-----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, V0HpZbgXG8ffdR3WN1cKfbcnf9LgXpUF6VLzFFR/54+PmggeP8ew+wFlfbORNbL0 x8NE1UacAifm3fQYw+bR6Q== 0001019687-99-000194.txt : 19990416 0001019687-99-000194.hdr.sgml : 19990416 ACCESSION NUMBER: 0001019687-99-000194 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 24 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEWSTAR MEDIA 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: 99594659 BUSINESS ADDRESS: STREET 1: 8955 BEVERLY BLVD CITY: LOS ANGELES STATE: CA ZIP: 90048 BUSINESS PHONE: 3107861600 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 ENTERTAINMENT INC DATE OF NAME CHANGE: 19970516 FORMER COMPANY: FORMER CONFORMED NAME: DOVE AUDIO INC DATE OF NAME CHANGE: 19941021 10KSB 1 ANNUAL REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ----------- (MARK ONE) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO _____________ COMMISSION FILE NUMBER 0-24984 NEWSTAR MEDIA INC. (NAME OF SMALL BUSINESS ISSUER 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 (ZIP CODE) OFFICES) (310) 786-1600 --------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE) SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE. SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE --------------- Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and none will 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, 1998 were $15,800,000. As of April 12, 1999, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the issuer was approximately $23,277,124 based upon the average closing bid and asked price of the issuer's common stock on such date. Transitional Small Business Disclosure format: Yes __ No X Shares of Common Stock outstanding as of April 12, 1999: 17,319,289 DOCUMENTS INCORPORATED BY REFERENCE Portions of the issuer's definitive proxy statement for its 1999 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. ================================================================================ PART I ITEM 1. BUSINESS GENERAL NewStar Media Inc. (together with its subsidiaries, "NewStar" 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. The Company changed its name from Dove Entertainment, Inc. to NewStar Media Inc. in May 1998. Through Dove Audio, the Company's 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 1,400 audio titles currently offered for sale. The Company also publishes printed books through its NewStar Publishing division. Through Dove Four Point, Inc. and NewStar Television Inc. (collectively "NewStar Television"), wholly owned subsidiaries of the Company, the Company is engaged in the production and development of television programming. In 1995, the Company formed a wholly-owned subsidiary, Dove International, Inc., now known as NewStar Worldwide Inc. ("NewStar Worldwide"), 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 are read by the author, trained readers or celebrity readers such as Linda Hamilton, Patrick Macnee, William Windom and Gregory Peck. Between 1996 and 1998, the Company received eight Grammy nominations and was awarded a Grammy in 1998 in the spoken-word album for children category for "Children's Shakespeare" and in 1996 in the 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 by sales to date have been "The Bridges of Madison County" read by its author Robert James Waller, "A Brief History of Time" read by Michael Jackson and "The Bible - The New Testament" read by Gregory Peck. 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 commenced in 1994. 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 published approximately fifteen titles in 1998 and is currently developing up to ten books for potential publication in 1999. The Company has an active backlist of approximately thirty-five titles. The Company had from time to time produced television and theatrical films. In April 1996, the Company expanded its presence in television programming through the acquisition of Four Point Entertainment, Inc. ("Four Point Entertainment"), now NewStar Television. NewStar 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, NewStar Television owns and operates post-production and edit facilities for its own and third-party programming. Since its inception over ten years ago as Four Point Entertainment, NewStar Television has produced over 26 television shows (accounting for over 1,415 episodes of national television programming), including "American Gladiators" and "Amazing America." Recent productions include "Futuresport" staring Wesley Snipes, Dean Cain and Vanessa L. Williams, which aired on ABC in October 1998, "Unwed Father" which aired on ABC in October 1997 and the syndicated series "Make Me Laugh", which aired on Comedy Central in 1998. In July 1995, the Company, through NewStar Worldwide, 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 Company's film and television library, film and television libraries which may be acquired for the purpose of distribution for television, and television programs provided by NewStar Television. 1 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, (iv) the Company's internet strategy and (v) 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: net operating losses; uncertainty as to future operating results; growth and acquisition risks; 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 and no assurance as to continued listing of the Company's common stock on the Nasdaq SmallCap Market. 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. 333-67901) 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 NewStar's principal business strategies are to: (i) expand its library of audio books by acquiring and/or producing new titles licensed from established authors and major consumer magazines and classic literature in the public domain, and through the acquisition of other companies which may compliment or expand its existing businesses, (ii) build its audio book business by appealing to the mass audience of people engaged in activities that permit the simultaneous enjoyment of audio books (such as vehicle drivers and joggers), rather than aiming primarily at the smaller audience of book buyers which has been the primary target of the audio industry to date, (iii) increase distribution of its audio book library through outlets (such as mass merchandisers, food and drug chains, and convenience stores), direct marketing, and premium sales, (iv) develop a strong internet presence to sell audio books, (v) continue to diversify its operations through the production of television programming (concentrating on movies for broadcast/cable/pay television and reality programming for network, cable and syndication), (vi) continue the publication of printed books and acquire other book publishers with a leading presence in one or more lines of specific-interest books and (vii) continue its feature film and television programming distribution operations. Historically, 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 will be able to obtain wider distribution of the authors' works than possible presently. 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. In addition, the Company believes that there is a large, untapped market for audio books that are brief enough, priced attractively, and available broadly so as to provide a viable alternative to talk-radio, and is seeking to acquire content for such "talk-radio style" entertainment. The Company believes that its strategy of diversity in development for television programming has allowed NewStar Television to take advantage of sales opportunities in emerging markets, while continuing to service mainstream 2 distribution channels in network and syndication. NewStar 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 valued the market at $1.6 billion annually. However, this includes audio tapes sold as part of educational or infomercial packages. "Pure" audio books account for estimated annual sales of about $400 million. 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 limited distribution in discount stores, record stores, video stores, truck stops, and gas stations, and 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 new challenges and opportunities. From 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 and potential expansion. Although audio books have been available to the public for more than 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 ability to increase the availability of audio books so that they become a potential impulse purchase in hundreds of thousands of retail outlets comparable to the current availability of mass paperback books. However, 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. 