXHIBIT B-2 November 10, 1997 The Chase Manhattan Bank 270 Park Avenue New York, NY 10017 Hughes Hubbard & Reed One Battery Park Plaza New York, New York 10004-1482 Ladies and Gentlemen: I am Vice President and General Counsel of Dove Entertainment, Inc. (the "Company"), a California corporation. I am providing this opinion to you pursuant to Section 4.1(c) of the Credit, Security, Guaranty and Pledge Agreement (the "Credit Agreement"), dated as of November 4, 1997, among the Company, the Corporate Guarantors named therein and The Chase Manhattan Bank (the "Lender"). Except as otherwise indicated, capitalized terms used in this opinion and defined in the Credit Agreement will have the meanings given in the Credit Agreement. In my capacity as General Counsel, I have examined originals or copies of those corporate and other records and documents I considered appropriate. I have obtained and relied upon those certificates of public officials I considered appropriate. I have assumed the genuineness of all signatures (other than with respect to the Credit Parties), the authenticity of all documents submitted as originals and the conformity with originals of all documents submitted as copies. To the extent any Credit Parties' obligations depend on the due authorization, execution and delivery of any Fundamental Document by any other person, I have assumed that such Fundamental Document has been so authorized, executed and delivered by such other person. The "Individual Guaranty Agreements" are the guaranty agreements, each dated as of November 4, 1997, between Terrence Elkes, Bruce Maggin, Kenneth Gorman, John Healy and Ronald Lightstone and the Lender. On the basis of such examination, my reliance upon the assumptions in this opinion and my consideration of those questions of law I considered relevant, and subject to the limitations and qualifications in this opinion, I am of the opinion that: -1- 138 1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of California. 2. Dove International, Inc. ("Dove International") is a corporation duly organized, validly existing and in good standing under the laws of the State of California. 3. The Borrower has the power and authority (i) to own and operate its assets and properties and to carry on its business as now being conducted, (ii) to execute, deliver and perform its obligations under the Credit Agreement and other Fundamental Documents to which it is a party and any other documents contemplated thereby to which it is a party, (iii) to borrow under the Credit Agreement, (iv) to grant to the Lender the security interests contemplated by the Fundamental Documents and (v) to pledge to the Lender the Pledged Securities as contemplated by the Credit Agreement. 4. Each of Dove International and Dove Four Point, Inc. ("Dove Four Point") has the corporate power and authority (i) to own and operate its assets and properties and to carry on its business as now being conducted, (ii) to execute, deliver and perform its obligations under the Fundamental Documents to which it is a party, (iii) to guarantee the obligations of the Borrower and (iv) to grant to the Lender the security interests contemplated by the Fundamental Documents. 5. The execution, delivery and performance of the Fundamental Documents to which it is a party by each Credit Party, the grant to the Lender of the security interest as contemplated by the Credit Agreement and the pledge to the Lender of the Pledged Securities as contemplated by the Credit Agreement: (a) have been duly authorized by all requisite corporate action on the part of each Credit Party, (b) will not violate any provision of any State of California or United States federal law, statute, governmental rule or regulation, or treaty that I, in the exercise of customary professional diligence, recognized as applicable to the Credit Parties or to transactions of the type contemplated in the Fundamental Documents, (c) will not violate any provision of the Articles of Incorporation or By-laws of any Credit Party, (d) will not violate any provision of any material indenture, agreement, bond, note or other instrument to which any Credit Party or by which any Credit Party or any of their respective properties or assets are bound, or be in conflict with, result in a breach or termination of, or constitute (with due notice or lapse of time or both) a default under, or accelerate any performance required by, any such indenture, agreement, bond, note or other instrument and (e) will not result in the creation or imposition of (or the obligation to create or impose) any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of any of any Credit Party, other than pursuant to of the Fundamental Documents to which such Credit Party is a party. -2- 139 6. Each Credit Party has duly executed and delivered to the Lender all of the Fundamental Documents to which it is a party. 7. No authorizations, consents, approvals, registrations or filings from or with any California or United States federal governmental authority that I have, in the exercise of customary professional diligence, recognized as applicable to the Credit Parties or to transactions of the type contemplated by the Fundamental Documents, is required in connection with the execution, delivery and performance by any Credit Party of the Fundamental Documents to which it is a party. 8. There is no judgment, order, action, suit or other proceeding at law or in equity, or before any arbitrator or arbitration panel, of any California state or United States federal governmental authority (and, to my knowledge, any other Governmental Authority), or, to my knowledge, any investigation of the affairs of, any Credit Party, or any of their respective properties or rights which (i) if adversely determined, could reasonably be expected to materially affect (a) the ability of any Credit Party to carry on its business, (b) the ability of any Credit Party to perform its respective obligations under the Fundamental Documents to which it is a party or any other material contract to which it is a party, (c) the validity or enforceability or priority of the security interests, rights, remedies or benefits available to the Lender under any of the Fundamental Documents, or (d) the Collateral or the Pledged Securities; or (ii) involves any of the transactions contemplated by the Fundamental Documents. 9. The authorized, issued and outstanding capital stock of Dove Four Point and Dove International is as set forth on Schedule 3.7(a) to the Credit Agreement (the "Pledged Securities") and such issued and outstanding capital stock has been duly authorized, validly issued, is fully paid and nonassessable and is owned of record by the Borrower. 10. There are no restrictions on the transfer of any Pledged Securities other than under the Credit Agreement. There are no outstanding rights, warrants, options or agreements to purchase or otherwise acquire any shares of stock or securities or obligations of any kind convertible into any shares of capital stock of Dove International or Dove Four Point. 11. None of the Credit Parties is (a) and "investment company", within the meaning of the Investment Company Act of 1940, as amended or (b) subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or any federal statute or regulation limiting such corporation's ability to incur indebtedness for money borrowed as contemplated by the Credit Agreement or by any other Fundamental Document. The making of the Loans and the application of the proceeds thereof as contemplated by the Fundamental Documents do not violate any of -3- 140 Regulations G, T, U or X of the Board of Governors of the Federal Reserve System, as amended. 12. Assuming that New York law is identical to California law, each Individual Guaranty Agreement constitutes the legal, valid and binding obligation of the Individual Guarantor party thereto and is enforceable against such Individual Guarantor in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors rights generally (including, without limitation, fraudulent conveyance laws) and by general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. 13. You have received an opinion letter of Hughes, Hubbard & Reed (a copy of which is attached hereto) (the "HHR Opinion") with respect to the creation and perfection of a security interest in the Pledged Stock (as defined therein). Assuming that New York law is identical with California law, and in reliance on the HHR Opinion and subject to any and all assumptions, qualifications and limitations expressed therein, the perfected security interest of the Lender in the Pledged Stock will be prior to any other security interest in such Pledged Stock that may be created by the Company under the Uniform Commercial Code. I express no opinion as to the effect of non-compliance by the Lender with any state or federal laws or regulations applicable to the transactions contemplated by any of the Fundamental Documents because of the nature of its business. The law covered by this opinion is limited to the present federal law of the United States and the present law of the State of California. I express no opinion as to the laws of any other jurisdiction and no opinion regarding the statutes, administrative decisions, rules, regulations or requirements of any county, municipality, subdivision or local authority of any jurisdiction. This opinion is issued as of the date hereof, and I disclaim any obligation to advise you of changes in law or fact that occur after the date hereof. This opinion may be relied upon by you only in connection with the execution and delivery of the Credit Agreement and the other Fundamental Documents. It may not be used or relied upon by you for any other purpose or by any other person, nor may copies be delivered to any other person, without in each instance my prior written consent. You may, however, deliver a copy of this opinion to your accountants, attorneys, and other professional advisors, to governmental regulatory agencies having jurisdiction over you and to successors and permitted transferees under the Credit -4- 141 Agreement, and such successors and transferees may rely on this opinion as if it were addressed and had been delivered to them on the date of this opinion. Very truly yours, /s/ ROBERT C. MURRAY - ------------------------ Robert C. Murray RCM:kms -5- 142 EXHIBIT C FORM OF BORROWING BASE CERTIFICATE as of ___________ The undersigned (the "Borrower") HEREBY CERTIFIES the following information as of __________, pursuant to the Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, among Dove Entertainment, Inc. as Borrower, the Corporate Guarantors named therein and The Chase Manhattan Bank, as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time (herein called the "Credit Agreement"), the defined terms therein being herein used with the same meanings:
(from detailed schedules Amount Advance Borrowing attached) $000's Rate Base ------ ------- --------- a. Eligible L/C Receivables x 100% = ------- --------- b. Eligible Receivables x 85% = ------- --------- c. Eligible Library Amount x 35% = ------- --------- d. Inventory of physical audio cassettes and printed books x 30% = ------- --------- e. Less Amounts Payable to Third Parties not Already Deducted(1) ( ) -------- f. Less Amounts of accrued but unpaid residuals owed to any trade guilds with respect to each item of Product included in the Borrowing Base ( ) -------- TOTAL BORROWING BASE ==========
- -------- (1) To the extent not already deducted in computing the Total Borrowing Base, the sum of all amounts payable to third parties from or with regard to the amounts otherwise included in the Borrowing Base pursuant to items (a) through (d), including without limitation remaining acquisition payments, set offs, current profit participations, deferments, commissions and royalties must be subtracted from the Total Borrowing Base. 143 COMMITMENT AVAILABILITY a. Outstanding Loans ---------- b. L/C Exposure ---------- Total outstanding ---------- Availability ----------
The Borrower has no reason to believe that the aggregate principal amount of all Loans to the Borrower outstanding as of the date of this certificate would exceed the Borrowing Base if such Borrowing Base was computed as of the date of this certificate. IN WITNESS WHEREOF, the undersigned has caused this certificate to be executed this ____ day of _____________. DOVE ENTERTAINMENT, INC. By: ------------------------------------- Name: Title: -2- 144 EXHIBIT D-1 FORM OF PLEDGEHOLDER AGREEMENT (ONLY APPLICABLE WITH RESPECT TO UNCOMPLETED PRODUCT FOR WHICH A COMPLETION GUARANTEE IS REQUIRED) AGREEMENT dated as of [INSERT DATE] (the "Agreement") among (i) [INSERT NAME OF LABORATORY] (the "Laboratory"), (ii) [INSERT NAME OF EACH CREDIT PARTY WHO HAS CONTROL OVER THE PHYSICAL ELEMENTS OF THE COLLATERAL] (collectively referred to herein as the "Company"), (iii) [INSERT NAME OF COMPLETION GUARANTOR] (the "Completion Guarantor") and (iv) The Chase Manhattan Bank (the "Lender"). Pursuant to the Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement"), among Dove Entertainment, Inc., (the "Borrower"), the Corporate Guarantors named therein and the Lender, the Lender has agreed, subject to the terms and conditions set forth in the Credit Agreement, to make loans to the Borrower in connection with, among other things, the acquisition, production and distribution of the Product (as hereinafter defined). The Company has granted to the Lender a security interest in, among other things, all of its right, title and interest in and to the [DESCRIBE NATURE OF PRODUCT, I.E. MOVIE-OF-THE-WEEK, TELEVISION PROGRAMS, AUDIOBOOKS, ETC.] listed on Schedule 1 hereto (hereinafter called the "Product") as security for various obligations of the Company to the Lender. Such security interest covers, among other things, all physical properties of every kind or nature of, or relating to, the Product and all versions thereof, including, without limitation, exposed film, developed film, positives, negatives, prints, positive prints, answer prints, special effects, preparing materials (including interpositives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices, and all other forms of pre-print elements), sound tracks, cutouts, trims and any and all other physical properties of every kind and nature of, or relating to, the Product, whether in completed form or in some state of completion, and all audio and video masters, duplicates, drafts, versions, variations and copies of each thereof, in all formats whether on film, videotape, disk, cassette, phonorecord or otherwise and -1- 145 all music sheets and promotional materials relating to the Product all of the foregoing items being hereinafter collectively called the "Collateral". Pursuant to the Completion Guaranty dated as of [INSERT DATE], among the Completion Guarantor, the Company and the Lender (the "Completion Guaranty"), the Completion Guarantor has agreed to guaranty the completion and delivery of the Product. In connection therewith, the Company has granted to the Completion Guarantor, a security interest in certain assets that are included in the Collateral, all as specified in, and subject to the terms and conditions of, the Company's Completion Agreement dated as of [INSERT DATE], between the Company and the Completion Guarantor (the "Company's Agreement"). From time to time, the Laboratory will have in its possession certain items of the Collateral. Accordingly, the parties hereto hereby agree as follows: 1. Each of the Company, the Completion Guarantor, and the Lender hereby appoints the Laboratory as the pledgeholder of all items of Collateral that may from time to time come into the possession or control of the Laboratory. The Laboratory agrees to hold all such items of Collateral as pledgeholder for the Lender subject to the following terms and conditions: a. Except as permitted by Section 1(b) below, the Laboratory will keep all items of Collateral at the laboratories or storage facilities listed on Schedule 2 hereto, and will not deliver such property to anyone. b. Subject to the provisions of Sections 1(c) and 1(d) below, the Laboratory will permit the Company and/or Completion Guarantor (and their respective designated affiliates, sublicensees or designees): i) to have access to the negatives and other pre-print material of the Product (but not remove them from the possession of the Laboratory) for purposes of inspecting, cutting, scoring or similar purposes; ii) to obtain a reasonable number of positive prints including without limitation, dailies, for the purposes of editing and previewing the Product; iii) to direct the making of pre-print material, positive prints and video masters of the Product and trailers thereof and the delivery thereof to the Company or distributors, licensees or other parties as the Company may direct; -2- 146 iv) to remove reasonable amounts of material for processing by optical and/or sound houses which agree in writing to be bound by the terms hereof or enter into a separate laboratory pledgeholder agreement substantially in the form hereof, and to return such materials when processed to the Laboratory; v) with the prior written consent of the Lender, to forward any item of Collateral to another laboratory. The Lender's consent contained in this clause (v) may be revoked at any time by written notice to the Laboratory, the Completion Guarantor and the Company from the Lender. In addition, such consent shall be deemed to be revoked at any time upon receipt by the Laboratory of written notice from the Lender, that an Event of Default has occurred under the Credit Agreement; and vi) to forward any of the above-mentioned property to another laboratory, approved by the Lender, if the Lender has previously received a Pledgeholder Agreement executed by such laboratory. c. If and when the Laboratory shall receive written notice from the Lender that an Event of Default shall have occurred and is continuing under the Credit Agreement, the Laboratory shall take no further orders from the Company and will hold all items of Collateral within its possession or under its control as pledgeholder hereunder, subject only (i) to the order and instruction of the Lender; and (ii) to the rights of the Lender and/or the Completion Guarantor to have access to and/or delivery of items referred to in Section 6 below. d. If and when the Laboratory shall receive written notice from the Completion Guarantor that the Completion Guarantor has exercised its right to take over the production of the Product under the Company's Agreement and, unless and until the Laboratory shall have received written notice from the Lender to the contrary, the Laboratory shall allow the Completion Guarantor to exercise the rights set forth in clauses (i), (ii), (iii) and (iv) of Section 1(b) hereof. Following such notice from the Completion Guarantor, the Laboratory will not permit the Company to have any further access to, or direct any further actions to be taken with respect to, the Collateral in the Laboratory's possession or under its control or to obtain any prints thereof. e. If the Completion Guarantor takes over the production of the Product and requests that the Collateral be moved to a different laboratory, the Lender agrees to consent to such move so long as a laboratory pledgeholder agreement is executed by the various parties hereto (other than the Laboratory) -3- 147 and by the replacement laboratory, substantially in the form hereof and so as long as the replacement laboratory is reasonably satisfactory to the Lender. 2. The Company agrees with the Lender that during production of the Product it will deliver the daily rushes for the Product to the Laboratory as soon as practicable and will use their best efforts to deliver the daily rushes on a weekly basis. 3. The Laboratory shall keep the original negatives of the Product in film vaults separate from and at a reasonable distance from protective duplicating materials (whether protective masters, fine grains, duplicate negatives or otherwise) to afford protection against any loss or damage, whether by fire or other disaster or otherwise. The Laboratory shall keep the Lender and the Completion Guarantor advised in writing of the actual location of the film vaults where all items of the Collateral are kept, including information as to the separate film vaults utilized for the original negatives and protective materials as aforesaid. 4. Subject to the rights of the Completion Guarantor, the Laboratory agrees that in its capacity as pledgeholder it is holding and has possession of the Collateral and the physical properties thereof constructively for the Lender and, until such time that the Lender notifies the Laboratory that the Lender no longer has any rights in the Collateral, upon written notice to the Laboratory indicating that an Event of Default has occurred and is continuing under the Credit Agreement (a copy of which will be sent to the Completion Guarantor unless its rights hereunder have terminated as contemplated by Section 8 hereof), will hold a sale or sales of the Collateral or any part thereof in accordance with the direction and instruction of the Lender, at the expense of the Lender, or in the alternative will cause to be delivered or made available to the Lender or its nominee (in all cases, pursuant to written instructions from the Lender) the Collateral and all physical properties thereof in the possession of the Laboratory or under its control for the purpose of enabling the Lender to deal with the same pursuant to the Credit Agreement. Nothing herein contained shall be construed to waive any rights of the Laboratory as specified under Section 9 hereof. 5. Each of the Completion Guarantor and the Company hereby waives any claim for damages or otherwise which it may have against the Laboratory for any acts which the Laboratory may take as pledgeholder, pursuant to the written direction of the Lender made in accordance with the terms of this Agreement. 6. Subject to Section 9 hereof, the Laboratory agrees that, despite the existence of any other claim which the Laboratory may have against the Company and/or the Completion Guarantor and/or any third-party distributor of the Product, the Laboratory shall accept and fulfill orders for laboratory work and any other material which may be required by the Lender or any other third-party distributor of the Product, subject to satisfactory credit arrangements being made with the Laboratory with respect to any charges incurred on behalf of the Lender or any such third-party distributor, and the Laboratory will not assert any claim or -4- 148 lien, statutory or otherwise, against the Lender or against the Product (except as set forth in Section 9 hereof) with respect to any charges for laboratory services or materials ordered by the Company, the designees of the Company, any third-party distributor of the Product or the Completion Guarantor. 7. The parties hereto agree that the Lender and its respective designees, successors and assigns shall each be entitled to unilaterally remove from the Laboratory materials made pursuant to an order contemplated by Section 6 hereof, which materials shall not be subject to this Agreement. 8. The rights granted hereunder to the Completion Guarantor shall (i) at all times be junior and subordinate to the rights hereunder of the Lender and (ii) terminate upon the completion and delivery of the Product, unless prior to such completion and delivery of the Product, the Completion Guarantor has notified the Lender and the Laboratory in writing that it has or anticipates that it will have to advance its own funds to complete the Product. Notwithstanding anything to the contrary in this Agreement, the Completion Guarantor shall have no rights under this Agreement if the Lender gives written notice to the Laboratory and the Completion Guarantor that the Product has been completed and delivered without the requirement that the Completion Guarantor advance any of its own funds pursuant to the Completion Guaranty. The Completion Guarantor hereby agrees that in the event that the Completion Guarantor shall have been released in writing from all of its obligations under the Completion Guaranty for the Product, any amendment or termination of this Agreement thereafter shall not require the Completion Guarantor's consent. 9. The Laboratory shall hold and/or process the Collateral under its standard terms of business as set forth in Schedule 3 hereto, except that any liens arising in favor of the Laboratory shall be limited to an aggregate amount of $50,000 at any one time outstanding for processing and/or storing the Collateral and/or materials delivered therefrom for the Company, any of their designees and/or the Completion Guarantor. Except as provided in the prior sentence, the rights of the Laboratory in the Collateral shall be subordinate and junior to the rights of the Lender and the Completion Guarantor in respect of the Collateral. 10. The Lender shall promptly give written notice to the Laboratory when the Lender's security interests in the Collateral has terminated. Upon receipt of such written notice, the Laboratory's obligations hereunder as pledgeholder for the Lender shall terminate. 11. This Agreement shall be binding on and inure to the benefit of the parties hereto and the successors and assigns of each of the parties. 12. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK -5- 149 APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK. 13. No amendment to this Agreement shall be effective unless in writing and signed by the Company, the Lender and the Laboratory and if the Laboratory has not received the notice from the Lender contemplated by Section 8 hereof, then also the Completion Guarantor. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together, shall constitute but one instrument, and shall become effective on the date on which each of the Completion Guarantor and the Lender shall have received a fully-executed copy of this Agreement. Promptly thereafter, the Company shall deliver or mail counterparts of this Agreement bearing the signature of each of the parties hereto to each party hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first written above. [LABORATORY] By ----------------------------------------- Name: Title: Address: Attn: [LIST APPLICABLE CREDIT PARTY(IES)] By ----------------------------------------- Name: Title: Address: Attn: -6- 150 [COMPLETION GUARANTOR] By ----------------------------------------- Name: Title: Address: Attn: THE CHASE MANHATTAN BANK By ----------------------------------------- Name: Title: Address: 270 Park Avenue, 37th floor New York, NY 10017-2070 Attn: John J. Huber, III -7- 151 Schedule 1 List of items of Product 152 Schedule 2 List of Laboratory and Storage Facilities 153 Schedule 3 [Attach Laboratory's Standard Terms of Business] 154 EXHIBIT D-2 FORM OF PLEDGEHOLDER AGREEMENT (COMPLETED PRODUCT) AGREEMENT dated as of __________, 1997 (the "Agreement") among (i) [INSERT NAME OF LABORATORY] (the "Laboratory"), (ii) [INSERT NAME OF EACH CREDIT PARTY WHO HAS CONTROL OVER THE PHYSICAL ELEMENTS OF THE COLLATERAL] (collectively referred to herein as the "Company") and (iii) The Chase Manhattan Bank (the "Lender"). Pursuant to the Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement"), among Dove Entertainment, Inc., (the "Borrower"), the Corporate Guarantors named therein and the Lender, the Lender has agreed, subject to the terms and conditions set forth in the Credit Agreement, to make loans to the Borrower in connection with, among other things, the acquisition, production and distribution of the Product (as hereinafter defined). The Company has granted to the Lender a security interest in, among other things, all of its right, title and interest in and to the [DESCRIBE NATURE OF PRODUCT, I.E. MOVIE-OF-THE-WEEK, TELEVISION PROGRAMS, AUDIOBOOKS, ETC.] listed on Schedule 1 hereto (hereinafter called the "Product") as security for various obligations of the Company to the Lender. Such security interest covers, among other things, all physical properties of every kind or nature of, or relating to, the Product and all versions thereof, including, without limitation, exposed film, developed film, positives, negatives, prints, positive prints, answer prints, special effects, preparing materials (including interpositives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices, and all other forms of pre-print elements), sound tracks, cutouts, trims and any and all other physical properties of every kind and nature of, or relating to, the Product, whether in completed form or in some state of completion, and all audio and video masters, duplicates, drafts, versions, variations and copies of each thereof, in all formats whether on film, videotape, disk, cassette, phonorecord or otherwise and all music sheets and promotional materials relating to the Product all of the foregoing items being hereinafter collectively called the "Collateral". From time to time, the Laboratory will have in its possession certain items of the Collateral. -1- 155 Accordingly, the parties hereto hereby agree as follows: 1. Each of the Company and the Lender hereby appoints the Laboratory as the pledgeholder of all items of Collateral that may from time to time come into the possession or control of the Laboratory. The Laboratory agrees to hold all such items of Collateral as pledgeholder for the Lender subject to the following terms and conditions: a. Except as permitted by Section 1(b) below, the Laboratory will keep all items of Collateral at the laboratories or storage facilities listed on Schedule 2 hereto, and will not deliver such property to anyone. b. Subject to the provisions of Sections 1(c) below, the Laboratory will permit the Company and its designated affiliates, sublicensees and designees: i) to have access to the negatives and other pre-print material of the Product (but not remove them from the possession of the Laboratory) for purposes of inspecting, cutting, scoring or similar purposes; ii) to obtain a reasonable number of positive prints including without limitation, dailies, for the purposes of editing and previewing the Product; iii) to direct the making of pre-print material, positive prints and video masters of the Product and trailers thereof and the delivery thereof to the Company or distributors, licensees or other parties as the Company may direct; iv) to remove reasonable amounts of material for processing by optical and/or sound houses which agree in writing to be bound by the terms hereof or enter into a separate laboratory pledgeholder agreement substantially in the form hereof, and to return such materials when processed to the Laboratory; v) with the prior written consent of the Lender, to forward any item of Collateral to another laboratory. The Lender hereby consents to the Laboratory's forwarding original material or elements constituting Collateral, if requested to do so by the Company, to any of the laboratories listed on Schedule 4 hereto. The Lender's consent contained in this clause (v) may be revoked at any time by written notice to the Laboratory and the Company from the Lender. In addition, such consent shall be deemed to be revoked at any time upon receipt by the Laboratory of written notice -2- 156 from the Lender, that an Event of Default has occurred under the Credit Agreement; and vi) to forward any of the above-mentioned property to another laboratory, approved by the Lender, if the Lender has previously received a Pledgeholder Agreement executed by such laboratory. c. If and when the Laboratory shall receive written notice from the Lender that an Event of Default shall have occurred and is continuing under the Credit Agreement, the Laboratory shall take no further orders from the Company and will hold all items of Collateral within its possession or under its control as pledgeholder hereunder, subject only (i) to the order and instruction of the Lender; and (ii) to the rights of the Lender to have access to and/or delivery of items referred to in Section 5 below. 2. The Laboratory shall keep the original negatives of the Product in film vaults separate from and at a reasonable distance from protective duplicating materials (whether protective masters, fine grains, duplicate negatives or otherwise) to afford protection against any loss or damage, whether by fire or other disaster or otherwise. The Laboratory shall keep the Lender advised in writing of the actual location of the film vaults where all items of the Collateral are kept, including information as to the separate film vaults utilized for the original negatives and protective materials as aforesaid. 3. The Laboratory agrees that in its capacity as pledgeholder it is holding and has possession of the Collateral and the physical properties thereof constructively for the Lender and, until such time that the Lender notifies the Laboratory that the Lender no longer has any rights in the Collateral, upon written notice to the Laboratory indicating that an Event of Default has occurred and is continuing under the Credit Agreement, will hold a sale or sales of the Collateral or any part thereof in accordance with the direction and instruction of the Lender, at the expense of the Lender, or in the alternative will cause to be delivered or made available to the Lender or its nominee (in all cases, pursuant to written instructions from the Lender) the Collateral and all physical properties thereof in the possession of the Laboratory or under its control for the purpose of enabling the Lender to deal with the same pursuant to the Credit Agreement. Nothing herein contained shall be construed to waive any rights of the Laboratory as specified under Section 7 hereof. 4. The Company hereby waives any claim for damages or otherwise which it may have against the Laboratory for any acts which the Laboratory may take as pledgeholder, pursuant to the written direction of the Lender made in accordance with the terms of this Agreement. -3- 157 5. Subject to Section 7 hereof, the Laboratory agrees that, despite the existence of any other claim which the Laboratory may have against the Company and/or any third-party distributor of the Product, the Laboratory shall accept and fulfill orders for laboratory work and any other material which may be required by the Lender or any other third-party distributor of the Product, subject to satisfactory credit arrangements being made with the Laboratory with respect to any charges incurred on behalf of the Lender or any such third-party distributor, and the Laboratory will not assert any claim or lien, statutory or otherwise, against the Lender or against the Product (except as set forth in Section 7 hereof) with respect to any charges for laboratory services or materials ordered by the Company, the designees of the Company or any third-party distributor of the Product. 6. The parties hereto agree that the Lender and its respective designees, successors and assigns shall each be entitled to unilaterally remove from the Laboratory materials made pursuant to an order contemplated by Section 5 hereof, which materials shall not be subject to this Agreement. 7. The Laboratory shall hold and/or process the Collateral under its standard terms of business as set forth in Schedule 3 hereto, except that any liens arising in favor of the Laboratory shall be limited to an aggregate amount of $50,000 at any one time outstanding for processing and/or storing the Collateral and/or materials delivered therefrom for the Company and/or any of their designees. Except as provided in the prior sentence, the rights of the Laboratory in the Collateral shall be subordinate and junior to the rights of the Lender in respect of the Collateral. 8. The Lender shall promptly give written notice to the Laboratory when the Lender's security interests in the Collateral has terminated. Upon receipt of such written notice, the Laboratory's obligations hereunder as pledgeholder for the Lender shall terminate. 9. This Agreement shall be binding on and inure to the benefit of the parties hereto and the successors and assigns of each of the parties. 10. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK. 11. No amendment to this Agreement shall be effective unless in writing and signed by the Company, the Lender and the Laboratory. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together, shall constitute but one instrument, and shall become effective on the date on which the Lender shall have received a fully-executed copy of this Agreement. Promptly thereafter, the -4- 158 Company shall deliver or mail counterparts of this Agreement bearing the signature of each of the parties hereto to each party hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first written above. [LABORATORY] By ------------------------------------- Name: Title: Address: Attn: DOVE ENTERTAINMENT, INC. By ------------------------------------- Name: Title: Address: Attn: DOVE INTERNATIONAL, INC. By ------------------------------------- Name: Title: Address: Attn: -5- 159 DOVE FOUR POINT, INC. By ------------------------------------- Name: Title: Address: Attn: THE CHASE MANHATTAN BANK By ------------------------------------- Name: Title: Address: 270 Park Avenue, 37th floor New York, NY 10017-2070 Attn: John J. Huber, III -6- 160 Schedule 1 List of Items of Product 161 Schedule 2 List of Laboratory and Storage Facilities 162 Schedule 3 [Attach Laboratory's Standard Terms of Business] 163 Schedule 4 Other Laboratories 164 EXHIBIT E-1 FORM OF COPYRIGHT SECURITY AGREEMENT WHEREAS, Dove Entertainment, Inc., a California corporation ("Borrower"), and each Subsidiary of Borrower whose name appears at the foot hereof (collectively the "Grantors") now own or hold and may hereafter acquire or hold certain copyrights and rights under copyright with respect to certain movies-of-the-week, television programs, films, videotapes or other programs produced for television release or for release in any other medium, shown on network, free and cable, pay and/or other television medium (including, without limitation, first-run syndication), certain written works, books and other published material, and sound recordings and audiobooks, in each case whether recorded on film, videotape, cassette, cartridge, disc, audio cassette or on or by any other means, method, process or device whether now owned or hereafter developed, including, without limitation, those United States copyright registrations listed on Schedule 1 hereto (the "Product") as such Schedule may be amended from time to time by the addition of copyrights subsequently arising or acquired; WHEREAS, pursuant to that certain Credit, Security, Guaranty and Pledge Agreement, dated as of November 4, 1997, (as the same may be amended, modified or otherwise supplemented from time to time, the "Credit Agreement"), among the Borrower, the Corporate Guarantors named therein and The Chase Manhattan Bank (the "Lender"), the Lender has agreed to make loans to the Borrower; WHEREAS, pursuant to the terms of the Credit Agreement, the Grantors granted to the Lender a security interest in all of the personal property of the Grantors including all right, title and interest of the Grantors in, to and under any copyright or copyright license whether now existing or hereafter arising or acquired, and all proceeds thereof to secure the payment of the Obligations (as such term is defined in the Credit Agreement); NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, Grantors do, as security for the Obligations, hereby grant to the Lender a continuing security interest in all the Grantors' right, title and interest in and to each and every item of Product, the scenario, screenplay or script upon which an item of Product is based, all of the properties thereof, tangible and intangible, and all domestic and foreign copyrights and all other rights therein and thereto, of every kind and character, whether now in existence or hereafter to be made or produced, and whether or not in possession of such Grantors, including with respect to each and every item of Product and without limiting the foregoing language, each and all of the following particular rights and properties (to the extent they are owned or hereafter created or acquired by Grantors): -1- 165 (i) all scenarios, screenplays and/or scripts at every stage thereof; (ii) all common law and/or statutory copyright and other rights in all literary and other properties (hereinafter called "said literary properties") which form the basis of each item of Product and/or which are and/or will be incorporated into each item of Product, all component parts of each item of Product consisting of said literary properties, all rights in and to the story, all treatments of said story and said literary properties, together with all preliminary and final screenplays used and to be used in connection with the item of Product, and all other literary material upon which the item of Product is based or from which it is adapted; (iii) all rights in and to all music and musical compositions used and to be used in each item of Product, including, each without limitation, all rights to record, rerecord, produce, reproduce or synchronize all of said music and musical compositions in and in connection therewith; (iv) without limitation, all exposed film, developed film, positives, negatives, prints, positive prints, answer prints, special effects, preparing materials (including interpositives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices, and all other forms of pre-print elements), sound tracks, cutouts, trims and any and all other physical properties of every kind and nature relating to such item of Product, whether in completed form or in some state of completion, and all masters, duplicates, drafts, versions, variations and copies of each thereof, in all formats whether on film, videotape, disk or otherwise and all music sheets and promotional materials relating to such item of Product (collectively, the "Physical Materials"); (v) all collateral, allied, subsidiary and merchandising rights appurtenant or related to each item of Product including, without limitation, the following rights: all rights to produce remakes or sequels or prequels to each item of Product based upon each item of Product, said literary properties or the theme of each item of Product and/or the text or any part of said literary properties; all rights throughout the world to broadcast, transmit and/or reproduce by means of television (including commercially sponsored, sustaining and subscription or "pay" television) or by any process analogous thereto, now known or hereafter devised, each item of Product or any remake or sequel or prequel to the item of Product; all rights to produce primarily for television or similar use a motion picture or series of motion pictures, by use of film or any other recording device or medium now known or hereafter devised, based upon each item of Product, said literary properties or any part thereof, including, without limitation, based upon any script, scenario or the like used in each item of Product; all merchandising rights including, without limitation, all rights to use, exploit and license others to use and exploit any and all commercial tieups of any kind arising out of or connected with said literary properties, each item of Product, the title or titles of each item of Product, the characters of each item -2- 166 of Product or said literary properties and/or the names or characteristics of said characters and including further, without limitation, any and all commercial exploitation in connection with or related to each item of Product, any remake or sequel thereof and/or said literary properties; (vi) all statutory copyrights, domestic and foreign, obtained or to be obtained on items of Product, together with any and all copyrights obtained or to be obtained in connection with each item of Product or any underlying or component elements of each item of Product, including, in each case without limitation, all copyrights on the property described in subparagraphs (i) through (v) inclusive, of this paragraph, together with the right to copyright (and all rights to renew or extend such copyrights) and the right to sue in the name of any of the Grantors' names for past, present and future infringements of copyright; (vii) all insurance policies and completion bonds connected with each item of Product and all proceeds which may be derived therefrom; (viii) all rights to distribute, sell, rent, license the exhibition of and otherwise exploit and turn to account each item of Product, the Physical Materials and rights in and to said story, other literary material upon which each item of Product is based or from which it is adapted, and said music and musical compositions used or to be used in each item of Product; (ix) any and all sums, proceeds, money, products, profits or increases, including money profits or increases (as those terms are used in the New York Uniform Commercial Code (the "UCC") or otherwise) or other property obtained or to be obtained from the distribution, exhibition, sale or other uses or dispositions of each item of Product or any part of each item of Product, including, without limitation, all proceeds, profits, products and increases, whether in money or otherwise, from the sale, rental or licensing of each item of Product and/or any of the elements of each item of Product including from collateral, allied, subsidiary and merchandising rights; (x) the dramatic, nondramatic, stage, television, radio and publishing rights, title and interest in and to each item of Product, and the right to obtain copyrights and renewals of copyrights therein; (xi) the name or title of each item of Product and all rights of such Grantor to the use thereof, including, without limitation, rights protected pursuant to trademark, service mark, unfair competition and/or the rules and principles of any other applicable statutes, common law, or other rule or principle of law; (xii) any and all contract rights and/or chattel paper which may arise in connection with each item of Product; -3- 167 (xiii) all accounts and/or other rights to payment which such Grantor presently owns or which may arise in favor of such Grantor in the future, including, without limitation, any refund under a completion guaranty, all accounts and/or rights to payment due from exhibitors in connection with the distribution of each item of Product, and from exploitation of any and all of the collateral, allied, subsidiary, merchandising and other rights in connection with each item of Product; (xiv) any and all "general intangibles" (as that term is defined in the UCC) not elsewhere included in this definition, including, without limitation, any and all general intangibles consisting of any right to payment which may arise in the distribution or exploitation of any of the rights set out herein, and any and all general intangible rights in favor of such Grantor for services or other performances by any third parties, including actors, writers, directors, individual producers and/or any and all other performing or nonperforming artists in any way connected with each item of Product, any and all general intangible rights in favor of such Grantor relating to licenses of sound or other equipment, licenses for any photograph or photographic process, and all general intangibles related to the distribution or exploitation of each item of Product including general intangibles related to or which grow out of the exhibition of each item of Product and the exploitation of any and all other rights in each item of Product set out in this definition; (xv) any and all goods, including inventory (as that term is defined in the UCC), which may arise in connection with the creation, production or delivery of each item of Product and which goods pursuant to any production or distribution agreement or otherwise are owned by such Grantor; (xvi) all and each of the rights, regardless of denomination, which arise in connection with the creation, production, completion of production, delivery, distribution, or other exploitation of each item of Product, including, without limitation, any and all rights in favor of such Grantor, the ownership or control of which are or may become necessary or desirable, in the opinion of the Lender, in order to complete production of each item of Product in the event that the Agent exercises any rights it may have to take over and complete production of each item of Product; (xvii) any and all documents issued by any pledgeholder or bailee with respect to the item of Product, or any Physical Materials (whether or not in completed form) with respect thereto; (xviii) any and all production accounts or other bank accounts established by such Grantor with respect to such item of Product; (xix) any and all rights of such Grantor under contracts relating to the production or acquisition of each item of Product; and -4- 168 (xx) any and all rights of such Grantor under any agreement entered into by such Grantor pursuant to which such Grantor has sold, leased, licensed or assigned distribution rights or other exploitation rights to any item of Product to an unaffiliated person; (all of the foregoing items or types of property, whether presently existing or hereafter arising or acquired, shall be referred to herein collectively as the "Collateral"). Each of the Grantors agrees that if any person, firm, corporation or other entity shall do or perform any acts which the Lender believes constitute a copyright infringement of the photoplay or of any of the literary, dramatic or musical material contained in the Product, or constitute a plagiarism, or violate or infringe any right of any Grantor or the Lender therein or if any person, firm, corporation or other entity shall do or perform any acts which the Lender believes constitute an unauthorized or unlawful distribution, exhibition, or use thereof, then and in any such event, upon 30 days' prior written notice to such Grantor, while an Event of Default under the Credit Agreement is continuing, the Lender may and shall have the right to take such steps and institute such suits or proceedings as the Lender may deem advisable or necessary to prevent such acts and conduct and to secure damages and other relief by reason thereof, and to generally take such steps as may be advisable or necessary or proper for the full protection of the rights of the parties. The Lender may take such steps or institute such suits or proceedings in its own name or in the name of such Grantor or in the names of the parties jointly. The Lender hereby agrees to give the applicable Grantor notice of any steps taken, or any suits or proceedings instituted, by the Lender pursuant to this paragraph. This security interest is granted in conjunction with the security interests granted to the Lender pursuant to the Credit Agreement. Each Grantor does hereby further acknowledge and affirm that the rights and remedies of the Lender with respect to the security interest in the Collateral made and granted hereby are subject to, and more fully set forth in, the Credit Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein. This Copyright Security Agreement is made for collateral purposes only. At such time as all of the Loans under the Credit Agreement shall have been repaid in full, the Commitments (including any commitment to issue any Letter of Credit) shall have terminated and all Letters of Credit shall have expired or been terminated or cancelled, the Lender shall execute and deliver to such Grantors, at the Borrower's or the applicable Grantor's expense, without representation, warranty or recourse, all releases and reassignments, termination statements and other instruments as may be necessary or proper to terminate the security interest of the Lender in the Collateral, subject to any disposition thereof which may have been made by the Lender pursuant to the terms hereof or of the Credit Agreement. The Lender agrees that there will be no assignment of the Collateral, other than the security interest described herein, unless and until there shall occur an Event of Default under -5- 169 the Credit Agreement and the Lender gives written notice to the applicable Grantor of its intention to enforce its rights against any of the Collateral. So long as no Event of Default under the Credit Agreement shall have occurred and be continuing, and subject to the various provisions of the Credit Agreement and the other Fundamental Documents to which it is a party, each Grantor may use, license and exploit the Collateral in any lawful manner. THIS COPYRIGHT SECURITY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Credit Agreement. IN WITNESS WHEREOF, the Grantors have caused this Copyright Security Agreement to be duly executed by its officer thereunto duly authorized as of November 4, 1997. DOVE ENTERTAINMENT, INC. By ------------------------------------------ Name: Title: -6- 170 DOVE INTERNATIONAL, INC. By ------------------------------------------ Name: Title: DOVE FOUR POINT, INC. By ------------------------------------------ Name: Title: Accepted: THE CHASE MANHATTAN BANK By ------------------------------------------ Name: Title: -7- 171 STATE OF CALIFORNIA ) : ss.: COUNTY OF LOS ANGELES) On the ____ day of __________, in the year 1997, before me personally came _____________________, to me known, who, being by me sworn, did say that s/he is an ____________ of Dove Entertainment, Inc. which corporation is described in, and which corporation executed the above instrument, and that s/he signed his/her name by order of the Board of Directors of said corporation. ----------------------------------- Notary Public 172 STATE OF ) : ss.: COUNTY OF ) On the ____ day of __________, in the year 1997, before me personally came _____________________, to me known, who, being by me sworn, did say that s/he is an ____________ of Dove International, Inc., which corporation is described in, and which corporation executed the above instrument, and that s/he signed his/her name by order of the Board of Directors of said corporation. ----------------------------------- Notary Public 173 STATE OF ) : ss.: COUNTY OF ) On the ____ day of __________, in the year 1997, before me personally came _____________________, to me known, who, being by me sworn, did say that s/he is an ____________ of Dove Four Point, Inc., which corporation is described in, and which corporation executed the above instrument, and that s/he signed his/her name by order of the Board of Directors of said corporation. ----------------------------------- Notary Public 174 SCHEDULE 1 to Copyright Security Agreement
Title Registration No. Date of Registration - ----- ---------------- --------------------
175 EXHIBIT E-2 FORM OF SUPPLEMENT NO. __ TO THE COPYRIGHT SECURITY AGREEMENT DATED AS OF NOVEMBER 4, 1997 WHEREAS, [INSERT NAME OF GRANTOR], a __________ corporation (the "Grantor") is party to that certain Credit, Security, Guaranty and Pledge Agreement, dated as of November 4, 1997, (as the same may be amended, modified or otherwise supplemented from time to time, the "Credit Agreement"), among Dove Entertainment, Inc. (the "Borrower"), the Corporate Guarantors named therein (the "Guarantors") and The Chase Manhattan Bank, as Lender (the "Lender"); WHEREAS, pursuant to the terms of the Credit Agreement, the Grantor has granted to the Lender a security interest in all right, title and interest of the Grantor in and to all personal property, whether now owned, presently existing or hereafter acquired or created, including, without limitation, all right, title and interest of the Grantor in, to and under any item of Product (such term being used herein as defined in the Copyright Security Agreement referred to below) and any copyright or copyright license, whether now existing or hereafter arising, acquired or created, and all proceeds thereof or income therefrom, to secure the payment and performance of the Obligations (such term being used herein as defined in the Credit Agreement) pursuant to the Credit Agreement; WHEREAS, the Grantor is a party to a Copyright Security Agreement, dated as of November 4, 1997 (as the same has been, or may hereafter be, amended or supplemented from time to time, the "Copyright Security Agreement"), pursuant to which the Grantor has granted to the Lender, as security for the Obligations, a continuing security interest in all of the Grantor's right, title and interest in and to each and every item of Product, the scenario, screenplay or script upon which an item of Product is based, all of the properties thereof, tangible and intangible, and all domestic and foreign copyrights and all other rights therein and thereto, of every kind and character, whether now in existence or hereafter to be made or produced, and whether or not in possession of the Grantor, all as more fully set forth in the Copyright Security Agreement; WHEREAS, the Grantor has acquired or created additional items of Product since the date of execution of the Copyright Security Agreement and the most recent Supplement thereto and holds certain additional copyrights and rights under copyright with respect to items of Product; -1- 176 WHEREAS, Schedule 1 to the Copyright Security Agreement does not reflect (i) item(s) of Product acquired or created by the Grantor since the date of execution of the Copyright Security Agreement and the most recent Supplement thereto or (ii) all the copyrights and rights under copyright held by the Grantor; THEREFORE, A. The Grantor does hereby grant to the Lender, as security, a continuing security interest in and to all of the Grantor's right, title and interest in and to each and every item of Product being added to Schedule 1 to the Copyright Security Agreement pursuant to paragraph (b) below, the scenario, screenplay or script upon which such item of Product is based, all of the properties thereof, tangible and intangible, and all domestic and foreign copyrights and all other rights therein and thereto, of every kind and character, whether now in existence or hereafter to be made or produced, and whether or not in possession of the Grantor, all as contemplated by, and as more fully set forth in, the Copyright Security Agreement. B. Schedule 1 to the Copyright Security Agreement is hereby supplemented, effective as of the date hereof, so as to reflect all of the copyrights and rights under copyright with respect to the item(s) of Product in and to which the Grantor has granted a continuing security interest to the Lender pursuant to the terms of the Copyright Security Agreement and the Credit Agreement. The following item(s) of Product and copyright information are hereby added to Schedule 1 to the Copyright Security Agreement:
Date of Title Registration No. Registration ----- ---------------- ------------
Except as expressly supplemented hereby, the Copyright Security Agreement shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in the Copyright Security Agreement, the terms "Agreement", "this Agreement", "this Copyright Security Agreement", "herein", "hereafter", "hereto", "hereof" and words of similar import, shall, unless the context otherwise requires, mean the Copyright Security Agreement as supplemented by this Supplement. Except as expressly supplemented hereby, the Copyright Security Agreement, all documents contemplated thereby and any previously executed Supplements thereto, are each hereby confirmed and ratified by the Grantor. The execution and filing of this Supplement, and the addition of the item(s) of Product set forth herein to Schedule 1 to the Copyright Security Agreement are not intended by -2- 177 the parties to derogate from, or extinguish, any of the Lender's rights or remedies under (i) the Copyright Security Agreement and/or any agreement, amendment or supplement thereto or any other instrument executed by the Grantor and heretofore recorded or submitted for recording in the U.S. Copyright Office or (ii) any financing statement, continuation statement, deed or charge or other instrument executed by the Grantor and heretofore filed in any state or country in the United States of America or elsewhere. IN WITNESS WHEREOF, the Grantor has caused this Supplement No. ___ to the Copyright Security Agreement to be duly executed by its duly authorized officer as of [INSERT DATE OF EXECUTION]. [NAME OF GRANTOR] By: ---------------------------------------- Name: Title: -3- 178 STATE OF _____________) : ss.: COUNTY OF ____________) On this the ___ day of __________, ____, before me, ________________________________, the undersigned Notary Public, personally appeared ________________________________, [ ] personally known to me, [ ] proved to me on the basis of satisfactory evidence, to be the _________________________ of the corporation known as ______________________ who executed the foregoing instrument on behalf of the corporation, and acknowledged that such corporation executed it pursuant to a resolution of its Board of Directors. WITNESS my hand and official seal. ______________________________ Notary Public 6 179 EXHIBIT F FORM OF LABORATORY ACCESS LETTER [DATE] [ADDRESS TO LABORATORY] Dear Sir or Madam: This letter will confirm the terms of an agreement among you (the "Laboratory"), Dove Entertainment, Inc. ("Borrower") and the affiliates of Borrower listed on the signature pages hereto (collectively, the "Company") and The Chase Manhattan Bank (the "Lender") relating to the items of Product (the "Product") listed on Schedule 1 hereto. Reference is hereby made to that certain Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among the Borrower, the Corporate Guarantors named therein and the Lender; The Laboratory now has or may have in its possession or under its control certain of the exposed film, developed film, positives, negatives, prints, positive prints, answer prints, special effects, preparing material (including interpositives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices, and all other forms of pre-print elements), sound tracks, cutouts, trims and any and all other physical properties of every kind and nature, of or relating to, the Product, whether in completed form or in some state of completion, and all audio and video masters, duplicates, drafts, versions, variations and copies of each thereof, in all formats whether on film, videotape, disk, cassette, phonorecord or otherwise and all materials relating to the Product (all of the foregoing physical properties now or hereafter in the Laboratory's possession or control are herein collectively referred to as the "Physical Materials"). The Company now possesses certain rights in connection with the Product and the Physical Materials, including, without limitation, non-exclusive rights of access with respect to the Physical Materials (the "Access Rights"). For good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. The Laboratory hereby agrees and confirms to the Lender that the Company is entitled to exercise the Access Rights with respect to the Physical Materials. The Company and the Lender hereby confirm to the Laboratory, and the Laboratory hereby acknowledges, that in -1- 180 order to secure certain obligations under the Credit Agreement, the Company has pursuant to the Credit Agreement, inter alia, granted to the Lender a security interest in and to the Company's right, title and interest in and to the Access Rights. 2. The parties hereby agree that, upon written notice from the Lender to the Laboratory that an Event of Default (as such term is defined in the Credit Agreement) has occurred and is continuing, and the Lender has exercised its security interest with respect to Access Rights, the Laboratory shall accord to the Lender (or the Lender's successors or assigns) instead of the Company, the non-exclusive right to exercise the Access Rights including, without limitation, the non-exclusive right to have access to the Physical Materials and to order and receive from the Laboratory on the Laboratory's normal and customary terms all materials and services customarily rendered or furnished by the Laboratory in connection with the Physical Materials. 3. The Laboratory and the other parties hereto hereby agree that the rights of any party hereunder (including, without limitation, the Lender's non-exclusive right to exercise the Access Rights) shall not be affected, diminished, impeded or interfered with by reason of any failure of any other person or entity to pay for any charges which have heretofore been incurred or which may hereinafter be incurred in connection with the Product or the Physical Materials, that the Laboratory will not look to any party hereunder for payment of any charges incurred by any other person or entity with respect to the Product or the Physical Materials (it being understood and agreed that all services or materials ordered by any party shall be at the sole cost and expense of the party ordering the same) and that any claim or lien which the Laboratory may assert against any party hereto with respect to services or materials furnished or rendered by the Laboratory at the request of such party with respect to the Product or the Physical Materials will not interfere with any other party's rights of access with respect to the Physical Materials or other rights referred to hereunder. 4. The parties hereto hereby agree that the Access Rights may not be terminated without the prior written consent of the Lender or unless the Laboratory shall have received notice that the Lender's security interest in and to the Company's right, title and interest in and to the Access Rights has terminated, and that the Physical Materials may not be released to any other entity (including another laboratory) without the Lender's prior written consent (which consent shall not be unreasonably withheld), except that unless and until the Laboratory shall have received written notice to the contrary, the Laboratory will permit the Company to remove Physical Materials from its premises in the ordinary course of business and in a manner consistent with the Access Rights. -2- 181 Kindly confirm your agreement to and acceptance of the foregoing by signing in the space provided below. Very truly yours, DOVE ENTERTAINMENT, INC. By ------------------------------------------ Name: Title: DOVE INTERNATIONAL, INC. By ------------------------------------------ Name: Title: DOVE FOUR POINT, INC. By ------------------------------------------ Name: Title: THE CHASE MANHATTAN BANK By ------------------------------------------ Name: Title: AGREED AND ACCEPTED BY: [LABORATORY] By: ------------------------------------ Name: Title: 182 Schedule 1 THE PRODUCT [LIST TITLES OF PRODUCT] 183 EXHIBIT G FORM OF NOTICE OF ASSIGNMENT AND IRREVOCABLE INSTRUCTIONS [INSERT NAME AND ADDRESS OF APPLICABLE CREDIT PARTY] As of __________ [INSERT NAME AND ADDRESS OF ACCOUNT DEBTOR] Re: [DESCRIBE AGREEMENT BETWEEN THE APPLICABLE CREDIT PARTY (THE "COMPANY") AND ACCOUNT DEBTOR (THE "AGREEMENT")] Dear Sir or Madam: The undersigned has created a security interest in its benefits and rights to receive payments under the Agreement referred to above, for the benefit of The Chase Manhattan Bank (the "Lender") pursuant to that certain Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among Dove Entertainment, Inc., the Corporate Guarantors named therein and the Lender. The Company hereby irrevocably instructs and authorizes you to pay all monies from time to time owing or to become due from you to us pursuant to the Agreement (the "Assigned Payments") as follows: If by wire transfer, to: The Chase Manhattan Bank for credit to Dove Entertainment, Inc. Collection Account Account No. 323-516-440 ABA No. 021000021 -1- 184 If by mail or hand delivery, to: The Chase Manhattan Bank P.O. Box 29176 New York, NY 10087-9176 for credit to Dove Entertainment, Inc. Collection Account This authority and instruction is coupled with an interest and may not be modified, terminated or revoked without the prior written consent of the Lender. Upon the occurrence of an Event of Default (as such term is defined in the Credit Agreement), the Lender shall have the right to modify this authority and instruction by written notice to the parties hereto. This Notice of Assignment and Irrevocable Instruction rescinds, supersedes and replaces in its entirety any prior or previous notice and/or directions to pay that you may have received with regard to the payment of all or any portion of the Assigned Payments. Please signify your acknowledgment hereof by signing and returning to the Lender at the address below the acknowledgment and confirmation as set out below. Very truly yours, [INSERT NAME OF APPLICABLE CREDIT PARTY] By:___________________________ Name: Title: To: The Chase Manhattan Bank c/o Morgan, Lewis & Bockius LLP 101 Park Avenue New York, New York 10178-0060 Attention: Michael A. Chapnick, Esq. -2- 185 WE ACKNOWLEDGE RECEIPT, of the foregoing notice of irrevocable authority and instruction and undertake to comply with it. We hereby confirm and agree that all monies owing under the Agreement shall be paid immediately when they are due subject only to the Agreement between us and the Company. Dated this ______ day of ______ [NAME OF ACCOUNT DEBTOR] By:_________________________ Name: Title: [THE UNDERSIGNED ACKNOWLEDGES THAT THE NOTICE OF ASSIGNMENT, DATED AS OF ______, IN FAVOR OF THE UNDERSIGNED HAS BEEN TERMINATED. [NAME OF OLD LENDER] BY:_________________________ NAME: TITLE:(1) - -------- (1) Applicable only to receivables previously assigned to another lender. -3- 186 EXHIBIT H FORM OF BORROWING CERTIFICATE The undersigned HEREBY CERTIFIES with respect to the Borrowing to be made on the date indicated below pursuant to the Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, among Dove Entertainment, Inc. (the "Borrower"), the Corporate Guarantors named therein and The Chase Manhattan Bank (the "Lender") (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement"; capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement) that: (a) the representations and warranties contained in the Credit Agreement are true and correct in all material respects on and as of the date hereof as if such representations and warranties had been made on and as of the date hereof except to the extent that such representations and warranties expressly relate to an earlier date and except to the extent that changes have occurred without breach or default under any of the terms or conditions of the Credit Agreement; (b) no Default or Event of Default has occurred or is continuing, nor shall any such event occur by reason of the making of the Loan(s) requested herein; (c) the Borrower requests [A] Loan(s) on the terms and conditions as stated in the Credit Agreement and the Note: (i) the requested Business Day of the Loan is [INSERT DATE]; (ii) the type of [INSERT WHETHER AN ALTERNATE BASE RATE OR EURODOLLAR LOAN] requested, the amounts thereof and the Interest Period(s) [IF A EURODOLLAR LOAN IS REQUESTED] are as follows: Type Interest Period Amount ---- --------------- ------ (iii) $_______ of the Loan requested above shall be subject to the guaranty obligations of the Individual Guarantors pursuant to the Guaranty Agreements(1); (d) the Borrowing Base on [INSERT DATE] was $__________ as indicated on the most recent Borrowing Base Certificate delivered to the Lender pursuant to the Credit - -------- (1) Applicable for Loans subject to the guaranty obligations of the Individual Guarantors under the Guaranty Agreements. -1- 187 Agreement and the undersigned has no reason to believe that the sum of (x) the Borrowing Base, (y) Maximum Guaranty Amount and (z) amounts currently held in the Collection Account, if currently computed would be less than the outstanding principal amount of all Loans under the Credit Agreement (after giving effect to the Loan requested hereby). IN WITNESS WHEREOF, the undersigned has caused this certificate to be executed this ___ day of ___________. DOVE ENTERTAINMENT, INC. By____________________________ Name: Title: APPROVED BY: MEDIA EQUITIES INTERNATIONAL, L.L.C. By____________________________ Name: Kenneth F. Gorman Title: By____________________________ Name: Bruce Maggin Title: -2- 188 EXHIBIT I FORM OF INSTRUMENT OF ASSUMPTION AND JOINDER Instrument of ASSUMPTION AND JOINDER AGREEMENT dated as of ___________ (the "Assumption Agreement") made by [INSERT NAME OF NEW CREDIT PARTY], a [INSERT STATE OF INCORPORATION] corporation (the "Company") in favor of The Chase Manhattan Bank, as Lender (the "Lender"), under that certain Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among Dove Entertainment, Inc., a California corporation, the Corporate Guarantors referred to therein and the Lender. W I T N E S S E T H The Company is a [INSERT STATE OF INCORPORATION] corporation and is a Subsidiary of [INSERT NAME OF CREDIT PARTY]. Pursuant to Section 6.22 of the Credit Agreement, the Company is required to execute this document (as a newly [FORMED OR ACQUIRED] Subsidiary of [INSERT NAME OF CREDIT PARTY]). NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt of which is hereby acknowledged, the Company hereby agrees as follows: 1. Assumption and Joinder. (a) The Company hereby expressly confirms that it has assumed, and hereby agrees to perform and observe, each and every one of the covenants, rights, promises, agreements, terms, conditions, obligations, appointments, duties and liabilities of (i) a Corporate Guarantor under the Credit Agreement and all the other Fundamental Documents applicable to it as a Corporate Guarantor, (ii) a Contributor (as such term is defined in the Contribution Agreement) under the Contribution Agreement and (iii) a Grantor (as such term is defined in the Copyright Security agreement) under the Copyright Security Agreement. By virtue of the foregoing, the Company hereby accepts and assumes any liability of (x) a Corporate Guarantor and/or a Credit Party related to each representation or warranty, covenant or obligation made by a Corporate Guarantor and/or a Credit Party in the Credit Agreement or any other document and hereby expressly affirms, on the date hereof, for the benefit of the Lender, each of such representations, warranties, covenants and obligations, (y) a Contributor related to each covenant or obligation made by a Contributor in the Contribution Agreement and hereby expressly affirms, -1- 189 on the date hereof, each of such covenants and obligations and (z) a Grantor related to each covenant or obligation made by a Grantor in the Copyright Security Agreement and hereby expressly affirms, on the date hereof, each of such covenants and obligations. (b) All references to the term "Corporate Guarantor" or "Credit Party" in the Credit Agreement or any other Fundamental Document, or in any document or instrument executed and delivered or furnished, or to be executed and delivered or furnished, in connection therewith shall be deemed to be references to, and shall include, the Company. (c) All references to the term "Contributor" in the Contribution Agreement, or in any document or instrument executed and delivered or furnished, or to be executed and delivered or furnished, in connection therewith shall be deemed to be references to, and shall include, the Company. (d) All references to the term "Grantor" in the Copyright Security Agreement, or in any document or instrument executed and delivered or furnished, or to be executed and delivered or furnished, in connection therewith shall be deemed to be references to, and shall include, the Company. 2. Representations and Warranties. The Company hereby represents and warrants to the Lender as follows: (a) The Company has the requisite corporate power and authority to enter into this Assumption Agreement and to perform its obligations hereunder and under the Credit Agreement, the Contribution Agreement, the Copyright Security Agreement and the other Fundamental Documents to which it is a party. The execution, delivery and performance of this Assumption Agreement by the Company and the performance of its obligations under the Credit Agreement and the other Fundamental Documents have been duly authorized by the Board of Directors of the Company and no other corporate proceedings on the part of the Company are necessary to authorize the execution, delivery or performance of this Assumption Agreement, the transactions contemplated hereby or the performance of its obligations under the Credit Agreement or any other Fundamental Document. This Assumption Agreement has been duly executed and delivered by the Company. This Assumption Agreement and the Credit Agreement each constitutes a legal, valid and binding obligation of the Company enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors rights generally and to general principles of equity. (b) The representations and warranties set forth in Article 3 of the Credit Agreement are true and correct on and as of the date hereof (except to the extent that such representations and warranties expressly relate to an earlier date) with the same effect as if made on and as of the date hereof. -2- 190 (c) The authorized capitalization of the Company, the number of shares of its capital stock outstanding on the date hereof, and the ownership of the outstanding shares of its capital stock is set forth on Schedule 1 hereto. (d) On the date hereof the Company has not done business, is not doing business and does not intend to do business other than under its full corporate name, including, without limitation, under any trade name or other doing business name except as set forth on Schedule 1 hereto, and is in good standing in all jurisdictions where the failure to be in good standing as a foreign jurisdiction would give rise to a material liability of the Company. (e) The chief executive office of the Company is located at ________________________. Such office is the place where the Company keeps the records concerning the Collateral attributable to it on the date hereof. The only places at which the Company regularly keeps any goods included in the Collateral attributable to it on the date hereof are the places listed on Schedule 2 hereto. 3. Further Assurances. At any time and from time to time, upon the Lender?s request and at the sole expense of the Company, the Company will promptly and duly execute and deliver any and all further instruments and documents and take such further action as the Lender reasonably deems necessary to effect the purposes of this Assumption Agreement. 4. Binding Effect; Assignment. This Assumption Agreement shall be binding upon the Company and shall inure to the benefit of the Lender and its successors and assigns. 5. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK. IN WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be duly executed and delivered by its duly authorized officer as of the date first above written. [NAME OF COMPANY] By: ______________________ Name: Title: -3- 191 SCHEDULE 1 Capital Stock of [NAME OF COMPANY] Authorized capitalization: Number of shares of capital stock outstanding: Ownership of the outstanding capital stock: 192 SCHEDULE 2 Location of Collateral 193 EXHIBIT J FORM OF CONTRIBUTION AGREEMENT This CONTRIBUTION AGREEMENT ("Agreement") is entered into as of November 4, 1997 by and among Dove Entertainment, Inc., a California corporation (the "Company" or the "Borrower") and each Subsidiary of the Borrower whose name appears at the foot hereof (collectively, the "Contributors", individually each a "Contributor"), for the purpose of establishing the respective rights and obligations of contribution among the Contributors and the Borrower in connection with the Credit Agreement (as hereinafter defined). Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. WHEREAS, the Borrower and the Contributors are parties to a Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 among the Borrower, the Contributors and The Chase Manhattan Bank (the "Lender") (said agreement, as it may hereafter be amended, supplemented or otherwise modified, renewed or replaced from time to time in accordance with its terms being the "Credit Agreement"), pursuant to which the Lender has made certain commitments, subject to the terms and conditions set forth therein, to extend a credit facility to the Borrower; WHEREAS, pursuant to the Credit Agreement, the Contributors have guaranteed the Obligations (such term being used herein as defined in the Credit Agreement) of the Borrower; WHEREAS, pursuant to the terms of the Credit Agreement, each of the Borrower and Contributors has granted to the Lender a security interest in the Collateral (as defined in the Credit Agreement) for their respective obligations thereunder; WHEREAS, as a result of the transactions contemplated by the Credit Agreement, the Borrower and the Contributors will benefit, directly and indirectly, from the Obligations and in consideration thereof desire to enter into this Agreement to allocate such benefits among themselves and to provide a fair and equitable arrangement to make contributions in the event any payments are made by the Contributors under the Credit Agreement or the Lender exercises recourse against any of the Collateral owned by the Contributors (such payment or recourse being referred to herein as a "Contribution"); NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Contributors and the Borrower hereby agree as follows: -1- 194 SECTION 1. Contribution. In order to provide for just and equitable contribution among the Contributors and the Borrower in the event any Contribution is made by a Contributor (a "Funding Contributor") under the Credit Agreement, that Funding Contributor shall be entitled to a contribution from certain other Contributors and from the Borrower for all payments, damages and expenses incurred by that Funding Contributor in discharging any of the Obligations, in the manner and to the extent set forth in this Agreement. The amount of any Contribution under this Agreement shall be equal to the payment made pursuant to the Credit Agreement or the fair saleable value of the Funding Contributor's portion of the Collateral against which recourse is exercised, and shall be determined as of the date on which such payment is made or recourse is exercised, as the case may be. SECTION 2. Benefit Amount Defined. For purposes of this Agreement, the "Benefit Amount" of any Contributor as of any date of determination shall be the net value of the benefits to such Contributor from extensions of credit made by the Lender to the Borrower under the Credit Agreement. Such benefits shall include benefits of funds constituting proceeds of Loans which are deposited into the account of the Borrower by the Lender which are in turn advanced or contributed by the Borrower to such Contributor (collectively, the "Benefits"). In the case of any proceeds of Loans or Benefits advanced or contributed to a Person (an "Owned Entity") any of the equity interests of which are owned directly or indirectly by a Contributor, the Benefit Amount of a Contributor with respect thereto shall be that portion of the net value of the benefits attributable to Loans or Benefits advanced or contributed to the Owned Entity equal to the direct or indirect percentage ownership of such Contributor in its Owned Entity. SECTION 3. Contribution Obligation. Each Contributor and the Borrower shall be liable to a Funding Contributor in an amount equal to the greater of (A) the product of (i) a fraction the numerator of which is (x) the Benefit Amount of such Contributor or Borrower, and the denominator of which is (y) the total amount of Obligations and (ii) the amount of Obligations paid by such Funding Contributor and (B) 95% of the excess of the fair saleable value of the property of such Contributor over the total liabilities of such Contributor (including the maximum amount reasonably expected to become due in respect of contingent liabilities), as the case may be, determined as of the date on which the payment made by a Funding Contributor is deemed made for purposes of this Agreement or any recourse is exercised against any Contributor's portion of the Collateral, as the case may be (giving effect to all payments made by other Funding Contributors and to the exercise of recourse against any other Funding Contributor's portion of the Collateral as of such date in a manner to maximize the amount of such contributions). SECTION 4. Allocation. In the event that at any time there exists more than one Funding Contributor with respect to any Contribution (in any such case, the "Applicable Contribution"), then payment from other Contributors and from the Borrower pursuant to this Agreement shall be allocated among such Funding Contributors in proportion to the total amount of the Contribution made for or on account of the Borrower by each such Funding Contributor pursuant to the Applicable Contribution. In the event that at any time any Contributor pays an -2- 195 amount under this Agreement in excess of the amount calculated pursuant to clause (A) of Section 3, that Contributor shall be deemed to be a Funding Contributor to the extent of such excess and shall be entitled to contribution from the other Contributors and from the Borrower in accordance with the provisions of this Agreement. SECTION 5. Subrogation. Any payments made hereunder by the Borrower shall be credited against amounts payable by the Borrower pursuant to any subrogation rights of the Contributors which received the payments under this Agreement. SECTION 6. Preservation of Rights. This Agreement shall not limit any right which any Contributor may have against any other Person which is not a party hereto. SECTION 7. Subsidiary Payment. The amount of contribution payable under this Agreement by any Contributor shall be reduced by the amount of any contribution paid hereunder by a Subsidiary of such Contributor. SECTION 8. Equitable Allocation. If as a result of any reorganization, recapitalization, or other corporate change in the Company or any Affiliates or Subsidiaries thereof, or as a result of any amendment, waiver or modification of the terms and conditions governing the Credit Agreement or the Obligations, or for any other reason, the Contributions under this Agreement become inequitable, the parties hereto shall promptly modify and amend this Agreement to provide for an equitable allocation of the Contributions. Any of the foregoing modifications and amendments to this Agreement shall be in writing and signed by all parties hereto. SECTION 9. Asset of Party to Which Contribution is Owing. The parties hereto acknowledge that the right to contribution hereunder shall constitute an asset in favor of the party to which such contribution is owing. SECTION 10. Subordination. No payments payable by a Contributor or by the Borrower pursuant to the terms hereof shall be paid until all amounts then due and payable by the Borrower to the Lender, pursuant to the terms of the Fundamental Documents, are paid in full in cash. Nothing contained in this Agreement shall affect the obligations of any party hereto to the Lender under the Credit Agreement or any other Fundamental Documents. SECTION 11. Successors and Assigns; Amendments. This Agreement shall be binding upon each party hereto and its respective successors and assigns and shall inure to the benefit of the parties hereto and their respective successors and assigns, and in the event of any transfer or assignment of rights by a Contributor or by the Borrower, the rights and privileges herein conferred upon that Contributor shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and condition hereof. Except as specifically required under Section 8, this Agreement shall not be amended without the prior written consent of the Lender. -3- 196 SECTION 12. Termination. This Agreement, as it may be modified or amended from time to time, shall remain in effect, and shall not be terminated until the Credit Agreement has been discharged or otherwise satisfied in accordance with its terms. SECTION 13. Choice of Law. This Agreement, and any instrument or agreement required hereunder, shall be deemed to be made under, shall be governed by, and shall be construed and enforced in accordance with, the laws of the State of New York without regard to principles of conflict of laws. SECTION 14. Counterparts. This Agreement, and any modifications or amendments hereto may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original for all purposes, but all such counterparts shall constitute but one and the same instrument. SECTION 15. Effectiveness. This Agreement shall become effective on the date on which all of the parties hereto shall have executed this Agreement. The Company shall deliver counterparts hereof bearing the signatures of each of the parties hereto to the Lender. IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be duly executed as of the day and year first written above. DOVE ENTERTAINMENT, INC. By_______________________________ Name: Title: DOVE INTERNATIONAL, INC. DOVE FOUR POINT, INC. By_____________________________ Name: Title: -4- 197 EXHIBIT K-1 FORM OF GUARANTY AGREEMENT GUARANTY AGREEMENT, dated as of November 4, 1997 (as the same may be further supplemented, amended or otherwise modified, renewed or replaced from time to time, the "Guaranty Agreement") between (i) TERRENCE A. ELKES, an individual residing in Westchester County, New York (the "Individual Guarantor") and (ii) THE CHASE MANHATTAN BANK, a New York banking corporation (the "Lender"). Pursuant to the Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (as the same may be further amended, supplemented, or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among Dove Entertainment, Inc., a California corporation (the "Borrower"), the Corporate Guarantors referred to therein and the Lender, the Lender has agreed to make Loans to the Borrower and issue Letters of Credit in an amount outstanding at any one time not in excess of $8,000,000. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. The Individual Guarantor, Kenneth F. Gorman, Ronald Lightstone, John T. Healy and Bruce Maggin (collectively, the "Guarantors") are the direct and indirect owners of Media Equities International, L.L.C. As an inducement to the Lender to make the Loans and issue Letters of Credit to the Borrower, each of the Guarantors has agreed to guaranty such obligations of the Borrower in an amount not to exceed the lesser of (x) $2,000,000 and (y) the outstanding principal of and any interest on all Loans made and to be made by the Lender to the Borrower in excess of the Borrowing Base (as defined in the Credit Agreement) on the terms and conditions set forth in the Credit Agreement (the "Maximum Guaranty Amount"). The Individual Guarantor individually has agreed to guaranty such obligations of the Borrower to the extent and in accordance with the terms hereof. Therefore, for good and valuable consideration, the receipt of which is hereby acknowledged by the Individual Guarantor, the parties hereto agree as follows: -1- 198 1. GUARANTY SECTION 1.1 Guaranty. (a) The Individual Guarantor unconditionally and irrevocably guarantees the due and punctual payment by the Borrower, subject to Section 1.1(g) and the limitations set forth in Section 3.1 hereof, in an amount not to exceed the product of 110% of the Individual Guarantor's ownership interest in MEI as of the date hereof (as set forth on Schedule 1 hereto) multiplied by the Maximum Guaranty Amount (the "Guaranteed Obligations"), as and when such amounts shall become due and payable whether by scheduled maturity, acceleration or otherwise and any extensions or renewals thereof, reimbursement obligations in respect of Letters of Credit, related costs and attorney's fees, and all other monetary obligations of the Borrower to the Lender under the Credit Agreement. (b) In furtherance of the provisions of this Guaranty Agreement, and not in limitation of any other right which the Lender may have at law or in equity against the Borrower or any other guarantor of the Guaranteed Obligations, upon failure of the Borrower to pay any of the Guaranteed Obligations when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, the Individual Guarantor hereby promises to and will, upon receipt of written demand by the Lender, forthwith pay or cause to be paid to the Lender in cash an amount equal to the unpaid balance of the Guaranteed Obligations then due and payable, subject always to the limitations set forth in Section 3.1 hereof. (c) The Individual Guarantor, to the extent permitted by applicable law, waives presentation to, demand for payment from and protest to the Borrower and also waives notice of protest for nonpayment, notice of acceleration and notice of intent to accelerate. The obligations of the Individual Guarantor hereunder shall not be affected by (i) the failure of the Lender to assert any claim or demand or to enforce any right or remedy against the Borrower or any other guarantor of the Guaranteed Obligations under the provisions of the Credit Agreement or any other agreement or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of the Credit Agreement, the Note or any other agreement; (iv) the release, exchange, waiver or foreclosure of any security held by the Lender for the Guaranteed Obligations or any of them or (v) the failure of the Lender to exercise any right or remedy against any other guarantor of the Guaranteed Obligations. (d) The Individual Guarantor further agrees that this guaranty is a continuing guaranty and constitutes a guaranty of performance and of payment when due and not just of collection, and waives, to the extent permitted by applicable law, any right to require that any resort be had by the Lender to any security held for payment of the Guaranteed Obligations or to any balance of any deposit, account or credit on the books of the Lender in favor of the Borrower or any other guarantor or to any other person. (e) The Individual Guarantor hereby expressly assumes all responsibilities to remain informed of the financial condition of the Borrower and each other guarantor of the -2- 199 Guaranteed Obligations and any circumstances affecting the Collateral or the ability of the Borrower to perform under the Credit Agreement. (f) This guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed Obligations, the Note or any other instrument evidencing any of the Guaranteed Obligations, or by the existence, validity, enforceability, perfection or extent of any collateral therefor or by any other circumstance relating to the Guaranteed Obligations which might otherwise constitute a defense to the guaranty under this Guaranty Agreement. The Lender makes no representation or warranty in respect to any such circumstances nor has any duty or responsibility whatsoever to the Individual Guarantor in respect to the management and maintenance of the Guaranteed Obligations or the Collateral. (g) Notwithstanding anything to the contrary contained herein, as a condition precedent to any Borrowing in excess of the Borrowing Base being included within the scope of this Guaranty, MEI shall have provided its prior written approval to Borrower's request for the extension of such credit. The Individual Guarantor agrees that the written approval by both Kenneth F. Gorman and Bruce Maggin on behalf of MEI shall be binding upon and enforceable against the Individual Guarantor. SECTION 1.2 No Impairment of Guaranty. Except as provided in Sections 1.1(g) and 3.1 hereof, the obligations of the Individual Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense (other than payment of the Guaranteed Obligations) or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Individual Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lender to assert any claim or demand or to enforce any remedy hereunder or under the Credit Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure, or delay, willful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or thing, or omission or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of the Individual Guarantor or would otherwise operate as a discharge of the Individual Guarantor as a matter of law, unless and until the Guaranteed Obligations are paid in full. SECTION 1.3 Continuation and Reinstatement, etc. The Individual Guarantor further agrees that his guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or other reorganization of the Borrower or any other guarantor of the Guaranteed Obligations or otherwise. -3- 200 SECTION 1.4 Subrogation. Subject to the prior final and indefeasible payment in full of all Obligations and to the extent of payments received by the Lender from the Individual Guarantor on the Guaranteed Obligations, the Individual Guarantor shall be subrogated to the rights of the Lender to receive payments or distributions of cash, property or securities of the Borrower applicable to the Obligations; provided, that all such rights of subrogation shall be subordinated and junior in right of payment to the prior payment in full of the Obligations to the Lender. SECTION 1.5 Application of Guaranteed Amounts. In the event the Lender receives an amount in excess of the Maximum Guaranty Amount then due and payable from the Individual Guarantor, the other Guarantors pursuant to the terms of this Guaranty Agreement and the respective guaranty agreements of other Guarantors or otherwise, the Lender shall remit such excess to MEI for disbursement to the Guarantors in such amounts as the Guarantors shall determine. 2. REPRESENTATIONS AND WARRANTIES The Individual Guarantor makes the following representations and warranties to the Lender, all of which shall survive the execution and delivery of the Note and this Guaranty Agreement and the making of the loans evidenced and to be evidenced by the Note: (i) The execution, delivery and performance of this Guaranty Agreement (a) will not violate, or involve the Lender in a violation of, any provision of applicable law or any order of any governmental authority or any judgment of any court applicable to the Individual Guarantor or his property, (b) will not violate any indenture, any agreement for borrowed money, any bond, note or other similar instrument or any other material agreement to which the Individual Guarantor is a party or by which the Individual Guarantor or any of his property is bound, (c) will not be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, bond, note, instrument or other material agreement to which the Individual Guarantor is a party and (d) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or assets of the Individual Guarantor other than pursuant to this Guaranty Agreement. (ii) This Guaranty Agreement constitutes the legal, valid and binding obligation of the Individual Guarantor, enforceable in accordance with its terms, subject (a) as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency and other laws affecting creditors' rights generally and to moratorium laws from time to time in effect, (b) to general equitable principles which may limit the right to obtain the remedy of specific performance and (c) to the qualification that the enforceability of indemnification provisions may be limited by applicable federal and state securities laws, rules and regulations. -4- 201 (iii) The Individual Guarantor will realize a direct economic benefit as a result of the Loans being made to the Borrower pursuant to the Credit Agreement. 3. REDUCTION OF GUARANTEED OBLIGATIONS SECTION 3.1 Reduction of Guaranteed Obligations. The maximum liability of the Guarantors pursuant to Section 1.1 hereof shall be reduced on a dollar-for-dollar basis by (i) the amount, if any, by which the refinancing of the Borrower's office building exceeds $1,800,000 and (ii) any net proceeds received by the Credit Parties in connection with the exploitation of the motion picture entitled "Wilde". 4. MISCELLANEOUS SECTION 4.1 Notices. Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or if by telecopier, delivered by such equipment) addressed (i) if to the Lender, to it at 270 Park Avenue, 37th floor, New York, New York 10017, Attn: John J. Huber, III, Facsimile No.: (212) 270-4584, with a copy to Chase Securities Inc., 1800 Century Park East, Suite 400, Los Angeles, California 90067, Attn: Kenneth R. Wilson, Facsimile No.: (310) 788-5628, (ii) if to the Individual Guarantor, to him at c/o Apollo Partners, LLC, 1 Stamford Plaza, 12th floor, Stamford, CT 06901, or such other address as such party may from time to time designate by giving written notice to the other party hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Guaranty Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid return receipt requested, if by mail, or when receipt is acknowledged, if by telecopier, in each case addressed to such party as provided in this Section 4.1 or in accordance with the latest unrevoked written direction from such party. SECTION 4.2 Successors. Each reference herein to a party hereto shall be deemed to include its respective successors, assigns, heirs, executors, administrators and legal representatives including but not by way of limitation, any party in whose favor the provisions of the Note shall inure, all of whom shall be bound by the provisions of this Guaranty Agreement. SECTION 4.3 SERVICE OF PROCESS. THE INDIVIDUAL GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK IN NEW YORK COUNTY AND TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT, OR THE SUBJECT MATTER HEREOF BROUGHT BY THE LENDER OR ITS SUCCESSORS OR ASSIGNS. THE INDIVIDUAL GUARANTOR TO THE EXTENT PERMITTED BY APPLICABLE LAW (A) HEREBY WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, -5- 202 OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT HE IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT HIS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, (B) HEREBY WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION, SUIT OR PROCEEDING INSTITUTED BY THE LENDER IN STATE COURT TO FEDERAL COURT, AND (C) HEREBY AGREES NOT TO ASSERT ANY OFFSETS OR COUNTERCLAIMS (OTHER THAN COMPULSORY COUNTERCLAIMS) IN ANY SUCH ACTION, SUIT OR PROCEEDING. THE INDIVIDUAL GUARANTOR HEREBY CONSENTS TO SERVICE OF PROCESS BY CERTIFIED MAIL AT THE ADDRESS TO WHICH NOTICES ARE TO BE GIVEN, AND AGREES THAT THE SUBMISSION TO JURISDICTION AND THE CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE LENDER. FINAL JUDGMENT AGAINST THE INDIVIDUAL GUARANTOR IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER JURISDICTIONS (X) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ANY INDEBTEDNESS OR LIABILITY OF THE INDIVIDUAL GUARANTOR THEREIN DESCRIBED OR (Y) IN ANY OTHER MANNER PROVIDED BY, OR PURSUANT TO, THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED, HOWEVER, THAT THE LENDER MAY AT ITS OPTION BRING SUIT OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE INDIVIDUAL GUARANTOR OR ANY OF HIS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE INDIVIDUAL GUARANTOR OR SUCH ASSETS MAY BE FOUND. SECTION 4.4 GOVERNING LAW. THIS GUARANTY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 4.5 No Waiver, etc. Neither a failure nor a delay on the part of the Lender in exercising any right, power or privilege under this Guaranty Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Lender herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which it may have under this Guaranty Agreement, at law, in equity, by statute, or otherwise. SECTION 4.6 Modification, etc. No modification, amendment or waiver of any provision of this Guaranty Agreement, nor the consent to any departure by the Individual -6- 203 Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Individual Guarantor in any case shall entitle the Individual Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 4.7 Severability. If any one or more of the provisions contained in this Guaranty Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall in no way be affected or impaired thereby. SECTION 4.8 Headings. Section headings used herein are for convenience of reference only and are not to affect the construction of, or be taken into consideration in interpreting, this Guaranty Agreement. SECTION 4.9 WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, THE INDIVIDUAL GUARANTOR HEREBY WAIVES, AND COVENANTS THAT HE WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. THE INDIVIDUAL GUARANTOR ACKNOWLEDGES THAT HE HAS BEEN INFORMED BY THE LENDER THAT THE PROVISIONS OF THIS SECTION 4.9 CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDER HAS RELIED, IS RELYING AND WILL RELY IN MAKING THE LOANS EVIDENCED BY THE NOTE AND ENTERING INTO THIS GUARANTY AGREEMENT. THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 4.9 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE INDIVIDUAL GUARANTOR TO THE WAIVER OF HIS RIGHTS TO TRIAL BY JURY. IN WITNESS WHEREOF, the Individual Guarantor and the Lender have caused this Guaranty Agreement to be executed by its duly authorized officer, all as of the date first written above. ----------------------------------------- TERRENCE A. ELKES -7- 204 Executed by the Lender THE CHASE MANHATTAN BANK in New York, New York By:______________________________________ Name: Title: ACKNOWLEDGED AND AGREED with respect to Section 1.1(g) MEDIA EQUITIES INTERNATIONAL, L.L.C. By:____________________________________ Name: Title: 205 EXHIBIT K-2 FORM OF GUARANTY AGREEMENT GUARANTY AGREEMENT, dated as of November 4, 1997 (as the same may be further supplemented, amended or otherwise modified, renewed or replaced from time to time, the "Guaranty Agreement") between (i) KENNETH F. GORMAN, an individual residing in Nassau County, New York (the "Individual Guarantor") and (ii) THE CHASE MANHATTAN BANK, a New York banking corporation (the "Lender"). Pursuant to the Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (as the same may be further amended, supplemented, or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among Dove Entertainment, Inc., a California corporation (the "Borrower"), the Corporate Guarantors referred to therein and the Lender, the Lender has agreed to make Loans to the Borrower and issue Letters of Credit in an amount outstanding at any one time not in excess of $8,000,000. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. The Individual Guarantor, Terrence A. Elkes, Ronald Lightstone, John T. Healy and Bruce Maggin (collectively, the "Guarantors") are the direct and indirect owners of Media Equities International, L.L.C. As an inducement to the Lender to make the Loans and issue Letters of Credit to the Borrower, each of the Guarantors has agreed to guaranty such obligations of the Borrower in an amount not to exceed the lesser of (x) $2,000,000 and (y) the outstanding principal of and any interest on all Loans made and to be made by the Lender to the Borrower in excess of the Borrowing Base (as defined in the Credit Agreement) on the terms and conditions set forth in the Credit Agreement (the "Maximum Guaranty Amount"). The Individual Guarantor individually has agreed to guaranty such obligations of the Borrower to the extent and in accordance with the terms hereof. Therefore, for good and valuable consideration, the receipt of which is hereby acknowledged by the Individual Guarantor, the parties hereto agree as follows: -1- 206 1. GUARANTY SECTION 1.1 Guaranty. (a) The Individual Guarantor unconditionally and irrevocably guarantees the due and punctual payment by the Borrower, subject to Section 1.1(g) and the limitations set forth in Section 3.1 hereof, in an amount not to exceed the product of 110% of the Individual Guarantor's ownership interest in MEI as of the date hereof (as set forth on Schedule 1 hereto) multiplied by the Maximum Guaranty Amount (the "Guaranteed Obligations"), as and when such amounts shall become due and payable whether by scheduled maturity, acceleration or otherwise and any extensions or renewals thereof, reimbursement obligations in respect of Letters of Credit, related costs and attorney's fees, and all other monetary obligations of the Borrower to the Lender under the Credit Agreement. (b) In furtherance of the provisions of this Guaranty Agreement, and not in limitation of any other right which the Lender may have at law or in equity against the Borrower or any other guarantor of the Guaranteed Obligations, upon failure of the Borrower to pay any of the Guaranteed Obligations when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, the Individual Guarantor hereby promises to and will, upon receipt of written demand by the Lender, forthwith pay or cause to be paid to the Lender in cash an amount equal to the unpaid balance of the Guaranteed Obligations then due and payable, subject always to the limitations set forth in Section 3.1 hereof. (c) The Individual Guarantor, to the extent permitted by applicable law, waives presentation to, demand for payment from and protest to the Borrower and also waives notice of protest for nonpayment, notice of acceleration and notice of intent to accelerate. The obligations of the Individual Guarantor hereunder shall not be affected by (i) the failure of the Lender to assert any claim or demand or to enforce any right or remedy against the Borrower or any other guarantor of the Guaranteed Obligations under the provisions of the Credit Agreement or any other agreement or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of the Credit Agreement, the Note or any other agreement; (iv) the release, exchange, waiver or foreclosure of any security held by the Lender for the Guaranteed Obligations or any of them or (v) the failure of the Lender to exercise any right or remedy against any other guarantor of the Guaranteed Obligations. (d) The Individual Guarantor further agrees that this guaranty is a continuing guaranty and constitutes a guaranty of performance and of payment when due and not just of collection, and waives, to the extent permitted by applicable law, any right to require that any resort be had by the Lender to any security held for payment of the Guaranteed Obligations or to any balance of any deposit, account or credit on the books of the Lender in favor of the Borrower or any other guarantor or to any other person. (e) The Individual Guarantor hereby expressly assumes all responsibilities to remain informed of the financial condition of the Borrower and each other guarantor of the -2- 207 Guaranteed Obligations and any circumstances affecting the Collateral or the ability of the Borrower to perform under the Credit Agreement. (f) This guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed Obligations, the Note or any other instrument evidencing any of the Guaranteed Obligations, or by the existence, validity, enforceability, perfection or extent of any collateral therefor or by any other circumstance relating to the Guaranteed Obligations which might otherwise constitute a defense to the guaranty under this Guaranty Agreement. The Lender makes no representation or warranty in respect to any such circumstances nor has any duty or responsibility whatsoever to the Individual Guarantor in respect to the management and maintenance of the Guaranteed Obligations or the Collateral. (g) Notwithstanding anything to the contrary contained herein, as a condition precedent to any Borrowing in excess of the Borrowing Base being included within the scope of this Guaranty, MEI shall have provided its prior written approval to Borrower's request for the extension of such credit. The Individual Guarantor agrees that the written approval by both Kenneth F. Gorman and Bruce Maggin on behalf of MEI shall be binding upon and enforceable against the Individual Guarantor. SECTION 1.2 No Impairment of Guaranty. Except as provided in Sections 1.1(g) and 3.1 hereof, the obligations of the Individual Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense (other than payment of the Guaranteed Obligations) or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Individual Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lender to assert any claim or demand or to enforce any remedy hereunder or under the Credit Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure, or delay, willful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or thing, or omission or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of the Individual Guarantor or would otherwise operate as a discharge of the Individual Guarantor as a matter of law, unless and until the Guaranteed Obligations are paid in full. SECTION 1.3 Continuation and Reinstatement, etc. The Individual Guarantor further agrees that his guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or other reorganization of the Borrower or any other guarantor of the Guaranteed Obligations or otherwise. -3- 208 SECTION 1.4 Subrogation. Subject to the prior final and indefeasible payment in full of all Obligations and to the extent of payments received by the Lender from the Individual Guarantor on the Guaranteed Obligations, the Individual Guarantor shall be subrogated to the rights of the Lender to receive payments or distributions of cash, property or securities of the Borrower applicable to the Obligations; provided, that all such rights of subrogation shall be subordinated and junior in right of payment to the prior payment in full of the Obligations to the Lender. SECTION 1.5 Application of Guaranteed Amounts. In the event the Lender receives an amount in excess of the Maximum Guaranty Amount then due and payable from the Individual Guarantor, the other Guarantors pursuant to the terms of this Guaranty Agreement and the respective guaranty agreements of other Guarantors or otherwise, the Lender shall remit such excess to MEI for disbursement to the Guarantors in such amounts as the Guarantors shall determine. 2. REPRESENTATIONS AND WARRANTIES The Individual Guarantor makes the following representations and warranties to the Lender, all of which shall survive the execution and delivery of the Note and this Guaranty Agreement and the making of the loans evidenced and to be evidenced by the Note: (i) The execution, delivery and performance of this Guaranty Agreement (a) will not violate, or involve the Lender in a violation of, any provision of applicable law or any order of any governmental authority or any judgment of any court applicable to the Individual Guarantor or his property, (b) will not violate any indenture, any agreement for borrowed money, any bond, note or other similar instrument or any other material agreement to which the Individual Guarantor is a party or by which the Individual Guarantor or any of his property is bound, (c) will not be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, bond, note, instrument or other material agreement to which the Individual Guarantor is a party and (d) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or assets of the Individual Guarantor other than pursuant to this Guaranty Agreement. (ii) This Guaranty Agreement constitutes the legal, valid and binding obligation of the Individual Guarantor, enforceable in accordance with its terms, subject (a) as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency and other laws affecting creditors' rights generally and to moratorium laws from time to time in effect, (b) to general equitable principles which may limit the right to obtain the remedy of specific performance and (c) to the qualification that the enforceability of indemnification provisions may be limited by applicable federal and state securities laws, rules and regulations. -4- 209 (iii) The Individual Guarantor will realize a direct economic benefit as a result of the Loans being made to the Borrower pursuant to the Credit Agreement. 3. REDUCTION OF GUARANTEED OBLIGATIONS SECTION 3.1 Reduction of Guaranteed Obligations. The maximum liability of the Guarantors pursuant to Section 1.1 hereof shall be reduced on a dollar-for-dollar basis by (i) the amount, if any, by which the refinancing of the Borrower's office building exceeds $1,800,000 and (ii) any net proceeds received by the Credit Parties in connection with the exploitation of the motion picture entitled "Wilde". 4. MISCELLANEOUS SECTION 4.1 Notices. Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or if by telecopier, delivered by such equipment) addressed (i) if to the Lender, to it at 270 Park Avenue, 37th floor, New York, New York 10017, Attn: John J. Huber, III, Facsimile No.: (212) 270-4584, with a copy to Chase Securities Inc., 1800 Century Park East, Suite 400, Los Angeles, California 90067, Attn: Kenneth R. Wilson, Facsimile No.: (310) 788-5628, (ii) if to the Individual Guarantor, to him at c/o Apollo Partners, LLC, 1 Stamford Plaza, 12th floor, Stamford, CT 06901, or such other address as such party may from time to time designate by giving written notice to the other party hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Guaranty Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid return receipt requested, if by mail, or when receipt is acknowledged, if by telecopier, in each case addressed to such party as provided in this Section 4.1 or in accordance with the latest unrevoked written direction from such party. SECTION 4.2 Successors. Each reference herein to a party hereto shall be deemed to include its respective successors, assigns, heirs, executors, administrators and legal representatives including but not by way of limitation, any party in whose favor the provisions of the Note shall inure, all of whom shall be bound by the provisions of this Guaranty Agreement. SECTION 4.3 SERVICE OF PROCESS. THE INDIVIDUAL GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK IN NEW YORK COUNTY AND TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT, OR THE SUBJECT MATTER HEREOF BROUGHT BY THE LENDER OR ITS SUCCESSORS OR ASSIGNS. THE INDIVIDUAL GUARANTOR TO THE EXTENT PERMITTED BY APPLICABLE LAW (A) HEREBY WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, -5- 210 OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT HE IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT HIS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, (B) HEREBY WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION, SUIT OR PROCEEDING INSTITUTED BY THE LENDER IN STATE COURT TO FEDERAL COURT, AND (C) HEREBY AGREES NOT TO ASSERT ANY OFFSETS OR COUNTERCLAIMS (OTHER THAN COMPULSORY COUNTERCLAIMS) IN ANY SUCH ACTION, SUIT OR PROCEEDING. THE INDIVIDUAL GUARANTOR HEREBY CONSENTS TO SERVICE OF PROCESS BY CERTIFIED MAIL AT THE ADDRESS TO WHICH NOTICES ARE TO BE GIVEN, AND AGREES THAT THE SUBMISSION TO JURISDICTION AND THE CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE LENDER. FINAL JUDGMENT AGAINST THE INDIVIDUAL GUARANTOR IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER JURISDICTIONS (X) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ANY INDEBTEDNESS OR LIABILITY OF THE INDIVIDUAL GUARANTOR THEREIN DESCRIBED OR (Y) IN ANY OTHER MANNER PROVIDED BY, OR PURSUANT TO, THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED, HOWEVER, THAT THE LENDER MAY AT ITS OPTION BRING SUIT OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE INDIVIDUAL GUARANTOR OR ANY OF HIS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE INDIVIDUAL GUARANTOR OR SUCH ASSETS MAY BE FOUND. SECTION 4.4 GOVERNING LAW. THIS GUARANTY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 4.5 No Waiver, etc. Neither a failure nor a delay on the part of the Lender in exercising any right, power or privilege under this Guaranty Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Lender herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which it may have under this Guaranty Agreement, at law, in equity, by statute, or otherwise. SECTION 4.6 Modification, etc. No modification, amendment or waiver of any provision of this Guaranty Agreement, nor the consent to any departure by the Individual -6- 211 Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Individual Guarantor in any case shall entitle the Individual Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 4.7 Severability. If any one or more of the provisions contained in this Guaranty Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall in no way be affected or impaired thereby. SECTION 4.8 Headings. Section headings used herein are for convenience of reference only and are not to affect the construction of, or be taken into consideration in interpreting, this Guaranty Agreement. SECTION 4.9 WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, THE INDIVIDUAL GUARANTOR HEREBY WAIVES, AND COVENANTS THAT HE WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. THE INDIVIDUAL GUARANTOR ACKNOWLEDGES THAT HE HAS BEEN INFORMED BY THE LENDER THAT THE PROVISIONS OF THIS SECTION 4.9 CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDER HAS RELIED, IS RELYING AND WILL RELY IN MAKING THE LOANS EVIDENCED BY THE NOTE AND ENTERING INTO THIS GUARANTY AGREEMENT. THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 4.9 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE INDIVIDUAL GUARANTOR TO THE WAIVER OF HIS RIGHTS TO TRIAL BY JURY. IN WITNESS WHEREOF, the Individual Guarantor and the Lender have caused this Guaranty Agreement to be executed by its duly authorized officer, all as of the date first written above. ------------------------------------ KENNETH F. GORMAN -7- 212 Executed by the Lender THE CHASE MANHATTAN BANK in New York, New York By: ---------------------------------------- Name: Title: ACKNOWLEDGED AND AGREED with respect to Section 1.1(g) MEDIA EQUITIES INTERNATIONAL, L.L.C. By: ----------------------------------- Name: Title: -8- 213 EXHIBIT K-3 FORM OF GUARANTY AGREEMENT GUARANTY AGREEMENT, dated as of November 4, 1997 (as the same may be further supplemented, amended or otherwise modified, renewed or replaced from time to time, the "Guaranty Agreement") between (i) BRUCE MAGGIN, an individual residing in Westchester County, New York (the "Individual Guarantor") and (ii) THE CHASE MANHATTAN BANK, a New York banking corporation (the "Lender"). Pursuant to the Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (as the same may be further amended, supplemented, or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among Dove Entertainment, Inc., a California corporation (the "Borrower"), the Corporate Guarantors referred to therein and the Lender, the Lender has agreed to make Loans to the Borrower and issue Letters of Credit in an amount outstanding at any one time not in excess of $8,000,000. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. The Individual Guarantor, Terrence A. Elkes, Kenneth F. Gorman, Ronald Lightstone and John T. Healy (collectively, the "Guarantors") are the direct and indirect owners of Media Equities International, L.L.C. As an inducement to the Lender to make the Loans and issue Letters of Credit to the Borrower, each of the Guarantors has agreed to guaranty such obligations of the Borrower in an amount not to exceed the lesser of (x) $2,000,000 and (y) the outstanding principal of and any interest on all Loans made and to be made by the Lender to the Borrower in excess of the Borrowing Base (as defined in the Credit Agreement) on the terms and conditions set forth in the Credit Agreement (the "Maximum Guaranty Amount"). The Individual Guarantor individually has agreed to guaranty such obligations of the Borrower to the extent and in accordance with the terms hereof. Therefore, for good and valuable consideration, the receipt of which is hereby acknowledged by the Individual Guarantor, the parties hereto agree as follows: -1- 214 1. GUARANTY SECTION 1.1 Guaranty. (a) The Individual Guarantor unconditionally and irrevocably guarantees the due and punctual payment by the Borrower, subject to Section 1.1(g) and the limitations set forth in Section 3.1 hereof, in an amount not to exceed the product of 110% of the Individual Guarantor's ownership interest in MEI as of the date hereof (as set forth on Schedule 1 hereto) multiplied by the Maximum Guaranty Amount (the "Guaranteed Obligations"), as and when such amounts shall become due and payable whether by scheduled maturity, acceleration or otherwise and any extensions or renewals thereof, reimbursement obligations in respect of Letters of Credit, related costs and attorney's fees, and all other monetary obligations of the Borrower to the Lender under the Credit Agreement. (b) In furtherance of the provisions of this Guaranty Agreement, and not in limitation of any other right which the Lender may have at law or in equity against the Borrower or any other guarantor of the Guaranteed Obligations, upon failure of the Borrower to pay any of the Guaranteed Obligations when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, the Individual Guarantor hereby promises to and will, upon receipt of written demand by the Lender, forthwith pay or cause to be paid to the Lender in cash an amount equal to the unpaid balance of the Guaranteed Obligations then due and payable, subject always to the limitations set forth in Section 3.1 hereof. (c) The Individual Guarantor, to the extent permitted by applicable law, waives presentation to, demand for payment from and protest to the Borrower and also waives notice of protest for nonpayment, notice of acceleration and notice of intent to accelerate. The obligations of the Individual Guarantor hereunder shall not be affected by (i) the failure of the Lender to assert any claim or demand or to enforce any right or remedy against the Borrower or any other guarantor of the Guaranteed Obligations under the provisions of the Credit Agreement or any other agreement or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of the Credit Agreement, the Note or any other agreement; (iv) the release, exchange, waiver or foreclosure of any security held by the Lender for the Guaranteed Obligations or any of them or (v) the failure of the Lender to exercise any right or remedy against any other guarantor of the Guaranteed Obligations. (d) The Individual Guarantor further agrees that this guaranty is a continuing guaranty and constitutes a guaranty of performance and of payment when due and not just of collection, and waives, to the extent permitted by applicable law, any right to require that any resort be had by the Lender to any security held for payment of the Guaranteed Obligations or to any balance of any deposit, account or credit on the books of the Lender in favor of the Borrower or any other guarantor or to any other person. (e) The Individual Guarantor hereby expressly assumes all responsibilities to remain informed of the financial condition of the Borrower and each other guarantor of the -2- 215 Guaranteed Obligations and any circumstances affecting the Collateral or the ability of the Borrower to perform under the Credit Agreement. (f) This guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed Obligations, the Note or any other instrument evidencing any of the Guaranteed Obligations, or by the existence, validity, enforceability, perfection or extent of any collateral therefor or by any other circumstance relating to the Guaranteed Obligations which might otherwise constitute a defense to the guaranty under this Guaranty Agreement. The Lender makes no representation or warranty in respect to any such circumstances nor has any duty or responsibility whatsoever to the Individual Guarantor in respect to the management and maintenance of the Guaranteed Obligations or the Collateral. (g) Notwithstanding anything to the contrary contained herein, as a condition precedent to any Borrowing in excess of the Borrowing Base being included within the scope of this Guaranty, MEI shall have provided its prior written approval to Borrower's request for the extension of such credit. The Individual Guarantor agrees that the written approval by both Kenneth F. Gorman and Bruce Maggin on behalf of MEI shall be binding upon and enforceable against the Individual Guarantor. SECTION 1.2 No Impairment of Guaranty. Except as provided in Sections 1.1(g) and 3.1 hereof, the obligations of the Individual Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense (other than payment of the Guaranteed Obligations) or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Individual Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lender to assert any claim or demand or to enforce any remedy hereunder or under the Credit Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure, or delay, willful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or thing, or omission or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of the Individual Guarantor or would otherwise operate as a discharge of the Individual Guarantor as a matter of law, unless and until the Guaranteed Obligations are paid in full. SECTION 1.3 Continuation and Reinstatement, etc. The Individual Guarantor further agrees that his guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or other reorganization of the Borrower or any other guarantor of the Guaranteed Obligations or otherwise. -3- 216 SECTION 1.4 Subrogation. Subject to the prior final and indefeasible payment in full of all Obligations and to the extent of payments received by the Lender from the Individual Guarantor on the Guaranteed Obligations, the Individual Guarantor shall be subrogated to the rights of the Lender to receive payments or distributions of cash, property or securities of the Borrower applicable to the Obligations; provided, that all such rights of subrogation shall be subordinated and junior in right of payment to the prior payment in full of the Obligations to the Lender. SECTION 1.5 Application of Guaranteed Amounts. In the event the Lender receives an amount in excess of the Maximum Guaranty Amount then due and payable from the Individual Guarantor, the other Guarantors pursuant to the terms of this Guaranty Agreement and the respective guaranty agreements of other Guarantors or otherwise, the Lender shall remit such excess to MEI for disbursement to the Guarantors in such amounts as the Guarantors shall determine. 2. REPRESENTATIONS AND WARRANTIES The Individual Guarantor makes the following representations and warranties to the Lender, all of which shall survive the execution and delivery of the Note and this Guaranty Agreement and the making of the loans evidenced and to be evidenced by the Note: (i) The execution, delivery and performance of this Guaranty Agreement (a) will not violate, or involve the Lender in a violation of, any provision of applicable law or any order of any governmental authority or any judgment of any court applicable to the Individual Guarantor or his property, (b) will not violate any indenture, any agreement for borrowed money, any bond, note or other similar instrument or any other material agreement to which the Individual Guarantor is a party or by which the Individual Guarantor or any of his property is bound, (c) will not be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, bond, note, instrument or other material agreement to which the Individual Guarantor is a party and (d) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or assets of the Individual Guarantor other than pursuant to this Guaranty Agreement. (ii) This Guaranty Agreement constitutes the legal, valid and binding obligation of the Individual Guarantor, enforceable in accordance with its terms, subject (a) as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency and other laws affecting creditors' rights generally and to moratorium laws from time to time in effect, (b) to general equitable principles which may limit the right to obtain the remedy of specific performance and (c) to the qualification that the enforceability of indemnification provisions may be limited by applicable federal and state securities laws, rules and regulations. -4- 217 (iii) The Individual Guarantor will realize a direct economic benefit as a result of the Loans being made to the Borrower pursuant to the Credit Agreement. 3. REDUCTION OF GUARANTEED OBLIGATIONS SECTION 3.1 Reduction of Guaranteed Obligations. The maximum liability of the Guarantors pursuant to Section 1.1 hereof shall be reduced on a dollar-for-dollar basis by (i) the amount, if any, by which the refinancing of the Borrower's office building exceeds $1,800,000 and (ii) any net proceeds received by the Credit Parties in connection with the exploitation of the motion picture entitled "Wilde". 4. MISCELLANEOUS SECTION 4.1 Notices. Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or if by telecopier, delivered by such equipment) addressed (i) if to the Lender, to it at 270 Park Avenue, 37th floor, New York, New York 10017, Attn: John J. Huber, III, Facsimile No.: (212) 270-4584, with a copy to Chase Securities Inc., 1800 Century Park East, Suite 400, Los Angeles, California 90067, Attn: Kenneth R. Wilson, Facsimile No.: (310) 788-5628, (ii) if to the Individual Guarantor, to him at c/o H.A.M Media Group LLC, 305 Madison Avenue, Suite 301, New York, NY 10017, or such other address as such party may from time to time designate by giving written notice to the other party hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Guaranty Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid return receipt requested, if by mail, or when receipt is acknowledged, if by telecopier, in each case addressed to such party as provided in this Section 4.1 or in accordance with the latest unrevoked written direction from such party. SECTION 4.2 Successors. Each reference herein to a party hereto shall be deemed to include its respective successors, assigns, heirs, executors, administrators and legal representatives including but not by way of limitation, any party in whose favor the provisions of the Note shall inure, all of whom shall be bound by the provisions of this Guaranty Agreement. SECTION 4.3 SERVICE OF PROCESS. THE INDIVIDUAL GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK IN NEW YORK COUNTY AND TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT, OR THE SUBJECT MATTER HEREOF BROUGHT BY THE LENDER OR ITS SUCCESSORS OR ASSIGNS. THE INDIVIDUAL GUARANTOR TO THE EXTENT PERMITTED BY APPLICABLE LAW (A) HEREBY WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, -5- 218 OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT HE IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT HIS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, (B) HEREBY WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION, SUIT OR PROCEEDING INSTITUTED BY THE LENDER IN STATE COURT TO FEDERAL COURT, AND (C) HEREBY AGREES NOT TO ASSERT ANY OFFSETS OR COUNTERCLAIMS (OTHER THAN COMPULSORY COUNTERCLAIMS) IN ANY SUCH ACTION, SUIT OR PROCEEDING. THE INDIVIDUAL GUARANTOR HEREBY CONSENTS TO SERVICE OF PROCESS BY CERTIFIED MAIL AT THE ADDRESS TO WHICH NOTICES ARE TO BE GIVEN, AND AGREES THAT THE SUBMISSION TO JURISDICTION AND THE CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE LENDER. FINAL JUDGMENT AGAINST THE INDIVIDUAL GUARANTOR IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER JURISDICTIONS (X) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ANY INDEBTEDNESS OR LIABILITY OF THE INDIVIDUAL GUARANTOR THEREIN DESCRIBED OR (Y) IN ANY OTHER MANNER PROVIDED BY, OR PURSUANT TO, THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED, HOWEVER, THAT THE LENDER MAY AT ITS OPTION BRING SUIT OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE INDIVIDUAL GUARANTOR OR ANY OF HIS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE INDIVIDUAL GUARANTOR OR SUCH ASSETS MAY BE FOUND. SECTION 4.4 GOVERNING LAW. THIS GUARANTY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 4.5 No Waiver, etc. Neither a failure nor a delay on the part of the Lender in exercising any right, power or privilege under this Guaranty Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Lender herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which it may have under this Guaranty Agreement, at law, in equity, by statute, or otherwise. SECTION 4.6 Modification, etc. No modification, amendment or waiver of any provision of this Guaranty Agreement, nor the consent to any departure by the Individual -6- 219 Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Individual Guarantor in any case shall entitle the Individual Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 4.7 Severability. If any one or more of the provisions contained in this Guaranty Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall in no way be affected or impaired thereby. SECTION 4.8 Headings. Section headings used herein are for convenience of reference only and are not to affect the construction of, or be taken into consideration in interpreting, this Guaranty Agreement. SECTION 4.9 WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, THE INDIVIDUAL GUARANTOR HEREBY WAIVES, AND COVENANTS THAT HE WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. THE INDIVIDUAL GUARANTOR ACKNOWLEDGES THAT HE HAS BEEN INFORMED BY THE LENDER THAT THE PROVISIONS OF THIS SECTION 4.9 CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDER HAS RELIED, IS RELYING AND WILL RELY IN MAKING THE LOANS EVIDENCED BY THE NOTE AND ENTERING INTO THIS GUARANTY AGREEMENT. THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 4.9 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE INDIVIDUAL GUARANTOR TO THE WAIVER OF HIS RIGHTS TO TRIAL BY JURY. IN WITNESS WHEREOF, the Individual Guarantor and the Lender have caused this Guaranty Agreement to be executed by its duly authorized officer, all as of the date first written above. ------------------------------------------ BRUCE MAGGIN -7- 220 Executed by the Lender THE CHASE MANHATTAN BANK in New York, New York By: ---------------------------------------- Name: Title: ACKNOWLEDGED AND AGREED with respect to Section 1.1(g) MEDIA EQUITIES INTERNATIONAL, L.L.C. By: --------------------------------- Name: Title: -8- 221 Schedule 1 Equity Interests in Media Equities International, L.L.C.