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 over 1,400 titles in its audio book library currently offered for sale. The Company released approximately 120 new audio book titles in 1998 and plans to release approximately twelve new titles per month in 1999. 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. 3 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 seeks to obtain an option or right of first refusal as to one or more future works. Authors are typically compensated by advances against royalties. The Company typically acquires audio publishing rights for specific titles or groups of titles on a world-wide basis, including foreign language rights. The Company uses an array of talented professional readers and celebrities for its recordings. Books are also frequently read by the authors themselves. The Company believes that, by virtue of its Los Angeles base, it has an advantage in gaining access to highly capable and/or recognizable celebrity reading talent. The Company seeks to maintain ongoing relationships with popular readers who are typically compensated on a flat-fee basis, though occasionally readers may also be compensated on a royalty basis. The Company currently employs three 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. 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. At the same time, the Company is looking to increase its penetration into the self-help and spirituality areas, and to establish a strong children's line. 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. In addition to continuing to acquire audio rights to paper-based books, the Company is seeking to acquire content for broad-interest "talk-radio style" listening entertainment by, among other things, licensing names and intellectual property of leading children's book publishers and leading magazines for adults. 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. The Company makes use of foil and other design options to try to enhance mass marketing. It 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) and specialty audio book retail outlets. The Company currently sells to all major book retailers and distributors, including, Ingram Book Company, 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. NewStar also sells to rack jobbers and is represented in all major wholesale clubs, including Sam's, Costco and BJ's Wholesale Clubs. The Company is developing contracts with various distributors and sales agents to distribute selected audio product of the Company to mass merchandisers, supermarket and drug store chains, truck stops, airports and convenience stores. 4 Sales to retail and other outlets are effected through a combination of the Company's own sales force and third party distributors. The Company established its audio book sales operation in 1989 and has historically independently sold audio books primarily to bookstores. At present, the Company has an internal sales and marketing force of eight persons. The Company also utilizes a network of independent sales representatives throughout the country. In November 1997 the Company entered into an agreement with Mercedes Distribution Center ("Mercedes") under which Mercedes performs 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 provides 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 October 1998, the Company entered into a distribution agreement with HarperCollins Canada Limited pursuant to which HarperCollins Canada sells and distributes all of the Company's audio books in Canada. The agreement continues in effect until terminated upon six months written notice, but no party may terminate prior to August 31, 2001. The Company has recently adopted a plan to market three audio product price ranges - the current line retailing between $15.00 and $30.00, which is sold primarily to bookstores, a new two-cassette line to retail at approximately $7.99, and a new one-cassette line to retail at $4.99. The new lines will be sold in mass merchandisers, supermarket and drug chains, convenience stores, gas stations, military exchanges, and anywhere else that mss paperback books are sold. To service these accounts the Company plans to augment its own sales force and appoint a variety of brokers, each specialized in a particular retail channel. To further broaden the availability of its audio line, the Company is seeking to acquire a direct mail audio marketer and build a strong internet presence, although there is no assurance as to the future success of these efforts. 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 returns 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. 5 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 reevaluated its book publishing program and reduced the number of its publications to less than twenty-five titles per year. In the fall of 1996, the Company launched Dove Kids, a children's publishing program, but following disappointing results discontinued the Dove Kids division, opting instead to publish children's titles on a selective basis. The Company's strategy is to build its book publishing business by acquiring publishers with lines of specific interest books, to be marketed both through book stores and via direct marketing efforts, particularly on the internet where specialized audiences can be defined. FILM AND TELEVISION PRODUCTION The Company had from time to time developed and produced long form programming made for television and theatrical films. In April 1996, the Company expanded its presence in television programming through the acquisition of Four Point Entertainment, Inc., now NewStar Television. NewStar 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 reality programming for network, cable and syndication and 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 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. NewStar Television's current projects in development include "Quadroon Ball", a planned motion picture for Lifetime Television starring Vanessa L. Williams, "By Dawn's Early Light", a planned telefilm for the A&E Network, "Stealing Sinatra" a two-hour telefilm about the 1963 kidnapping of Frank Sinatra, Jr. and "Random Acts of Comedy", an original game show. The Company is also developing "Jacobs Hands" based on the recently rediscovered original screen treatment by Aldous Huxley and Christopher Isherwood, planned as a theatrical motion picture starring Melissa Joan Hart. NewStar 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'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, NewStar Worldwide, 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, include 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 Company's film and television library, film and television libraries which may be acquired for the purpose of distribution for television and television programs produced by NewStar Television. 6 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 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. The Company seeks to build assets by retaining ownership of the television programs that it produces. The trend in the television industry is for networks and other distributors of the Company's television programming to no longer license the programming but to obtain ownership. In addition, license fees from those distributors that are still willing to license programs are decreasing. A significant effect of these trends is to force independent television production companies, such as NewStar Television, to seek co-production arrangements in Canada and Europe (with the effect of reducing foreign sales needed to offset the lower license fees) or create alternative strategies for financing production costs. 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 At April 12, 1999, the Company had 47 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 accordance with industry practice, the Company meets a substantial part of its personnel needs by retaining temporary employees, directors, actors, producers, editors, readers, technicians and other specialized personnel on a per production, weekly or per-diem basis. 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 7 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 residuals 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. NEED FOR ADDITIONAL FINANCING. The Company has experienced significant negative cash flows from operations, including $10,659,000 and $8,691,000 for the years ended December 31, 1998 and December 31, 1997, respectively. In November 1997, the Company entered into an agreement with The Chase Manhattan Bank providing the Company with an $8,000,000 loan facility for working capital purposes, which was increased to $10,000,000 in May 1998, and the Company had borrowed $7,434,000 against the facility as of December 31, 1998. As discussed in Note 8 of Notes to Consolidated Financial Statements, as of January 28, 1999, the Company had borrowed the maximum amount permitted to be borrowed under its loan facility with The Chase Manhattan Bank. The Company was not in compliance with certain of the financial compliance tests at December 31, 1998 and has requested waivers from The Chase Manhattan Bank. As of April 12, 1999, the Company has not received any such waivers and there is no assurance that the Company will receive the waivers in the future. Accordingly, the Company has classified Notes Payable to The Chase Manhattan Bank as a Current Liability. The Company believes that its current capital resources may not be sufficient to cover its immediate capital requirements and accordingly is recently in discussions with a number of potential sources to provide additional working capital whether through the issuance of additional equity or debt securities, additional bank financing or otherwise. There are however no assurances that such financing will be obtained. In view of the current status of the Company's credit facility and the need for additional financing the Company is involved in in-depth discussions with a number of parties in connection with providing substantial additional equity capital. Although the Company believes it may be close to consummation of such additional financing there is no assurance that it will be successful. In addition, the Company has 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 acquisitions of rights involving significantly greater outlays of capital than required in the business conducted to date by the Company. In the event that additional working capital is not obtained or not obtained in sufficient amounts, the Company's operations may be significantly curtailed. 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 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. 8 NO ASSURANCE AS TO CONTINUED LISTING ON THE NASDAQ SMALLCAP MARKET Although the Company's common stock currently trades on the Nasdaq SmallCap Market, there is no assurance that the common stock will continue to be traded on that market. On October 13, 1998, the Company was notified by The Nasdaq Stock Market, Inc. ("Nasdaq") that the Company's common stock will continue to be listed on the Nasdaq SmallCap Market via an exception from the net tangible assets requirement. Although the Company was not in compliance with the net tangible assets requirement as of March 31, 1998, the Company was granted a temporary exception from this standard subject to the Company meeting certain conditions. In addition to complying with all continued listing requirements, (1) on or before November 16, 1998, the Company was required to make a public filing containing a September 30, 1998 balance sheet, with pro forma adjustments for any significant transactions or events occurring on or before the filing date, evidencing at least $2,700,000 in net tangible assets; and (2) on or before January 11, 1999, the Company was required to achieve a bid price for its common stock of at least $1.00 per share and maintain such a bid price for a minimum of ten consecutive trading days. On December 7, 1998, Nasdaq notified the Company that the Company satisfied both conditions. On March 10, 1999, the Company was notified by Nasdaq that the Company failed to satisfy Marketplace Rule 4310(c)(4) for continued listing of its common stock on the Nasdaq SmallCap Market by failing to maintain a closing bid price greater than or equal to $1.00. Nasdaq informed the Company that no delisting action with respect to the bid price deficiency was to be initiated at the time of such notification. Instead, Nasdaq provided the Company 90 calendar days from the date of the notification in which to regain compliance with the minimum bid price requirement. The Company will be deemed in compliance if at anytime within ninety calendar days from March 9, 1999, the shares of the Company's stock have a closing bid price of at least $1.00 or more for a minimum of ten consecutive trading days. If the Company is not able to demonstrate compliance with the minimum bid price on or before June 9, 1999, the Company's common stock will be subject to delisting, effective the close of business on June 9, 1999. Since March 10, 1999, the shares of the Company's stock have had a closing bid price of at least $1.00 for ten consecutive trading days, however, the Company has not been notified by Nasdaq that it has regained compliance with the minimum bid price requirement. As of December 31, 1998, the Company's net tangible assets were less than $2,000,000. If at some future date the Company's securities should cease to be listed on the Nasdaq SmallCap Market, they may continue to be traded on the OTC - Bulletin Board. If the Company's common stock is delisted from the Nasdaq SmallCap Market, it would likely be more difficult to buy or sell the Company's common stock or to obtain timely and accurate quotations to buy or sell. In addition, the delisting process could result in a decline in the trading market for the Company's common stock which could depress the Company's stock price, among other consequences. There is no assurance that at any time the Company will be able to satisfy all of the conditions for continued listing on the Nasdaq SmallCap Market. 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. The Company copyrights substantially all of the audio works it produces. In those 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 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) was $2,650,000. In September 1998, the Company sold the Property for approximately $4,166,000. In connection with the sale of the Property, the Company entered into a one-year lease with the purchaser of the Property, having monthly payments of approximately $35,000 and expiring in August 1999. The Company is actively looking for office space to which to relocate after its current lease expires. 9 ITEM 3. LEGAL PROCEEDINGS PENDING LEGAL PROCEEDINGS On July 10, 1998, an action entitled Palisades Pictures LLC, Nothing to Lose Productions Inc., CUB Films, Mark Severini, Eric Bross and Jeff Dowd v. Dove International, Inc., Dove Audio, Inc. and NewStar Media, Inc. was filed in Los Angeles Superior Court (BC 194069). Plaintiffs allege breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty, interference with prospective economic advantage and promissory estoppel, arising out of an alleged distribution agreement pursuant to which Dove International, Inc. was to have distributed the motion picture "Nothing to Lose." Plaintiffs are seeking damages in excess of $1,000,000, plus punitive and exemplary damages. The Company believes that it has good and meritorious defenses to the action. Nevertheless, there is no assurance that the Company will prevail in the action. In February 1999, the Company was served with a complaint in an action entitled Norton Herrick v. NewStar Media Inc., Michael Viner and Deborah Raffin Viner (Los Angeles Superior Court Case No. SC055421). The action was brought by one of the shareholders who opted out of the Class Action Settlement described below. The complaint alleges fraud, negligent misrepresentation, violation of sections 25400 and 25401 of the California Corporations Code and breach of fiduciary duty, and seeks recovery of in excess of $1,000,000 plus exemplary and punitive damages. The Company believes that the claims in this action are adequately covered by insurance policies that the Company maintains. While the Company believes that it has good and meritorious defenses to the action, there is no assurance that the Company will prevail in the action. On September 28, 1998, Michael Viner and Deborah Raffin (the "Former Principals") commenced an arbitration against the Company, alleging breach of, and seeking specific performance of a termination agreement to which they and the Company are a party (the "Termination Agreement.") In December 1998, the Former Principals asserted that they were entitled to rescission of the Termination Agreement for material failure of consideration, or, in the alternative, unspecified damages against the Company. In a decision dated March 31, 1999, the arbitrator determined that the Former Principals may not rescind the Termination Agreement on the grounds presented to the arbitrator. While the Company believes that it has good and meritorious defenses to the remaining claims in the action, there is no assurance that the Company will prevail in the action. 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. On April 21, 1998, Mr. Leider obtained a writ of attachment for approximately $287,000 in respect of his claims, for which the Company has substituted an undertaking for the amount of attachment. 