- -------------------------------------------------------------------------------- Guarantor Equity Interest - -------------------------------------------------------------------------------- Bruce Maggin 14.11% (through Maggin's 66 2/3% interest in H.A.M. Media Group LLC, which holds 21.16% of MEI) - --------------------------------------------------------------------------------
-9- < 222 EXHIBIT K-4 FORM OF GUARANTY AGREEMENT GUARANTY AGREEMENT, dated as of November 4, 1997 (as the same may be further supplemented, amended or otherwise modified, renewed or replaced from time to time, the "Guaranty Agreement") between (i) JOHN T. HEALY, an individual residing in New York County, New York (the "Individual Guarantor") and (ii) THE CHASE MANHATTAN BANK, a New York banking corporation (the "Lender"). Pursuant to the Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (as the same may be further amended, supplemented, or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among Dove Entertainment, Inc., a California corporation (the "Borrower"), the Corporate Guarantors referred to therein and the Lender, the Lender has agreed to make Loans to the Borrower and issue Letters of Credit in an amount outstanding at any one time not in excess of $8,000,000. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. The Individual Guarantor, Terrence A. Elkes, Kenneth F. Gorman, Ronald Lightstone and Bruce Maggin (collectively, the "Guarantors") are the direct and indirect owners of Media Equities International, L.L.C. As an inducement to the Lender to make the Loans and issue Letters of Credit to the Borrower, each of the Guarantors has agreed to guaranty such obligations of the Borrower in an amount not to exceed the lesser of (x) $2,000,000 and (y) the outstanding principal of and any interest on all Loans made and to be made by the Lender to the Borrower in excess of the Borrowing Base (as defined in the Credit Agreement) on the terms and conditions set forth in the Credit Agreement (the "Maximum Guaranty Amount"). The Individual Guarantor individually has agreed to guaranty such obligations of the Borrower to the extent and in accordance with the terms hereof. Therefore, for good and valuable consideration, the receipt of which is hereby acknowledged by the Individual Guarantor, the parties hereto agree as follows: -1- 223 1. GUARANTY SECTION 1.1 Guaranty. (a) The Individual Guarantor unconditionally and irrevocably guarantees the due and punctual payment by the Borrower, subject to Section 1.1(g) and the limitations set forth in Section 3.1 hereof, in an amount not to exceed the product of 110% of the Individual Guarantor's ownership interest in MEI as of the date hereof (as set forth on Schedule 1 hereto) multiplied by the Maximum Guaranty Amount (the "Guaranteed Obligations"), as and when such amounts shall become due and payable whether by scheduled maturity, acceleration or otherwise and any extensions or renewals thereof, reimbursement obligations in respect of Letters of Credit, related costs and attorney's fees, and all other monetary obligations of the Borrower to the Lender under the Credit Agreement. (b) In furtherance of the provisions of this Guaranty Agreement, and not in limitation of any other right which the Lender may have at law or in equity against the Borrower or any other guarantor of the Guaranteed Obligations, upon failure of the Borrower to pay any of the Guaranteed Obligations when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, the Individual Guarantor hereby promises to and will, upon receipt of written demand by the Lender, forthwith pay or cause to be paid to the Lender in cash an amount equal to the unpaid balance of the Guaranteed Obligations then due and payable, subject always to the limitations set forth in Section 3.1 hereof. (c) The Individual Guarantor, to the extent permitted by applicable law, waives presentation to, demand for payment from and protest to the Borrower and also waives notice of protest for nonpayment, notice of acceleration and notice of intent to accelerate. The obligations of the Individual Guarantor hereunder shall not be affected by (i) the failure of the Lender to assert any claim or demand or to enforce any right or remedy against the Borrower or any other guarantor of the Guaranteed Obligations under the provisions of the Credit Agreement or any other agreement or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of the Credit Agreement, the Note or any other agreement; (iv) the release, exchange, waiver or foreclosure of any security held by the Lender for the Guaranteed Obligations or any of them or (v) the failure of the Lender to exercise any right or remedy against any other guarantor of the Guaranteed Obligations. (d) The Individual Guarantor further agrees that this guaranty is a continuing guaranty and constitutes a guaranty of performance and of payment when due and not just of collection, and waives, to the extent permitted by applicable law, any right to require that any resort be had by the Lender to any security held for payment of the Guaranteed Obligations or to any balance of any deposit, account or credit on the books of the Lender in favor of the Borrower or any other guarantor or to any other person. (e) The Individual Guarantor hereby expressly assumes all responsibilities to remain informed of the financial condition of the Borrower and each other guarantor of the -2- 224 Guaranteed Obligations and any circumstances affecting the Collateral or the ability of the Borrower to perform under the Credit Agreement. (f) This guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed Obligations, the Note or any other instrument evidencing any of the Guaranteed Obligations, or by the existence, validity, enforceability, perfection or extent of any collateral therefor or by any other circumstance relating to the Guaranteed Obligations which might otherwise constitute a defense to the guaranty under this Guaranty Agreement. The Lender makes no representation or warranty in respect to any such circumstances nor has any duty or responsibility whatsoever to the Individual Guarantor in respect to the management and maintenance of the Guaranteed Obligations or the Collateral. (g) Notwithstanding anything to the contrary contained herein, as a condition precedent to any Borrowing in excess of the Borrowing Base being included within the scope of this Guaranty, MEI shall have provided its prior written approval to Borrower's request for the extension of such credit. The Individual Guarantor agrees that the written approval by both Kenneth F. Gorman and Bruce Maggin on behalf of MEI shall be binding upon and enforceable against the Individual Guarantor. SECTION 1.2 No Impairment of Guaranty. Except as provided in Sections 1.1(g) and 3.1 hereof, the obligations of the Individual Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense (other than payment of the Guaranteed Obligations) or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Individual Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lender to assert any claim or demand or to enforce any remedy hereunder or under the Credit Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure, or delay, willful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or thing, or omission or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of the Individual Guarantor or would otherwise operate as a discharge of the Individual Guarantor as a matter of law, unless and until the Guaranteed Obligations are paid in full. SECTION 1.3 Continuation and Reinstatement, etc. The Individual Guarantor further agrees that his guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or other reorganization of the Borrower or any other guarantor of the Guaranteed Obligations or otherwise. -3- 225 SECTION 1.4 Subrogation. Subject to the prior final and indefeasible payment in full of all Obligations and to the extent of payments received by the Lender from the Individual Guarantor on the Guaranteed Obligations, the Individual Guarantor shall be subrogated to the rights of the Lender to receive payments or distributions of cash, property or securities of the Borrower applicable to the Obligations; provided, that all such rights of subrogation shall be subordinated and junior in right of payment to the prior payment in full of the Obligations to the Lender. SECTION 1.5 Application of Guaranteed Amounts. In the event the Lender receives an amount in excess of the Maximum Guaranty Amount then due and payable from the Individual Guarantor, the other Guarantors pursuant to the terms of this Guaranty Agreement and the respective guaranty agreements of other Guarantors or otherwise, the Lender shall remit such excess to MEI for disbursement to the Guarantors in such amounts as the Guarantors shall determine. 2. REPRESENTATIONS AND WARRANTIES The Individual Guarantor makes the following representations and warranties to the Lender, all of which shall survive the execution and delivery of the Note and this Guaranty Agreement and the making of the loans evidenced and to be evidenced by the Note: (i) The execution, delivery and performance of this Guaranty Agreement (a) will not violate, or involve the Lender in a violation of, any provision of applicable law or any order of any governmental authority or any judgment of any court applicable to the Individual Guarantor or his property, (b) will not violate any indenture, any agreement for borrowed money, any bond, note or other similar instrument or any other material agreement to which the Individual Guarantor is a party or by which the Individual Guarantor or any of his property is bound, (c) will not be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, bond, note, instrument or other material agreement to which the Individual Guarantor is a party and (d) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or assets of the Individual Guarantor other than pursuant to this Guaranty Agreement. (ii) This Guaranty Agreement constitutes the legal, valid and binding obligation of the Individual Guarantor, enforceable in accordance with its terms, subject (a) as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency and other laws affecting creditors' rights generally and to moratorium laws from time to time in effect, (b) to general equitable principles which may limit the right to obtain the remedy of specific performance and (c) to the qualification that the enforceability of indemnification provisions may be limited by applicable federal and state securities laws, rules and regulations. -4- 226 (iii) The Individual Guarantor will realize a direct economic benefit as a result of the Loans being made to the Borrower pursuant to the Credit Agreement. 3. REDUCTION OF GUARANTEED OBLIGATIONS SECTION 3.1 Reduction of Guaranteed Obligations. The maximum liability of the Guarantors pursuant to Section 1.1 hereof shall be reduced on a dollar-for-dollar basis by (i) the amount, if any, by which the refinancing of the Borrower's office building exceeds $1,800,000 and (ii) any net proceeds received by the Credit Parties in connection with the exploitation of the motion picture entitled "Wilde". 4. MISCELLANEOUS SECTION 4.1 Notices. Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or if by telecopier, delivered by such equipment) addressed (i) if to the Lender, to it at 270 Park Avenue, 37th floor, New York, New York 10017, Attn: John J. Huber, III, Facsimile No.: (212) 270-4584, with a copy to Chase Securities Inc., 1800 Century Park East, Suite 400, Los Angeles, California 90067, Attn: Kenneth R. Wilson, Facsimile No.: (310) 788-5628, (ii) if to the Individual Guarantor, to him at c/o H.A.M Media Group LLC, 305 Madison Avenue, Suite 301, New York, NY 10017, or such other address as such party may from time to time designate by giving written notice to the other party hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Guaranty Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid return receipt requested, if by mail, or when receipt is acknowledged, if by telecopier, in each case addressed to such party as provided in this Section 4.1 or in accordance with the latest unrevoked written direction from such party. SECTION 4.2 Successors. Each reference herein to a party hereto shall be deemed to include its respective successors, assigns, heirs, executors, administrators and legal representatives including but not by way of limitation, any party in whose favor the provisions of the Note shall inure, all of whom shall be bound by the provisions of this Guaranty Agreement. SECTION 4.3 SERVICE OF PROCESS. THE INDIVIDUAL GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK IN NEW YORK COUNTY AND TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT, OR THE SUBJECT MATTER HEREOF BROUGHT BY THE LENDER OR ITS SUCCESSORS OR ASSIGNS. THE INDIVIDUAL GUARANTOR TO THE EXTENT PERMITTED BY APPLICABLE LAW (A) HEREBY WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, -5- 227 OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT HE IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT HIS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, (B) HEREBY WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION, SUIT OR PROCEEDING INSTITUTED BY THE LENDER IN STATE COURT TO FEDERAL COURT, AND (C) HEREBY AGREES NOT TO ASSERT ANY OFFSETS OR COUNTERCLAIMS (OTHER THAN COMPULSORY COUNTERCLAIMS) IN ANY SUCH ACTION, SUIT OR PROCEEDING. THE INDIVIDUAL GUARANTOR HEREBY CONSENTS TO SERVICE OF PROCESS BY CERTIFIED MAIL AT THE ADDRESS TO WHICH NOTICES ARE TO BE GIVEN, AND AGREES THAT THE SUBMISSION TO JURISDICTION AND THE CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE LENDER. FINAL JUDGMENT AGAINST THE INDIVIDUAL GUARANTOR IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER JURISDICTIONS (X) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ANY INDEBTEDNESS OR LIABILITY OF THE INDIVIDUAL GUARANTOR THEREIN DESCRIBED OR (Y) IN ANY OTHER MANNER PROVIDED BY, OR PURSUANT TO, THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED, HOWEVER, THAT THE LENDER MAY AT ITS OPTION BRING SUIT OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE INDIVIDUAL GUARANTOR OR ANY OF HIS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE INDIVIDUAL GUARANTOR OR SUCH ASSETS MAY BE FOUND. SECTION 4.4 GOVERNING LAW. THIS GUARANTY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 4.5 No Waiver, etc. Neither a failure nor a delay on the part of the Lender in exercising any right, power or privilege under this Guaranty Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Lender herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which it may have under this Guaranty Agreement, at law, in equity, by statute, or otherwise. SECTION 4.6 Modification, etc. No modification, amendment or waiver of any provision of this Guaranty Agreement, nor the consent to any departure by the Individual -6- 228 Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Individual Guarantor in any case shall entitle the Individual Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 4.7 Severability. If any one or more of the provisions contained in this Guaranty Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall in no way be affected or impaired thereby. SECTION 4.8 Headings. Section headings used herein are for convenience of reference only and are not to affect the construction of, or be taken into consideration in interpreting, this Guaranty Agreement. SECTION 4.9 WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, THE INDIVIDUAL GUARANTOR HEREBY WAIVES, AND COVENANTS THAT HE WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. THE INDIVIDUAL GUARANTOR ACKNOWLEDGES THAT HE HAS BEEN INFORMED BY THE LENDER THAT THE PROVISIONS OF THIS SECTION 4.9 CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDER HAS RELIED, IS RELYING AND WILL RELY IN MAKING THE LOANS EVIDENCED BY THE NOTE AND ENTERING INTO THIS GUARANTY AGREEMENT. THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 4.9 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE INDIVIDUAL GUARANTOR TO THE WAIVER OF HIS RIGHTS TO TRIAL BY JURY. IN WITNESS WHEREOF, the Individual Guarantor and the Lender have caused this Guaranty Agreement to be executed by its duly authorized officer, all as of the date first written above. ------------------------------------ JOHN T. HEALY -7- 229 Executed by the Lender THE CHASE MANHATTAN BANK in New York, New York By: ---------------------------------------- Name: Title: ACKNOWLEDGED AND AGREED with respect to Section 1.1(g) MEDIA EQUITIES INTERNATIONAL, L.L.C. By: ----------------------------------------- Name: Title: -8- 230 Schedule 1 Equity Interests in Media Equities International, L.L.C. - -------------------------------------------------------------------------------- Guarantor Equity Interest - -------------------------------------------------------------------------------- John T. Healy 7.05% (through Healy's 33 1/3% interest in H.A.M. Media Group LLC, which holds 21.16% of MEI) - -------------------------------------------------------------------------------- -9- 231 EXHIBIT K-5 FORM OF GUARANTY AGREEMENT GUARANTY AGREEMENT, dated as of November 4, 1997 (as the same may be further supplemented, amended or otherwise modified, renewed or replaced from time to time, the "Guaranty Agreement") between (i) RONALD LIGHTSTONE, an individual residing in Los Angeles County, California (the "Individual Guarantor") and (ii) THE CHASE MANHATTAN BANK, a New York banking corporation (the "Lender"). Pursuant to the Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (as the same may be further amended, supplemented, or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among Dove Entertainment, Inc., a California corporation (the "Borrower"), the Corporate Guarantors referred to therein and the Lender, the Lender has agreed to make Loans to the Borrower and issue Letters of Credit in an amount outstanding at any one time not in excess of $8,000,000. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. The Individual Guarantor, Terrence A. Elkes, Kenneth F. Gorman, John T. Healy and Bruce Maggin (collectively, the "Guarantors") are the direct and indirect owners of Media Equities International, L.L.C. As an inducement to the Lender to make the Loans and issue Letters of Credit to the Borrower, each of the Guarantors has agreed to guaranty such obligations of the Borrower in an amount not to exceed the lesser of (x) $2,000,000 and (y) the outstanding principal of and any interest on all Loans made and to be made by the Lender to the Borrower in excess of the Borrowing Base (as defined in the Credit Agreement) on the terms and conditions set forth in the Credit Agreement (the "Maximum Guaranty Amount"). The Individual Guarantor individually has agreed to guaranty such obligations of the Borrower to the extent and in accordance with the terms hereof. Therefore, for good and valuable consideration, the receipt of which is hereby acknowledged by the Individual Guarantor, the parties hereto agree as follows: -1- 232 1. GUARANTY SECTION 1.1 Guaranty. (a) The Individual Guarantor unconditionally and irrevocably guarantees the due and punctual payment by the Borrower, subject to Section 1.1(g) and the limitations set forth in Section 3.1 hereof, in an amount not to exceed the product of 110% of the Individual Guarantor's ownership interest in MEI as of the date hereof (as set forth on Schedule 1 hereto) multiplied by the Maximum Guaranty Amount (the "Guaranteed Obligations"), as and when such amounts shall become due and payable whether by scheduled maturity, acceleration or otherwise and any extensions or renewals thereof, reimbursement obligations in respect of Letters of Credit, related costs and attorney's fees, and all other monetary obligations of the Borrower to the Lender under the Credit Agreement. (b) In furtherance of the provisions of this Guaranty Agreement, and not in limitation of any other right which the Lender may have at law or in equity against the Borrower or any other guarantor of the Guaranteed Obligations, upon failure of the Borrower to pay any of the Guaranteed Obligations when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, the Individual Guarantor hereby promises to and will, upon receipt of written demand by the Lender, forthwith pay or cause to be paid to the Lender in cash an amount equal to the unpaid balance of the Guaranteed Obligations then due and payable, subject always to the limitations set forth in Section 3.1 hereof. (c) The Individual Guarantor, to the extent permitted by applicable law, waives presentation to, demand for payment from and protest to the Borrower and also waives notice of protest for nonpayment, notice of acceleration and notice of intent to accelerate. The obligations of the Individual Guarantor hereunder shall not be affected by (i) the failure of the Lender to assert any claim or demand or to enforce any right or remedy against the Borrower or any other guarantor of the Guaranteed Obligations under the provisions of the Credit Agreement or any other agreement or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of the Credit Agreement, the Note or any other agreement; (iv) the release, exchange, waiver or foreclosure of any security held by the Lender for the Guaranteed Obligations or any of them or (v) the failure of the Lender to exercise any right or remedy against any other guarantor of the Guaranteed Obligations. (d) The Individual Guarantor further agrees that this guaranty is a continuing guaranty and constitutes a guaranty of performance and of payment when due and not just of collection, and waives, to the extent permitted by applicable law, any right to require that any resort be had by the Lender to any security held for payment of the Guaranteed Obligations or to any balance of any deposit, account or credit on the books of the Lender in favor of the Borrower or any other guarantor or to any other person. (e) The Individual Guarantor hereby expressly assumes all responsibilities to remain informed of the financial condition of the Borrower and each other guarantor of the -2- 233 Guaranteed Obligations and any circumstances affecting the Collateral or the ability of the Borrower to perform under the Credit Agreement. (f) This guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed Obligations, the Note or any other instrument evidencing any of the Guaranteed Obligations, or by the existence, validity, enforceability, perfection or extent of any collateral therefor or by any other circumstance relating to the Guaranteed Obligations which might otherwise constitute a defense to the guaranty under this Guaranty Agreement. The Lender makes no representation or warranty in respect to any such circumstances nor has any duty or responsibility whatsoever to the Individual Guarantor in respect to the management and maintenance of the Guaranteed Obligations or the Collateral. (g) Notwithstanding anything to the contrary contained herein, as a condition precedent to any Borrowing in excess of the Borrowing Base being included within the scope of this Guaranty, MEI shall have provided its prior written approval to Borrower's request for the extension of such credit. The Individual Guarantor agrees that the written approval by both Kenneth F. Gorman and Bruce Maggin on behalf of MEI shall be binding upon and enforceable against the Individual Guarantor. SECTION 1.2 No Impairment of Guaranty. Except as provided in Sections 1.1(g) and 3.1 hereof, the obligations of the Individual Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense (other than payment of the Guaranteed Obligations) or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Individual Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lender to assert any claim or demand or to enforce any remedy hereunder or under the Credit Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure, or delay, willful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or thing, or omission or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of the Individual Guarantor or would otherwise operate as a discharge of the Individual Guarantor as a matter of law, unless and until the Guaranteed Obligations are paid in full. SECTION 1.3 Continuation and Reinstatement, etc. The Individual Guarantor further agrees that his guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or other reorganization of the Borrower or any other guarantor of the Guaranteed Obligations or otherwise. -3- 234 SECTION 1.4 Subrogation. Subject to the prior final and indefeasible payment in full of all Obligations and to the extent of payments received by the Lender from the Individual Guarantor on the Guaranteed Obligations, the Individual Guarantor shall be subrogated to the rights of the Lender to receive payments or distributions of cash, property or securities of the Borrower applicable to the Obligations; provided, that all such rights of subrogation shall be subordinated and junior in right of payment to the prior payment in full of the Obligations to the Lender. SECTION 1.5 Application of Guaranteed Amounts. In the event the Lender receives an amount in excess of the Maximum Guaranty Amount then due and payable from the Individual Guarantor, the other Guarantors pursuant to the terms of this Guaranty Agreement and the respective guaranty agreements of other Guarantors or otherwise, the Lender shall remit such excess to MEI for disbursement to the Guarantors in such amounts as the Guarantors shall determine. 2. REPRESENTATIONS AND WARRANTIES The Individual Guarantor makes the following representations and warranties to the Lender, all of which shall survive the execution and delivery of the Note and this Guaranty Agreement and the making of the loans evidenced and to be evidenced by the Note: (i) The execution, delivery and performance of this Guaranty Agreement (a) will not violate, or involve the Lender in a violation of, any provision of applicable law or any order of any governmental authority or any judgment of any court applicable to the Individual Guarantor or his property, (b) will not violate any indenture, any agreement for borrowed money, any bond, note or other similar instrument or any other material agreement to which the Individual Guarantor is a party or by which the Individual Guarantor or any of his property is bound, (c) will not be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, bond, note, instrument or other material agreement to which the Individual Guarantor is a party and (d) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or assets of the Individual Guarantor other than pursuant to this Guaranty Agreement. (ii) This Guaranty Agreement constitutes the legal, valid and binding obligation of the Individual Guarantor, enforceable in accordance with its terms, subject (a) as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency and other laws affecting creditors' rights generally and to moratorium laws from time to time in effect, (b) to general equitable principles which may limit the right to obtain the remedy of specific performance and (c) to the qualification that the enforceability of indemnification provisions may be limited by applicable federal and state securities laws, rules and regulations. -4- 235 (iii) The Individual Guarantor will realize a direct economic benefit as a result of the Loans being made to the Borrower pursuant to the Credit Agreement. 3. REDUCTION OF GUARANTEED OBLIGATIONS SECTION 3.1 Reduction of Guaranteed Obligations. The maximum liability of the Guarantors pursuant to Section 1.1 hereof shall be reduced on a dollar-for-dollar basis by (i) the amount, if any, by which the refinancing of the Borrower's office building exceeds $1,800,000 and (ii) any net proceeds received by the Credit Parties in connection with the exploitation of the motion picture entitled "Wilde". 4. MISCELLANEOUS SECTION 4.1 Notices. Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or if by telecopier, delivered by such equipment) addressed (i) if to the Lender, to it at 270 Park Avenue, 37th floor, New York, New York 10017, Attn: John J. Huber, III, Facsimile No.: (212) 270-4584, with a copy to Chase Securities Inc., 1800 Century Park East, Suite 400, Los Angeles, California 90067, Attn: Kenneth R. Wilson, Facsimile No.: (310) 788-5628, (ii) if to the Individual Guarantor, to him at 400 Parkwood Drive, Los Angeles, California 90077-3530, or such other address as such party may from time to time designate by giving written notice to the other party hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Guaranty Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid return receipt requested, if by mail, or when receipt is acknowledged, if by telecopier, in each case addressed to such party as provided in this Section 4.1 or in accordance with the latest unrevoked written direction from such party. SECTION 4.2 Successors. Each reference herein to a party hereto shall be deemed to include its respective successors, assigns, heirs, executors, administrators and legal representatives including but not by way of limitation, any party in whose favor the provisions of the Note shall inure, all of whom shall be bound by the provisions of this Guaranty Agreement. SECTION 4.3 SERVICE OF PROCESS. THE INDIVIDUAL GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK IN NEW YORK COUNTY AND TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT, OR THE SUBJECT MATTER HEREOF BROUGHT BY THE LENDER OR ITS SUCCESSORS OR ASSIGNS. THE INDIVIDUAL GUARANTOR TO THE EXTENT PERMITTED BY APPLICABLE LAW (A) HEREBY WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, -5- 236 OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT HE IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT HIS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, (B) HEREBY WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION, SUIT OR PROCEEDING INSTITUTED BY THE LENDER IN STATE COURT TO FEDERAL COURT, AND (C) HEREBY AGREES NOT TO ASSERT ANY OFFSETS OR COUNTERCLAIMS (OTHER THAN COMPULSORY COUNTERCLAIMS) IN ANY SUCH ACTION, SUIT OR PROCEEDING. THE INDIVIDUAL GUARANTOR HEREBY CONSENTS TO SERVICE OF PROCESS BY CERTIFIED MAIL AT THE ADDRESS TO WHICH NOTICES ARE TO BE GIVEN, AND AGREES THAT THE SUBMISSION TO JURISDICTION AND THE CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE LENDER. FINAL JUDGMENT AGAINST THE INDIVIDUAL GUARANTOR IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER JURISDICTIONS (X) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ANY INDEBTEDNESS OR LIABILITY OF THE INDIVIDUAL GUARANTOR THEREIN DESCRIBED OR (Y) IN ANY OTHER MANNER PROVIDED BY, OR PURSUANT TO, THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED, HOWEVER, THAT THE LENDER MAY AT ITS OPTION BRING SUIT OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE INDIVIDUAL GUARANTOR OR ANY OF HIS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE INDIVIDUAL GUARANTOR OR SUCH ASSETS MAY BE FOUND. SECTION 4.4 GOVERNING LAW. THIS GUARANTY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 4.5 No Waiver, etc. Neither a failure nor a delay on the part of the Lender in exercising any right, power or privilege under this Guaranty Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Lender herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which it may have under this Guaranty Agreement, at law, in equity, by statute, or otherwise. SECTION 4.6 Modification, etc. No modification, amendment or waiver of any provision of this Guaranty Agreement, nor the consent to any departure by the Individual -6- 237 Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Individual Guarantor in any case shall entitle the Individual Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 4.7 Severability. If any one or more of the provisions contained in this Guaranty Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall in no way be affected or impaired thereby. SECTION 4.8 Headings. Section headings used herein are for convenience of reference only and are not to affect the construction of, or be taken into consideration in interpreting, this Guaranty Agreement. SECTION 4.9 WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, THE INDIVIDUAL GUARANTOR HEREBY WAIVES, AND COVENANTS THAT HE WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. THE INDIVIDUAL GUARANTOR ACKNOWLEDGES THAT HE HAS BEEN INFORMED BY THE LENDER THAT THE PROVISIONS OF THIS SECTION 4.9 CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDER HAS RELIED, IS RELYING AND WILL RELY IN MAKING THE LOANS EVIDENCED BY THE NOTE AND ENTERING INTO THIS GUARANTY AGREEMENT. THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 4.9 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE INDIVIDUAL GUARANTOR TO THE WAIVER OF HIS RIGHTS TO TRIAL BY JURY. IN WITNESS WHEREOF, the Individual Guarantor and the Lender have caused this Guaranty Agreement to be executed by its duly authorized officer, all as of the date first written above. --------------------------------------- RONALD LIGHTSTONE -7- 238 Executed by the Lender THE CHASE MANHATTAN BANK in New York, New York By: ----------------------------------------- Name: Title: ACKNOWLEDGED AND AGREED with respect to Section 1.1(g) MEDIA EQUITIES INTERNATIONAL, L.L.C. By: ---------------------------------- Name: Title: -8- 239 GUARANTY AGREEMENT SPOUSAL CONSENT The undersigned acknowledges that she has read the foregoing Guaranty Agreement (the "Guaranty Agreement") and that she knows its content. The undersigned is aware that by its provisions her spouse agrees to guarantee certain obligations owed by Dove Entertainment, Inc. to The Chase Manhattan Bank (the "Lender") under that certain Credit, Security, Guaranty and Pledge Agreement, dated as of November 4, 1997 among Dove Entertainment, Inc., as borrower, the Corporate Guarantors referred to therein and the Lender (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement"). The undersigned hereby consents to the Guaranty Agreement and accepts all of the provisions of such Guaranty Agreement to the extent of her community property interests in whatever property is subject to the Guaranty Agreement, and further agrees that the undersigned will take no action at any time to hinder the enforcement of the Guaranty Agreement, the Credit Agreement, or any related document or instrument, or any provision contained therein. Dated: As of November ___, 1997 --------------------------------- 240 Schedule 1 Equity Interests in Media Equities International, L.L.C.
- -------------------------------------------------------------------------------- Guarantor Equity Interest - -------------------------------------------------------------------------------- Ronald Lightstone 11.70% in MEI - --------------------------------------------------------------------------------
-9- EX-10.53 9 EXHIBIT 10.53 1 EXHIBIT 10.53 COPYRIGHT SECURITY AGREEMENT WHEREAS, Dove Entertainment, Inc., a California corporation ("Borrower"), and each Subsidiary of Borrower whose name appears at the foot hereof (collectively the "Grantors") now own or hold and may hereafter acquire or hold certain copyrights and rights under copyright with respect to certain movies-of-the-week, television programs, films, videotapes or other programs produced for television release or for release in any other medium, shown on network, free and cable, pay and/or other television medium (including, without limitation, first-run syndication), certain written works, books and other published material, and sound recordings and audiobooks, in each case whether recorded on film, videotape, cassette, cartridge, disc, audio cassette or on or by any other means, method, process or device whether now owned or hereafter developed, including, without limitation, those United States copyright registrations listed on Schedule 1 hereto (the "Product") as such Schedule may be amended from time to time by the addition of copyrights subsequently arising or acquired; WHEREAS, pursuant to that certain Credit, Security, Guaranty and Pledge Agreement, dated as of November 4, 1997, (as the same may be amended, modified or otherwise supplemented from time to time, the "Credit Agreement"), among the Borrower, the Corporate Guarantors named therein and The Chase Manhattan Bank (the "Lender"), the Lender has agreed to make loans to the Borrower; WHEREAS, pursuant to the terms of the Credit Agreement, the Grantors granted to the Lender a security interest in all of the personal property of the Grantors including all right, title and interest of the Grantors in, to and under any copyright or copyright license whether now existing or hereafter arising or acquired, and all proceeds thereof to secure the payment of the Obligations (as such term is defined in the Credit Agreement); NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, Grantors do, as security for the Obligations, hereby grant to the Lender a continuing security interest in all the Grantors' right, title and interest in and to each and every item of Product, the scenario, screenplay or script upon which an item of Product is based, all of the properties thereof, tangible and intangible, and all domestic and foreign copyrights and all other rights therein and thereto, of every kind and character, whether now in existence or hereafter to be made or produced, and whether or not in possession of such Grantors, including with respect to each and every item of Product and without limiting the foregoing language, each and all of the following particular rights and properties (to the extent they are owned or hereafter created or acquired by Grantors): -1- 2 (i) all scenarios, screenplays and/or scripts at every stage thereof; (ii) all common law and/or statutory copyright and other rights in all literary and other properties (hereinafter called "said literary properties") which form the basis of each item of Product and/or which are and/or will be incorporated into each item of Product, all component parts of each item of Product consisting of said literary properties, all rights in and to the story, all treatments of said story and said literary properties, together with all preliminary and final screenplays used and to be used in connection with the item of Product, and all other literary material upon which the item of Product is based or from which it is adapted; (iii) all rights in and to all music and musical compositions used and to be used in each item of Product, including, each without limitation, all rights to record, rerecord, produce, reproduce or synchronize all of said music and musical compositions in and in connection therewith; (iv) without limitation, all exposed film, developed film, positives, negatives, prints, positive prints, answer prints, special effects, preparing materials (including interpositives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices, and all other forms of pre-print elements), sound tracks, cutouts, trims and any and all other physical properties of every kind and nature relating to such item of Product, whether in completed form or in some state of completion, and all masters, duplicates, drafts, versions, variations and copies of each thereof, in all formats whether on film, videotape, disk or otherwise and all music sheets and promotional materials relating to such item of Product (collectively, the "Physical Materials"); (v) all collateral, allied, subsidiary and merchandising rights appurtenant or related to each item of Product including, without limitation, the following rights: all rights to produce remakes or sequels or prequels to each item of Product based upon each item of Product, said literary properties or the theme of each item of Product and/or the text or any part of said literary properties; all rights throughout the world to broadcast, transmit and/or reproduce by means of television (including commercially sponsored, sustaining and subscription or "pay" television) or by any process analogous thereto, now known or hereafter devised, each item of Product or any remake or sequel or prequel to the item of Product; all rights to produce primarily for television or similar use a motion picture or series of motion pictures, by use of film or any other recording device or medium now known or hereafter devised, based upon each item of Product, said literary properties or any part thereof, including, without limitation, based upon any script, scenario or the like used in each item of Product; all merchandising rights including, without limitation, all rights to use, exploit and license others to use and exploit any and all commercial tieups of any kind arising out of or connected with said literary properties, each item of Product, the title or titles of each item of Product, the characters of each item -2- 3 of Product or said literary properties and/or the names or characteristics of said characters and including further, without limitation, any and all commercial exploitation in connection with or related to each item of Product, any remake or sequel thereof and/or said literary properties; (vi) all statutory copyrights, domestic and foreign, obtained or to be obtained on items of Product, together with any and all copyrights obtained or to be obtained in connection with each item of Product or any underlying or component elements of each item of Product, including, in each case without limitation, all copyrights on the property described in subparagraphs (i) through (v) inclusive, of this paragraph, together with the right to copyright (and all rights to renew or extend such copyrights) and the right to sue in the name of any of the Grantors' names for past, present and future infringements of copyright; (vii) all insurance policies and completion bonds connected with each item of Product and all proceeds which may be derived therefrom; (viii) all rights to distribute, sell, rent, license the exhibition of and otherwise exploit and turn to account each item of Product, the Physical Materials and rights in and to said story, other literary material upon which each item of Product is based or from which it is adapted, and said music and musical compositions used or to be used in each item of Product; (ix) any and all sums, proceeds, money, products, profits or increases, including money profits or increases (as those terms are used in the New York Uniform Commercial Code (the "UCC") or otherwise) or other property obtained or to be obtained from the distribution, exhibition, sale or other uses or dispositions of each item of Product or any part of each item of Product, including, without limitation, all proceeds, profits, products and increases, whether in money or otherwise, from the sale, rental or licensing of each item of Product and/or any of the elements of each item of Product including from collateral, allied, subsidiary and merchandising rights; (x) the dramatic, nondramatic, stage, television, radio and publishing rights, title and interest in and to each item of Product, and the right to obtain copyrights and renewals of copyrights therein; (xi) the name or title of each item of Product and all rights of such Grantor to the use thereof, including, without limitation, rights protected pursuant to trademark, service mark, unfair competition and/or the rules and principles of any other applicable statutes, common law, or other rule or principle of law; (xii) any and all contract rights and/or chattel paper which may arise in connection with each item of Product; -3- 4 (xiii) all accounts and/or other rights to payment which such Grantor presently owns or which may arise in favor of such Grantor in the future, including, without limitation, any refund under a completion guaranty, all accounts and/or rights to payment due from exhibitors in connection with the distribution of each item of Product, and from exploitation of any and all of the collateral, allied, subsidiary, merchandising and other rights in connection with each item of Product; (xiv) any and all "general intangibles" (as that term is defined in the UCC) not elsewhere included in this definition, including, without limitation, any and all general intangibles consisting of any right to payment which may arise in the distribution or exploitation of any of the rights set out herein, and any and all general intangible rights in favor of such Grantor for services or other performances by any third parties, including actors, writers, directors, individual producers and/or any and all other performing or nonperforming artists in any way connected with each item of Product, any and all general intangible rights in favor of such Grantor relating to licenses of sound or other equipment, licenses for any photograph or photographic process, and all general intangibles related to the distribution or exploitation of each item of Product including general intangibles related to or which grow out of the exhibition of each item of Product and the exploitation of any and all other rights in each item of Product set out in this definition; (xv) any and all goods, including inventory (as that term is defined in the UCC), which may arise in connection with the creation, production or delivery of each item of Product and which goods pursuant to any production or distribution agreement or otherwise are owned by such Grantor; (xvi) all and each of the rights, regardless of denomination, which arise in connection with the creation, production, completion of production, delivery, distribution, or other exploitation of each item of Product, including, without limitation, any and all rights in favor of such Grantor, the ownership or control of which are or may become necessary or desirable, in the opinion of the Lender, in order to complete production of each item of Product in the event that the Agent exercises any rights it may have to take over and complete production of each item of Product; (xvii) any and all documents issued by any pledgeholder or bailee with respect to the item of Product, or any Physical Materials (whether or not in completed form) with respect thereto; (xviii)any and all production accounts or other bank accounts established by such Grantor with respect to such item of Product; (xix) any and all rights of such Grantor under contracts relating to the production or acquisition of each item of Product; and -4- 5 (xx) any and all rights of such Grantor under any agreement entered into by such Grantor pursuant to which such Grantor has sold, leased, licensed or assigned distribution rights or other exploitation rights to any item of Product to an unaffiliated person; (all of the foregoing items or types of property, whether presently existing or hereafter arising or acquired, shall be referred to herein collectively as the "Collateral"). Each of the Grantors agrees that if any person, firm, corporation or other entity shall do or perform any acts which the Lender believes constitute a copyright infringement of the photoplay or of any of the literary, dramatic or musical material contained in the Product, or constitute a plagiarism, or violate or infringe any right of any Grantor or the Lender therein or if any person, firm, corporation or other entity shall do or perform any acts which the Lender believes constitute an unauthorized or unlawful distribution, exhibition, or use thereof, then and in any such event, upon 30 days' prior written notice to such Grantor, while an Event of Default under the Credit Agreement is continuing, the Lender may and shall have the right to take such steps and institute such suits or proceedings as the Lender may deem advisable or necessary to prevent such acts and conduct and to secure damages and other relief by reason thereof, and to generally take such steps as may be advisable or necessary or proper for the full protection of the rights of the parties. The Lender may take such steps or institute such suits or proceedings in its own name or in the name of such Grantor or in the names of the parties jointly. The Lender hereby agrees to give the applicable Grantor notice of any steps taken, or any suits or proceedings instituted, by the Lender pursuant to this paragraph. This security interest is granted in conjunction with the security interests granted to the Lender pursuant to the Credit Agreement. Each Grantor does hereby further acknowledge and affirm that the rights and remedies of the Lender with respect to the security interest in the Collateral made and granted hereby are subject to, and more fully set forth in, the Credit Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein. This Copyright Security Agreement is made for collateral purposes only. At such time as all of the Loans under the Credit Agreement shall have been repaid in full, the Commitments (including any commitment to issue any Letter of Credit) shall have terminated and all Letters of Credit shall have expired or been terminated or cancelled, the Lender shall execute and deliver to such Grantors, at the Borrower's or the applicable Grantor's expense, without representation, warranty or recourse, all releases and reassignments, termination statements and other instruments as may be necessary or proper to terminate the security interest of the Lender in the Collateral, subject to any disposition thereof which may have been made by the Lender pursuant to the terms hereof or of the Credit Agreement. The Lender agrees that there will be no assignment of the Collateral, other than the security interest described herein, unless and until there shall occur an Event of Default under -5- 6 the Credit Agreement and the Lender gives written notice to the applicable Grantor of its intention to enforce its rights against any of the Collateral. So long as no Event of Default under the Credit Agreement shall have occurred and be continuing, and subject to the various provisions of the Credit Agreement and the other Fundamental Documents to which it is a party, each Grantor may use, license and exploit the Collateral in any lawful manner. THIS COPYRIGHT SECURITY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Credit Agreement. -6- 7 IN WITNESS WHEREOF, the Grantors have caused this Copyright Security Agreement to be duly executed by its officer thereunto duly authorized as of November 4, 1997. DOVE ENTERTAINMENT, INC. By: /s/ NEIL TOPHAM ------------------------------------- Name: Title: DOVE INTERNATIONAL, INC. By: /s/ NEIL TOPHAM ------------------------------------- Name: Title: DOVE FOUR POINT, INC. By: /s/ NEIL TOPHAM ------------------------------------- Name: Title: -7- 8 Accepted: THE CHASE MANHATTAN BANK By: /s/ MITCHELL J. GERVIS ----------------------------------- Name: Mitchell J. Gervis Title: Vice President 9 STATE OF CALIFORNIA ) : ss.: COUNTY OF LOS ANGELES ) On the 4th day of November, in the year 1997, before me personally came Neil Topham, to me known, who, being by me sworn, did say that he is the CFO and Treasurer of Dove Entertainment, Inc. which corporation is described in, and which corporation executed the above instrument, and that s/he signed his/her name by order of the Board of Directors of said corporation. /s/ VICTORIA KAYE SEAL ----------------------------- Notary Public 10 STATE OF CALIFORNIA ) : ss.: COUNTY OF LOS ANGELES ) On the 4th day of November, in the year 1997, before me personally came Neil Topham, to me known, who, being by me sworn, did say that he is the CFO and Treasurer of Dove International, Inc., which corporation is described in, and which corporation executed the above instrument, and that s/he signed his/her name by order of the Board of Directors of said corporation. /s/ VICTORIA KAYE SEAL ----------------------------- Notary Public 11 STATE OF CALIFORNIA ) : ss.: COUNTY OF LOS ANGELES ) On the 4th day of November, in the year 1997, before me personally came Neil Topham, to me known, who, being by me sworn, did say that he is the CFO and Treasurer of Dove Four Point, Inc., which corporation is described in, and which corporation executed the above instrument, and that s/he signed his/her name by order of the Board of Directors of said corporation. /s/ VICTORIA KAYE SEAL ----------------------------- Notary Public 12 SCHEDULE 1 to Copyright Security Agreement Title Registration No. Date of Registration - ----- ---------------- -------------------- EX-10.54 10 EXHIBIT 10.54 1 EXHIBIT 10.54 SECURITY AGREEMENT AGREEMENT dated as of November 4, 1997 among DOVE ENTERTAINMENT, INC., a California corporation ("Dove"), DOVE FOUR POINT, INC., a Florida corporation ("Four Point") and DOVE INTERNATIONAL, INC., a California corporation ("Dove International" and, together with Dove and Four Point, individually and collectively, the "Borrower"), and MEDIA EQUITIES INTERNATIONAL, LLC, a New York limited liability company ("MEI"). W I T N E S S E T H: WHEREAS, Dove has entered into that certain Credit, Security and Pledge Agreement (the "Credit Agreement"), dated as of the date hereof, among Dove, the Guarantors named therein and The Chase Manhattan Bank ("Chase"). WHEREAS, Terrence A. Elkes, Kenneth F. Gorman, John T. Healy, Bruce Maggin and Ronald Lightstone (collectively, the "MEI Principals") are, directly or indirectly, all of the beneficial owners of MEI. WHEREAS, it is a condition to the effectiveness of the Credit Agreement that the MEI Principals guaranty a portion of the obligations of Dove under the Credit Agreement, as more fully described in the Credit Agreement and the Guaranty Agreement (as such terms is defined in the Credit Agreement). WHEREAS, Dove has entered into a certain Fee Agreement of even date hereof with MEI, pursuant to which Dove agreed to pay the sum of $25,000 per year and to promptly reimburse MEI if any of the MEI Principals make any payments to Chase pursuant to a Guaranty Agreement (the "Fee Agreement"). WHEREAS, it is a condition precedent to the making of the Guaranty Agreement that Borrower shall have granted the security interests contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce the MEI Principals to make the guarantees under the Guaranty Agreement, Borrower hereby agrees with MEI, as follows: 2 SECTION I. Definitions A. Certain Defined Terms. Terms defined in the Credit Agreement and not otherwise defined herein have the respective meanings provided for in the Credit Agreement. The following terms, as used herein, have the meanings set forth below: "Collateral" has the meaning assigned to that term in Section 2. "Documents" means all "documents" (as defined in the UCC) or other receipts covering, evidencing or representing goods now owned or hereafter acquired by Borrower. "Proceeds" means all proceeds of, and all other profits, rentals or receipts, in whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition of, or realization upon, any Collateral including, without limitation, all claims of Borrower against third parties for loss of, damage to or destruction of, or for proceeds payable under, or unearned premiums with respect to, policies of insurance with respect to any Collateral, and any condemnation or requisition payments with respect to any Collateral, in each case whether now existing or hereafter arising. "Secured Obligations" has the meaning assigned to that term in Section 3. "Security Interests" means the security interests granted pursuant to Section 2, as well as all other security interests created or assigned as additional security for the Secured Obligations pursuant to the provisions of this Agreement. "UCC" means the Uniform Commercial Code as in effect on the date hereof in the State of New York, provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the Security Interest in any Collateral or the availability of any remedy hereunder is governed by the Uniform Commercial Code as in effect on or after the date hereof in any other jurisdiction, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection or availability of such remedy. B. Other Definition Provisions. References to "Subsections", "subsections", "Exhibits" and "Schedules" shall be to Sections, subsections, Exhibits and Schedules, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in subsection 1.A. may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. All references to statutes and related regulations shall include (unless otherwise specifically provided herein) any amendments of same and any successor statutes and regulations. 