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 (Dove Entertainment v. Gerald Leider, et. al., Los Angeles Superior Court Case No. SC050414) 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. On July 6, 1998, a first amended complaint in the action entitled Mattken Corp. and Gerald J. Leider v. NewStar Media, Inc. was filed in the Los Angeles Superior Court (BC 191736). The plaintiffs allege breach of contract arising out of a purported agreement between Mr. Leider and the Company in connection with executive producer services on the motion picture "Morning Glory", and a purported sales agency agreement between Mattken Corp. and the Company. Plaintiffs are seeking in excess of $350,000. The Company believes that it has good and meritorious defenses to the action. Nevertheless, there is no assurance that the Company will prevail in the action. In August 1993, a trial court confirmed an arbitration award in favor of the Company against Steven Stern and Sharmhill Productions in the approximate amount of $4.5 million relating to the film "Morning Glory" ("Stern Judgment"). In a related matter, the Company sought to restore certain alleged 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 and the Company is pursuing 10 its own adversary proceeding 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 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 in excess of the amount of the Stern 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. LEGAL PROCEEDINGS SETTLED, DISMISSED OR ON APPEAL In 1998, the class action cases, Alan Fields v. Dove Entertainment, Inc., et al. (Los Angeles Superior Court No. BC174659), Global Asset Allocation Consultants, L.L.C. v. Dove Entertainment, Inc., et al. (United States District Court for the Central District of California Civil Action No. 97-6253-WDK) and George, et al. v. Dove Entertainment, Inc. et al. (United States District Court for the Central District of California Civil Action No. 97-7482-R) were settled between the parties (the "Class Action Settlement") Subsequently, the Class Action Settlement was approved by both the federal and state courts. The state court approval became final and non-appealable in the fourth quarter of 1998 and the federal court approval became final and non-appealable in the first quarter of 1999. 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). In November 1998, the Company entered into a settlement agreement with the plaintiffs, with all payments thereunder to be made by the Company's insurance carrier, and the action was dismissed. In August 1997, the Former Principals commenced an arbitration against the Company seeking specific performance of, and alleging breach of, the Termination Agreement, and claimed damages in excess of $165,000 and additional reimbursements allegedly due for other items. The Company filed its own claims against the Former Principals. On July 17, 1998, the arbitrator ruled in favor of the Company on some issues and in favor of the Former Principals on other issues, resulting in a net recovery by the Former Principals of approximately $30,000. The arbitrator also confirmed an earlier ruling that a provision of the Termination Agreement 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 enjoined and restrained the Former Principals from engaging in the audio book business during that period. On December 30, 1998, the Los Angeles Superior Court entered its Judgment Confirming the Arbitration Award. On February 25, 1999 the Former Principals filed a Notice of Appeal from the Judgment. In another arbitration proceeding between the Company and the Former Principals and one of their companies relating to an alleged breach of the Termination Agreement by the Company for, among other things, failing to prepare office space for use by the Former Principals, 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. A petition is pending in the Los Angeles County Superior Court to confirm the arbitrator's award. 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 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 complaint alleged among other things that the book 11 "You'll Never Make Love In This Town Again" defamed Mr. Bass and violated his rights of publicity under New York statutes. The complaint sought 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 action in New York was voluntarily stayed after Mr. Bass filed a similar action in the State of California entitled Michael Bass v. Penguin USA et. al. (California Superior Court Case No. SC049191) seeking essentially the same damages. The action in California was dismissed with prejudice on July 6, 1998. In March 1999, the Company entered into a settlement agreement with the plaintiff in connection with the action entitled Robert H. Tourtelot v. Dove Audio, Inc. etc. et al. (Los Angeles Superior Court Case No. SC040739). Pursuant to the settlement agreement, the Company will make payments over time to Mr. Tourtelot totaling $60,000. On July 21, 1998 a Judgment Pursuant to Terms of Settlement was issued in connection with the action Soloway v. Dove Entertainment (Los Angeles Superior Court Case No. BC175516) and the terms of the settlement and judgment have been fully performed. 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, 1998, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock is traded on the Nasdaq SmallCap Market under the symbol NWST. See discussion in Item 1 of Part I under the caption "No Assurance as to Continued Listing on the Nasdaq SmallCap Market." 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 9, 1999, there were 102 holders of record of common stock of the Company and approximately 1,255 beneficial owners of common stock of the Company.
Low High --- ---- Year Ended December 31, 1997: First quarter (through March 31, 1997) $1.313 $3.750 Second quarter (through June 30, 1997) $1.125 $3.563 Third quarter (through September 30, 1997) $1.375 $3.000 Fourth quarter (through December 31, 1997) $1.063 $1.750 Year Ended December 31, 1998: First quarter (through March 31, 1998) $1.188 $2.750 Second quarter (through June 30, 1998) $1.000 $2.625 Third quarter (through September 30, 1998) $0.625 $2.500 Fourth quarter (through December 31, 1998) $0.438 $2.531 Year Ending December 31, 1999 First quarter (through March 31, 1999) $0.750 $1.500 Second quarter (through April 12, 1999) $0.906 $1.125
12 As previously reported in the Company's public filings with the Securities and Exchange Commission, during the period January 1, 1998 to September 30, 1998, the Company issued the following shares of common stock of the Company to the persons indicated: (i) 240,000 shares of common stock to Media Equities International, LLC ("MEI") for payment of consulting fees owed to MEI; (ii) 26,492 shares of common stock to the Company's Cash or Deferred Profit Sharing Plan; (iii) 51,600 shares to Tin Man Enterprises in satisfaction of approximately $100,000 in payables; (iv) 94,118 shares to Custom Duplicating, Inc. in satisfaction of approximately $200,000 in payables; (v) 41,106 shares to Leopold, Petrich & Smith in satisfaction of approximately $60,000 in payables; (vi) 19,608 shares to Steven Soloway in partial settlement of litigation; (vii) 68,028 shares to MEI as payment of consulting fees; (viii) 34,014 shares to MEI as payment of a guarantee fee of $50,000; (ix) 392,854 shares to MEI as payment of accrued dividends (plus interest thereon) on the Company's preferred stock in the amount of $589,000 and (x) 62,764 shares to Michael Viner and Deborah Raffin upon conversion of convertible Series E Preferred Stock. Pursuant to a Stock Purchase Agreement, dated as of July 30, 1998, between Apollo Partners, LLC ("Apollo") and Ronald Lightstone and the Company and a Stock Purchase Agreement, dated as of November 12, 1998, between Apollo, Mr. Lightstone and the Company, the Company sold an aggregate of 8,122,393 shares of Common Stock of the Company to Elkes Limited Partnership ("ELP") (as assignee of Apollo), Gorman Limited Partnership ("GLP") (as assignee of Apollo) and Ronald Lightstone for an aggregate price of $5,840,000 (or $0.719 per share). The managing general partner of ELP is Terrence Elkes, the Chairman of the Board of Directors of the Company. The managing general partner of GLP is Kenneth Gorman, the Vice-Chairman of the Board of Directors of the Company. Mr. Lightstone is the President and Chief Executive Officer of, and a member of the Board of Directors, of the Company. In November 1998 the Company authorized the issuance of 189,146 shares of Common Stock to MEI as payment of approximately $107,000 of accrued dividends on the Company's preferred stock. 171,057 of those shares were issued in December 1998 and 18,089 were issued in January 1999. MEI is a significant shareholder of the Company. MEI is a limited liability company, the members of which are Apollo, the H.A.M. Media Group, LLC and Mr. Lightstone. Apollo is a limited liability company, the members if which are Messrs. Elkes and Gorman. The H.A.M. Media Group, LLC is a limited liability company, the members of which are John T. Healy and Bruce Maggin. Messrs. Healy and Maggin are members of the Board of Directors of the Company. On October 13, 1998, the Company issued 25,409 shares of common stock to the Former Principals upon conversion of convertible Series E Preferred Stock held by them. On November 23, 1998 the Company issued 17,391 shares to in partial settlement of royalties and other amounts owed to Spacetime Publications Ltd. On December 31, 1998 the Company sold an aggregate of 640,000 shares to ELP and GLP for $500,000. In addition, on December 31, 1998, an aggregate of 389,588 shares of common stock of the Company were issued to vendors and service providers in satisfaction of $292,000 of payables owed by the Company. 13 In addition, on December 31, 1998 the Company issued an additional 163,234 shares to certain vendors as an additional payment to 186,824 shares issued in August 1998 in satisfaction of approximately $360,000 in payables owed by the Company. The Company has issued 400,000 shares of common stock to Ronald Lightstone, the Company's President and Chief Executive Officer, pursuant to Mr. Lightstone's employment agreement with the Company, although not all of those shares have vested. Between January 1, 1998 and December 31, 1998, 196,772 shares of the 400,000 shares vested and as of December 31, 1998, 203,228 shares were not vested. In 1998, a total of 189 shares of Series E Preferred Stock were released from escrow to the Former Principals in lieu of certain monthly payments as provided in the Employment Termination Agreement. All of the shares issued were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. 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 NewStar 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 1,400 titles currently offered for sale. Through NewStar 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. 1998 was a year of improvement over 1997 as the Company benefited from a change in its business strategies in its audio book publishing program and television programming production and distribution, a reduction in overhead expenses, and enhanced management. 14 The Company expanded its audio book publishing program in 1998 with an increased emphasis on quality and acquiring and/or producing new titles licensed from established authors or classic literature in the public domain. In 1998, the Company produced more than 120 audio book titles, including such key releases as "Sudden Mischief" by Robert Parker, "Flight of Eagles" by Jack Higgins, "Fortunes of War" by Stephen Coonts, "The Predators" by Harold Robbins, "American Dreams" by John Jakes, "I Married a Communist" by Philip Roth and "The Virtues of Aging" by former President of the United States Jimmy Carter. Additionally, the Company was awarded a 1998 Grammy in the spoken-word album for children category for its production of "Children's Shakespeare". NewStar's focus on developing long-lived relationships with best-selling authors, improved controls over production and manufacturing costs, reduced returns and the absence in 1998 of $2,495,000 of write-offs incurred in 1997 resulted in a 24% gross margin in 1998 compared to a -27% gross margin in 1997 in the audio and book operations. Recently, new strategies were developed and implemented to expand the audio book business by appealing to the mass audience of people engaged in activities that permit the simultaneous enjoyment of audio books (such as vehicle drivers and joggers), rather than aiming primarily at the far smaller audience of printed book buyers which has been the primary target of the audio industry to date. In doing so, the Company will be marketing three product ranges, namely the current line retailing between $15.00 and $30.00, sold primarily to bookstores; and two new lines - a two-cassette line retailing at $7.99, and a one-cassette line retailing at $4.99 - both sold in mass merchandisers, supermarket and drug chains, convenience stores, gas stations, military exchanges, etc. Secondly, the Company is pursuing an Internet strategy to position its website (under the name audiouniverse.com) as the premier website for audio books. The development of the audiouniverse.com website, currently underway, includes: providing a full line of audio books with audio sound samples; offering discounts on goods and services related to the audio books purchased; and arranging banners, links, and the ability to purchase audio related goods and services through strategic alliances with other companies. Finally, the Company has embarked upon a plan to pursue possible acquisitions of several audio book and book companies to expand its current audio book library, build a book publishing business, and provide additional channels of distribution for current and backlist product. The Company's catalog of audio books planned to be released in 1999 includes "Hush Money" by Robert Parker, "The Ground Beneath Her Feet" by Salman Rushdee, "Cuba" by Stephen Coonts, "Phantom of Manhattan" by Frederick Forsyth, "Front Row at the White House" by Helen Thomas" and "Duane's Depressed" by Larry McMurtry. 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. 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 estimates allowances 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. In 1998, NewStar Television produced and delivered to ABC "Futuresport", a two-hour television motion picture, which aired on ABC in October 1998. Additionally, home video rights were licensed to Colombia Tri-Star and sales agreements have been entered into, thus far, for the licensing of the motion picture to a portion of the international marketplace. The Company also completed production and delivery of 165 episodes of "Make Me Laugh", the syndicated series which aired on Comedy Central in 1998, and delivered the theatrical movie "Wilde" to Sony Pictures Classics for distribution in North America pursuant to a 1997 agreement. NewStar Television's current projects in development include "Quadroon Ball", a television motion picture for Lifetime Television, "By Dawn's Early Light", a planned telefilm for the A&E Network, "Stealing Sinatra", a two-hour telefilm about the 1963 kidnapping of Frank Sinatra, Jr., and "Random Acts of Comedy", an original game show series. 15 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. The Company has historically experienced significant negative cash flows from operations, including $10,659,000 for the year ended December 31, 1998 and $8,691,000 for the year ended December 31, 1997. In 1998, such negative cash flows have resulted from, among other things, use of working capital for expansion of audio and printed book publishing, development and production of television programming and an increased pay down of commitments, legal fees and settlements. To meet operating cash flow requirements in 1998, the Company sold its principal office building and land in September 1998 for approximately $4,166,000 resulting in a gain of approximately $1,734,000. Additionally, the Company sold shares of common stock, the most significant sales resulting in an aggregate of $5,840,000 for 8,122,393 shares issued to Elkes Limited Partnership, Gorman Limited Partnership and the Company's CEO and President, Ronald Lightstone. 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, -------------------------------------- 1998 1997 1996 ---- ---- ---- REVENUES Publishing 44% 41% 43% Television and Film 56 59 57 ---- ---- ---- Total 100% 100% 100% ==== ==== ==== OPERATING EXPENSES Publishing 34% 55% 42% Television and Film 45 72 44 Selling, general & administrative 59 59 37 Employee separation costs -- 10 -- ---- ---- ---- Total 138% 196% 123% ==== ==== ==== 16 YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 - --------------------------------------------------------------------- Publishing - ---------- REVENUES. Net publishing revenues for 1998 increased $80,000 to $6,880,000 compared with $6,800,000 for 1997. Of the 1998 net publishing revenues, net audio book revenue was approximately $6,973,000 and printed books incurred net returns of approximately $93,000. In 1997, net audio book revenue was approximately $7,400,000 and printed books incurred net returns of approximately $600,000. The increase in net publishing revenues was attributable primarily to a reduction in returns of printed books experienced in 1998 compared to 1997 as a result of the Company's curtailing of the printed book publishing program and the general shake-out in the marketplace in 1997. Net audio book revenue decreased slightly from year to year as the volume of audio books released in 1998 was lower primarily due to the Company's shift in strategy to produce fewer, higher quality titles. However, as a result of the Company's increased emphasis on quality, returns as a percentage of revenues decreased and offset the reduction in audio book titles released. 