2 3 SECTION II. Grant of Security Interests In order to secure the payment and performance of the Secured Obligations in accordance with the terms thereof, each of Dove, Four Point and Dove International hereby grants to MEI a continuing security interest, subordinated as provided in the Subordination Agreement among Borrower, MEI, the MEI Principals and Chase dated as of November 4, 1997 (the "Subordination Agreement"), in and to all of their right, title and interest in the following property, whether now owned or existing or hereafter acquired or arising and regardless of where located (all being collectively referred to as the "Collateral"): All of the Borrowers' right, title and interest in personal property, tangible and intangible, wherever located or situated and whether now owned or hereafter acquired or created, including but not limited to goods, accounts, intercompany obligations, partnership and joint venture interests, contract rights, documents, chattel paper, general intangibles, goodwill, equipment, inventory, investment property, instruments, copyrights, trademarks, trade names, insurance proceeds, cash and deposit accounts and any proceeds thereon, products thereof or income therefrom, further including but not limited to all of such Borrowers' rights, title and interest in and to each and every item and type of Product and Recorded Product, the scenario, screenplay or script upon which an item of Product is based, all of the properties thereof, tangible and intangible, and all domestic and foreign copyrights and all other rights therein and thereto, of every kind and character, whether now in existence or hereafter to be made or produced, and whether or not in possession of such Borrower, including with respect to each and every item of Product and/or Recorded Product and without limiting the foregoing language, each and all of the following particular rights and properties (to the extent they are owned or hereafter created or acquired by such Borrower): (i) all scenarios, screenplays and/or scripts at every stage thereof; (ii) all common law and/or statutory copyright and other rights in all literary and other properties (hereinafter called "said literary properties") which form the basis of each item of Product and/or Recorded Product and/or which are and/or will be incorporated into each item of Product and/or Recorded Product, all component parts of each item of Product and/or Recorded Product consisting of said literary properties, all rights in and to the story, all treatments of said story and said literary properties, together with all preliminary and final screenplays used and to be used in connection with the item of Product and/or Recorded Product, and all other literary material upon which the item of Product and/or Recorded Product is based or from which it is adapted; (iii) all rights in and to all music and musical compositions used and to be used in each item of Product and/or Recorded Product, including, each without limitation, all rights to record, rerecord, produce, reproduce or synchronize all of said music and musical compositions in and in connection therewith; 3 4 (iv) all tangible personal property relating to each item of Product and/or Recorded Product, including, without limitation, all exposed film, developed film, positives, negatives, prints, positive prints, answer prints, special effects, preparing materials (including interpositives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices, and all other forms of pre-print elements), sound tracks, cutouts, trims and any and all other physical properties of every kind and nature relating to such item of Product and/or Recorded Product, whether in completed form or in some state of completion, and all masters, duplicates, drafts, versions, variations and copies of each thereof, in all formats whether on film, videotape, disk or otherwise and all music sheets and promotional materials relating to such item of Product and/or Recorded Product (collectively, the "Physical Materials"); (v) all collaterals, allied, subsidiary and merchandising rights appurtenant or related to each item of Product and/or Recorded Product including, without limitation, the following rights: all rights to produce remakes or sequels or prequels to each item of Product and/or Recorded Product based upon each item of Product and/or Recorded Product, said literary properties or the theme of each item of Product and/or Recorded Product and/or the text or any part of said literary properties; all rights throughout the world to broadcast, transmit and/or reproduce by means of television (including commercially sponsored, sustaining and subscription or "pay" television) or by any process analogous thereto, now known or hereafter devised, each item of Product and/or Recorded Product or any remake or sequel or prequel to the item of Product and/or Recorded Product; all rights to produce primarily for television or similar use a motion picture or series of motion pictures, by use of film or any other recording device o medium now known or hereafter devised, based upon each item of Product and/or Recorded Product, said literary properties or any part thereof, including, without limitation, based upon any script, scenario or the like used in each item of Product and/or Recorded Product; all merchandising rights including, without limitation, all rights to use, exploit and license others to use and exploit any and all commercial tie-ups of any kind arising out of or connected with said literary properties, each item of Product and/or Recorded Product, the title or titles of each item of Product and/or Recorded Product, the characters of each item of Product and/or Recorded Product or said literary properties and/or the names or characteristics of said characters and including further, without limitation, any and all commercial exploitation in connection with or related to each item of Product and/or Recorded Product, any remake or sequel thereof and/or said literary properties; 4 5 (vi) all statutory copyrights, domestic and foreign, obtained or to be obtained on each item of Product and/or Recorded Product, together with any and all copyrights obtained or to be obtained in connection with each item of Product and/or Recorded Product or any underlying or component elements of each item of Product and/or Recorded Product, including in each case without limitation, all copyrights on the property described in subparagraphs (I) through (v) inclusive, of this paragraph, together with the right to copyright (and all rights to renew or extend such copyrights) and the right to sue in the name of any Borrower for past, present and future infringements of copyright; (vii) all insurance policies and completion bonds connected with each item of Product and/or Recorded Product and all proceeds which may be derived therefrom; (viii) all rights to distribute, sell, rent, license the exhibition of and otherwise exploit and turn to account each item of Product and/or Recorded Product, the Physical Materials and rights in and to said story, other literary material upon which each item of Product and/or Recorded Product is based or from which it is adapted, and said music and musical compositions used or to be used in each item of Product and/or Recorded Product; (ix) any and all sums, proceeds, money, products, profits or increases, including money profits or increases (as those terms are used in the UCC or otherwise) or other property obtained or to be obtained from the distribution, exhibition, sale or other uses or dispositions of each item of Product and/or Recorded Product or any part of each item of Product and/or Recorded Product, including, without limitation, all proceeds, profits, products and increases, whether in money or otherwise, from the sale, rental or licensing of each item of Product and/or Recorded Product including from collateral, allied, subsidiary and merchandising rights; (x) the dramatic, nondramatic, stage, television, radio and publishing rights, title and interest in and to each item of Product and/or Recorded Product, and the right to obtain copyrights and renewals of copyrights therein; (xi) the name or title of each item of Product and/or Recorded Product and all rights of such Borrower to the use thereof; including, without limitation, rights protected pursuant to trademark, service mark, unfair competition and/or the rules and principles of law and of any other applicable statutory, common law, or other applicable statutes, common law, or other rule or principle of law; 5 6 (xii) any and all contract rights and/or chattel paper which may arise in connection with each item of Product and/or Recorded Product; (xiii) all accounts and/or other rights to payment which such Borrower presently owns or which may arise in favor of such Borrower in the future, including, without limitation, any refund under a completion guaranty, all accounts and/or rights to payment due from exhibitors in connection with the distribution of each item of Product and/or Recorded Product, and from exploitation of any and all of the collateral, allied, subsidiary, merchandising and other rights in connection with item of Product and/or Recorded Product; (xiv) any and all "general intangibles" (as that term is defined in the UCC) not elsewhere included in this definition, including, without limitation, any and all general intangibles consisting of any right to payment which may arise in the distribution or exploitation of any of the rights set out herein, and any and all general intangible rights in favor of such Borrower for services or other performances by any third parties, including actors, writers, directors, individual producers and/or any and all other performing or nonperforming artists in any way connected with each item of Product and/or Recorded Product, any and all general intangible rights in favor of such Borrower relating to licenses of sound or other equipment, licenses for any photograph or photographic process, and all general intangibles related to the distribution or exploitation of each item of Product and/or Recorded Product including general intangibles related to or which grow out of the exhibition of each item of Product and/or Recorded Product and the exploitation of any and all other rights in each item of Product and/or Recorded Product set out in this definition; (xv) any and all goods including inventory (as that term is defined in the UCC) which may arise in connection with the creation, production or delivery of each item of Product and/or Recorded and which goods pursuant to any production or distribution agreement or otherwise are owned by such Borrower; (xvi) all and each of the rights, regardless of denomination, which arise in connection with the creation, production, completion of production, delivery, distribution, or other exploitation of each item of Product and/or Recorded Product, including, without limitation, any and all rights in favor of such Borrower, the ownership or control of which are or may become necessary or desirable, in the opinion of MEI, in order to complete production of each item of Product and/or Recorded Product in the event that MEI exercises any rights it may have to take over and complete production of each item of Product and/or Recorded Product; 6 7 (xvii) any and all documents issued by any pledgeholder or bailee with respect to the item of Product and/or Recorded Product or any Physical Materials (whether or not in completed form) with respect thereto; (xviii) any and all production accounts or other bank accounts established by such Borrower with respect to such item of Product and/or Recorded Product; (xix) any and all rights of such Borrower under contracts relating to the production or acquisition of such item of Product and/or Recorded Product; (xx) any and all rights of such Borrower under Distribution Agreements relating to each item of Product and/or Recorded Product; and (xxi) Proceeds of all or any of the foregoing; provided, that, notwithstanding anything to the contrary contained above, "Collateral" shall not include the "Real Property" described in the Deed of Trust dated April 24, 1996 among the Borrower, Asahi Bank of California and North America Title Company, as Trustee, and the "Accounts" described in the Assignment of Rents dated April 24, 1996 between the Borrower and Asahi Bank of California. SECTION III. Security for Obligations This Agreement secures the payment and prompt performance of Dove pursuant to the Fee Agreement and all obligations of Borrower now or hereafter existing under this Agreement and all renewals, extensions, restructurings and refinancings of any of the above (all such debts, obligations and liabilities of Borrower being collectively called the "Secured Obligations"). SECTION IV. Borrower Remains Liable Anything herein to the contrary notwithstanding: (a) Borrower shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed; (b) the exercise by MEI of any of the rights hereunder shall not release Borrower from any of its duties or obligations under the contracts and agreements included in the Collateral; and (C) MEI shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall MEI be obligated to perform any of the obligations or duties of Borrower thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 7 8 SECTION V. Representations and Warranties Borrower represents and warrants as follows: A. Binding Obligation. This Agreement is the legally valid and binding obligation of Borrower, enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium, or similar laws or equitable principles relating to or limiting creditor's rights generally. B. Location of Tangible Personal Property. All of the tangible personal property is located at the places specified on Schedule I. C. Ownership of Collateral; Bailees. Except for matters disclosed on Schedule II, other than Permitted Encumbrances and the Security Interests, Borrower owns the Collateral free and clear of any Lien. No effective financing statement or other form of lien notice covering all or any part of the Collateral is on file in any recording office, except for those in favor of Chase and MEI and as disclosed on Schedule II. D. Office Locations; Fictitious Names. The chief place of business, the chief executive office and the office where Borrower keeps its books and records are located at the places specified on Schedule I. Borrower does not do business and has not done business during the past five years under any trade-name or fictitious business name except as disclosed on Schedule III. E. Perfection. This Agreement creates a valid, perfected and, except for the Permitted Encumbrances, and the security interest in favor of Chase pursuant to the Credit Agreement, a first priority security interest in the Collateral, securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken. F. Governmental Authorizations; Consents. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or consent of any other Person (including without limitation any Licensor of Intellectual Property or party to any Assigned Agreement) is required either (a) for the grant by Borrower of the security interest granted hereby or for the execution, delivery or performance of this Agreement by Borrower or (b) for the perfection of or the exercise by MEI of its rights and remedies hereunder (except as may have been taken by or at the direction of Borrower or MEI). G. Accounts. Each Account constitutes the legally valid and binding obligation of the customer obligated to pay the same. No customer has any defense, set-off, claim or counterclaim against Borrower that can be asserted against MEI, whether in any proceeding to enforce MEI's rights in the Collateral or otherwise except defenses, set-offs, claims or counterclaims that are not, in the aggregate, material to the value of the accounts. None of the accounts is evidenced by a promissory note or other instrument other than a check. 8 9 H. Intellectual Property. The copyrights and copyright licenses constitute all of the intellectual property owned by Borrower. I. Accurate Information. All information heretofore, herein or hereafter supplied to MEI by or on behalf of Borrower with respect to the Collateral is and will be accurate and complete in all material respects. J. Credit Agreement Warranties. Each representation and warranty set forth in the Credit Agreement is true and correct in all material respects and such representations and warranties are hereby incorporated herein by this reference with the same effect as though set forth in their entirety herein. SECTION VI. Further Assurances; Covenants A. Other Documents and Actions. Borrower will, from time to time, at its expense, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or desirable, or that MEI may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable MEI to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Borrower will: (a) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as MEI may request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (b) at any reasonable time, upon demand by MEI exhibit the Collateral to allow inspection of the Collateral by MEI or persons designated by MEI; and (c) upon MEI's request, appear in and defend any action or proceeding that may affect Borrower's title to or MEI's security interest in the Collateral. B. MEI Authorized. Borrower hereby authorizes MEI to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral without the signature of Borrower where permitted by law. C. Corporate or Name Change. Borrower will notify MEI promptly in writing prior to any change in Borrower's name, identity or corporate structure. D. Business Locations. Borrower will keep the Collateral at the locations specified on Schedule I. Borrower will give MEI thirty (30) days prior written notice of any change in Borrower's chief place of business or of any new location of business or any new location for any of the Collateral. With respect to any new location (which in any event shall be within the continental United States), Borrower will execute such documents and take such actions as MEI deems necessary to perfect and protect the Security Interests. 9 10 E. Collateral Description. Borrower will furnish to MEI, from time to time, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as MEI may reasonably request, all in reasonable detail. F. Records of Collateral. Borrower shall keep full and accurate books and records relating to the Collateral and shall stamp or otherwise mark such books and records in such manner as MEI may reasonably request indicating that the Collateral is subject to the Security Interests. G. Other Information. Borrower will, promptly upon request, provide to MEI all information and evidence it may reasonably request concerning the Collateral, and in particular the Accounts, to enable MEI to enforce the provisions of this Agreement. SECTION VII. MEI Appointed Attorney-in-Fact Subject to the terms of the Intercreditor Agreement, if Dove is in default of any of its obligations under the Fee Agreement and during the continuance thereof, Borrower hereby irrevocably MEI as Borrower's attorney-in-fact, with full authority in the place and stead of Borrower and in the name of Borrower, MEI or otherwise, from time to time in MEI's discretion to take any action and to execute any instrument that MEI may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation: (i) to obtain and adjust insurance required to be paid to MEI; (ii) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (iii) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clauses (a) and (b) above; (iv) to file any claims or take any action or institute any proceedings that MEI may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of MEI with respect to any of the Collateral; (v) to pay or discharge taxes or Liens, levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by MEI in its sole discretion, and such payments made by MEI to become obligations of Borrower to MEI, due and payable immediately without demand; (vi) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, assignments, verifications and notices in 10 11 connection with Accounts and other documents (including without limitation financing statements, continuation statements and other documents necessary or advisable to perfect the Security Interests) relating to the Collateral; and (vii) generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though MEI were the absolute owner thereof for all purposes, and to do, at MEI's option and Borrower's expense, at any time or from time to time, all acts and things that MEI deems necessary to protect, preserve or realize upon the Collateral. Borrower hereby ratifies and approves all acts of MEI made or taken pursuant to this Section 7. Neither MEI nor any person designated by MEI shall be liable for any acts or omissions or for any error of judgment or mistake of fact or law. This power, being coupled with an interest, is irrevocable so long as this Agreement shall remain in force. SECTION VIII. Transfers and Other Liens Except as otherwise permitted by the Credit Agreement, Borrower shall not: (i) Sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral, except that Borrower may sell inventory in the ordinary course of business. (ii) Create or suffer to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Collateral to secure indebtedness of any Person except for the security interest created by this Agreement or permitted under the Credit Agreement, except with written permission of MEI. SECTION IX. Remedies Subject to the terms of the Subordination Agreement, if Dove is in default of any of its obligations under the Fee Agreement or an Event of Default has occurred and such default is continuing, MEI may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Collateral) and also may: (a) require Borrower to, and Borrower hereby agrees that it will, at its expense and upon request of MEI forthwith, assemble all or part of the Collateral as directed by MEI and make it available to MEI at a place to be designated by MEI which is reasonably convenient to both parties; (b) without notice or demand or legal process, enter upon any premises of Borrower and take possession of the 11 12 Collateral; and (C) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of MEI's offices or elsewhere, at such time or times, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as MEI may deem commercially reasonable. Borrower agrees that, to the extent notice of sale shall be required by law, at least ten days notice to Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. At any sale of the Collateral, if permitted by law, MEI may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase of the Collateral or any portion thereof for the account of MEI (on behalf of MEI). MEI shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. MEI may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the extent permitted by law, Borrower hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any law now existing or hereafter enacted. SECTION X. Limitation on Duty of MEI with Respect to Collateral Beyond the safe custody thereof, MEI shall have no duty with respect to any Collateral in its possession or control (or in the possession or control of any MEI or bailee) or with respect to any income thereon or the preservation of rights against prior parties or any other rights pertaining thereto. MEI shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which it accords its own property. MEI shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehouseman, carrier, forwarding agency, consignee or other MEI or bailee selected by MEI in good faith. SECTION XI. Application of Proceeds Upon the occurrence and during the continuance of an Event of Default, the proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied as set forth in the Credit Agreement and/or the Subordination Agreement, whichever is applicable. SECTION XII. Expenses Borrower shall pay all insurance expenses and all expenses of protecting, storing, warehousing, appraising, insuring, handling, maintaining and shipping the Collateral, all costs, fees and expenses of perfecting and maintaining the Security Interests, and any and all excise, property, sales and use taxes imposed by any state, federal or local authority on any of the Collateral, or with respect to periodic appraisals and inspections of the Collateral, or with respect to the sale or other disposition thereof. If Borrower fails promptly to pay any portion of the above expenses when due 12 13 or to perform any other obligation of Borrower under this Agreement, MEI or any other MEI may, at its option, but shall not be required to, pay or perform the same and charge Borrower's account for all costs and expenses incurred therefor, and Borrower agrees to reimburse MEI or such MEI therefor on demand. All sums so paid or incurred by MEI or any other MEI for any of the foregoing, any and all other sums for which Borrower may become liable hereunder and all costs and expenses (including attorneys' fees, legal expenses and court costs) incurred by MEI or any other MEI in enforcing or protecting the Security Interests or any of their rights or remedies under this Agreement shall be payable on demand, shall constitute Obligations, shall bear interest until paid at the highest rate provided in the Credit Agreement and shall be secured by the Collateral. SECTION XIII. Termination of Security Interests; Release of Collateral Upon payment in full of all Secured Obligations and the termination of all commitments under the Fee Agreement and the Guaranty Agreement, the Security Interests shall terminate and all rights to the Collateral shall revert to Borrower. Upon such termination of the Security Interests or release of any Collateral, MEI will, at the expense of Borrower, execute and deliver to Borrower such documents as Borrower shall reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be. SECTION XIV. Notices Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or if by telecopier, delivered by such equipment) addressed (I) if to the Borrower, to it at 8955 Beverly Boulevard, Los Angeles, California 90048, Attn: Robert Murray, Esq. and Ronald Lightstone, Facsimile No.: (310) 788-5628, (ii) if to MEI, to it c/o Bruce Maggin, H.A.M. Media Group LLC, 305 Madison Avenue, Suite 3016, New York, New York 10017, Facsimile No.: (212) 297-2576, (with a copy to Morrison Cohen Singer & Weinstein, LLP, 750 Lexington Avenue, 8th Floor, New York, NY 10022, Attention: Joel A. Feldman, Esq., Facsimile No.: (212) 735-8708) or such other address as such party may from time to time designate by giving written notice to the other party hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Security Agreement shall be deemed to have been on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid, return receipt requested, if by mail, or when receipt is acknowledged, if by telecopier, in each case addressed to such party as provided in this Section 14 or in accordance with the latest unrevoked written direction from such party. SECTION XV. Waivers, Non-Exclusive Remedies No failure on the part of MEI to exercise, and no delay in exercising and no course of dealing with respect to, any right under the Credit Agreement or this Agreement shall operate as a waiver 13 14 thereof; nor shall any single or partial exercise by MEI of any right under the Credit Agreement or this Agreement preclude any other or further exercise thereof or the exercise of any other right. The rights in this Agreement and the Credit Agreement are cumulative and are not exclusive of any other remedies provided by law. SECTION XVI. Successors and Assigns This Agreement is for the benefit of MEI and it successors and assigns, and in the event of an assignment of all or any of the Secured Obligations, the rights hereunder, to the extent applicable to the Secured Obligations so assigned, may be transferred with such Secured Obligations. This Agreement shall be binding on Borrower and its successors and assigns. SECTION XVII. Changes in Writing No amendment, modification, termination or waiver of any provision of this Agreement or consent to any departure by Borrower therefrom, shall in any event be effective without the written concurrence of MEI and the Borrower. SECTION XVIII. Applicable Law THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. SECTION XIX. Failure or Indulgence Not Waiver; Remedies Cumulative No failure or delay on the part of MEI in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or any other right, power or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION XX. Headings Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 14 15 SECTION XXI. Counterparts This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. Witness the due execution hereof by the respective duly authorized officers of the undersigned as of the day first above written. DOVE ENTERTAINMENT, INC. MEDIA EQUITIES INTERNATIONAL, LLC By: /s/ NEIL TOPHAM By: /s/ BRUCE MAGGIN ------------------------------- ------------------------------- Title: Chief Financial Officer Title: President ---------------------------- ---------------------------- DOVE FOUR POINT ENTERTAINMENT, INC. By: /s/ NEIL TOPHAM ------------------------------- Title: Chief Financial Officer ---------------------------- DOVE INTERNATIONAL, INC. By: /s/ NEIL TOPHAM ------------------------------- Title: Chief Financial Officer ---------------------------- 15 16 SCHEDULE I 8955 BEVERLY BOULEVARD LOS ANGELES, CA 90048 INTERNATIONAL CINE SERVICES, INC. 920 ALLEN AVENUE GLENDALE, CA 91201 BONDED ARCHIVES 3205 BURTON AVENUE BURBANK, CA 91504 LASER PACIFIC MEDIA CORP. 809 N. CAHUENGA BLVD. HOLLYWOOD, CA 90038 AMERICAN DIRECT MAIL 3688 BEVERLY BOULEVARD LOS ANGELES, CA 90069 GES EXPOSITION SERVICES 13861 RESENCRANS AVENUE SANTA FE SPRINGS, CA 90670 GILBERT PRODUCTION SERVICES, INC. 4571 ELECTONICS PLACE LOS ANGELES, CA 90039 KEEP IT SELF STORAGE 6827 WOODLEY AVENUE VAN NUYS, CA 91406 SELECT STORAGE 135 WEST AVENUE 34 LOS ANGELES, CA 90031 MERCEDES 62 IMLAY STREET BROOKLYN, NY 16 17 SCHEDULE II THE DIRECTORS GUILD AND THE SCREEN ACTORS GUILD WILL HAVE A FIRST PRIORITY PERFECTED SECURITY INTEREST (AND RELATED FINANCING STATEMENTS) ON THE PROPERTY OF DOVE FOUR POINT, INC. CONSISTING OF THE MADE FOR TELEVISION MOVIE KNOWN AS "FUTURESPORT" AND ASSETS RELATED THERETO. 17 18 SCHEDULE III DOVE* DOVE ENTERTAINMENT* DOVE FOUR POINT* DOVE INTERNATIONAL* FOUR POINT DOVE BOOKS* DOVE AUDIO* DOVE TELEVISION* DOVE FRONTLIST AUDIO SELECT DOVE BOOKS ON TAPE DOVE KIDS OLIVE BRANCH DOVE PICTURES, INC. *NAMES WITH AN ASTERISK ARE NAMES CURRENTLY USED BY THE CREDIT PARTIES. 18 EX-10.55 11 EXHIBIT 10.55 1 EXHIBIT 10.55 SUBORDINATION AGREEMENT SUBORDINATION AGREEMENT dated as of November 4, 1997 (as amended, supplemented otherwise modified, renewed or replaced from time to time, the "Subordination Agreement") among (i) DOVE ENTERTAINMENT, INC. ("Borrower"), (ii) DOVE INTERNATIONAL, INC. and DOVE FOUR POINT, INC. (collectively, the "Corporate Guarantors"; together with the Borrower, the "Obligors"), (iii) TERRENCE A. ELKES, KENNETH F. GORMAN, RONALD LIGHTSTONE, JOHN T. HEALY and BRUCE MAGGIN (each an "Individual Guarantor"), (iv) MEDIA EQUITIES INTERNATIONAL, L.L.C. ("MEI"; and together with the Individual Guarantors, the "Subordinated Creditors"), and (v) THE CHASE MANHATTAN BANK (the "Lender"). Introductory Statement Pursuant to the terms of a Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 among Obligors and the Lender (the "Credit Agreement"), the Lender has agreed, subject to the terms and conditions thereof, to make loans (the "Loans") to the Borrower. The Credit Agreement, the Note referred to therein and the other documents, instruments and agreements contemplated thereby as they may be amended or otherwise modified from time to time, shall hereinafter be referred to as "Senior Obligation Documents". For purposes of this Subordination Agreement, unless otherwise defined herein, capitalized terms used herein shall have the respective meanings given to such terms in the Credit Agreement. Pursuant to the terms of the Guaranty Agreement, the Individual Guarantors have agreed to provide an unconditional guaranty of the payment of the Obligations (as defined in the Credit Agreement) in an amount equal to the lesser of (x) $2,000,000 and (y) the amount by which the actual borrowings by the Borrower exceeds the Borrowing Base in accordance with the terms of the Credit Agreement and Guaranty Agreement, subject to the limitations set forth therein (the "Maximum Guaranty Amount"); provided, that in the case of any Individual Guarantor, such guarantor's guaranty obligation shall not exceed the product of 110% of such Individual Guarantor's ownership interest in Media Equities International, L.L.C. as of the date 2 of the Credit Agreement multiplied by the Maximum Guaranty Amount. Pursuant to the terms of a certain Fee Agreement dated as of November 4, 1997 (the "Fee Agreement") between the Borrower and MEI, the Borrower has agreed to pay the sum of $25,000 per year and to reimburse MEI for any payments made to the Lender by the Individual Guarantors under the Guaranty Agreement. The obligations of the Obligors to repay any amounts payable to MEI or the Individual Guarantors in connection with the Guaranty Agreement and Fee Agreement are hereinafter referred to as the "Subordinated Obligations." Any promissory note evidencing any loan, any replacements or substitutes therefore with respect to the Subordinated Obligations and any related loan agreement, security agreement or any other related agreement, including without limitation, the Fee Agreement, with respect to the Subordinated Obligations are hereinafter referred to as "Junior Obligation Documents". In order to induce the Lender to enter into the Credit Agreement, the Subordinated Creditors have agreed, subject to the provisions of this Subordination Agreement, that the Subordinated Obligations shall be subordinate to the Senior Obligations (as hereinafter defined). NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Agreement to Subordinate. Each Subordinated Creditor agrees that the Subordinated Obligations are and shall be subordinate and subject in right of payment, to the extent and in the manner hereinafter set forth, to the prior payment in full of the Senior Obligations and that any guarantees, security interests, mortgages and other liens securing payment of the Subordinated Obligations are and shall be subordinate, to the fullest extent permitted by law and as hereinafter set forth, to any guarantees, security interests and mortgages and other liens securing payment of the Senior Obligations, notwithstanding the perfection, order of perfection or failure to perfect, any such security interest or other lien, or the filing or recording, order of filing or recording, or failure to file or record this Subordination Agreement or any instrument or other document in any filing or recording office in any jurisdiction. The term "Senior Obligations" shall mean all obligations of the Obligors under the Senior Obligation Documents including, without limitation, whether outstanding at the date hereof or hereafter incurred or created, all obligations to pay principal, premium, if any, interest (including, without limitation, interest accruing after the commencement of any bankruptcy, insolvency, reorganization or similar proceedings with respect to the Obligors, whether or not determined to be an allowed claim in any such proceeding), charges, costs, expenses and fees including, without limitation, the disbursements and reasonable fees of counsel to the Lender, all obligations to reimburse or indemnify the Lender in any way, and all renewals, extensions, restructurings, refinancings or refunding of any indebtedness under the Senior Obligation Documents in the nature of a "workout" or otherwise. The expressions "prior payment in full", "payment in full", "paid in full" or any other similar term(s) or phrase(s) when used herein with respect to Senior Obligation Documents - 2 - 3 shall mean the payment in full, in cash, of all of the Senior Obligations and the termination of the Commitment. 2. Restrictions on Payment of the Subordinated Obligations, Etc. Except after the Blockage Period (as defined below), the Subordinated Creditors shall not ask, demand, sue for, take or receive, directly or indirectly, from any Obligor or any affiliate thereof, in cash or other property, by set-off, by realizing upon collateral, foreclosing on any lien or otherwise, exercise any remedies or rights under the Junior Obligation Documents or by executions, garnishments, levies, attachments or by any other action relating to the Subordinated Obligations, or in any other manner, payment of, or additional security for, all or any part of the Subordinated Obligations unless and until the Senior Obligations shall have been paid in full. Each of the Subordinated Creditors and the Lender agree that if any Default (as defined in the Credit Agreement) occurs and is continuing, pursuant to which the Lender may, or following notice or lapse of time would be able to, accelerate the maturity of the Senior Obligations, and if the Lender gives written notice of the event of default to the Obligors and the Subordinated Creditors (a "Blockage Notice"), then, unless and until such event of default has been cured or waived or has ceased to exist or the Subordinated Creditors and the Obligors receive notice from the Lender terminating the Blockage Period (as defined below), during the 270 days after the delivery of such Blockage Notice (the "Blockage Period"), the Subordinated Creditors shall not exercise any of the rights or remedies described in the preceding sentence. The Lender shall provide the Subordinated Creditors with such Blockage Notice within (10) Business Days' after it obtains knowledge of such Default, in which case the Blockage Period shall commence from the date such notice is received by the Subordinated Creditors; provided, however, that in the event the Lender fails to deliver such notice within such 10-day period, the Blockage Period shall commence from the date the Lender obtained knowledge of such Default. The Obligors will not make any payment on any of the Subordinated Obligations, or take any other action, in contravention of the provisions of this Subordination Agreement. 3. Additional Provisions Concerning Subordination. Each Subordinated Creditor and each of the Obligors agree as follows: a. In the event of (i) any dissolution, winding up, liquidation or reorganization of any of the Obligors (whether voluntary or involuntary and whether in bankruptcy, insolvency or receivership proceedings, or upon an assignment for the benefit of creditors or proceedings for voluntary or involuntary liquidation, dissolution or other winding up of any of the Obligors, whether or not involving insolvency or bankruptcy, or any other marshalling of the assets and liabilities of any of the Obligors or otherwise); or (ii) any Event of Default or an event which with notice and/or passage of time would constitute an Event of Default (as such term is defined in the Credit Agreement), or any default, demand for payment or acceleration of maturity regarding the Subordinated Obligations: (1) all Senior Obligations shall first be paid to the Lender in full before any payment or distribution is made upon the principal of or interest on or any fees, costs, - 3 - 4 charges or expenses in connection with the Subordinated Obligations, and before any other action described in Section 2 and 4 hereof is taken by any Subordinated Creditor; and (2) any payment or distribution of assets of any of the Obligors, whether in cash, property or securities to which the Subordinated Creditors would be entitled with respect to the Subordinated Obligations except for the provisions hereof, shall be paid or delivered by the Obligors, or any receiver, trustee in bankruptcy, liquidating trustee, disbursing agent, agent or other person making such payment or distribution, directly to the Lender, to the extent necessary to pay in full all Senior Obligations remaining unpaid, after giving effect of any concurrent payment or distribution to the Lender before any payment or distribution is made to any Subordinated Creditor; b. In any proceeding referred to or resulting from any event referred to in subsection (a) of this Section 3 commenced by or against any of the Obligors, each Subordinated Creditor will duly and promptly take such action as the Lender may reasonably request to (i) demand, sue for, collect and receive any and all payments or distribution referred to in subsection (a) of this Section 3 which may be payable or deliverable upon or with respect to the Subordinated Obligations and to file appropriate claims or proofs of claim with respect thereto, and (ii) execute and deliver to the Lender such powers of attorney, assignments or other instruments as the Lender may request in order to enable it to enforce any and all claims with respect to the Subordinated Obligations. In the event the Subordinated Creditors fail to take such action upon the Lender's request, the Lender may, and is hereby irrevocably authorized and empowered (in its own name or in the name of the Subordinated Creditors or otherwise) but shall have no obligation to, (i) demand, sue for, collect and receive any and all payments or distribution which may be payable or deliverable upon or with respect to the Subordinated Obligations and to give acquittance therefore, (ii) file appropriate claims or proofs of claim in respect of the Subordinated Obligations and (iii) take such other action as the Lender may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of the Lender hereunder. c. All payments or distributions upon or with respect to the Subordinated Obligations which are received by any of the Subordinated Creditors contrary to the provisions of this Subordination Agreement shall be deemed to be the property of the Lender, shall be received in trust for the benefit of the Lender, shall be segregated from other funds and property held by any of the Subordinated Creditors and shall be forthwith paid over to the Lender in the same form as so received (with any necessary endorsement) to be applied to the payment or prepayment of the Senior Obligations until the Senior Obligations shall have been paid in full; d. Each Subordinated Creditor hereby waives any requirement for marshalling of assets by the Lender in connection with any foreclosure of any lien of the Lender under the Senior Obligation Documents; - 4 - 5 e. Each Subordinated Creditor shall not take any action to impair or otherwise adversely affect the foreclosure of, or other realization of the Lender's rights under the Senior Obligation Documents; and f. The Lender is hereby authorized to demand specific performance of this Subordination Agreement at any time when any Subordinated Creditor shall have failed to comply with any of the provisions of this Subordination Agreement, and each Subordinated Creditor hereby irrevocably waives any defense based on the adequacy of a remedy at law which might be asserted as a bar to such remedy of specific performance. 4. Subrogation. Subject to the payment in full of all Senior Obligations to the extent of payments received by the Lender for application against the Senior Obligations which would be payable to any of the Subordinated Creditors for application against the Subordinated Obligations but for the provisions of this Agreement, the applicable Subordinated Creditor shall be subrogated to the rights of the Lender to receive payments or distributions of cash, property or securities of any of the Obligors applicable to the Senior Obligations until the principal of (and premium, if any) and interest on the Subordinated Obligations shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the Lender of any cash, property or securities to which any of the Subordinated Creditors would be entitled with respect to the Subordinated Obligations except for the provisions of this Section, and no payments over to the Lender pursuant to the provisions of this Subordination Agreement by any of the Subordinated Creditors, shall, as between, the Obligors, its creditors other than the Lender, and the Subordinated Creditors, be deemed to be a payment by the Obligors to or on account of the Senior Obligations. However, each Subordinated Creditor agrees that no payment or distribution to the Lender pursuant to the provisions of this Subordination Agreement shall entitle the Subordinated Creditors to exercise any rights of subrogation in respect thereof until the Senior Obligations shall have been paid in full. 5. Legend. Each Subordinated Creditor and the Obligors will cause each promissory note evidencing any of the Subordinated Obligations, any replacement thereof and any mortgage or security document relating thereto to include the following provision: "The principal amount of the indebtedness evidenced or secured by this instrument is subordinated to other indebtedness pursuant to, and to the extent provided in, and is otherwise subject to the terms of, the Subordination Agreement dated as of November 4, 1997 by and among Dove Entertainment, Inc., the Individual Guarantors named therein, Media Equities International, L.L.C. and The Chase Manhattan Bank." 6. Negative Covenants of the Subordinated Creditors. So long as any of the Senior Obligations shall remain outstanding, each Subordinated Creditor will not, without the prior written consent of the Lender: - 5 - 6 a. Sell, assign, pledge, encumber or otherwise dispose of any instrument evidencing the indebtedness owed to any Subordinated Creditor or any collateral securing the Subordinated Obligations unless such sale, assignment, pledge, encumbrance or other disposition is made expressly subject to this Subordination Agreement and the other party to such sale, assignment, pledge, encumbrance or other disposition consents in writing to be bound by the terms hereof; b. Permit the terms of the Junior Obligations Documents or collateral securing any Subordinated Obligations to be changed in any way which would limit or impair these subordinated provisions, allow the interest payable on the Subordinated Obligations to be no greater than as is currently set forth in the Junior Obligation Documents; c. Declare all or any portion of the Subordinated Obligations due and payable prior to the date fixed therefor or realize upon, or otherwise exercise any remedies with respect to, any collateral securing the Subordinated Obligations or take any other action prohibited by Section 2 hereof; or d. Subject to Section 2 hereof, commence, or join with any creditor other than the Lender in commencing any proceeding referred to in Section 3(a). 7. Obligations Unconditional. All rights and interests of the Lender hereunder, and all agreements and obligations of the Subordinated Creditors and the Obligors hereunder, shall remain in full force and effect irrespective of: a. Any lack of validity or enforceability of any Senior Obligation Document or any other agreement or instrument relating thereto; b. Any change in the time, manner or place of payment of, or in any other term of, all or any of the Senior Obligations, or any other amendment or waiver of or any consent to departure from any Senior Obligation Document; c. Any exchange, release or nonperfection of any collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Senior Obligations; or d. Any other circumstances which might otherwise constitute a defense available to, or a discharge of, any of the Obligors in respect of the Senior Obligations or any of the Subordinated Creditors or the Obligors in respect of this Subordination Agreement. 8. Further Assurances. Each Subordinated Creditor and the Obligors will, at their own expense and at any time and from time to time, promptly execute and deliver all further instruments and documents, and take all further action that the Lender may reasonably request, in order to perfect or otherwise protect any right or interest granted or purported to be granted - 6 - 7 hereby or to enable the Lender to exercise and enforce its rights and remedies hereunder. Each Subordinated Creditor further authorizes the Lender to file UCC financing statements and any amendments thereto or continuations thereof with regard to the Subordinated Obligations without the Subordinated Creditors' signatures. 9. Expenses. The Obligors agree to pay to the Lender, upon demand, the amount of any and all reasonable expenses, including the reasonable fees and expenses of counsel for the Lender, which the Lender may incur in connection with the exercise or enforcement against any of the Subordinated Creditors of any of the rights or interests of the Lender hereunder. 10. Notice. All demands, notices and other communications which any party hereto may desire or may be required to give to any other party hereunder shall be in writing (including telegraphic communication) and shall be mailed, telecopied, telegraphed or delivered to such other party at its address as follows: a. to the Lender at: The Chase Manhattan Bank 270 Park Avenue, 37th floor New York, New York 10017 Attn: John J. Huber III With a copies to: Chase Securities Inc. 1800 Century Park East, Suite 400 Los Angeles, CA 90067 Attention: Kenneth R. Wilson and Morgan, Lewis & Bockius LLP 101 Park Avenue New York, New York 10178 Attention: Michael A. Chapnick, Esq. b. to the Obligors at: Dove Entertainment, Inc. 8955 Beverly Boulevard Beverly Hills, CA 90048 Attention: Robert Murray, Esq. and Ronald Lightstone - 7 - 8 c. to the Subordinated Creditors at: Media Equities International, L.L.C. c/o H.A.M. Media Group LLP 305 Madison Avenue, Suite 3016 New York, New York 10017 Attn: Bruce Maggin With a copy to: Morrison Cohen Singer & Weinstein, LLP 750 Lexington Avenue, 8th Floor New York, NY 10022 Attn: Joel Feldman, Esq. or to any such party at such other address as shall be designated by such party in a written notice to each other party, complying as to delivery with the terms of this Section 10. All such demands, notices, and other communications shall be effective when received. 11. SERVICE OF PROCESS. EACH SUBORDINATED CREDITOR AND EACH OF THE OBLIGORS HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK AND THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS SUBORDINATION AGREEMENT OR THE SUBJECT MATTER HEREOF BROUGHT BY THE LENDER OR ITS SUCCESSORS OR ASSIGNS IN EITHER OF THE ABOVE- MENTIONED FORUMS AT THE SOLE OPTION OF THE LENDER. EACH SUBORDINATED CREDITOR AND EACH OF THE OBLIGORS TO THE EXTENT PERMITTED BY APPLICABLE LAW, (A) HEREBY WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT HE OR IT, AS APPLICABLE IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT HIS OR ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER OR THAT THIS SUBORDINATION AGREEMENT OR THE SUBJECT MATTER HEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, (B) HEREBY WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION, SUIT OR PROCEEDING INSTITUTED BY THE AGENT IN STATE COURT TO FEDERAL COURT, AND (C) HEREBY WAIVES IN ANY SUCH ACTION, SUIT OR PROCEEDING ANY OFFSETS OR COUNTERCLAIMS (EXCEPT FOR COMPULSORY COUNTERCLAIMS). EACH SUBORDINATED CREDITOR AND EACH OF THE OBLIGORS HEREBY CONSENTS TO SERVICE OF PROCESS BY - 8 - 9 REGISTERED MAIL AT THE ADDRESS TO WHICH NOTICES ARE TO BE GIVEN. EACH SUBORDINATED CREDITOR AND EACH OF THE OBLIGORS AGREES THAT HIS OR ITS SUBMISSION TO JURISDICTION AND HIS OR ITS CONSENT TO SERVICE OF PROCESSES BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE LENDER. FINAL JUDGMENT AGAINST THE SUBORDINATED CREDITORS OR ANY OF THE OBLIGORS IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER JURISDICTIONS (A) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ANY INDEBTEDNESS OR LIABILITY OF THE SUBORDINATED CREDITORS OR ANY OF THE OBLIGORS THEREIN DESCRIBED OF (B) IN ANY OTHER MANNER PROVIDED BY OR PURSUANT TO THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED, HOWEVER, THAT THE LENDER MAY AT ITS OPTION BRING SUIT, OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE SUBORDINATED CREDITORS OR ANY OF THE OBLIGORS OR ANY OF THEIR RESPECTIVE ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE SUBORDINATED CREDITORS, ANY OF THE OBLIGORS OR THEIR RESPECTIVE ASSETS MAY BE FOUND. EACH SUBORDINATED CREDITOR AND EACH OF THE OBLIGORS FURTHER COVENANTS AND AGREES THAT SO LONG AS THIS SUBORDINATION AGREEMENT SHALL BE IN EFFECT, EACH SHALL MAINTAIN A DULY APPOINTED AGENT FOR THE RECEIPT AND ACCEPTANCE ON ITS BEHALF OF SERVICE OF SUMMONS AND OTHER LEGAL PROCESSES, AND UPON FAILURE TO DO SO THE CLERK OF EACH COURT TO WHOSE JURISDICTION IT HAS SUBMITTED SHALL BE DEEMED TO BE HIS OR ITS, AS APPLICABLE RESPECTIVE DESIGNATED AGENT UPON WHOM SUCH PROCESS MAY BE SERVED ON HIS OR ITS, AS APPLICABLE, BEHALF, AND NOTIFICATION BY THE ATTORNEY FOR PLAINTIFF, COMPLAINANT OR PETITIONER THEREIN BY MAIL OR TELEGRAPH TO THE SUBORDINATED CREDITOR OR ANYB OF THE OBLIGORS OF THE FILING OR EACH SUIT, ACTION OR PROCEEDING SHALL BE DEEMED SUFFICIENT NOTICE THEREOF. 