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 1998 decreased $3,858,000 to $5,306,000 compared with $9,164,000 for 1997. The decrease was attributable to 1) lower storage and warehouse costs, 2) a prospective change in the estimate of percentages used to amortize capitalized production costs whereby, starting in October 1998 and over a five-year period, approximately 50% of such costs are amortized over the first year of a title's release, with the remaining 50% amortized over the next four years, compared to the Company previously amortizing such costs over a two-year period, 80% in the first year of release and the balance thereafter, and 3) the absence in 1998 of $2,495,000 of write-downs incurred in 1997. As a result, cost of sales as a percentage of net publishing revenues decreased from 135% in 1997 to 77% for 1998. Film and Television - -------------------- REVENUES. Film and television revenues for 1998 decreased $952,000 to $8,920,000, compared with $9,872,000 for 1997. Consistent with 1997, the Company, through NewStar Television, produced only one made for television motion picture. The reduction in revenue primarily was due to reduced series production by NewStar Television in 1998. COST OF SALES. Film and television amortization for 1998 decreased $4,902,000 to $7,077,000, compared with $11,979,000 for 1997. Cost of sales as a percentage of net film and television revenues decreased from 121% in 1997 to 79% for 1998, due primarily to the 1997 write-off of $3,767,000 in production costs arising from an assessment of film net realizable values, mainly in theatrical productions. In addition, reduced cost overages on certain film projects were experienced. General - ------- GROSS PROFIT / (LOSS). The Company experienced a gross profit of $3,417,000 for 1998 versus a gross loss of $4,471,000 for 1997, 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 $613,000 to $9,285,000 for 1998 compared to $9,898,000 for 1997. The decrease in SG&A was mostly attributable to cost savings implemented by the new management beginning in June 1997, and a reduction in 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. GAIN ON SALE OF LAND AND BUILDING. In September 1998, the Company sold its principal office building and land for approximately $4,166,000, resulting in a gain of approximately $1,734,000. 17 NET INTEREST EXPENSE. Net interest expense for 1998 was $798,000 compared with $358,000 for 1997. The increase in interest expense is primarily the result of increased utilization of the Company's loan facility for working capital purposes and a production loan obtained in connection with the production of a television motion picture. 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. 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 NewStar Television produced only one made for television motion picture compared with two in 1996 and reduced series production by NewStar 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. 18 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 NewStar Television in 1996, the purchase of the Company's new office building in 1996 and the operating cash losses experienced during 1996 and 1997. LIQUIDITY AND CAPITAL RESOURCES 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"). On May 21, 1998, the Chase Loan facility was increased to $10,000,000 with the other terms of the original agreement remaining substantially the same. The Chase Loan is secured by substantially all of the Company's assets and 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 Chase Loan provides that the Company is permitted to borrow a further $4,000,000 (increased from $2,000,000 upon amendment of the Chase Loan agreement on May 21, 1998) provided the aggregate amount borrowed does not exceed $10,000,000, and 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. The Company was not in compliance with certain of the financial compliance tests at December 31, 1998 and has requested waivers from Chase Bank. As of April 12, 1999, the Company has not received any such waivers and there is no assurance that the Company will receive the waivers in the future. Accordingly, the Company has classified Notes Payable to Chase Bank as a Current Liability. At December 31, 1998, the Company had borrowed $7,434,000 against the facility. In addition, Chase Bank had provided a letter of credit for $287,000 in respect of certain litigation. On January 28, 1999, the Company and Chase Bank were notified by one of the principals of MEI that there would be no approvals for further extensions of credit under the Chase Loan. Accordingly, as of January 28, 1999, the Company had borrowed the maximum amount permitted to be borrowed under the Chase Loan. In February 1998, the Company and Chase Bank amended the Chase Loan to provide the Company with up to $3,289,000 in short-term financing to produce the television motion picture "Futuresport" (the "Futuresport Loan"). The Futuresport Loan was incorporated into the Chase Loan under the same terms and conditions of the Chase Loan, was secured by the receivables generated by Futuresport and was required to be repaid on or before October 31, 1998. The Futuresport Loan and accrued interest was paid in full in September 1998. On July 14, 1998, the Company entered into an agreement with Apollo Partners, LLC, pursuant to which the Company borrowed $1,500,000 secured by a second mortgage on the Company's principal office building (the "Apollo Loan"). The Apollo Loan provided for interest at the prime rate plus 2% per annum and was required to be repaid on the earlier of 180 days following July 21, 1998 or the sale of the Company's principal office building, or earlier at the option of the Company. The Company repaid the Apollo Loan and accrued interest in full in September 1998. 19 On September 4, 1998, the Company sold its principal office building and land for approximately $4,166,000, resulting in a gain of approximately $1,734,000. The Company sold an aggregate of 8,122,393 shares of common stock of the Company to ELP, GLP and Ronald Lightstone for an aggregate price of $5,840,000. The proceeds from the sale of the building and the sale of the 3,824,757 shares of common stock were used to fully pay the outstanding $1,804,000 mortgage note payable and accrued interest to Asahi Bank of California, fully pay the $1,500,000 Apollo Loan and accrued interest, pay down a portion of the Chase Loan and fund working capital requirements. On December 31, 1998, the Company sold 640,000 shares of common stock to ELP and GLP for $500,000 which was used for working capital purposes. The Company has experienced significant negative cash flows from operations, including $10,659,000 and $8,691,000 for the years ended December 31, 1998 and December 31, 1997, respectively. As discussed in Note 8 of Notes to Consolidated Financial Statements, as of January 28, 1999, the Company had borrowed the maximum amount permitted to be borrowed under the Chase Loan. The Company believes that its current capital resources may not be sufficient to cover its immediate capital requirements and accordingly is recently in discussions with a number of potential sources to provide additional working capital whether through the issuance of additional equity or debt securities, additional bank financing or otherwise. There are however no assurances that such financing will be obtained. In addition, the Company has 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 acquisitions of rights involving significantly greater outlays of capital than required in the business conducted to date by the Company. In the event that additional working capital is not obtained or not obtained in sufficient amounts, the Company's operations may be significantly curtailed. 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 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. 20 As of April 12, 1999, the Company's unused sources of funds consisted primarily of approximately $162,000 in cash. 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 or those of its vendors or customers may have been written using two digits rather than four, to define the applicable year. As a result, those systems may 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 has contracted with Mercedes Distribution to provide a full distribution service for its publishing operations. This distribution service includes complete computer systems needs for distribution of the Company's publishing operations together with information systems pertaining thereto. If Mercedes were to experience year 2000 problems, the Company could experience significant deterioration of operating efficiency. Mercedes Distribution has represented to the Company that such systems are year 2000 compliant. The Company utilizes MAS 90, a widely available package system for its financial systems. The vendor of MAS 90 has represented to the Company that MAS 90 is year 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. The Company does not believe that year 2000 problems that may be experienced by its customers, suppliers and vendors (other than Mercedes) would result in a significant deterioration of operating efficiency. However, until the Company has completed its evaluation of the year 2000 issue, no assurance can be given that the Company will avoid deterioration of operating efficiency or programming costs because of year 2000 problems. The Company estimates the incremental costs associated with addressing and fixing potential year 2000 problems to be no more than $25,000. 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, 1998. 21 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Messrs. Maggin and Healy and Media Equities International, LLC, H.A.M. Media Group, LLC and Apollo Partners, LLC each filed three late reports, two of which related to one transaction each, and one of which related to three transactions. Messrs. Elkes and Gorman each filed three late reports, one of which related to one transaction, one of which related to four transactions and one of which related to three transactions. Elkes Limited Partnership and Gorman Limited Partnership each filed four late reports, two of which related to two transactions each, one of which related to one transaction and one of which was such entity's Form 3 filing. Mr. Murray filed one late report relating to initial filing on Form 3. Mr. Lightstone filed seven late reports, six of which related to one transaction each and one of which related to three transactions. 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, 1998. 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, 1998. 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, 1998. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT: (1) FINANCIAL STATEMENTS Page
Report of KPMG LLP................................................................F-l Balance Sheet at December 31, 1998................................................F-2 Statements of Operations for the Years Ended December 31, 1998 and 1997 ..........F-3 Statements of Shareholders' Equity for the Years Ended December 31, 1998 and 1997..................................................F-4 Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 ..........F-5 Notes to Financial Statements ....................................................F-7
22 (2) EXHIBITS EXHIBIT NO. DESCRIPTION --------------- -------------------------------------------- 3.1 Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Registration Statement on Form SB-2 filed with the Commission on October 7, 1994 (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 (filed as Exhibit 3.8 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 3.9 Certificate of Amendment of Articles of Incorporation of the Company filed with the Secretary of State of California on May 4, 1998 (filed as Exhibit 3.9 to the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1998) 4.1 Specimen Series A Preferred Stock certificate of the Company (filed as Exhibit 4.2 to Amendment No. 2 to the Registration Statement filed with the Commission on November 29, 1994 ("Amendment No. 2")) 4.2 Form of Certificate of Determination of the Series A Preferred Stock of the Company (filed as Exhibit 4.3 to the Registration Statement) 4.3 Form of Underwriter's Warrant Agreement (filed as Exhibit 4.4 to the Registration Statement) 23 EXHIBIT NO. DESCRIPTION --------------- -------------------------------------------- 4.4 Form of Warrant Agreement (filed as Exhibit 4.5 to the Registration Statement) 4.5 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) 4.6 Placement Agency Agreement dated August 1, 1994 between the Company and Joseph Stevens & Company, LP (filed as Exhibit 4.7 to Amendment No. 1 ) 4.7 Placement Agent Warrant Agreement dated December 24, 1995 between Whale Securities Co., LP and Dove Audio (filed as Exhibit 4.8 to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.8 Placement Agent Warrant (filed as Exhibit 4.9 to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.9 Form of Registration Rights Agreement (filed Exhibit 4.10 to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.10 Form of Common Stock Purchase Warrant (filed as Exhibit 4.11 to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.11 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) 4.12 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) 4.13 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) 4.14 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) 4.15 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) 4.16 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) 4.17 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) 2 EXHIBIT NO. DESCRIPTION --------------- -------------------------------------------- 4.18 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) 4.19 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) 4.20 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) 10.1 Form of Publishing Agreement (filed as Exhibit 10.16 to Amendment No. 1) 10.2 Form of Artist Agreement (filed as Exhibit 10.17 to Amendment No. 1) 10.3 Form of Company's 1994 Stock Incentive Plan (filed as Exhibit 10.18 to the Registration Statement) 10.4 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) 10.5 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) 10.6 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) 10.7 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) 10.8 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) 10.9 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) 10.10 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) 25 EXHIBIT NO. DESCRIPTION --------------- ------------------------------------------- 10.11 Loan Agreement, dated as of September 26, 1997, between the Company and Dove Four Point, Inc. and Media Equities International, Inc. (filed as Exhibit 10.47 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.12 Debt Subordination and Intercreditor Agreement, dated September 26, 1997, among the Company, Dove Four Point, Inc., Media Equities International, Inc. and Sanwa Bank California (filed as Exhibit 10.48 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.13 Security Agreement, dated as of September 26, 1997, between the Company, Dove Four Point, Inc. and Media Equities International, Inc. (filed as Exhibit 10.49 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.14 Copyright Security Agreement, dated as of September 26, 1997, by Dove Four Point, Inc. in favor of Media Equities International, Inc. (filed as Exhibit 10.50 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.15 Copyright Security Agreement, dated as of September 26, 1997 by the Company in favor of Media Equities International, Inc. (filed as Exhibit 10.51 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.16 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") (filed as Exhibit 10.52 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.17 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") (filed as Exhibit 10.53 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.18 Security Agreement, dated as of November 4, 1997 between the Company and Media Equities International (filed as Exhibit 10.54 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.19 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 (filed as Exhibit 10.55 to the Annual Report on Form 10-KSB for the fiscal year ended 1997). 