12. Miscellaneous. a. No amendment of any provision of this Subordination Agreement shall be effective unless it is in writing and signed by each of the Subordinated Creditors, each of the Obligors and the Lender, and no waiver of any provision of this Subordination Agreement, and no consent to any departure therefrom, shall be effective unless it is in writing and signed by the Lender, and any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. b. No failure on the part of the Lender to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. - 9 - 10 c. Any provision of this Subordination Agreement which is prohibited or unenforceable in any jurisdiction, shall, as to such jurisdiction, be ineffective to the extent of such prohibition or invalidity without invalidating the remaining portions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. d. This Subordination Agreement shall be binding on the Subordinated Creditors and the Obligors and their respective successors and assigns including without limitation any holders of the instruments evidencing the Subordinated Obligations. e. This Subordination Agreement may be executed by one or more of the parties to this Subordination Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. f. This Subordination Agreement shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have executed this Subordination Agreement on the date first above written. OBLIGORS: DOVE ENTERTAINMENT, INC. By: /s/ NEIL TOPHAM ------------------------------- Name: Neil Topham Title: Chief Financial Officer DOVE INTERNATIONAL, INC. By: /s/ NEIL TOPHAM ------------------------------- Name: Neil Topham Title: Chief Financial Officer DOVE FOUR POINT, INC. By: /s/ NEIL TOPHAM ------------------------------- Name: Neil Topham Title: Chief Financial Officer - 10 - 11 SUBORDINATED CREDITORS: /s/ TERRENCE ELKES ---------------------------------- TERRENCE A. ELKES /s/ KENNETH GORMAN ---------------------------------- KENNETH F. GORMAN /s/ RONALD LIGHTSTONE ---------------------------------- RONALD LIGHTSTONE /s/ JOHN HEALY ---------------------------------- JOHN T. HEALY /s/ BRUCE MAGGIN ---------------------------------- BRUCE MAGGIN MEDIA EQUITIES INTERNATIONAL, L.L.C. By: /s/ BRUCE MAGGIN ------------------------------- Name: Bruce Maggin Title: President THE CHASE MANHATTAN BANK Executed in New York, New York on February 13, 1998 By: /s/ TRACEY S. NAVIN ------------------------------- Name: Tracey A. Navin Title: Vice President - 11 - EX-10.56 12 EXHIBIT 10.56 1 EXHIBIT 10.56 CONTRIBUTION AGREEMENT This CONTRIBUTION AGREEMENT ("Agreement") is entered into as of November 4, 1997 by and among Dove Entertainment, Inc., a California corporation (the "Company" or the "Borrower") and each Subsidiary of the Borrower whose name appears at the foot hereof (collectively, the "Contributors", individually each a "Contributor"), for the purpose of establishing the respective rights and obligations of contribution among the Contributors and the Borrower in connection with the Credit Agreement (as hereinafter defined). Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. WHEREAS, the Borrower and the Contributors are parties to a Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 among the Borrower, the Contributors and The Chase Manhattan Bank (the "Lender") (said agreement, as it may hereafter be amended, supplemented or otherwise modified, renewed or replaced from time to time in accordance with its terms being the "Credit Agreement"), pursuant to which the Lender has made certain commitments, subject to the terms and conditions set forth therein, to extend a credit facility to the Borrower; WHEREAS, pursuant to the Credit Agreement, the Contributors have guaranteed the Obligations (such term being used herein as defined in the Credit Agreement) of the Borrower; WHEREAS, pursuant to the terms of the Credit Agreement, each of the Borrower and Contributors has granted to the Lender a security interest in the Collateral (as defined in the Credit Agreement) for their respective obligations thereunder; WHEREAS, as a result of the transactions contemplated by the Credit Agreement, the Borrower and the Contributors will benefit, directly and indirectly, from the Obligations and in consideration thereof desire to enter into this Agreement to allocate such benefits among themselves and to provide a fair and equitable arrangement to make contributions in the event any payments are made by the Contributors under the Credit Agreement or the Lender exercises recourse against any of the Collateral owned by the Contributors (such payment or recourse being referred to herein as a "Contribution"); NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Contributors and the Borrower hereby agree as follows: -1- 2 SECTION 1. Contribution. In order to provide for just and equitable contribution among the Contributors and the Borrower in the event any Contribution is made by a Contributor (a "Funding Contributor") under the Credit Agreement, that Funding Contributor shall be entitled to a contribution from certain other Contributors and from the Borrower for all payments, damages and expenses incurred by that Funding Contributor in discharging any of the Obligations, in the manner and to the extent set forth in this Agreement. The amount of any Contribution under this Agreement shall be equal to the payment made pursuant to the Credit Agreement or the fair saleable value of the Funding Contributor's portion of the Collateral against which recourse is exercised, and shall be determined as of the date on which such payment is made or recourse is exercised, as the case may be. SECTION 2. Benefit Amount Defined. For purposes of this Agreement, the "Benefit Amount" of any Contributor as of any date of determination shall be the net value of the benefits to such Contributor from extensions of credit made by the Lender to the Borrower under the Credit Agreement. Such benefits shall include benefits of funds constituting proceeds of Loans which are deposited into the account of the Borrower by the Lender which are in turn advanced or contributed by the Borrower to such Contributor (collectively, the "Benefits"). In the case of any proceeds of Loans or Benefits advanced or contributed to a Person (an "Owned Entity") any of the equity interests of which are owned directly or indirectly by a Contributor, the Benefit Amount of a Contributor with respect thereto shall be that portion of the net value of the benefits attributable to Loans or Benefits advanced or contributed to the Owned Entity equal to the direct or indirect percentage ownership of such Contributor in its Owned Entity. SECTION 3. Contribution Obligation. Each Contributor and the Borrower shall be liable to a Funding Contributor in an amount equal to the greater of (A) the product of (i) a fraction the numerator of which is (x) the Benefit Amount of such Contributor or Borrower, and the denominator of which is (y) the total amount of Obligations and (ii) the amount of Obligations paid by such Funding Contributor and (B) 95% of the excess of the fair saleable value of the property of such Contributor over the total liabilities of such Contributor (including the maximum amount reasonably expected to become due in respect of contingent liabilities), as the case may be, determined as of the date on which the payment made by a Funding Contributor is deemed made for purposes of this Agreement or any recourse is exercised against any Contributor's portion of the Collateral, as the case may be (giving effect to all payments made by other Funding Contributors and to the exercise of recourse against any other Funding Contributor's portion of the Collateral as of such date in a manner to maximize the amount of such contributions). SECTION 4. Allocation. In the event that at any time there exists more than one Funding Contributor with respect to any Contribution (in any such case, the "Applicable Contribution"), then payment from other Contributors and from the Borrower pursuant to this Agreement shall be allocated among such Funding Contributors in proportion to the total amount of the Contribution made for or on account of the Borrower by each such Funding Contributor pursuant to the Applicable Contribution. In the event that at any time any Contributor pays an -2- 3 amount under this Agreement in excess of the amount calculated pursuant to clause (A) of Section 3, that Contributor shall be deemed to be a Funding Contributor to the extent of such excess and shall be entitled to contribution from the other Contributors and from the Borrower in accordance with the provisions of this Agreement. SECTION 5. Subrogation. Any payments made hereunder by the Borrower shall be credited against amounts payable by the Borrower pursuant to any subrogation rights of the Contributors which received the payments under this Agreement. SECTION 6. Preservation of Rights. This Agreement shall not limit any right which any Contributor may have against any other Person which is not a party hereto. SECTION 7. Subsidiary Payment. The amount of contribution payable under this Agreement by any Contributor shall be reduced by the amount of any contribution paid hereunder by a Subsidiary of such Contributor. SECTION 8. Equitable Allocation. If as a result of any reorganization, recapitalization, or other corporate change in the Company or any Affiliates or Subsidiaries thereof, or as a result of any amendment, waiver or modification of the terms and conditions governing the Credit Agreement or the Obligations, or for any other reason, the Contributions under this Agreement become inequitable, the parties hereto shall promptly modify and amend this Agreement to provide for an equitable allocation of the Contributions. Any of the foregoing modifications and amendments to this Agreement shall be in writing and signed by all parties hereto. SECTION 9. Asset of Party to Which Contribution is Owing. The parties hereto acknowledge that the right to contribution hereunder shall constitute an asset in favor of the party to which such contribution is owing. SECTION 10. Subordination. No payments payable by a Contributor or by the Borrower pursuant to the terms hereof shall be paid until all amounts then due and payable by the Borrower to the Lender, pursuant to the terms of the Fundamental Documents, are paid in full in cash. Nothing contained in this Agreement shall affect the obligations of any party hereto to the Lender under the Credit Agreement or any other Fundamental Documents. SECTION 11. Successors and Assigns; Amendments. This Agreement shall be binding upon each party hereto and its respective successors and assigns and shall inure to the benefit of the parties hereto and their respective successors and assigns, and in the event of any transfer or assignment of rights by a Contributor or by the Borrower, the rights and privileges herein conferred upon that Contributor shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and condition hereof. Except as specifically required under Section 8, this Agreement shall not be amended without the prior written consent of the Lender. -3- 4 SECTION 12. Termination. This Agreement, as it may be modified or amended from time to time, shall remain in effect, and shall not be terminated until the Credit Agreement has been discharged or otherwise satisfied in accordance with its terms. SECTION 13. Choice of Law. This Agreement, and any instrument or agreement required hereunder, shall be deemed to be made under, shall be governed by, and shall be construed and enforced in accordance with, the laws of the State of New York without regard to principles of conflict of laws. SECTION 14. Counterparts. This Agreement, and any modifications or amendments hereto may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original for all purposes, but all such counterparts shall constitute but one and the same instrument. SECTION 15. Effectiveness. This Agreement shall become effective on the date on which all of the parties hereto shall have executed this Agreement. The Company shall deliver counterparts hereof bearing the signatures of each of the parties hereto to the Lender. IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be duly executed as of the day and year first written above. DOVE ENTERTAINMENT, INC. By: /s/ NEIL TOPHAM ----------------------------------------- Name: Title: DOVE INTERNATIONAL, INC. /s/ NEIL TOPHAM DOVE FOUR POINT, INC. By: /s/ NEIL TOPHAM ------------------------------------------ Name: Title: -4- EX-10.57 13 EXHIBIT 10.57 1 EXHIBIT 10.57 FEE AGREEMENT THIS FEE AGREEMENT (this "Agreement") is made the 4th day of November, 1997, by and between DOVE ENTERTAINMENT, INC., a California corporation, having its principal place of business at 8955 Beverly Blvd., Los Angeles, California, 90048 ("Dove") and MEDIA EQUITIES INTERNATIONAL, LLC, a New York limited liability company having its principal place of business at c/o Morrison Cohen Singer & Weinstein, LLP, 750 Lexington Avenue, New York, New York ("MEI"). WHEREAS, Dove has entered into that certain Credit, Security and Pledge Agreement (the "Credit Agreement"), dated as of the date hereof, among Dove, the Guarantors named therein and The Chase Manhattan Bank ("Chase"). WHEREAS, Terrence A. Elkes, Kenneth F. Gorman, John T. Healy, Bruce Maggin and Ronald Lightstone are, directly or indirectly, all of the beneficial owners of MEI (the "MEI Principals"). WHEREAS, it is a condition to the effectiveness of the Credit Agreement that the MEI Principals guaranty a portion of the obligations of Dove under the Credit Agreement, as more fully described in the Credit Agreement and the Guaranty Agreement (as such term is defined in the Credit Agreement). WHEREAS, Dove and its subsidiaries will receive substantial benefit from the credit facility provided by the Credit Agreement and the guaranty thereof by the MEI Principals. NOW, THEREFORE, based upon the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Dove and MEI hereby agree as follows: 1. So long as the Guaranty Agreement (as such term is defined in the Credit Agreement) shall be in full force and effect (and not be declared null and void, or become unenforceable or be terminated or disaffirmed by any MEI Principal) and no Event of Default shall exist and be continuing under and as defined in the Credit Agreement, Dove shall pay to MEI a fee in the amounty of $25,000 per annum, to be paid yearly, in advance , on the date of the execution and delivery of the Guaranty Agreement and each anniversary thereof. 2. Payment shall be made by check and mailed to MEI at its principal place of buisness as set forth in the introductory paragraph to this Agreement, or at such other address as MEI shall provide to Dove in writing. - 1 - 2 3. Dove hereby agrees that, if, pursuant to the Guaranty Agreement, any MEI Principal shall make any payment to Chase, Dove shall promptly pay such amount to such MEI Principal. Each MEI Principal under the Guaranty Agreement shall be a third party beneficiary under this Paragraph 3 of this Agreement. 4. Dove and MEI represent and warrant that they have the legal power and authority to enter into thisAgreement and that the persons signing for each party are authorized and directed to do so. 5. This agreement constitutes and expresses the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemtporaneous agreements and understandings, inducements or conditions, whether express or implied, oral or written. Neither this Agreement nor any portion or provision hereof may be amended orally or in any manner other than by an agreement in writing signed by Dove and MEI. 6. EACH PARTY HERETO HEREBY WAIVES TRIAL BY JURY IN ANY COURT IN ANY SUIT, ACTION OR PROCEEDING ON ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO THIS AGREEMENT AND/OR THE DEFENSE OR ENFORCEMENT OF ANY PARTIES' RIGHTS AND REMEDIES, INCLUDING WITHOUT LIMITATION, TORT CLAIMS. EACH PARTY ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY AND ONLY AFTER CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEY. 7. This Agreement shall inure to the benefit of MEI, its successors and assigns, and shall be binding upon both Dove and MEI and their respective heirs, personal representatives, successors and assigns. 8. The vaildity, construction and enforcement of this Agreement shall be governed by the internal laws of the State of California. 9. The provisions of this Agreement are independent of and separable from each other. If any provision hereof shall for any reason be held invalid or unenforceable, it is the intent of the parties that such invalidity or unenforceability shall not affect the validity or enforceability of any other provision hereof, and that this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. 10. This Agreement may be executed in separate counterparts and be each party on a separate counterpart, each of which, when executed and delivered, shall be deemed to be an original. Such counterparts shall together constitute one and the same instrument. - 2 - 3 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed, sealed and delivered this 4th day of November, 1997. DOVE ENTERTAINMENT, INC. By: /s/ NEIL TOPHAM ------------------------------- Name: Neil Topham Title: Chief Financial Officer MEDIA EQUITIES INTERNATIONAL, LLC By: /s/ BRUCE MAGGIN ------------------------------- Name: Bruce Maggin Title: President - 3 - EX-10.58 14 EXHIBIT 10.58 1 EXHIBIT 10.58 EMPLOYMENT AGREEMENT THIS AGREEMENT by and among Dove Entertainment, Inc. (the "Company"), a California corporation, and Ronald Lightstone (the "Executive"), is dated as of the 4th day of February, 1998. WHEREAS, the Executive has been duly appointed President and Chief Executive Officer of the Company by resolution duly adopted by the Board of Directors of the Company (the "Board"); and WHEREAS, the Executive is willing to serve in the employ of the Company on the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties agree as follows: 1. Employment. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to be employed by the Company, on the terms and subject to the conditions set forth herein. 2. Term of Employment. The term of the Executive's employment under this Agreement (the "Employment Period") shall have commenced on June 10, 1997 and shall end on June 10, 1999, unless extended or terminated earlier in accordance with Section 5. 3. Titles and Responsibilities. a) Titles. During the Employment Period, the Executive shall serve as the President and Chief Executive Officer of the Company. The Executive shall report and be responsible to the Board. b) Responsibilities. The Company hereby engages the Executive to provide his exclusive services as president and chief executive officer and to supervise the development, production and publication of books and audio books and to develop and produce motion pictures and television programs for the Company, and to supervise the exploitation and sale of such books, audio books, motion pictures and television programs. The Executive shall be the Company's president, general manager and chief executive officer and shall, subject to the control of the Board, have general supervision, direction and control of the business, affairs and officers of the Company. The Executive shall have the general powers and duties of management usually vested in the office of president and chief executive officer of a corporation; shall have any other powers and duties that are prescribed by the Board or the By-laws of the Company from time to time; and shall be primarily responsible for carrying out all - 1 - 2 orders and resolutions of the Board. Pursuant to the terms and conditions hereof, the Executive hereby accepts such engagement. The Executive shall render all services usually and customarily rendered by and required of presidents, chief executive officers and other executives similarly employed in the publishing, audio book publishing and/or entertainment industry. The Executive shall report only to the Board. c) Place of Performance. During the Employment Period, the Executive's office shall be located at the principal executive office of the Company, except for required business travel consistent with the Executive's position. The Company shall provide the Executive with an office, and executive secretary reasonably acceptable to him, and other support reasonably appropriate to his duties. d) Business Time. During the Employment Period, the Executive agrees to devote his full business time during normal business hours to the business and affairs of the Company and to perform faithfully, diligently and competently the responsibilities assigned to him hereunder, except for (i) time spent serving on corporate, civic or charitable boards or committees only if and to the extent not substantially interfering with the performance of such responsibilities, (ii) periods of vacation, disability and sick leave to which he is otherwise entitled under this Agreement, and (iii) activities having a charitable, educational or other public interest purpose only if and to the extent not substantially interfering with the performance of such responsibilities. 4. Compensation. a) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Base Salary") equal to $200,000, payable in accordance with the customary payroll as in effect from time to time for executives of the Company. b) Restricted Stock Award. On January 9, 1998, the Company shall grant to the Executive 400,000 shares of common stock of the Company (the "Grant Shares"). Ownership of the Grant Shares shall vest in the Executive as follows: On the tenth day of each month, commencing July 10, 1997, 1/36 of the Grant Shares shall vest in the Executive, such that after the third anniversary of July 10, 1997, ownership in all of the Grant Shares shall be vested in the Executive. Ownership in the Grant Shares shall continue to vest in the Executive in accordance with the preceding schedule whether or not the Executive shall be employed by the Company; provided that (i) if the Executive is terminated for Cause (as provided in Section 5(c) hereof), the Executive shall not be entitled to receive any Grant Shares that have not vested prior to the date of termination and (ii) if, at any time, the Executive is in breach of Section 8 of this - 2 - 3 Agreement, the Executive shall not be entitled to receive any Grant Shares that would vest during such time. In addition, all Grant shares shall vest immediately upon the death of the Executive. At the time of issuance, all Grant Shares shall be "restricted shares" as such term is defined in Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). The Company shall notify the Executive no later than twenty(20) days prior to the filing of any registration statement under the Securities Act on Form S-3 (or any successor to Form S-3) or any similar short-form registration statement and any related qualification or compliance under applicable securities and "blue sky" laws with respect to any shares of common stock of the Company, and will afford the Executive an opportunity to include in such registration all or part of the Grant Shares. All expenses of such registration shall be borne by the Company. c) Vacation. During the Employment Period, the Executive shall be entitled to three (3) weeks paid vacation per year. d) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable business-related expenses incurred by the Executive in accordance with the policies and procedures of the Company as applicable to its executives. e) Car Allowance. During the Employment Period, the Executive shall be entitled to automobile allowance of $1,000 per month. f) Other Executive Benefits. Without limiting the foregoing provisions of this Section 4, during the Employment Period the Executive shall be entitled to participate in or be covered under all compensation, pension, retirement and welfare and fringe benefit plans, programs and policies of the Company applicable to executives of the Company generally, provided, however, that he shall not be entitled to participate in any bonus plan or stock option plan except in the sole discretion of the Board. 5. Termination. a) Death or Disability. The Executive's employment pursuant to this Agreement shall terminate automatically upon the Executive's death. The Company may terminate the Executive's employment for Disability by giving to the Executive notice of its intention in accordance with Section 5(e) unless the Executive returns to the performance of his employment in accordance with Section 3(b) with 60 days after receipt of such notice. For purposes of this Agreement, "Disability" means any - 3 - 4 physical or mental condition that renders the Executive unable to perform the functions of his employment in accordance with Section 3(b) for 60 consecutive days or for a total of 90 days in any period of 360 consecutive days. b) Voluntary Termination After Change in Control. Notwithstanding anything in this Agreement to the contrary, after a Change in Control the Executive may voluntarily terminate his employment at any time (i) for any reason upon six months' written notice to the Company or (ii) on account of the Executive's serious illness which would prevent him from performing his responsibilities of employment in accordance with Section 3(b), which illness is duly documented, upon written notice pursuant to Section 5(e) but without any notice period. In the event of any termination pursuant to this Section 5(b), the Executive shall have no further obligation to the Company under this Agreement, except as provided in Section 9. c) Cause. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement, "Cause" means (i) gross negligence or willful misconduct of the Executive that is materially and demonstrably injurious to the Company; (ii)(ii)fraud, theft, embezzlement, conviction of the Executive by final judgment of a felony or misdemeanor involving dishonesty; or (iii) the occurrence of any matter relating to the Executive of the type set forth in Item 401(f) of Regulation S-K promulgated by the Securities and Exchange Commission. d) Good Reason. The Executive may terminate his employment for Good Reason. For purposes of the Agreement, "Good Reason" means (i) a material breach by the Company of any of the provisions of this Agreement or (ii) the failure by the Company to obtain an agreement from any successor to assume and agree to perform this Agreement, as contemplated by Section 12(b). e) Notice of Termination. Any termination by the Company for Cause or Disability or by the Executive for Good Reason shall be communicated by a written notice (a "Notice of Termination") to the other party hereto given in accordance with Section 13(d). A "Notice of Termination" shall set forth in reasonable detail the events giving rise to such termination. f) Date of Termination. For purposes of this Agreement, the term "Date of Termination" means (i) in the case of termination for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of his duties during such 30-day period); (ii) in the case of termination for Cause, the date specified in the Notice of Termination; (iii) in the case of any other termination for which a Notice of Termination is required, 30 days after Notice of Termination is given or, if later, the date specified therein, as the case may be; and (iv) in all other cases, the actual date on which the Executive's employment terminates during the Employment Period. - 4 - 5 6. Obligations of the Company Upon Termination. a) Death, Disability, Cause and Voluntary Termination. If at any time before or after a Change in Control the Executive's employment is terminated by the Company during the Employment Period by reason of the Executive's death, Disability or for Cause, or is voluntarily terminated by the Executive (other than for Good Reason), the Company shall have no further obligation to the Executive or the Executive's legal representatives other than (i) those obligations earned for Base Salary that have accrued at the Date of Termination (the "Accrued Obligations"), (ii) those obligations expressly provided under any of the plans referred to in Section 4(e) (the "Benefit Rights") and (iii) in the case of termination of employment by reason of the Executive's death, the payment of an amount equal to the Executive's Base Salary for one year. Notwithstanding anything herein to the contrary, if the Executive's employment is terminated by the Company for Cause as set forth in Section 5(c)(ii) the Company shall have no obligation under this Section 6(a) and shall have no further obligation to the Executive or the Executive's legal representatives. b) Termination by the Company other than for Cause or Disability and Termination by the Executive for Good Reason. (i) Lump Sum Payments. If during the Employment Period, the Company terminates the Executive's employment other than for death, Cause or Disability, or the Executive terminates his employment for Good Reason, the Company shall provide the Benefit Rights and shall pay to the executive in a lump sum in cash within 15 days of the Date of Termination the sum of the following amounts: (A) the Accrued Obligations; plus (B) an amount equal to the product of (1) one-twelfth times (2) the sum of the Executive's Base Salary times (3) the number full or partial of months remaining in the expired term of the Employment Period, but in no event less than twelve months (such period being the "Severance Period"). (ii) Welfare Benefits. If during the Employment Period, the Company terminates the Executive's employment other than for death, Cause or Disability, or the Executive terminates his employment for Good Reason, the Company shall provide or cause to be provided to the Executive and his family for the Severance Period continued life, medical and dental and disability insurance benefits at lease equal to those which the Executive was receiving or entitled to receive immediately prior to the termination of employment. (iii) Office. If during the Employment Period, the Company terminates the Executive's employment other than for death, Cause or Disability, or the Executive terminates his employment for Good Reason, for the Severance Period, the - 5 - 6 Company shall provide the Executive with an office and an executive secretary reasonably acceptable to him. (iv) Discharge of the Company's Obligations. The Company shall have no further obligations to the Executive in respect of any termination described in this Section 6(b). c) Change in Control. A Change in Control shall be deemed to have occurred if at any time Media Equities International, LLC shall not be entitled, directly or indirectly, whether through ownership of stock, corporation, contract or otherwise, to elect a majority of the Board. 7. No Mitigation: No Offset. In no event shall the Executive be obligated to seek other employment by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. Any amounts that may be earned by the executive other than from the Company after the Date of Termination shall not reduce the Company's obligation to make any payments hereunder. The amounts payable by the Company hereunder shall be subject to any right of set off that the Company may assert against the Executive. 8. Non-competition. (a) Scope. In the case of the Executive's termination of employment, including due to the expiration of the Employment Period, the Executive shall not, for one year following the Date of Termination, (a) divert to any competitor of the Company in the business conducted by the Company (the "Designated Industry") any active project of the Company; or (b) solicit or encourage any officer, employee or consultant of the Company to leave their employ for employment by or with any competitor of the Company of the Designated Industry. If at any time the provisions of this Section 8 shall be determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 9 shall be considered divisible and shall become and be immediately amended to apply only to such area, duration and scope of activity as shall be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and the Executive agrees that this Section 8 as so amended shall be valid and binding as though any invalid or unenforceable provision had not been included herein. Nothing in this Section 8 shall prevent or restrict the Executive from engaging in any business or industry other than the Designated Industry in any capacity. (b) Irreparable Harm. The Executive agrees that the remedy at law for any breach of this Section 8 shall be inadequate and that the Company shall be entitled to injunctive relief. - 6 - 7 9. Indemnification. The Company shall indemnify and hold harmless the executive, his heirs and personal representatives to the fullest extent permitted by applicable law, as now or hereafter in effect, with respect to any acts, omissions or events that occurred while the Executive is or was an employee of the Company or serves or served the Company or any other corporation or other enterprise of any kind in any capacity at the request of the Company (an "Enterprise"). Without limiting the generality of the foregoing, the Company shall promptly pay, or reimburse the Executive for, or advance to the Executive amounts for the payment of (a) all of the Executive's reasonable expenses, including attorneys' fees and court costs, actually and reasonably incurred in connection with the defense of any action, suit or proceeding, including any suit seeking recovery under any Company director's and officer's liability policy, or in connection with any appeal thereof, to which the Executive may be party by reason of any action taken or failure to act under or in connection with his service for the Company or an Enterprise; and (b) all amounts required to be paid in settlement of or in satisfaction of a judgment in connection with any such action, suit or proceeding; provided, however, that the Company shall not be required to indemnify or hold harmless the Executive, his heirs or personal representatives in any manner whatsoever in the event that the liability incurred by the Executive resulted from his negligence, fraud, willful malfeasance or willful misconduct. 10. Arbitration. If a dispute arises between the parties respecting the terms of this Agreement or Executive's employment with the Company, including, without limitation, any dispute with respect to the validity of this Agreement of this arbitration clause, such dispute shall be finally resolved by binding arbitration as follows. The parties agree that any and all disputes, claims or controversies arising out of or relating to this agreement that are not resolved by their mutual agreement shall be submitted to final and binding arbitration before JAMS/Endispute, with copy to the other party. The arbitration will be conducted in accordance with the provisions of JAMS/Endispute's Comprehensive Arbitration Rules and Procedures in effect at the time of filing of the demand for arbitration. The parties will cooperate with JAMS/Endispute and with one another in selecting an arbitrator from JAMS/Endispute's panel of neutrals, and in scheduling the arbitration proceedings. The parties covenant that they will participate in the arbitration in good faith, and that they will share equally in its costs. The provisions of this paragraph may be enforced by any Court of competent jurisdiction, and the party seeking enforcement shall be entitled to an award of all costs, fees and Angeles, California expenses , including attorneys fees, to be paid by the party against whom enforcement is ordered. Notwithstanding anything to the contrary contained herein, no discovery shall be permitted in the arbitration proceeding. - 7 - 8 11. Successors. a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of an be enforceable by the Executive's legal representatives. b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company shall require any successor to all or substantially all of the business and/or assets of the Company, whether direct or indirect, by an agreement in form and substance reasonably satisfactory to the executive, expressly to assume and agree to perform this Agreement. 12. Miscellaneous. (a) Withholding. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the executive has agreed. (b) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of California, applied without reference to principles of conflict of law. (c) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (d) Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered or mailed to the other party by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Ronald Lightstone (Personal and Confidential) c/o Dove Entertainment 8955 Beverly Boulevard Los Angeles, CA 90048 - 8 - 9 If to the Company: Dove Entertainment, Inc. 8955 Beverly Boulevard Los Angeles, CA 90048 Attn.: General Counsel or to any such other address as either party shall have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only when actually received by the addressee. (e) Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement. (f) Waiver. Waiver by any party hereto of any breach or default by any other party of any of the terms of this Agreement shall no operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. (g) Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein, and no other agreement, verbal or otherwise, shall be binding as between the parties unless it is in writing and signed by the party against who enforcement is sought. All prior and contemporaneous agreements and understandings between the parties with respect to the subject matter of this Agreement are superseded by this Agreement. (h) Survival. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. (i) Captions and References. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. References in this Agreement to a section number are references to sections of the Agreement unless otherwise specified. (j) Consent to Jurisdiction. Each of the parties to this Agreement hereby submits to the exclusive jurisdiction of the courts of the State of California and the Federal courts of the United States of America located in such state solely in respect of the interpretation and enforcement of the provisions of this interpretation and enforcement of this Agreement, that it is not subject thereto; that such action, suit or proceeding may not be brought or is not maintainable in said courts; that this Agreement may not be enforced in or by said courts; that its property is exempt or immune from execution; that the suit, action or proceeding is brought in an inconvenient forum; or that - 9 - 10 the venue of the suit, action or proceeding is improper. Each of the parties agrees that service of process in any such action, suit or proceeding shall be deemed in every respect effective service of process upon it if given in the manner set forth in Section 13(d). - 10 - 11 IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf all as of the day and year first above written. DOVE ENTERTAINMENT, INC. By: /s/ NEIL TOPHAM ------------------------------ Neil Topham Chief Financial Officer RONALD LIGHTSTONE /s/ RON LIGHTSTONE --------------------------------- - 11 - EX-10.59 15 EXHIBIT 10.59 1 EXHIBIT 10.59 SUPPLEMENT NO. 1 TO THE COPYRIGHT SECURITY AGREEMENT DATED AS OF NOVEMBER 4, 1997 WHEREAS, Dove Four Point, Inc., a Florida corporation (the "Grantor") is party to that certain Credit, Security, Guaranty and Pledge Agreement, dated as of November 4, 1997, (as the same may be amended, modified or otherwise supplemented from time to time, the "Credit Agreement"), among Dove Entertainment, Inc. (the "Borrower"), the Corporate Guarantors named therein (the "Guarantors") and The Chase Manhattan Bank, as Lender (the "Lender"); WHEREAS, pursuant to the terms of the Credit Agreement, the Grantor has granted to the Lender a security interest in all right, title and interest of the Grantor in and to all personal property, whether now owned, presently existing or hereafter acquired or created, including, without limitation, all right, title and interest of the Grantor in, to and under any item of Product (such term being used herein as defined in the Copyright Security Agreement referred to below) and any copyright or copyright license, whether now existing or hereafter arising, acquired or created, and all proceeds thereof or income therefrom, to secure the payment and performance of the Obligations (such term being used herein as defined in the Credit Agreement) pursuant to the Credit Agreement; WHEREAS, the Grantor is a party to a Copyright Security Agreement, dated as of November 4, 1997 (as the same has been, or may hereafter be, amended or supplemented from time to time, the "Copyright Security Agreement"), pursuant to which the Grantor has granted to the Lender, as security for the Obligations, a continuing security interest in all of the Grantor's right, title and interest in and to each and every item of Product, the scenario, screenplay or script upon which an item of Product is based, all of the properties thereof, tangible and intangible, and all domestic and foreign copyrights and all other rights therein and thereto, of every kind and character, whether now in existence or hereafter to be made or produced, and whether or not in possession of the Grantor, all as more fully set forth in the Copyright Security Agreement; WHEREAS, the Grantor has acquired or created additional items of Product since the date of execution of the Copyright Security Agreement and the most recent Supplement thereto and holds certain additional copyrights and rights under copyright with respect to items of Product; WHEREAS, Schedule 1 to the Copyright Security Agreement does not reflect (i) item(s) of Product acquired or created by the Grantor since the date of execution of the Copyright Security Agreement and the most recent Supplement thereto or (ii) all the copyrights and rights under copyright held by the Grantor; -1- 2 THEREFORE, A. The Grantor does hereby grant to the Lender, as security, a continuing security interest in and to all of the Grantor's right, title and interest in and to each and every item of Product being added to Schedule 1 to the Copyright Security Agreement pursuant to paragraph (b) below, the scenario, screenplay or script upon which such item of Product is based, all of the properties thereof, tangible and intangible, and all domestic and foreign copyrights and all other rights therein and thereto, of every kind and character, whether now in existence or hereafter to be made or produced, and whether or not in possession of the Grantor, all as contemplated by, and as more fully set forth in, the Copyright Security Agreement. B. Schedule 1 to the Copyright Security Agreement is hereby supplemented, effective as of the date hereof, so as to reflect all of the copyrights and rights under copyright with respect to the item(s) of Product in and to which the Grantor has granted a continuing security interest to the Lender pursuant to the terms of the Copyright Security Agreement and the Credit Agreement. The following item(s) of Product and copyright information are hereby added to Schedule 1 to the Copyright Security Agreement: Date of Title Registration No. Registration ----- ---------------- ------------ "Futuresport" (screenplay) Pending Submitted 2/12/98 Except as expressly supplemented hereby, the Copyright Security Agreement shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in the Copyright Security Agreement, the terms "Agreement", "this Agreement", "this Copyright Security Agreement", "herein", "hereafter", "hereto", "hereof" and words of similar import, shall, unless the context otherwise requires, mean the Copyright Security Agreement as supplemented by this Supplement. Except as expressly supplemented hereby, the Copyright Security Agreement, all documents contemplated thereby and any previously executed Supplements thereto, are each hereby confirmed and ratified by the Grantor. The execution and filing of this Supplement, and the addition of the item(s) of Product set forth herein to Schedule 1 to the Copyright Security Agreement are not intended by the parties to derogate from, or extinguish, any of the Lender's rights or remedies under (i) the Copyright Security Agreement and/or any agreement, amendment or supplement thereto or any other instrument executed by the Grantor and heretofore recorded or submitted for recording in the U.S. Copyright Office or (ii) any financing statement, continuation statement, deed or charge -2- 3 or other instrument executed by the Grantor and heretofore filed in any state or country in the United States of America or elsewhere. IN WITNESS WHEREOF, the Grantor has caused this Supplement No. 1 to the Copyright Security Agreement to be duly executed by its duly authorized officer as of February 20, 1998 DOVE FOUR POINT, INC. By: /s/ NEIL TOPHAM ---------------------------- Name: Neil Topham Title: Chief Financial Officer -3- 4 STATE OF CALIFORNIA ) : ss.: COUNTY OF LOS ANGELES ) On this the 20th day of February, 1998, before me, Victoria Kaye, the undersigned Notary Public, personally appeared Neil Topham, [X] personally known to me, [ ] proved to me on the basis of satisfactory evidence, to be the Vice President of the corporation known as Dove Four Point, Inc. who executed the foregoing instrument on behalf of the corporation, and acknowledged that such corporation executed it pursuant to a resolution of its Board of Directors. WITNESS my hand and official seal. /s/ VICTORIA KAYE ------------------------------- Notary Public EX-10.60 16 EXHIBIT 10.60 1 EXHIBIT 10.60 AMENDMENT NO. 1 dated as of February 27, 1998 to the Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (the "Credit Agreement"), among DOVE ENTERTAINMENT, INC. (the "Borrower"), the Corporate Guarantors named therein and THE CHASE MANHATTAN BANK, as Lender (the "Lender"). INTRODUCTORY STATEMENT The Lender has made available to the Borrower a revolving credit facility pursuant to the terms of the Credit Agreement. The Borrower has requested, among other things, that certain provisions of the Credit Agreement be modified in order to provide for the making of additional loans to Dove Four Point, Inc. in connection with the production of the television motion picture tentatively entitled "Futuresport". The Borrower, the Corporate Guarantors and the Lender have agreed to make revisions to the Credit Agreement, all on the terms and subject to the conditions hereinafter set forth. Therefore, the parties hereto hereby agree as follows: Section 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meaning given them in the Credit Agreement. Section 2. Amendments to the Credit Agreement. Subject to the satisfaction of the conditions precedent set forth in Section 3 hereof, the Credit Agreement is hereby amended as of the Effective Date (as hereinafter defined) as follows: (A) Article 1 of the Credit Agreement is hereby amended by inserting the following definitions in their correct alphabetical position: "Futuresport ABC Contract" shall mean that certain license agreement dated as of January 12, 1998, revised as of January 26, 1998, February 4, 1998 and February 13, 1998, between the Futuresport Borrower and American Broadcasting Companies, Inc. -1- 2 "Futuresport Borrower" shall mean Dove Four Point, Inc. "Futuresport Closing Date" shall mean the date on which the conditions precedent set forth in Section 4.3 have been satisfied or waived and the initial Futuresport Loan is made hereunder. "Futuresport Columbia Contract" shall mean that certain license agreement dated as of January 9, 1998, between Dove International, Inc. and Columbia Tristar Home Video with respect to worldwide video distribution rights for 'Futuresport'. "Futuresport Commitment Termination Date" shall mean June 30, 1998. "Futuresport Distribution Agreements" shall mean, collectively, the agreements entered into by the Futuresport Borrower or the Borrower, whether existing on the Futuresport Closing Date or thereafter executed, pursuant to which the Futuresport Borrower or the Borrower has licensed, leased, assigned or sold distribution, exhibition or other exploitation rights to "Futuresport" in any media or territory to any Person. "Futuresport Rights Agreements" shall mean, collectively, the following documents: (i) Writing Services Agreement dated as of February 3, 1997 between Dove Four Point, Inc. and Robert Wolfe with respect to the writing services of Robert Wolfe in connection with a teleplay tentatively entitled 'Futuresport' (the "Futuresport Screenplay"); (ii) Letters dated January 13, 1997 and September 22, 1997, each from Dove Four Point, Inc. to Writers and Artists Agency confirming that Dove Four Point, Inc. has engaged Robert Wolfe to provide a first rewrite and a second rewrite of the Futuresport Screenplay; (iii) Certificate of Authorship dated February 13, 1998 from Robert Wolfe in favor of Dove Four Point, Inc.; (iv) Production Services Deal Memo dated as of January 6, 1998 between Dove Four Point, Inc. and MEC Futuresport Productions Inc. "Futuresport RTL Contract" shall mean that certain Deal Memo dated as of January 27, 1998, between Dove International, Inc. and RTL Plus Deutschland Fernshen GmbH & Co., KG with respect to 'Futuresport'. (B) Clause (xiii) of the definition of "Eligible Receivables" appearing in Article 1 of the Credit Agreement is hereby amended by adding the following clause at the end thereof: -2- 3 " or (3) with respect to 'Futuresport', amounts attributable to such Product (other than the proceeds of the Futuresport ABC Contract, the Futuresport Columbia Contract and the Futuresport RTL Contract) may be treated as Eligible Receivables (even though 'Futuresport' has not yet been Completed), provided that such amounts otherwise meet all of the applicable criteria for inclusion as Eligible Receivables; provided, further, that upon payment in full of the Futuresport Loans, amounts payable under the Futuresport ABC Contract, the Futuresport Columbia Contract and the Futuresport RTL Contract which have not previously been applied to repay the Futuresport Loans may also be treated as Eligible Receivables if such amounts otherwise meet all of the applicable criteria for inclusion as Eligible Receivables; or" (C) The definition of "Commitment" appearing in Article 1 of the Credit Agreement is hereby amended by adding the words "(other than the Futuresport Loans)" immediately following the word "Loans" appearing in the first line therein. (D) Section 2.1(a) to the Credit Agreement is hereby amended by adding the words "(excluding the Futuresport Loans)" immediately following the word "Loans" in such Section 2.1(a). (E) Section 2.1(d) of the Credit Agreement is hereby amended by adding the parenthetical "(excluding the Futuresport Loans)" immediately following the word "Loans" appearing in the second line therein and third line therein. (F) Section 2.1 to the Credit Agreement is hereby amended by adding the following clause (e) at the end thereof: "(e) In addition to the Loans contemplated pursuant to Section 2.1(a) and (b) above, the Lender agrees, upon the terms and subject to the conditions hereof, to make loans (the "Futuresport Loans") to the Futuresport Borrower, on any Business Day from the Futuresport Closing Date to but excluding the Futuresport Commitment Termination Date for use in paying (i) production costs in connection with the motion picture tentatively entitled "Futuresport", in amounts not to exceed $3,289,260 in the aggregate (the "Futuresport Production Commitment"), and (ii) all charges of the Lender in connection with "Futuresport", including, but not limited to, interest, bank fees and legal fees, in amounts not to exceed $210,740 in the aggregate (the "Futuresport Bank Charges Commitment"). The Futuresport Production Commitment and the Futuresport Bank Charges Commitment are collectively referred to herein as the "Futuresport Commitment". Once repaid, amounts constituting the Futuresport Commitment may not be reborrowed and the Futuresport Commitment shall be reduced accordingly." (G) Section 2.2(c) to the Credit Agreement is hereby amended by adding the words "other than a Futuresport Loan" immediately preceding the words "in excess of the Borrowing Base" appearing in the proviso of such section. -3- 4 (H) Section 2.2(e) to the Credit Agreement is hereby amended by adding the words "or the Futuresport Commitment, as the case may be" immediately following the words "Commitment" appearing therein. (I) Section 2.2 to the Credit Agreement is hereby amended by adding the following clause (g) at the end thereof: "(g) The Lender shall disburse the proceeds of the Futuresport Loans directly into the Production Account for "Futuresport", located at Royal Bank of Canada, 1025 West Georgia Street, Vancouver, B.C. V7M 2J3, Account No. 2829-15507, ABA No. 00010- 003, Reference: "Futuresport", which account has been established for the sole purpose of paying production costs of such motion picture." (J) Section 2.3(a) to the Credit Agreement is hereby amended in its entirety to read as follows "(a) The Loans made by the Lender hereunder shall be evidenced by promissory notes substantially in the forms of Exhibit A and A-2 (Production) and A-2 (Bank Charges) hereto (collectively, the "Note"), in the face amount of the Lender's Commitment, the Futuresport Production Commitment and Futuresport Bank Charges Commitment, respectively, payable to the order of the Lender, duly executed by the Borrower or the Futuresport Borrower, as the case may be, and dated the date of the Closing Date or Futuresport Closing Date, as the case may be. The outstanding principal balance of the Loans shall be payable on the Commitment Termination Date, except in the case of the Futuresport Loans, the outstanding principal balance of such loans shall be payable on October 31, 1998." (K) Section 2.5(a) to the Credit Agreement is hereby amended by adding the words "(excluding the Futuresport Loans)" immediately following the words "outstanding Loans" appearing in the last line therein. (L) Section 2.6(a) to the Credit Agreement is hereby amended by adding the words "(excluding the Futuresport Loans)" immediately following the word "Loans" appearing in the second to last line therein. (M) Section 2.9(d) of the Credit Agreement is hereby amended by adding the words "(excluding the Futuresport Loans)" immediately after the word "Loans" appearing in the first and fourth lines therein. (N) Section 2.9(e) of the Credit Agreement is hereby amended by adding the words "(excluding the Futuresport Loans)" immediately after the word "Loans" appearing therein. -4- 5 (O) Section 2.9 of the Credit Agreement is hereby amended by adding the following clause (h) at the end thereof: "(h) In addition to the mandatory prepayment contemplated by Section 2.9(d), the Futuresport Borrower shall prepay the Futuresport Loans (i) in an amount equal to any balance in the Production Account for "Futuresport" remaining after all expenditures relating to the production of "Futuresport" shall have been paid, (ii) in an amount equal to and promptly upon the receipt of any other funds which shall be paid to the Futuresport Borrower in connection with that portion of the Collateral relating to "Futuresport" (other than the first $3,950,000 of the advance payable to the Futuresport Borrower by American Broadcasting Companies, Inc. pursuant to the Futuresport ABC Contract) and (iii) as otherwise provided in Article 8." (P) Section 2.14(a) to the Credit Agreement is hereby amended by adding the words "(excluding the Futuresport Loans)" immediately after the words "loans then outstanding" appearing in clause (A) of the proviso of such section. (Q) Section 2.14(h) of the Credit Agreement is hereby amended by adding the words "(excluding the Futuresport Loans)" immediately following the words "Loans outstanding" appearing in the second line therein. (R) The Credit Agreement is hereby amended by adding the following Article 3A immediately prior to Article 4 appearing therein: "3A. ADDITIONAL REPRESENTATIONS AND COVENANTS RELATING TO "FUTURESPORT". In order to induce the Lender to make the Futuresport Loans, the Futuresport Borrower makes the following representations, warranties and covenants to the Lender: (a) Ownership of Copyright, etc. Futuresport Borrower owns under copyright sufficient motion picture, television and allied rights in the literary properties upon which the motion picture tentatively entitled "Futuresport" (hereinafter referred to as "Futuresport") is based to enable the Futuresport Borrower to produce such picture in accordance with, and to satisfy its obligations under, the Futuresport Distribution Agreements. Futuresport Borrower has duly recorded a Form PA covering the Futuresport Screenplay in the United States Copyright Office (and in no other offices) and delivered copies of all such recordation to the Lender. "Futuresport" and any Film Asset or any component part thereof will not violate or infringe upon any copyright, right of privacy, trademark, patent, trade name, performing right or any literary, dramatic, musical, artistic, personal, private, civil, contract or property right or any other right of any Person or contain any libelous or slanderous material. There is no claim, suit, action or proceeding pending or threatened against the Futuresport Borrower that involves a claim of infringement of any copyright with respect to "Futuresport" or any Film Asset -5- 6 and the Futuresport Borrower has no knowledge of any existing infringement by any other Person of any copyright held by the Futuresport Borrower with respect to "Futuresport" or any Film Asset. (b) Futuresport Rights Agreements. Futuresport Rights Agreements are the only documents and agreements pursuant to which the Futuresport Borrower obtained rights to the Film Assets for "Futuresport". True and complete copies of the various agreements constituting the Futuresport Rights Agreements and all agreements with all persons whose services in connection with "Futuresport" are a requirement of the Futuresport Distribution Agreements, have been furnished to the Lender and are consistent with the requirements of the Futuresport Distribution Agreements. At the time of each Futuresport Loan, the above mentioned agreements will be in full force and effect, all amounts required to be paid to prevent reversion of the rights under the Futuresport Rights Agreement shall have been paid in full and no party to any such agreements will be in default thereunder or have any accrued right of termination thereunder. Futuresport Borrower agrees that it will not amend, alter, modify or waive, or consent to any amendment, alteration, modification or waiver of, the Futuresport Rights Agreements without the consent of the Lender. (c) The Futuresport Borrower agrees that it will direct, or cause to be directed, payment of the first $3,950,000 payable to the Futuresport Borrower by ABC under the Futuresport ABC Contract, to the production account for 'Futuresport' set forth in Section 2.2(g) hereof. (S) Article 4 of the Credit Agreement is hereby amended by adding the following Section 4.3 at the end thereof: "SECTION 4.3. Conditions Precedent to Futuresport Loans. The obligations of the Lender to make each Futuresport Loan are subject to the following conditions precedent (in addition to those conditions precedent set forth in Section 4.2): (a) Security and Supporting Documentation. The Lender shall have received each of the items required by Section 5.21 of the Credit Agreement (as amended by Amendment No. 1) with respect to the production of 'Futuresport'." (T) Section 5.13 (a)(i) of the Credit Agreement is hereby amended by adding the words "(or the case of 'Futuresport', to a location outside the United States or Canada)" immediately after the words "United States". (U) Section 5.21(ix) of the Credit Agreement is hereby amended by adding the words "with respect to the motion picture tentatively entitled 'Futuresport' and" immediately after the words "shall not be applicable" appearing in the proviso. -6- 7 (V) Section 6.21(b)(ii) of the Credit Agreement is hereby amended by adding the words "(other than 'Futuresport') immediately after the words "movie-of-the-week" and "movies-of-the-week" respectively. (W) Article 7 of the Credit Agreement is hereby amended by adding the words "and/or the Futuresport Commitment" following word "Commitment" appearing in the third and eighth lines of the concluding paragraph of such Article 7. Section 3. Conditions to Effectiveness. The effectiveness of this Amendment is subject to the satisfaction in full of each of the conditions precedent set forth in this Section 3 (the date on which all such conditions have been satisfied being herein called the "Effective Date"): (A) the Lender shall have received counterparts of this Amendment which, when taken together, bear the signatures of the Borrower, each Corporate Guarantor and the Lender; and (B) all legal matters incident to this Amendment shall be satisfactory to Morgan, Lewis & Bockius LLP, counsel for the Lender. Section 4. Fees. In consideration for the Lender entering into this Amendment and making the Futuresport Loans, on the Futuresport Closing Date, the Futuresport Borrower agrees to pay the Lender a one-time fee in the amount of $35,000. Section 5. Representations and Warranties. Each Credit Party represents and warrants that: (A) after giving effect to this Amendment, the representations and warranties contained in the Credit Agreement are true and correct in all material respects on and as of the date hereof as if such representations and warranties had been made on and as of the date hereof (except to the extent that any such representations and warranties specifically relate to an earlier date); and (B) after giving effect to this Amendment, no Event of Default or Default will have occurred and be continuing on and as of the date hereof. Section 6. Further Assurances. At any time and from time to time, upon the Lender's request and at the sole expense of the Credit Parties, each Credit Party will promptly and duly execute and deliver any and all further instruments and documents and take such further action as the Lender reasonably deems necessary to effect the purposes of this Amendment. Section 7. Fundamental Documents. This Amendment is designated a Fundamental Document by the Lender. -7- 8 Section 8. Full Force and Effect. Except as expressly amended hereby, the Credit Agreement and the other Fundamental Documents shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in the Credit Agreement, the terms "Agreement", "this Agreement", "herein", "hereafter", "hereto", "hereof", and words of similar import, shall, unless the context otherwise requires, mean the Credit Agreement as amended by this Amendment. Section 9. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Section 10. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. Section 11. Expenses. The Borrower agrees to pay all out-of-pocket expenses incurred by the Lender in connection with the preparation, execution and delivery of this Amendment, including, but not limited to, the reasonable fees and disbursements of counsel for the Lender. Section 12. Headings. The headings of this Amendment are for the purposes of reference only and shall not affect the construction of or be taken into consideration in interpreting this Amendment IN WITNESS WHEREOF, the parties hereby have caused this Amendment to be duly executed as of the date first written above. BORROWER: DOVE ENTERTAINMENT, INC. By: /s/ NEIL TOPHAM ------------------------------ Name: Neil Topham Title: Vice President & Chief Financial Officer -8- 9 CORPORATE GUARANTORS: DOVE INTERNATIONAL, INC. By: /s/ NEIL TOPHAM -------------------------------- Name: Neil Topham Title: Vice President DOVE FOUR POINT, INC. By: /s/ NEIL TOPHAM -------------------------------- Name: Neil Topham Title: Vice President LENDER: Executed in THE CHASE MANHATTAN BANK, as Lender New York, New York On February 27, 1998 By: /s/ ANN B. KERNS -------------------------------- Name: Ann B. Kerns Title: Vice President -9- 10 EXHIBIT A-2 (Production) FORM OF FUTURESPORT PRODUCTION NOTE $3,289,260 New York, New York as of February 27, 1998 FOR VALUE RECEIVED, DOVE FOUR POINT, INC., a Florida corporation (the "Obligor"), DOES HEREBY PROMISE TO PAY to the order of THE CHASE MANHATTAN BANK (the "Lender") at the office of The Chase Manhattan Bank at 270 Park Avenue, New York, New York 10017-2070, in lawful money of the United States of America in immediately available funds, the principal amount of THREE MILLION TWO HUNDRED EIGHTY NINE THOUSAND TWO HUNDRED SIXTY DOLLARS ($3,289,260), or the aggregate unpaid principal amount of all Futuresport Loans (as defined in the Credit Agreement referred to below) made by the Lender to the Obligor under the Futuresport Production Commitment pursuant to said Credit Agreement, whichever is less, on such date or dates as is required by said Credit Agreement, and to pay interest at the rates and times provided in the Credit Agreement on the unpaid principal amount from time to time outstanding hereunder, in like money, at such office and at such times as set forth in said Credit Agreement. All amounts payable hereunder shall be payable no later than October 31, 1998. The Obligor and any and all sureties, guarantors and endorsers of this Note and all other parties now or hereafter liable hereon severally waive grace, demand, presentment for payment, protest, notice of any kind (including, but not limited to, notice of dishonor, notice of protest, notice of intention to accelerate or notice of acceleration) and diligence in collecting and bringing suit against any party hereto and agree to the extent permitted by applicable law (i) to all extensions and partial payments, with or without notice, before or after maturity, (ii) to any substitution, exchange or release of any security now or hereafter given for this Note, (iii) to the release of any party primarily or secondarily liable hereon, and (iv) that it will not be necessary for any holder of this Note, in order to enforce payment of this Note, to first institute or exhaust such holder's remedies against the Obligor or any other party liable hereon or against any security for this Note. The nonexercise by the holder of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. The Lender may (but is not obligated to) set forth on the last page hereof such information as is designated on the last page hereof. This Note is the Production Note with respect to "Futuresport" referred to in that certain Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended (as the same may be further amended, supplemented or otherwise modified, renewed or replaced 11 from time to time, the "Credit Agreement") among the Obligor, the Corporate Guarantors referred to therein and The Chase Manhattan Bank, and is entitled to the benefits of, and is secured by the security interests granted in the Credit Agreement and the other security documents and guarantees referred to and described therein, which among other things, contains provisions for optional and mandatory prepayment and for acceleration of the maturity hereof upon the occurrence of certain events, all as provided in the Credit Agreement. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK. DOVE FOUR POINT, INC. By: _____________________________ Name: Title: 12 [LAST PAGE OF NOTE]
Unpaid Name of Principal Person Payments Balance Making Date Amount of Loan Principal Interest of Note Notation - ---- -------------- --------- -------- ------- --------
13 EXHIBIT A-2 (Bank Charges) FORM OF FUTURESPORT BANK CHARGES NOTE $210,740 New York, New York as of February 27, 1998 FOR VALUE RECEIVED, DOVE FOUR POINT, INC., a Florida corporation (the "Obligor"), DOES HEREBY PROMISE TO PAY to the order of THE CHASE MANHATTAN BANK (the "Lender") at the office of The Chase Manhattan Bank at 270 Park Avenue, New York, New York 10017-2070, in lawful money of the United States of America in immediately available funds, the principal amount of TWO HUNDRED TEN THOUSAND SEVEN HUNDRED FORTY DOLLARS ($210,740), or the aggregate unpaid principal amount of all Futuresport Loans (as defined in the Credit Agreement referred to below) made by the Lender to the Obligor under the Futuresport Bank Charges Commitment pursuant to said Credit Agreement, whichever is less, on such date or dates as is required by said Credit Agreement, and to pay interest at the rates and times provided in the Credit Agreement on the unpaid principal amount from time to time outstanding hereunder, in like money, at such office and at such times as set forth in said Credit Agreement. All amounts payable hereunder shall be payable no later than October 31, 1998. The Obligor and any and all sureties, guarantors and endorsers of this Note and all other parties now or hereafter liable hereon severally waive grace, demand, presentment for payment, protest, notice of any kind (including, but not limited to, notice of dishonor, notice of protest, notice of intention to accelerate or notice of acceleration) and diligence in collecting and bringing suit against any party hereto and agree to the extent permitted by applicable law (i) to all extensions and partial payments, with or without notice, before or after maturity, (ii) to any substitution, exchange or release of any security now or hereafter given for this Note, (iii) to the release of any party primarily or secondarily liable hereon, and (iv) that it will not be necessary for any holder of this Note, in order to enforce payment of this Note, to first institute or exhaust such holder's remedies against the Obligor or any other party liable hereon or against any security for this Note. The nonexercise by the holder of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. The Lender may (but is not obligated to) set forth on the last page hereof such information as is designated on the last page hereof. This Note is the Bank Charges Note with respect to "Futuresport" referred to in that certain Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended (as the same may be further amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among the Obligor, the Corporate Guarantors referred to therein and The Chase Manhattan Bank, and is entitled to the benefits of, and is secured by the security interests granted in the Credit Agreement and the 14 other security documents and guarantees referred to and described therein, which among other things, contains provisions for optional and mandatory prepayment and for acceleration of the maturity hereof upon the occurrence of certain events, all as provided in the Credit Agreement. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK. DOVE FOUR POINT, INC. By: _____________________________ Name: Title: 15 [LAST PAGE OF NOTE]
Unpaid Name of Principal Person Payments Balance Making Date Amount of Loan Principal Interest of Note Notation - ---- -------------- --------- -------- ------- --------
EX-10.61 17 EXHIBIT 10.61 1 EXHIBIT 10.61 AMENDMENT NO. 2 dated as of March 30, 1998 to the Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (the "Credit Agreement"), among DOVE ENTERTAINMENT, INC. (the "Borrower"), the Corporate Guarantors named therein and THE CHASE MANHATTAN BANK, as Lender (the "Lender"). INTRODUCTORY STATEMENT The Lender has made available to the Borrower a revolving credit facility pursuant to the terms of the Credit Agreement. The Borrower has requested that certain provisions of the Credit Agreement be modified, and the Borrower, the Corporate Guarantors and the Lneder have agreed to make revisions to the Credit Agreement, all on the terms and subject to the conditions hereinafter set forth. Therefore, the parties hereto hereby agree as follows: Section 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meaning given them in the Credit Agreement. Section 2. Amendments to the Credit Agreement. Subject to the satisfaction of the conditions precedent set forth in Section 4 hereof, the Credit Agreement is hereby amended as of the Effective Date (as hereinafter defined) as follows: (A) Section 6.16 of the Credit Agreement is hereby amended by deleting the amount "$8,000,000"appearing therein and replacing it with "$1,000,000." Section 3. Consent. The Lender hereby waives, effective as of December 31, 1997, the Credit Parties' non-compliance with (i) Section 6.15 of the Credit Agreement solely with respect to amount of allocated and unallocated overhead expenses in the fourth quarter of fiscal year 1997 permitted by such Section 6.15 and (ii) Section 6.16 jof the Credit Agreement solely with respect to the Consolidated Capital Base for the quarter ended December 31, 1997 permitted by such Section 6.16. -1- 2 Section 4. Conditions to Effectiveness. The effectiveness of this Amendment is subject ot the satisfaction in full of each of the conditions precedent set forth in the Section 4 (the date on which all such conditions have been satisfied being herin called the "Effective Date"): (A) the Lender shall have received counterparts of this Amendment which, when taken together, bear the signatures of the Borrower, each Corporate Guarantor and the Lender; and (B) all legal matters incident to this Amendment shall be satisfactory to Morgan, Lewis & Bockius LLP, counsel for the Lender. Section 5. Representations and Warranties. Each Credit Party represents and warrants that: (A) after giving effect to this Amendment, the representations and warranties contained in the Credit Agreement are true and correct in all material respects on and as of the date hereof as if such representations and warranties had been made on and as of the date hereof (except to the extent that any such representations and warranties specifically relate to an earlier date ); and (B) after fiving effect to this Amendment, no Event of Default or Default will have occurred and be continuing on and as of the date hereof. Section 6. Further Assurnaces. At any time and from time to time, upon the Lender's request and at the sole expense of the Credit Parties, each Credit Party will promptly and duly execute and deliver any and all further instruments and documents and take such further action as the Lender reasonbly deems necessary to effect the purposes of this Agreement. Section 7. Fundamental Documents. This Amendment is designated a Fundamental Document by the Lender. Section 8. Full Force and Effect. Except as expressly amended hereby, the Credit Agreement and the other Fundemental Documents shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in the Credit Agreement, the terms "Agreement", "this Agreement", "herein", "hereafter", "hereto", "hereof", and words of similar import shall, unless the context otherwise requires, mean the Credit Agreement as amended by this Amendment. Section 9. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. -2- 3 Section 10. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. Section 11. Expenses. The Borrower agrees to pay all out-of-pocket expenses incurred by the Lender in connection with the preparation, execution and delivery of this Amendment, including, but not limited to, the reasonable fees and disbursements of counsel for the Lender. Section 12. Headings. The headings of this Amendment are for the purposes of reference only and shll not affect the contruction of or be taken into consideration in interpreting this Amendment. IN WITNESS WHEREOF, the parties hereby have caused this Amendment to be duly executed as of the date first writtne above. BORROWER: DOVE ENTERTAINMENT, INC. By: /s/ NEIL TOPHAM ------------------------------------- Name: Neil Topham Title: Vice President & Chief Officer CORPORATE GUARANTORS: DOVE INTERNATIONAL, INC. By: /s/ NEIL TOPHAM ------------------------------------- Name: Neil Topham Title: Vice President -3- 4 DOVE FOUR POINT, INC. By: /s/ NEIL TOPHAM ------------------------------------- Name: Neil Topham Title: Vice President LENDER: Executed in THE CHASE MANHATTAN BANK, as Lender New York, New York By: /s/ DAVIDG. STAPLES ------------------------------------- Name: David G. Staples Title: Vice President -4- EX-10.62 18 EXHIBIT 10.62 1 EXHIBIT 10.62 Publishing Agreement DOVE BOOKS A DOVE AUDIO, INC. LABEL (the "Publisher") and ("Author") agree: FIRST: The Author A. shall deliver to the Publisher the literary work now entitled "" (hereinafter referred to as the "Literary Work") on "" in Final Form on an IBM or Macintosh compatible computer diskette with two double-spaced copies of the corresponding hard copy). The Literary Work, containing 200 entries shall be a guided tour to celebrity homes organized by neighborhood throughout the Los Angeles area. The final manuscript shall be approximately 250 typeset pages. B. makes the warranties and representations set forth in Part Two Paragraphs 36-45 of the Basic Agreement; C. grants and assigns to the Publisher: (i) all primary rights; and (ii) the shares provided in THIRD: A of this Publishing Agreement of the proceeds on disposition of the secondary rights; and D. grants the Publisher the first opportunity to consider the Author's next (i.e., written after the Literary Work) full-length work for publication on mutually satisfactory terms. If, within 60 days following submission of the final manuscript of such work to the Publisher, or within 60 days after publication of the Literary Work, whichever shall be later, Publisher and Author are unable in good faith to agree upon terms for publication, the Author shall be free thereafter to submit such next work to other publishers, provided, however, that the Publisher shall retain 1 2 the first option of publishing such work on terms no less favorable to the Author than those offered by any other publisher. During the period of this option, Author shall not submit such next work to other publishers, nor seek offers from or negotiate with others with respect thereto. SECOND: The Publisher A. shall publish the Literary Work in book form within 24 months after acceptance of the manuscript therefore; B. shall pay the Author, as an advance and on account of all monies accruing to Author, "" USD "" paid within thirty (30) days of full execution of this Agreement; "" paid within thirty (30) days of delivery and acceptance of the complete and final draft of the manuscript. (i) royalties at the following rates, based on Dove's suggested retail price of every copy sold in the United States, less returns for sales of the trade hardcover edition. The term "net receipts" shall mean all sums actually received by Publisher from sales, less any commissions to distributors or sales agents incurred by Publisher in making such sales. 10% of the suggested retail price of copies 1-5,000 sold; 12 1/2% of the suggested retail price of copies 5,001-10,000 sold; 15% of the suggested retail price of all copies sold thereafter. (ii) royalties at the following rates, based on Publisher's suggested retail price of every copy sold in the United States, less returns for sales of the trade paperback and mass market editions. The term "net receipts" shall mean all sums actually received by Publisher from sales, less any commissions to distributors or sales agents incurred by Publisher in making such sales. 7 1/2% of the suggested retail price of all trade paperback copies sold; 8% of the suggested retail price of all mass market paperback copies sold. (iii) 50% of the proceeds on disposition of the other primary rights, except as otherwise provided herein; and (iv) in accordance with the provisions in Part Five of the Basic Agreement, for sales by mail order, at special discount, for export or outside the United States, as unbound sheets, from reduced printings, to book clubs, or as excess stock, or for any 2 3 textbook, large print or hardcover reprint editions, on calendars and on Publisher's exercise of commercial rights, on electronic, audio or video editions of the Literary Work published by the Publisher itself or under one of its own imprints. THIRD: The Publisher and the Author A. shall share the proceeds on disposition of the secondary rights, except as otherwise provided herein, as follows: Dramatic Rights 50% to Author 50% to Publisher Motion Picture Rights 50% to Author 50% to Publisher Radio Rights 50% to Author 50% to Publisher Television Rights 50% to Author 50% to Publisher First Periodical Rights 50% to Author 50% to Publisher Commercial Rights 50% to Author 50% to Publisher British Commonwealth Rights 50% to Author 50% to Publisher
B. shall be bound by all of the terms and conditions of the Basic Agreement which follows and which is made an integral part of this Publishing Agreement; and Author: DOVE ENTERTAINMENT, INC. _________________________ By_________________________ Ron Lightstone FID# or SS#______________ Citizenship______________ Dated____________________ 3 4 Basic Agreement PART ONE Definition of Terms As used in this Basic Agreement and in the Publishing Agreement: Primary Rights 1. "Primary rights" shall mean all of the rights defined in Part One Paragraphs 2 through 14 inclusive. The territory within which such rights are exercisable is set forth in Part Three Paragraph 46. Trade Edition Rights, Trade Editions 2. "Trade edition rights" shall mean the exclusive right to publish, or authorize others to publish, trade editions of the Literary Work referred to in the Publishing Agreement. "Trade Editions" shall mean the first edition of the Literary Work in hardcover book form, and all other editions in book form except those referred to in the following paragraphs. Book Club Rights 3. "Book club rights" shall mean the exclusive right to authorize book clubs to print and sell the Literary Work in book form. Mass Market and Trade Paperback Rights 4. (a) "Mass market paperback rights" shall mean the exclusive right, after the publication of the first trade edition, to authorize others (not including book clubs) to publish paperback editions of the Literary Work in formats known in the publishing industry as designed primarily for mass market distribution through such channels as chain store outlets and news and magazine wholesalers. (b) "Trade paperback rights" shall mean the exclusive right to publish, or authorize others to publish, paperback editions of the Literary Work in formats known in the publishing industry as designed primarily for distribution through book 4 5 trade channels. Calendar Rights 5. "Calendar rights" shall mean the exclusive right to use, or to authorize others to use, all or any portion of the Literary Work as the basis for one or more calendars, which may include solely text and/or illustrations from the Literary Work with text and/or illustrations from other works. Textbook Rights 6. "Textbook rights" shall mean the exclusive right to publish, or to authorize others to publish, the Literary Work or any portion thereof in textbook form for distribution to or use in educational or other similar institutions. Permissions 7. "Permissions" shall mean the exclusive right, after publication of the trade edition, to reproduce, or to authorize others to reproduce, portions of the Literary Work, including, without limitation, selections from, parts of, and/or photographs, charts, maps, drawings, index, illustrations and other illustrative or decorative material from the Literary Work, to the extent that the Publisher deems appropriate. Publisher may authorize copyright and permissions clearance organizations to act in full or in part on its behalf and Publisher shall account to the Author for royalties received from such organizations designated as arising from reproduction of the Literary Work. Abridgment or Condensation Rights 8. "Abridgment or condensation rights" shall mean the exclusive right to publish, or to authorize others to publish, either as part of a book (as distinguished from a periodical), or as a separate book publication, an abbreviated version of the Literary Work, not exceeding two-thirds of the original version in length, all of which must be (i) in the original text, if it is an abridgment, or (ii) approved in writing by the Author, if it is a condensation. Second Periodical Rights 9. "Second periodical rights" shall mean the exclusive right to publish all or part of the Literary Work in a periodical (including a magazine or newspaper), serially or in one issue, after publication of the trade edition of the Literary Work. Transcription Rights 5 6 10. "Transcription rights" shall mean the exclusive right to use the Literary Work, or any portion thereof, as a basis for phonographic, tape, wire, magnetic, electronic, light wave amplification, photographic, microfilm, microfiche, slides, filmstrips, transparencies, programming for any method of information storage, reproduction or retrieval, and for any other forms or means of copying, recording, storage or retrieval (now known or hereafter devised) the text of the Literary Work, including recordings made for the blind, but excluding any uses encompassed in the electronic rights. Electronic Rights 11. "Electronic rights" shall mean the sole and exclusive right to use or adapt, and to authorize others to use or adapt, the Literary Work or any portion thereof, for one or more "electronic versions." As used herein, the term "electronic versions" shall mean any and all methods of copying, recording, storage, retrieval or transmission of all or any portion of the Literary Work, alone or in combination with other works, including in any multimedia work or electronic book, by any electronic, electromagnetic or other means now known or hereafter devised, including, without limitation, by analog or digital signal, whether in sequential or non-sequential order, on any and all physical media now known or hereafter devised including, without limitation, magnetic tape, floppy disks, interactive CD, CD-ROM, laser disk, optical disk, integrated circuit card or chip and any other human or machine readable medium, whether or not permanently affixed in such media, and the broadcast of transmission thereof by any means now known or hereafter devised, but excluding audio recording rights, video recording rights and all uses encompassed in the definitions of motion picture rights and television rights (provided that the exercise of any of the foregoing rights, if reserved herein by the Author or licensed to any third party, shall not preclude the exercise of electronic rights). Audio and Video Rights 12. (a) "Audio rights" shall mean the exclusive right to use or adapt, and to authorize others to use or adapt, the Literary Work or any portion thereof as the basis for one or more non- dramatic audio recordings. (b) "Video rights" shall mean the exclusive right to use or adapt, and to authorize others to use or adapt, the Literary Work or any portion thereof as the basis for one or more non-dramatic video recordings. Digest Rights 13. "Digest rights" shall mean the exclusive right to 6 7 publish, or to authorize others to publish, in any magazine whether devoted exclusively to abbreviated versions, or consisting primarily of other material - an abbreviated version (abridged or condensed) of the Literary Work, which version shall be complete in one issue and shall not exceed approximately 30,000 works or one-half of the length of the Literary Work, whichever is less. Other Publishing Rights 14. "Other publishing rights" shall mean all publishing rights not specifically enumerated herein, whether now in existence of hereafter coming into existence. Secondary Rights 15. "Secondary rights" shall mean all the rights defined in Part One Paragraphs 16 through 23 inclusive. The territory within which such rights are exercisable is set forth in Part Three Paragraph 47. Dramatic Rights 16. "Dramatic rights" shall mean the exclusive right to use, or to authorize others to use, the Literary Work, title, plot, episodes, events, scenes and characters depicted therein, in whole or in part, for (i) writing a dramatic version thereof, or a drama in any way based thereon and (ii) producing or performing either of the above on the stage. Motion Picture Rights 17. "Motion picture rights" shall mean the exclusive right to use, or to authorize others to use, the Literary Work, title, plot, episodes, events, scenes and characters depicted therein, in whole or in part, for the purpose of making motion pictures primarily for exhibition in regular commercial channels, and shall include the allied motion picture rights. "Allied motion picture rights" shall mean (i) the exclusive right to condense, or to authorize others to condense, the Literary Work, or the commercial motion picture treatment thereof, into not more than 7,500 words, for the purpose of promoting motion pictures based upon the Literary Work, and (ii) such limited radio or television rights as are customarily granted for the purpose of using those mediums to promote motion pictures based on the Literary Work. 18. DELETED Radio Rights 19. "Radio rights" shall mean the exclusive right to use, or to authorize others to use, the Literary Work, title, plot, 7 8 episodes, events, scenes and characters depicted therein, in whole or in part, for AM, FM or other broadcasting. Television Rights 20. "Television rights" shall mean the exclusive right to use or to authorize others to use, the Literary Work, title, plot, episodes, events, scenes and characters depicted therein, in whole or in part, for broadcast performances on television. First Periodical Rights 21. "First periodical rights" shall mean the exclusive right to publish, or authorize others to publish, all or part of the Literary Work in a periodical (including a magazine or newspaper), serially or in one issue, before publication of the trade edition of the Literary Work. Commercial Rights 22. "Commercial rights" shall mean the exclusive right to use, or to authorize others to use, in whole or in part, the Literary Work, the title of the Literary Work, and the names and characterizations of characters created in the Literary Work, as a basis for (i) trademarks or trade names for other products, or (ii) toys or games. Foreign Language Rights and British Commonwealth Rights 23. (a) "Foreign language rights" shall mean the exclusive right to translate or to authorize others to translate the Literary Work in whole or in part into one or more foreign languages, and to publish, or to authorize others to publish, such translations in any part of the world. (b) "British Commonwealth rights" shall mean the exclusive right to publish and to authorize others to publish the Literary Work in whole or in part in the English language in the British Commonwealth as defined by Publisher at the date of this agreement, excluding Canada and Israel. (c) Whichever party controls foreign language or British Commonwealth rights in the Literary Work shall control all publishing rights thereto as well as non-publishing primary rights. Non-publishing secondary rights shall in all instances be controlled by the party who is otherwise authorized to dispose of such rights pursuant to this agreement. Author's Unshared Secondary Rights 24. "Author's unshared secondary rights" shall mean all secondary rights as to which, under Part THIRD: A of the 8 9 Publishing Agreement, the Author is to retain all the proceeds from disposition. Shared Secondary Rights 25. "Shared secondary rights" shall mean all secondary rights as to which, under Part THIRD: A of the Publishing Agreement, the Author and the Publisher are to share the proceeds from disposition. Sale, Disposition or Grant of Rights 26. A "sale", "disposition" or "grant" of rights shall include an assignment, transfer, bargain or license of the rights referred to or of any interest or option relating to such rights. Proceeds on Disposition of Primary Rights 27. "Proceeds on disposition of the primary rights" shall mean the gross amount received on the sale or disposition of such primary rights, less any costs and expenses incurred by the Publisher in connection with or by reason of such sale or disposition. Proceeds on Disposition of Secondary Rights 28. "Proceeds on disposition of the secondary rights" shall mean the gross amount received from the sale or disposition of such secondary rights, less any third party commission which may be paid for services rendered in connection with such disposition, either to the Author's agent designated in the Publishing Agreement or to any agent authorized by the Publisher to dispose of such secondary rights, and less any bank fees or other monetary transfer charges incurred by the Publisher or Author in connection with or by reason of such sale or disposition. Final Form 29. "Final Form" shall mean a complete, legible, typewritten manuscript of the Literary Work (including photographs, charts, maps, drawings or index, if any of these are required), or, if Publisher requests, diskettes or other electronic format specified by Publisher containing the Literary Work, acceptable to the Publisher in content and form. Agreed Publication Date 30. "Agreed publication date" shall mean the date on which the Publisher has agreed in the Publishing Agreement to publish the Literary Work. 9 10 Actual Publication Date 31. "Actual publication date" shall mean the date of the first sale and shipment of the Literary Work. Base Royalty Rate 32. "Base royalty rate" shall mean the royalty rates provided in Part Second: B(i) and (ii) of the Publishing Agreement. Mail Order Sales 33. "Mail order sales" shall mean sales of the Literary Work directly to the consumer through mail order coupon advertising, direct-by-mail solicitation, or other direct response sales employing the mails. Special Discount Sales 34. "Special discount sales" shall mean sales made in the United States outside regular trade channels at a discount of more than 50% from the catalog retail price. Sales to book clubs shall not be included under special discount sales. Agreement 35. "Agreement (or "this agreement") shall mean the Publishing Agreement and this Basic Agreement. Part Two Author's Warranties The Author warrants and represents that: Sole Author and Proprietor 36. Author is the sole author and proprietor of the Literary Work. Authority to Grant 37. Author has full power and authority to make this agreement and to grant the rights granted hereunder, and Author has not previously assigned, transferred or otherwise encumbered the same; and Author has no prior agreement, commitment, or other arrangement, oral or written, to write or participate in writing any other book-length work and will enter into no such agreement, commitment, or other agreement until after delivery of the manuscript of the Literary Work in Final Form. 10 11 Not Previously Published, Not in Public Domain 38. The Literary Work is wholly original, has not been previously published, and is not in the public domain. No Infringement 39. The Literary Work does not infringe any statutory or common law copyright or any proprietary right of any third party. Not Libelous 40. The Literary Work does not invade the right of privacy of any third person, or contain any matter libelous or otherwise in contravention of the rights of any third person, and, if the Literary Work is not a work of fiction, all statements in the Literary Work asserted as facts are true or are based upon reasonable research for accuracy. Not Unlawful 41. (a) The Literary Work contains no matter which is obscene or matter the publication or sale whereof otherwise violates any federal or state statute or regulation, nor does Author's entering into this agreement violate any such statute or regulation, nor is the Literary Work in any other manner unlawful. Not Injurious 41. (b) Nothing contained in the Literary Work shall be injurious to the health of the user. Permissions 41. (c) If the Author incorporates in the Literary Work any writings, drawings, photographs or other material either previously published or not, either by the Author or another artist or writer, Author shall, prior to delivery of the Literary Work in Final Form obtain and, whenever requested by Publisher, deliver to the Publisher proper and complete written permission and authorization from the owner of the common law or statutory copyright or other right to use the same in the Literary Work and for the purpose of promoting or advertising the Literary Work throughout the world. Next Work 42. The Literary Work will be the Author's next book (whether under the Author's own name or otherwise). The Author agrees that he or she will not undertake to write any other work for publication in book form before delivery to the Publisher of 11 12 the manuscript of the Literary Work in Final Form, and that in no event will he or she publish or authorize publication of any other book-length work of which he or she is an author or co- author until six months after publication of the Literary Work. Investigation by Publisher 43. The Publisher shall be under no obligation to make an independent investigation to determine whether the foregoing warranties and representations are true and correct; and any independent investigation by or for the Publisher, or its failure to investigate, shall not constitute a defense to the Author in any action based upon a breach of any of the foregoing warranties. Effect of Warranties and Representations 44. The warranties and representations of Author hereunder are true on the date of execution of this agreement and shall be true of the date of actual publication of the Literary Work, and at all intervening times. The Publisher may rely on the truth of the warranties and representations herein in dealings with any third party in connection with the exercise or disposition of any rights in the Literary Work. Warranties to Survive Termination 45. Each of the foregoing warranties and representations shall survive the termination of this agreement. PART THREE Extent of Grant Territorial Extent of Primary Rights 46. Under the grant of primary rights, the Publisher and its grantees shall have: (a) the exclusive right of publication throughout the world in the English language under its own name and under various trade names and imprints; and (b) the non-exclusive right to sell or authorize others to sell Publisher's edition of the Literary Work in Australia if no other English language edition is for sale in Australia within 30 days after first English language publication in accordance with the provisions of the Australian Copyright Amendment Act of 1991. The Author shall advise Publisher immediately following Author's disposition of Australian rights in the Literary Work. The Publisher shall pay the Author royalties on such sales at the 12 13 applicable export royalty rate. Territorial Extent of Secondary Rights 47. The secondary rights are world-wide rights, and all provisions as to the disposition of such secondary rights and the sharing of the proceeds thereof shall apply equally in all countries of the world. Duration of Grant 48. All rights granted under this agreement are, except where expressly subject to earlier termination, to continue in effect during the full term of the copyright of the Literary Work in the United States under the laws of the United States. Author's Rights 49. All rights not expressly granted by the Author to the Publisher are reserved by the Author. The Author shall not exercise or dispose of any reserved rights in such a way as to substantially destroy, detract from, impair or frustrate the value of any rights granted therein to the Publisher, nor shall the Author publish or permit to be published during the term of this agreement any book or other writing based substantially on subject matter, material, characters or incidents in the Literary Work without the written consent of the Publisher. The Author has not granted and will not grant to any person (except to the Publisher), permission, authority, right or license for publication or distribution of the Literary Work in the open English language market, in a mass-market or trade paperback edition, sooner than the later of one year following the publication of any British hardcover edition or three months following publication of the first United States mass market paperback edition. The Author shall not submit any full-length work or proposal therefor in any form to the Publisher or to any third party until he or she has delivered to the publisher the complete manuscript of the Literary Work in Final Form. Disposition or Exercise by Publisher of Primary Rights 50. The Publisher shall have the exclusive right, but shall not be obligated, to dispose of or exercise any or all of the primary rights in the Literary Work. Disposition of Author's Unshared Secondary Rights 51. The Author shall have the exclusive right to dispose of the Author's unshared secondary rights, and shall notify the Publisher promptly after each such disposition. Flow-Through to Publisher 13 14 52. Until the Author's advance has earned out (after a reasonable reserve for returns), the Author shall be obligated to pay the Publisher all proceeds (less the agent's commission) resulting from the disposition of first periodical rights, foreign language rights and British Commonwealth rights, and such sums paid to the Publisher shall be credited in reduction of any unearned portion of the advance paid to the Author hereunder. The Publisher shall have the right to approve any disposition of such rights made before the Author's advance has earned out, such approval not unreasonably to be withheld. The Author's agent is hereby directed to make payments to the Publisher in accordance with this paragraph within 30 days after Author's agent's receipt thereof. Disposition by Publisher of Shared Secondary Rights 53. The Publisher shall have the exclusive right, but shall not be obligated, as agent of the Author, to dispose of the shared secondary rights as to which it has authority from the Author. The Publisher may appoint an agent to dispose of any rights of which the Publisher is authorized to dispose. When Publisher is specifically authorized to dispose of rights such authorization shall be deemed an agency coupled with an interest. Approvals, Sales to Affiliates 54. Neither the Publisher nor the Author shall unreasonably withhold consent where such consent is requested in connection with the disposition or exercise of rights under this agreement. The Author and the Publisher shall each have the right to receive copies of any contracts made with respect to said rights on request therefor. The Publisher may sell copies of the Literary Work and license primary and secondary rights granted to Publisher in the Literary Work to Publisher's parent, subsidiaries, affiliates and divisions, provided that the terms for such sale or license shall be no less favorable to the Author than the terms which Publisher in its reasonable judgment would accept from an unrelated third party. Author's Consent 55. When the Author's written consent or approval is requested under this agreement, if the Author, or the Author's agent or estate does not answer the Publisher's request for such consent or approval within a reasonable time, or if after reasonable diligence the Publisher has not succeeded in informing the Author or Author's agent or estate that such consent or approval is desired, the Author shall be deemed to have given his or her consent. Author's Name and Likeness 14 15 56. The Publisher may use the name and photograph or other likeness of the Author on the cover and jacket and generally in connection with the advertising and promotion of the Literary Work. Author and Publisher to Execute Documents 57. The Author shall, when requested by the Publisher, execute all documents which may be reasonably necessary or appropriate to enable the Publisher to exercise or deal with any of the rights granted hereunder. Author hereby appoints Publisher to be Author's attorney-in-fact to execute in Author's name and to file any and all documents necessary to record in the Copyright Office the assignment of exclusive rights made to Publisher hereunder. License Without Fee 58. The Publisher is authorized to license publication of the Literary Work in Braille or large type editions for sale to the physically handicapped and is authorized to license publication of extracts of the Literary Work containing not more than approximately 500 words, or 10,000 words in connection with motion picture licenses, without compensation therefor. In the event compensation is received it shall be shared as provided in Part SECOND: B(iii) of the Publishing Agreement. PART FOUR Copyright Copyright in the United States 59. The Author shall be deemed the sole holder and owner of the copyright in the Literary Work and Publisher may register such copyright in the United States. Notice 60. The Publisher shall print in each copy of the Literary Work published by it any notice required to comply with the applicable copyright laws of the United States and the provisions of the Universal Copyright Convention and the Berne Copyright Convention. Protection of Copyright in Disposition of Rights 61. Any agreement made by the Author or by the Publisher to dispose of any rights in and to the Literary Work shall require the licensee or grantee to take all necessary and appropriate steps to protect the copyright in the Literary Work. 15 16 Foreign Copyright 62. The Publisher may take such steps as it deems appropriate to copyright the Literary Work in countries other than the United States, but the Publisher shall be under no obligation to procure copyright in any such countries, and shall not be liable to the Author for any acts or omissions by it in connection therewith. PART FIVE Royalties and Other Payments Computation of Royalties Generally 63. When royalties are based on suggested retail price, they shall be computed on the basis of the number of copies actually sold by the Publisher, less returns. No royalties shall be computed on copies given away for review or promotion, nor on copies given or sold to Author. On Mail Orders and Special Discounts 64. On mail order sales and special discount sales the royalty shall be 5% of the suggested retail price. On Sheet and Export 65. On copies sold for export to third parties or outside the United States by Publisher or its affiliates, and on unbound sheet sales, royalties shall be calculated on the net amount actually received from such sales. No royalty will be payable to the Author with respect to any unbound sheet sales or full copy sales for export where such copies are furnished to a foreign licensee at the Publisher's cost plus a handling charge for such sheets and/or copies. On Sales From Reduced Printings 66. On sales made out of any new printings or bindings of 2,500 copies or less, made more than one year after publication date, royalties shall be computed at one-half the base royalty rate. Royalty Statements and Payments 67. The Publisher shall render royalty statements and make accounting and royalty and other payments to the Author (a) in September for the preceding period January 1 to June 30, and (b) in March for the preceding period July 1 to December 31, to the extent that Publisher has received payment for the sales upon which the royalties are calculated. The first such statement and 16 17 payment shall become due three (3) months after the conclusion of the first complete accounting period (January 1 to June 30 or July 1 to December 31) to follow publication of the Literary Work. Publisher may from time to time change such accounting periods provided no longer than six months elapses between any two accountings to the Author. If for any royalty period the current period total activity in the Author's account for the Literary Work is less than $100, then the Publisher may defer the rendering of a statement and payment until such royalty period as the cumulative activity since the last statement exceeds such amount. Details to Be Shown 68. Royalty statements will include the net number of copies sold and the reserve for returns being held by the Publisher. Book Club Sales 69. On sales to book clubs, the amount allocated as royalty or other compensation to the Publisher shall be divided equally between the Author and the Publisher. No royalty will be payable to the Author on unbound sheet sales or full copy sales to book clubs where such copies are furnished at the Publisher's cost plus a handling charge for such sheets and/or copies. Certain Primary Rights Exercised by Publisher 70. (a) On the exercise of textbook rights by publication under one of its own imprints royalties (but no further advance) shall be paid to the Author at the following rates: (i) 10% of the net amount received by Publisher on all copies sold within the United States; and (ii) 5% of the net amount received by Publisher on mail order sales and on all copies sold for export or outside the United States and on special discount sales. (b) On Publisher's publication of a large print edition, a hardcover reprint edition, or a calendar based upon the Literary Work under one of its own imprints, royalties (but no further advance) shall be paid to the Author at the following rates: (i) 10% of the net amount received by Publisher on all copies sold within the United States, exclusive of sales specified in subparagraph (ii) below, and (ii) 5% of the net amount received on mail order sales, on all copies sold for export or outside the United States and on special discount sales. If the Literary Work is combined with another work or works in a calendar, the Author's royalty on such calendar shall be a pro rata share of the total royalty payable for such calendar, based on the proportion material from the Literary Work bears to the calendar as a whole. 17 18 (c) On Publisher's exercise of commercial rights, royalties (but no further advance) shall be paid to the Author at the following rates: (i) 10% of the net amount received by Publisher on all copies or units sold within the United States, exclusive of sales specified in subparagraph (ii) below, and (ii) 5% of the net amount received on mail order sales, on all copies sold for export or outside the United States and on special discount sales. (d) On the exercise of electronic rights under one of its own or its affiliated imprints, royalties (but no further advance) shall be paid to the Author on electronic versions at the following rates: (i) 10% of net receipts received by Publisher. If the Literary Work is combined with another work or works in an electronic version, the Author's royalty on such electronic version shall be a pro rata share of the total royalty payable for such electronic version, based on the proportion material from the Literary Work bears to the electronic version as a whole. (e) On the exercise of audio or video rights by publication under one of its own imprints, royalties (but no further advance) shall be paid to the Author at the following rates: (i) 10% of net receipts received by Publisher. If the Literary Work is combined with another work or works in an audio/video version, the Author's royalty on such audio/video version shall be a pro rata share of the total royalty payable for such electronic version, based on the proportion material from the Literary Work bears to the audio/video version as a whole. Remainder and Salvage Sales 71. When the Publisher in its sole discretion determines that copies of the Literary Work are not readily salable at regular prices within a reasonable time, the Publisher may remainder copies of the Literary Work (but not earlier than 12 months from the actual publication date) or dispose of such copies as surplus at the best price obtainable. Notwithstanding anything set forth in this agreement, no royalty shall be payable on copies of the Literary Work sold at a discount of 85% or more from the catalog retail price. Payment of Advance 72. The payment of advances to the Author, including such payment following delivery of the manuscript, shall not be deemed to be evidence that the manuscript of the Literary Work is acceptable to the Publisher, or that the Author has complied with Author's warranties or other agreements hereunder. Offset 18 19 73. Any advance royalties or other sums paid to or on behalf of the Author under this agreement or otherwise, and any amounts due from the Author to the Publisher, may be applied in reduction of any amounts payable to the Author under this agreement. In the event of any overpayment by the Publisher to the Author, the Publisher may, in addition to any other remedies available to it, recoup such overpayment by deducting it from any amount payable to the Author under this agreement or any other agreement between the Author and the Publisher. 74. DELETED Reserve for Returns 75. Any amounts payable to the Author hereunder shall be subject to such reasonable reserve for returns of copies as the Publisher shall establish in its reasonable discretion. Author's Right to Examine Books of Account 76. The Author or the Author's representative may, upon written request, conduct a reasonable examination of the books and records of the Publisher insofar as they relate to the Literary Work for the period of two years immediately preceding such examination. Such examination must be conducted by a "Big 6" or otherwise affiliated accounting firm. Such examination shall occur on Publisher's premises at a time convenient to Publisher, but no later than 90 days after Author's request for such examination. Statements rendered hereunder shall be final and binding upon the Author unless objected to in writing, setting forth the specific objections thereto and the basis for such objections, within two years after the date of the statement. Author or Author's representative shall be limited to one (1) examination per calendar year. 77. DELETED PART SIX Delivery of Manuscript and Correction of Proofs Failure of Author to Deliver Work in Final Form 78. (a) Timely delivery of the Literary Work in Final Form is essential to the Publisher and is of the essence of this agreement. Any extension of the delivery date must be in writing signed by the Publisher. If the Author fails to deliver the Literary Work in Final Form within the time specified, the Publisher shall have the option to give the Author a notice in writing termination this agreement, and in such event the Publisher may then recover and the Author shall repay on demand 19 20 all amounts advanced to the Author. In the event that the Author completes a manuscript for the Literary Work after termination of this agreement pursuant to the preceding sentence, then the Publisher shall have the option, exercisable within 30 days after receipt of said manuscript, to acquire the Literary Work on the same terms and conditions as provided in this agreement. (b) The Publisher shall not be obligated to accept or publish the Literary Work if in its sole judgment such work is not acceptable to it. If the Author delivers a manuscript of the Literary Work within the time specified, in what the Author represents to be Final Form, the Literary Work shall be deemed to be acceptable to the Publisher unless, within 90 days after receipt thereof by the Publisher, the Publisher (1) notifies the Author in writing that in its editorial judgment the Literary Work is not acceptable to it, in which case the Author shall repay on demand all amounts advanced to the Author and upon such repayment this agreement shall terminate; or (2) notifies the Author in writing of the reasons why the submitted manuscript is unacceptable (including, without limitation, reservations or questions of the Publisher concerning matters within any of the warranties, in which case the Author shall have a period of 60 days to respond to the satisfaction of the Publisher in respect to all subject matter of such notice, provided however that if the Publisher in its sole discretion determines to submit the manuscript to a legal review, the Author shall cooperate with Publisher or Publisher's counsel in such review and the time for Publisher to accept or reject the Literary Work shall be extended to 30 days after completion of the legal review. Delay for Author's Illness 79. If because of illness or any other factor beyond his or her control, the Author is unable to deliver the Literary Work by the date provided in the Publishing Agreement, the date for such delivery shall be extended for a reasonable time. If after the elapse of such reasonable time the Author continues to be unable to deliver the Literary Work or to satisfy the Publisher's request for changes or substantiation, then the Publisher may give written notice of termination, effective at the expiration of 60 days or such longer period as the Publisher may specify in such notice, and if the Author shall fail to deliver the manuscript in Final Form within such period then this agreement shall terminate and the Author shall repay on demand all amounts advanced to author. If the Author dies prior to acceptance of the manuscript by the Publisher, whether or not following delivery of the manuscript in Final Form, the Publisher, in its sole discretion, may terminate this agreement upon giving written notice of termination to Author's personal representatives within 90 days of receipt by Publisher of notice of Author's death. In such event the publisher may then recover from such personal representatives all amounts previously advanced hereunder. 20 21 Failure to Delivery Photos, Charts, etc.; Care of Property 80. (a) If the Author fails to deliver photographs, charts, maps, drawings, or the index, in cases where any of these are required by Publisher for the Literary Work, the Publisher shall have the right (but not the obligation) to cause the same to be prepared, and in such event the cost of such preparation shall be borne by the Author as follows: (i) Author shall pay such costs upon receipt of an invoice from the Publisher; (ii) Publisher may withhold a portion of any advances payable to the Author under this agreement and deduct such costs from said advances; or (iii) at Publisher's option, Publisher may charge such cost to Author's royalty account, provided however that if the advance payable to Author under this agreement is unearned one year after publication of the Literary Work, then Author will reimburse Publisher for such costs upon receipt of an invoice from Publisher. (b) Publisher shall be responsible for only the same care of any property of Author in its hands as it takes of its own. Except in the case of Publisher's gross negligence, Publisher shall not be responsible for loss or damage to any property furnished by Author while in Publisher's custody or in the custody of anyone to whom delivery of such property is necessary in connection with the production of the Literary Work or is otherwise made with Author's consent. Author shall retain copies of any such property and, in the case of photographs, the negative for each photograph furnished. Corrections of Proofs 81. The Publisher shall supply the Author with one set of galley proofs, and, at its option, page proofs, and the Author shall return each set of proofs with his or her corrections to the Publisher within 21 days of receipt thereof. The Publisher also shall proofread the proofs. If the Author shall fail to return the corrected proofs within the 21-day period herein specified, the Publisher may publish the Literary Work without the Author's approval of the proofs - provided, however, that if, because of illness or any other factor beyond his or her control, the Author informs the Publisher that he or she is unable to return the corrected proofs, his or her time for correcting such proofs shall be extended for another 21-day period, and after that period the Publisher may publish the Literary Work without the Author's approval of the proofs. Cost of Author's Alterations 82. If, in the correction of galley and page proofs, the Author requests changes from the text of the manuscript, the Author shall bear the cost of such changes over 15% of the original cost of composition, as follows: (i) Author shall pay 21 22 such costs upon receipt of an invoice from the Publisher; (ii) Publisher may withhold a portion of any advances payable to the Author under this agreement and deduct such costs from said advances; or (iii) at Publisher's option, Publisher may charge such cost to author's royalty account, provided however that if the advance payable to the Author under this agreement is unearned one year after publication of the Literary Work, then the Author will reimburse Publisher for such costs upon receipt of an invoice from Publisher. At Author's request Publisher shall submit an itemized statement of such charges and shall make available corrected proofs for the Author's inspection at the Publisher's office. No Obligation to Publish 83. (a) Notwithstanding anything contained herein to the contrary, the Publisher shall not be obligated to publish the Literary Work if, in its sole and absolute judgment, whether before or after acceptance thereof, the Literary Work contains libelous or obscene material, or its publication would violate the right of privacy, common law or statutory copyright, or any other right of any person. In such event, Publisher shall be entitled on demand to the return of all monies advanced to the Author hereunder, and to terminate this agreement. Notwithstanding any request by Publisher for change or substantiation, nothing in this agreement shall be deemed to impose upon the Publisher any duty of independent investigation or to relieve the Author of any of the obligations assumed by Author hereunder, including, without limitation, the ongoing validity of Author's warranties and representations. (b) Notwithstanding anything contained herein to the contrary, the Publisher shall not be obligated to publish the Literary Work if, in its sole and absolute judgment, whether before or after acceptance thereof, supervening events or circumstances since the date of this agreement have, in the sole judgment of the Publisher, materially adversely changed the economic expectations of the Publisher in respect to the Literary Work at the time of the making of this agreement, and in such event all of the Publisher's rights in and to the Literary Work shall terminate and revert to the Author on the giving by the Publisher to the Author of notice of its decision, or, if the Publisher fails to do so, by the Author pursuant to Paragraph 84, and in any such event, except as provided in Paragraph 79, the Author shall be entitled as liquidated damages and in lieu of all damages and remedies, legal or equitable, to retain all payments theretofore made to the Author under this agreement. PART SEVEN Delays in Publication 22 23 Delays Due to Publisher's Fault 84. The Publisher, in its sole and absolute discretion, shall have the right to reschedule publication of the Literary Work beyond the agreed publication date for a reasonable time. If publication of the Literary Work is delayed in the absence of excusable circumstances the Author's sole and exclusive remedy shall be to give the Publisher a notice in writing, stating that if the Publisher fails to publish the Literary Work within 180 days after the date of such notice, then all of the Publisher's right in and to the Literary Work shall terminate at the end of such 180-day period; and if, in such event, the Publisher shall fail to publish the Literary Work within such 180-day period, all of the Publisher's rights in and to the Literary Work shall terminate and revert to the Author, and the Author shall be entitled, as liquidated damages and in lieu of all damages and remedies, legal or equitable, to retain all payments theretofore made to Author under this agreement. Delays Not Due to Publisher's Fault 85. If publication is delayed beyond the agreed publication date because of acts or conditions beyond the control of the Publisher or its suppliers or contractors, including (by way of illustration and not by way of limitation) war, shortages of material, strikes, riots, civil commotions, fire or flood, the agreed publication date shall be extended to a date six months following removal of the cause of the delay. PART EIGHT Disputes Between Parties Disputes Between Parties 86. Exclusive jurisdiction for the determination of any dispute solely between or among parties to this agreement is hereby vested in the Superior Court, Los Angeles, County or, at the election of either party if the jurisdictional prerequisites at the time exist, in the United States District Court for the Central District of California, and each party hereto shall submit to the jurisdiction of either such court in the City of Los Angeles or State of California for the determination of any such dispute and hereby consents (in addition to service of process by any other means provided at the time by law) to service of process on him, her or it, as the case may be, by registered mail, first class postage prepaid, return receipt requested, addressed to the party named in such process at the address to which notices may be given pursuant to Paragraph 106 of this agreement. Such notice by mail so given shall confer jurisdiction upon such court. At the sole election and 23 24 discretion of Publisher, all disputes between the parties shall be settled by arbitration before the American Arbitration Association in Los Angeles, California. PART NINE Indemnification and Defense of Litigation Indemnification by Author 87. The Author shall indemnify and hold the Publisher harmless against any loss, liability, damage, cost or expense (including reasonable attorneys' fees) arising out of or for the purpose of avoiding any suit, proceeding, claim or demand or the settlement thereof, which may be brought or made against the Publisher by reasons of the publication, sale, or distribution of, or disposition of rights in respect to the Literary Work, based on the contents of the Literary Work, except in connection with matters involving solely controversies arising out of or based on commercial transactions between the Publisher and its customers. Notice of Suits Brought 88. Prompt notice of any suit, proceeding, claim or demand brought or made against the Publisher or Author shall be given to the Author or Publisher respectively. Cost of Defending Suits 89. If any suit, claim or demand is brought or made, other than as excepted in Paragraph 87, the Publisher may elect (i) to undertake the defense thereof, or (ii) to notify the Author to undertake the defense. If the Publisher does so notify the Author, the Author shall undertake such defense; and in such cases the Publisher may, at its option, join in the defense. In all the foregoing events the cost and expense of any defense shall be borne by the Author, unless the Author has, pursuant to notification from the Publisher, undertaken the defense and the Publisher at its option elects to join with the Author in the defense, in which case the total cost and expense (including reasonable attorneys' fees) shall be shared equally by the Publisher and Author. Limitation on Liability 90. Whenever any non-excepted suit, claim or demand is instituted, the Publisher may withhold payments due to the Author under this agreement, or any other agreement between the Author and the Publisher. If a final adverse judgment is rendered in such a suit and is not discharged by the Author, the Publisher may apply the payments so withheld to its expenses and to the 24 25 satisfaction and discharge of such judgment. Author shall be insured under the Publisher's liability policy, which covers claims of libel and other forms of defamation, invasion of privacy or publicity and infringement of copyright or trademark arising from publication or the Literary Work, to the extent such policy is valid and collectible. In connection with such coverage and notwithstanding the other provisions of this Part Nine, with respect to all judgments, settlements and costs of defense, including attorneys' fees and other costs of claims covered by the policy, the Publisher and the Author shall share equally the first $100,000 of all such costs; thereafter the Author's liability shall be limited to 10% of all such costs up to the limits of the policy. Publisher shall retain counsel to represent Publisher and Author in any proceeding brought with respect to all such claims and shall control the defense of such claims, and Author shall cooperate fully with Publisher and said counsel in such defense. Notwithstanding the foregoing, Author shall be solely responsible for the cost of counsel separately retained by the Author for any reason and for judgments, settlements and costs of defense, including all attorneys' fees, attributable to a willful or reckless breach of this agreement by Author, and for any uninsured amount upon the finding of any copyright infringement. PART TEN Infringement by Others Suits by Publisher or Author 91. If during the existence of this agreement the copyright, or any other right in respect to the Literary Work, is infringed upon or violated, the Publisher may, at its own cost and expense, take such legal action, in the Author's name if necessary, as may be required to restrain such infringement and to seek damages therefor. The Publisher shall not be liable to the Author for the Publisher's failure to take such legal steps. If the Publisher does not bring such an action, the Author may do so in his or her own name and at his or her own cost and expense. Money damages recovered for an infringement shall be applied first toward the repayment of the expense of bringing and maintaining the action, and thereafter the balance shall be divided equally between the Author and Publisher. PART ELEVEN Withdrawal from Publication If Discontinued or Out of Print 92. If, at any time after the expiration of two years from the actual publication date, the Publisher allows all of its 25 26 editions of the Literary Work to go out of print and such status continues in effect for six months after the Author has made a written request for Publisher to put the Literary Work back into print, and if there is no English language or foreign language reprint edition authorized by Publisher available or contracted for, then the Author may by a notice in writing terminate this agreement subject to any licenses previously granted by Publisher (and any renewals or extensions thereof) and Publisher's right to continue to share in the proceeds therefrom. In the event of such termination the Author shall have the right to purchase any available plates or film of the Literary Work at cost. If the Author does not purchase such plates, film, copies or sheets, then the Publisher may dispose of them at any price and retain the proceeds of such sale. The Publisher is under no obligation to retain any such plates, film, copies or sheets. The Literary Work shall not be deemed out of print as long as it is (a) available in any edition, including electronic editions, in Publisher's inventory; (b) offered for sale by Publisher in its catalog or order form; or (c) electronically stored and available to the consumer for retrieval. PART TWELVE Breach by Publisher Termination for Material Breach 93. Except as otherwise specifically provided in this agreement, if the Publisher shall commit a material breach of this agreement and shall fail to remedy the breach within 60 days after receiving a written notice from the Author requesting the Publisher to remedy such breach, the Author may by a notice in writing (a) revoke the Publisher's right to publish the Literary Work, if it has not been published at such time; (b) require the Publisher to cease further publication of the Literary Work, if it has been published at such time, but in such event the Publisher shall be permitted to sell all copies of those editions of the Literary Work which have already been printed or are in the process of being printed; (c) revoke the grant to the Publisher of such of the other primary rights as the Publisher has not already exercised or disposed of; (d) revoke any power given to the Publisher to dispose of such secondary rights as have not already been disposed of; and (e) revoke any grant of the rights made to the Publisher in the Publishing Agreement to share in the proceeds on disposition of such secondary rights as have not already been disposed of. In such event the Author shall have the right to purchase any available plates or film of the Literary Work at cost, and/or remaining copies or sheets of the Literary Work already printed at the Publisher's manufacturing cost. If the Author does not purchase such plates, film, copies or sheets, the Publisher may dispose of them at any price and retain the proceeds of such sale. The Publisher is 26 27 under no obligation to retain any such plates, film, copies or sheets. Any right of the Author pursuant to Paragraph 76 shall survive such termination. PART THIRTEEN Miscellaneous Provisions Publisher Shall Determine Style, etc. 94. The format, imprint, style of printing and binding, and all matters relating to the manufacture, sale, distribution and promotion of the Literary Work shall be determined at the sole discretion of the Publisher. Title Changes 95. The title of the Literary Work as set forth in the Publishing Agreement may be changed at the sole discretion of the Publisher. Single Author to Represent 96. When there is more than one author, any one may be designated in writing to act on behalf of all the authors jointly, and the Publisher may rely on the acts of the author so designated as representative of and binding upon all authors; and in the absence of such designation, the Publisher may deal with any one of the authors as the agent and representative of all, and may rely on the acts of such author-representative as binding on all the authors. When there is more than one author, unless the Publishing Agreement specifies otherwise or until receipt by the Publisher of contrary instructions, the Publisher may assume that all authors share equally in proceeds payable hereunder and may either issue separate checks in equal amounts payable to each author severally or single checks payable jointly to all authors. Free Copies for Author, Purchases by Author 97. The Publisher shall present the Author with ten free copies of each edition of the Literary Work published by the Publisher, upon publication. The Author shall have the right to purchase additional copies for his or her own use at a 50% discount from the catalog retail price. Revisions 98. Author shall revise the first and subsequent editions of the Literary Work at the request of Publisher and supply any new matter necessary from time to time to keep the Literary Work up to date. If Author shall neglect, be incapable, be unwilling or, in Publisher's judgment, will not be able to revise or supply new 27 28 matter at a time and in a form satisfactory to Publisher, then Publisher shall have the right to engage some other person(s) to do so. When such revisions are not made by Author, Publisher may cause such fact to be evidenced in the revised edition. Publisher shall have all rights in connection with all subsequent editions which Publisher has in the original Literary Work. Publisher to Execute Documents 99. If any of the rights granted to the Publisher revert to the Author, the publisher shall execute all documents which may be necessary or appropriate to revest all such rights in the Author. Acceptance of Agreement 100. This agreement shall be binding on the Publisher only when it has been signed by an authorized officer of the Publisher. Laws Applicable to Agreement 101. This agreement shall be construed in accordance with the laws of the State of California applicable to agreements made and performed therein. Agreement on Binding on Successors in Interest 102. This agreement shall be binding upon and inure to the benefit of the executors, administrators and assigns of the Author, and upon and to the successors and assigns of the Publisher. Modification of Agreement 103. This agreement may not be modified, altered or changed except by an instrument in writing signed by the party to be charged. Waivers Are Not Cumulative 104. No waiver of any term or condition of this agreement, or of any breach of this agreement or of any part thereof, shall be deemed a waiver of any other term or condition of this agreement or of any later breach or of any part thereof, nor shall publication or continued publication or payment by the Publisher following notice or claim of facts which, if true, would constitute a breach of warranty, representation or agreement of the Author, constitute or imply any waiver by the Publisher of any defense, rights or remedies of the Publisher. No failure by either party to assert any right under this agreement shall preclude any later assertion of such right. 28 29 Validity and Enforceability 105. The invalidity or unenforceability of any provision of this agreement shall not affect the validity or enforceability of any other provision hereof, and any such invalid or unenforceable provision shall be deemed to be severable. Notices 106. All notices to be given hereunder by either party shall be in writing and shall be sent to the other party at the respective addresses as they are given in the Publishing Agreement, unless said addresses are changed by either party by a notice in writing to the other party. Singular Shall Include Plural 107. Wherever required by the context of this agreement, the singular shall include the plural, and the masculine shall include the feminine and the neuter. The term "Author" shall include "Authors" if there are more than one. Captions, Table of Contents, etc. 108. Captions or printed marginal notes, and the table of contents of this agreement are for convenience only, and are not to be deemed part of this agreement. 29 EX-10.63 19 EXHIBIT 10.63 1 EXHIBIT 10.63 June 12, 1997 ARTIST AGREEMENT The following confirms the terms of the agreement (the "Agreement") between DOVE AUDIO, INC., 301 N. Canon Drive, Suite #207, Beverly Hills, California 90210 ("Producer") and BAG Productions, Inc. ("Lender") f/s/o Brian Austin Green ("Artist"), c/o Karen Sellars, ICM, 8942 Wilshire Blvd., Beverly Hills, CA 90211 for Artist's services to perform concerning a reading of the Work entitled "ELFIS" by Alan Katz ("Work") for audio recording. The Agreement contains the following terms: 1. Lender hereby furnishes to Producer the services of Artist to perform a reading of an abridged and/or unabridged version of the Work in connection with the audio recording ("Recording") of the Work. Lender shall cause Artist to render services in accordance with this Agreement and to comply with all of the terms hereof, and Lender shall not permit Artist to violate any provision of this Agreement insofar as they refer to Artist. Lender warrants it has a valid, binding and subsisting written agreement with Artist under which Artist is obligated to render Artist's services exclusively for Lender, and that by the terms of such agreement between Lender and Artist, Lender has the right to enter into this Agreement with Producer for the furnishing of Artist's services to Producer hereunder and to grant to Producer any and all of the services and rights herein set forth. 2. Producer hereby employs Artist through Lender to render Artist's services to read the Work for audio recording. Producer shall notify Artist in advance of the date(s) of the recording sessions, with such dates to be mutually approved. 3. As full and complete consideration for any and all services performed and rights granted to Producer by Lender or Artist hereunder, Producer shall pay Lender the sum of Nine Hundred USD ($900.00) plus pension, health and welfare to payments and any other payments required by the applicable AFTRA code upon Artist's complete recording of the Work acceptable to Producer. For purposes of payroll, Entertainment Partners will be considered the employee of record. 4. Lender and Artist hereby agree that Producer shall pay directly to Lender all of the compensation that would have been payable to Artist had Artist rendered services directly to Producer in the first instance, and Producer shall not be obligated to make any such payments of any nature whatsoever to Artist. In no event shall Lender's failure to pay any amounts to Artist be deemed to constitute a breach of this Agreement by Producer. 5. Artist's services hereunder shall be rendered as an employee of Lender, and Lender hereby agrees that it will fully perform and discharge, and that Producer shall have no responsibility or liability on account of, any obligations of an employer with respect to Artist and 2 Artist's services hereunder, including, but not limited to, the withholding and/or payment of any sum required to be withheld and/or paid by such employer to any governmental authority based on or resulting from the services rendered by Artist hereunder or the compensation paid to Lender for such services, including, without limitation, payroll taxes, and Lender agrees to and does hereby indemnify and hold harmless Producer from and against such liability or obligation. 6. Producer shall have the perpetual and exclusive right, throughout the universe, to publish and distribute, and/or cause or authorize third parties to publish and distribute, reproductions of the Recordings in the form of phonograph records, audio cassettes, compact discs, or by any other method, means or process of embodying and/or transmitting spoken words now known or hereafter devised, for the full term of copyright, including renewals and extensions. The format in which the Recording is to be produced and distributed, the manner of distribution, the nature and extent of advertising and promotion, prices and discount schedules and the packaging to be utilized shall be in Producer's sole discretion. Nothing herein shall be deemed to obligate Producer to use or otherwise exploit the Recording. 7. Lender hereby grants to Producer, exclusively and perpetually, all present or hereafter existing rights of every kind or character whatsoever, whether or not such rights are now known, recognized or contemplated, and the complete unconditional and unencumbered title throughout the universe in and to the results and proceeds of Artist's services and performances pursuant to this Agreement and any and all material, writings, ideas, or dialogue composed, submitted or interpolated by Artist in connection with the preparation or production of the audio recording of the Work (the "Material"). All the Material, and the copyright therein shall automatically become the property of the Producer, which shall be the author thereof, it being agreed and acknowledged that all of the Material is a work specially ordered or commissioned for use as a part of the audio recording of the Work and constitutes a work-made-for-hire within the meaning of the Copyright Laws of the United States, or any similar laws throughout the world. 8. It is understood that Artist's services and the results and proceeds of such services shall be rendered on a work-made-for-hire basis within the meaning of the Copyright Laws of the United States, or any similar laws throughout the world, and all now known or hereafter existing rights of every kind, throughout the universe, in perpetuity and in all languages, for all now known or hereafter existing uses and forms of the audio recording of the Work, including without limitation all copyrights and renewals and extensions thereof, shall be owned solely and exclusively by Producer, and the foregoing shall be a full and complete assignment to Producer thereof. 9. Lender warrants that Artist is free to enter into this Agreement and to perform in accordance with its terms; that no lien, claim or encumbrance exists against the results or proceeds of Artist's services herein, and there are no conflicts with the rights granted herein nor any interference with Producer's full enjoyment thereof. Lender shall indemnify and hold harmless Producer, its officers, directors, employees, licensees, distributors, successors and assigns, from and against any cost, damage, liability, loss or expense, including attorney's fees and costs, arising from or related to the breach or alleged breach of the foregoing warranties. 3 10. Producer shall have the right to use the name and likeness of, and biographical information concerning Artist on the Recordings and the packaging thereof, and any and all advertising, publicity and/or promotion relating thereto. 11. Upon commencement of distribution, Producer shall provide Artist with five (5) complimentary copies of the Recordings. 12. Artist shall not perform on other recordings of the text of the Work, or any excerpts therefrom, without Producer's prior written approval, for as long as the Recordings are in print and available for sale. Artist may perform in motion pictures, television programs or any other dramatizations of the Work. 13. This Agreement shall be binding upon, and inure to the benefit of, the parties and their respective successors, assigns and/or licensees. 14. Lender and Artist agree that no default by Producer shall cause Lender or Artist irreparable damages entitling Lender or Artist to an injunction or other equitable relief; it being agreed that Lender and/or Artist shall be entitled to seek only monetary damages, if any, for a default by Producer hereunder. 15. Any controversy arising under any provision of this Agreement shall be settled by arbitration in Los Angeles, California by the American Arbitration Association under its rules as in effect on the date of delivery of demand for arbitration. Any award resolved thereunder may be confirmed by the Superior Court of the State of California, County of Los Angeles. Regardless of its place of physical execution, it is being made under, and shall be interpreted in accordance with the laws of the state of California applicable to contracts wholly to be performed therein. # # # 4 16. If any provision of this Agreement, as applied to any party or to any circumstance, shall be found to be void, invalid or unenforceable, the same shall in no way affect any other provision of this Agreement, the application of any such provision in any other circumstance, or the validity or enforceability of this Agreement. 17. This Agreement contains the entire understanding of the parties hereto, and may not be modified, nor shall any waiver be effective, unless in writing and signed by all the parties hereto. IN WITNESS WHEREOF, THE PARTIES HERETO HAVE EXECUTED THIS AGREEMENT AS OF THE DAY AND YEAR FIRST ABOVE WRITTEN. AGREED TO AND ACCEPTED BY: BAG PRODUCTIONS, DOVE AUDIO, INC. INC. By : By: Brian Austin Green Michael Viner Its: Its: President Fed. ID #: 95-4355626 I AGREE TO ABIDE BY THE TERMS AND CONDITIONS SET FORTH HEREIN: Brian Austin Green EX-10.64 20 EXHIBIT 10.64 1 EXHIBIT 10.64 Date EXCLUSIVE PUBLICATION AGREEMENT This will confirm the agreement made between DOVE ENTERTAINMENT, INC., 8955 Beverly Blvd., Los Angeles, CA 90048 ("Dove"), and "', concerning a work entitled "" ("Work") in which Author is the owner of all audio rights. 1. GRANT OF RIGHTS (a) Author hereby grants and licenses to Dove the sole and exclusive audio rights in and to the Work for the full term of copyright, including any renewals or extensions thereof, throughout the universe, in all languages, to publish abridged and unabridged readings of the Work, and to record, electronically or by any other manner now known or hereafter developed, the Work for the purpose of duplication on audio cassettes, compact discs or any other electronic forms now known or hereafter developed ("Cassettes"). (b) Author grants Dove the right to produce, publish, sell, license, and distribute the Cassettes under the Dove label or its assigns and to authorize others to produce, publish and distribute the Cassettes. This right shall include the right to authorize others to use portions of the Cassette for broadcast. (c) Author grants Dove permission to use Author's name and likeness in connection with all advertisement, publicity or promotion of the Cassettes provided that the Author's name and likeness will not be used in any endorsement or testimonial without Author's prior written consent, which consent shall not be unreasonably withheld. Author shall not receive any additional compensation for such endorsement or testimonial. (d) All other rights including, but not limited to print, motion picture and television, remain with the Author. (e) Promptly after execution of this Agreement, Author shall provide Dove free-of-charge with three (3) copies of the Work. 2. ROYALTIES As consideration for any and all rights granted by Author hereunder, Dove shall pay 1 2 Author a royalty as follows: (a) As an advance against future royalties, "" to be paid one-half upon signing of this agreement and one-half upon release of the Cassette by Dove. (b) On sales of the Cassettes: (i) Ten percent (10%) of net sales received from sales of the Cassettes. (ii) Five percent (5%) of the net sales received from premiums, special sales, catalog, book, library, record, tape, shopping or other clubs, and foreign sales of the Cassette. (iii) Fifty percent (50%) of net sales received under any licensing agreements. (iv) Net sales shall be defined as gross sales, less all returns. (c) On use of the Cassettes for review, advertising, publicity, or the like to promote the sale and distribution of the Cassettes, no royalties shall be paid. No royalty shall be paid on Cassettes sold at or below the cost of manufacture. (d) If any Cassette produced or licensed hereunder contains a work or works other than the Work that is the subject of this agreement, Author shall receive a proportion of the foregoing amounts stated in this paragraph based on the actual playing time of Author's Work on the Cassette against the total playing time of the Cassette. 3. ACCOUNTING Dove shall render a semi-annual accounting to Author of estimated net sales as of the first day of January or the first day of July. Dove shall send such statements, with checks in payment of amounts due, on or about the last day of March and September, to the extent that Dove has received payment for the sales upon which the royalties are calculated. The first such statement and payment shall become due three (3) months after the conclusion of the first complete accounting period (January 1-June 30, or July 1-December 31) to follow publication of the Cassette, and shall cover the time period from publication through the end of such accounting period. Dove shall maintain a reasonable reserve against returns of the Cassettes and the amount thereof shall be deducted from the payments to Author. Author shall have the right to inspect Dove's books of accounting, upon reasonable written request and sufficient notice, to determine the accuracy of statements rendered to Author, provided that there may not be more than one such examination in any twelve month period, and that each such statement shall be deemed incontestable two years after the date upon which such statement is issued unless an examination has taken place and a claim with respect thereto has been asserted in such two year period. After two years from the date of publication, no royalty statements will be issued on amounts less than Twenty USD ($20.00). 2 3 4. WARRANTY (a) Author warrants and represents that the Work is original; that Author is the sole author and proprietor of the Work; that Author has the full power and authority to enter into this agreement and to grant the rights granted hereunder to Dove, that there are no claims, liens, or encumbrances against the Work, that Author has not previously assigned, transferred or otherwise encumbered the Work in any manner which will conflict, interfere with, or impair the rights granted to Dove herein. Author further warrants and represents that the Work, when published by Dove, will not infringe upon any statutory or common law copyright, invade the right of privacy or publicity of any third person, or contain any matter that is defamatory, libelous or slanderous or otherwise in contravention of the rights of any third persons or party anywhere in the world, that nothing contained in the Work is injurious, harmful or damaging to the health of a user, and that all statements in the Work asserted as facts are true or are based upon reasonable research for accuracy. (b) Author agrees to defend and indemnify and hold harmless Dove, and its officers, directors, shareholders, employees, agents, representatives, successors, licensees, assigns, distributors and any seller of the Cassettes against any loss, liability, damage, cost, expense, claim, demand, action or proceeding that may be brought, including reasonable attorney fees and costs, arising from a breach or alleged breach of warranties set forth in this paragraph or otherwise arising from the Work or the rights therein. (c) Author warrants and represents that Author shall provide Dove with a complete copyright report of the Work, to be delivered to Dove either prior to or contemporaneous with the signing of this agreement. Author shall be solely responsible for all costs incurred in connection with the preparation of said copyright report. 5. RIGHT OF FIRST NEGOTIATION/ RIGHT OF LAST REFUSAL Author hereby grants Dove the right of first negotiation and the right of last refusal for the audio rights to Author's next book, and grants Dove the right of first negotiation and the right of last refusal for the audio rights to Author's subsequent book thereafter. (a) The term "Right of First Negotiation" is defined as when Author completes his or her next book, Author shall notify Dove in writing concerning said completion and immediately commence good faith negotiations with Dove regarding such audio rights. If, after the expiration of a thirty (30) day negotiation period ("Initial Negotiation Period") following the receipt of notice, no agreement has been reached between Author and Dove, Author may then negotiate with third parties regarding such audio rights. (b) The term "Right of Last Refusal" is defined as when Dove and Author fail to reach an agreement during the Initial Negotiation period, and Author makes or receives any firm bona fide third party offer to purchase the audio rights or any interest therein ("Third Party Offer"). 3 4 Author shall notify Dove by registered mail or telegram, if Author proposes to accept such Third Party Offer, including the name of the offeror, the proposed purchase price, and all other material terms of such Third Party Offer. Beginning upon Dove's receipt of Author's written notice of said Third Party Offer Dove shall have an exclusive thirty (30) day period to purchase the audio rights for the same purchase price and upon the same terms and conditions as set forth in such written Third Party Offer. If Dove elects to purchase such audio rights, Dove shall notify Author in writing of its intent to purchase the audio rights within such thirty (30) day period ("Second Negotiation Period"). If Dove elects not to purchase said audio rights from Author, Author may accept such Third Party Offer; except in the event that there is a change in the identity of the third party, the purchase price or in the terms and conditions of such Third Party Offer then Author shall offer to Dove the right to purchase the audio rights on the same terms as then set forth in the said Third Party Offer, or if any such proposed sale is not consummated with the third party within thirty (30) days following the Second Negotiation Period Dove's right of last refusal shall be revive and shall apply to each and every further offer or offers whenever received by Author relating to the audio rights or any interest therein; provided, further, that Dove's option shall continue in full force and effect, upon all the terms and conditions of this paragraph, while Author retains any rights, title or interest in or to the audio rights. Dove's interest in or to the audio rights and Dove's Right of Last Refusal shall inure to the benefit of Dove, its successors, licensees and assigns, and shall bind Author and Author's heirs, successors and assigns. 6. COVER ART To the extent of Author's rights in the design and illustration of the cover art used for the print version of the Work, Author grants to Dove the right to use such material for the Cassettes to the full extent of Author's rights in said cover art and, to the extent third parties control such rights, Author shall use best efforts to arrange for Dove to obtain the right to use such material for the Cassettes provided, however, that Author shall not be obligated to pay for such rights. 7. RIGHT TO EDIT Dove shall have the right, without further obligation to Author, to edit the Work in any manner it deems appropriate, for the purpose of, without limitation, connective material, advertising and promoting the Work. 8. AUTHOR'S COPIES Dove shall provide Author with five (5) copies of the Cassette, free of charge. Should the Author request additional copies, Dove will provide such additional copies at a price equal to 50% of the retail price of each Cassette, with no royalties paid to Author on all such sales. 9. ASSIGNMENT The provisions of this Agreement shall apply to, and inure to the benefit of and bind the 4 5 heirs, successors, executors, administrators, and assigns of the Author, and the successors, licensees and assigns of Dove. 10. COPYRIGHT Dove shall have the sole and exclusive right to secure copyright registration of the sound recording of the Work as contained in the Cassettes (as distinguished from the copyright of the Work) in the United States and such other Territories as set forth herein, if any, under any now existing or subsequent created laws, regulations or rules, in the name of Dove or any person, firm or corporation designated by Dove, and Dove shall own the copyright thereto. Author hereby assigns for the term of this Agreement, and any renewal thereof, and Dove shall own all right, title and interest in and to the Work as contained in the Cassettes and all additions to, alterations of or revisions of the Work as contained in the Cassettes, and all drafts, notes, scripts, voice recordings and musical recordings related thereto. If requested by Dove, Author agrees to execute, acknowledge and deliver, or, cause to be executed, acknowledged and delivered to Dove any instruments that may be required by Dove or that may be necessary, proper or expedient in the opinion of Dove to establish and vest in Dove such rights of copyright. Author shall notify Dove immediately in writing of any copyright notice Author wishes to be set forth on the package containing the Cassettes relating to the copyright in the underlying Work. 11. REMEDIES Author agrees that no default by Dove shall cause Author irreparable damages entitling Author to an injunction or other equitable relief; it being agreed that Author shall be entitled to seek only monetary damages, if any, for a default by Dove hereunder. 12. SEVERABILITY If any provision of this Agreement, as applied to any party or to any circumstance, shall be found to be void, invalid or unenforceable, the same shall in no way affect any other provision of this Agreement, the application of any such provision in any other circumstance, or the validity or enforceability of this Agreement. # # # 5 6 13. CALIFORNIA LAW APPLIES This Agreement shall be interpreted according to the laws of the State of California, applicable to agreements made and to be performed wholly therein. At Dove's sole election and discretion, any disputes between the parties regarding the provisions of this Agreement shall be settled by arbitration before the American Arbitration Association in Los Angeles, California. 14. INTEGRATION This Agreement shall contain the entire understanding of the parties hereto, and may not be modified, nor shall any waiver be effective, unless in writing and signed by all the parties hereto. THE PARTIES HERETO HEREBY AGREE TO ALL OF THE TERMS AND CONDITIONS SET FORTH ABOVE BY SIGNING BELOW. AGREED TO AND ACCEPTED BY: DOVE ENTERTAINMENT, INC. By: By: Ron Lightstone Its: President SS# Date: Date: 6 EX-23 21 EXHIBIT 23 1 EXHIBIT 23 The Board of Directors Dove Entertainment, Inc.: We consent to incorporation by reference in the registration statements (No. 333-43527 and No. 333-6059) on Form S-3 of Dove Entertainment, Inc. of our report dated April 3, 1998, relating to the consolidated balance sheet of Dove Entertainment, Inc. and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-KSB of Dove Entertainment, Inc. (signed) KPMG Peat Marwick LLP Los Angeles, California April 9, 1998 EX-27 22 FDS
5 1 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 302,000 0 3,198,000 1,125,000 3,037,000 6,844,000 5,083,000 1,148,000 19,071,000 8,402,000 7,857,000 0 63,000 2,000 2,747,000 19,071,000 16,672,000 16,672,000 21,143,000 21,143,000 11,422,000 90,000 358,000 (16,341,000) 229,000 (16,570,000) 0 0 0 16,570,000 (3.27) (3.27)
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