26 27 EXHIBIT NO. DESCRIPTION --------------- ------------------------------------------- 10.20 Contribution Agreement, dated as of November 4, 1997, among, the Company Dove Four Point, Inc. and Dove International, Inc. (filed as Exhibit 10.56 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.21 Fee Agreement, made as of November 4, 1997 between the Company and Media Equities International, LLC (filed as Exhibit 10.57 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.22 Employment Agreement, dated as of February 4, 1998 between the Company and Ronald Lightstone (filed as Exhibit 10.58 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.23 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 (filed as Exhibit 10.59 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.24 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 (filed as Exhibit 10.60 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.25 Amendment No. 2 to the Credit Agreement, dated as of April 1, 1998, between the Company, Dove International, Inc., Dove Four Point, Inc. and the Chase Manhattan Bank (filed as Exhibit 10.61 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.26 Form of Publishing Agreement (1997) (filed as Exhibit 10.62 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.27 Form of Artist Agreement (1997) (filed as Exhibit 10.63 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.28 Form of Executive Publication Agreement (filed as Exhibit 10.64 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.29 Loan Agreement, dated as of July 21, 1998, between NewStar Media Inc. and Dove Four Point, Inc. and Apollo Partners, LLC (filed as Exhibit 10.65 to the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1998) 27 EXHIBIT NO. DESCRIPTION --------------- -------------------------------------------- 10.30 Deed of Trust, dated July 21, 1998, among NewStar Media Inc., Apollo Partners, LLC and North American Title Company (filed as Exhibit 10.66 to the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1998) 10.31 Employment Agreement dated as of January 1, 1998, between Dove Four Point, Inc. and Ron Ziskin (filed as Exhibit 10.68 to the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1998) 10.32 Incentive Stock Option Agreement, dated as of January 1, 1998, between NewStar Media Inc. and Ron Ziskin on behalf of the Wedner-Ziskin Family Trust (filed as Exhibit 10.68 to the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1998) 10.33 Stock Purchase Agreement, dated as of July 30, 1998, among NewStar Media Inc., Apollo Partners, LLC and Ronald Lightstone (filed as Exhibit 10.67 to the Company's Current Report on Form 8-K filed with the Commission on September 3, 1998) 10.34 Registration Rights Agreement, dated as of July 30, 1998, by and among NewStar Media Inc., Apollo Partners, LLC and Ronald Lightstone 10.35 Standard Offer, Agreement and Escrow Instruction for Purchase of Real Estate, dated July 13, 1998, between Barry Beitler and Tony Dorn, as buyers and NewStar Media Inc., as seller 10.36 Residential Purchase Agreement, dated July 20, 1998, between Barry Beitler and Tony Dorn, as buyers, and NewStar Media Inc., as seller 10.37 Standard Industrial Lease - Special Net, dated August 5, 1998, between NewStar Media Inc. and 8955 Beverly Partnership 10.38 Stock Purchase Agreement, made as of November 12, 1998, among NewStar Media Inc., Apollo Partners, LLC and Ronald Lightstone 10.39 Registration Rights Agreement, dated as of November 12, 1998, by and among NewStar Media Inc., Apollo Partners, LLC and Ronald Lightstone 10.40 Agreement, dated as of July 30, 1998, between Media Equities International, LLC and NewStar Media Inc. 10.41 Incentive Stock Option Agreement, entered into as of January 1, 1998, by and between NewStar Media Inc. and Neil Topham 10.42 Incentive Stock Option Agreement, entered into as of January 1, 1998, by and between NewStar Media Inc. and Robert Murray 10.43 Trust Agreement, made December 30, 1998, by and between NewStar Media Inc. and Robert Murray, as trustee 28 EXHIBIT NO. DESCRIPTION --------------- -------------------------------------------- 10.44 Letter Agreement, dated July 1, 1998, among NewStar Media Inc., Dove Four Point, Inc., Dove Entertainment, Inc., Dove Audio, Inc., NewStar Worldwide Inc., Terrence A. Elkes, Kenneth F. Gorman, Ronald Lightstone, Jack Healy, Bruce Maggin, Media Equities International, LLC and The Chase Manhattan Bank 10.45 Consent Regarding "Limitations on Indebtedness" and "Limitations on Liens" dated July 14, 1998 between The Chase Manhattan Bank and NewStar Media Inc., Dove Four Point, Inc., NewStar Worldwide Inc., NewStar Television Inc., Dove Entertainment, Inc. and Dove Audio, Inc. 10.46 Consent, dated April 28, 1998, between The Chase Manhattan Bank and Dove Entertainment, Inc. 10.47 Consent regarding "Limitation on Indebtedness", dated December 5, 1997, between The Chase Manhattan Bank and Dove Entertainment, Inc., Dove Four Point, Inc. and Dove International, Inc. 10.48 Limited Waiver regarding "Consolidated Capital Base", dated July 29, 1998, between The Chase Manhattan Bank and NewStar Media Inc., NewStar Worldwide Inc., NewStar Television Inc., Dove Four Point, Inc. Dove Entertainment, Inc. and Dove Audio, Inc. 10.49 Modification Agreement, dated as of May 21, 1998 among Terrence A. Elkes, Kenneth F. Gorman, Bruce Maggin, John T. Healy, Ronald Lightstone, NewStar Media Inc., NewStar Worldwide Inc., Dove Four Point, Inc., Dove Entertainment, Inc., Dove Audio, Inc., Media Equities International, LLC., and The Chase Manhattan Bank 10.50 Instrument of Assumption and Joinder dated as of May 14, 1998 made by Dove Entertainment, Inc. in favor of The Chase Manhattan Bank 10.51 Instrument of Assumption and Joinder dated as of May 14, 1998 made by Dove Audio, Inc. in favor of The Chase Manhattan Bank 10.52 Supplement No. 2 to the Copyright Security Agreement dated as of May 14, 1998 by NewStar Media Inc. in favor of The Chase Manhattan Bank 10.53 Amendment No. 3 to the Credit Agreement dated as of May 21, 1998, between the Company, Dove International Inc., Dove Four Point, Inc. and the Chase Manhattan Bank 10.54 Agreement, dated as of December 31, 1998, between Media Equities International, LLC and NewStar Media Inc. 21.1 Subsidiaries of NewStar Media Inc. 27.1 Financial Data Schedule 2 (b) REPORTS ON FORM 8-K. A report on Form 8-K (dated December 7, 1998) was filed on December 10, 1998 reporting under Item 5 the notification by The Nasdaq Stock Market, Inc. that the Company evidenced compliance with all requirements necessary for continued listing on the Nasdaq SmallCap Market. A report on Form 8-K (dated November 11, 1999) was filed on November 16, 1998 reporting under Item 5 the sale of common stock of the Company, and, as a result of the sale of such shares, that the Company had pro forma net tangible assets at September 30, 1998 of $2,703,000 and accordingly satisfied one of two criteria imposed by The Nasdaq Stock Market, Inc. for continued listing of the Company's common stock on the Nasdaq SmallCap Market. The report also contained under Item 7 an unaudited, pro forma balance sheet of the Company for the three months ended September 30, 1998. A report on Form 8-K (dated October 13, 1998) was filed on October 16, 1998 reporting under Item 5 the continued listing of the Company's common stock on the Nasdaq SmallCap Market subject to the satisfaction of certain conditions. 30 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders of NewStar Media Inc.: We have audited the consolidated financial statements of NewStar Media Inc. and subsidiaries as listed in the accompanying index. 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 NewStar Media Inc. and subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for each of the years in the two year period ended December 31, 1998 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the financial statements, the Company has suffered recurring losses from operations and net cash flow deficiencies from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 14. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Los Angeles, California April 12, 1999 F-1 NEWSTAR MEDIA INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998
ASSETS CURRENT ASSETS Cash and cash equivalents $ 453,000 Accounts receivable, net of allowances of $1,312,000 2,482,000 Inventory 2,760,000 Film costs 348,000 Due from related party 74,000 Prepaid expenses and other assets 705,000 --------------- Total current assets 6,822,000 NON-CURRENT ASSETS Production masters, net 1,259,000 Film costs, net 4,296,000 Property and equipment, net 952,000 Goodwill and other assets 5,748,000 --------------- Total non-current assets 12,255,000 --------------- Total assets $ 19,077,000 =============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 4,511,000 Advances and deferred income 260,000 Notes payable 7,450,000 --------------- Total current liabilities 12,221,000 NON-CURRENT LIABILITIES Notes payable, less current portion 20,000 Accrued liabilities 600,000 --------------- Total non-current liabilities 620,000 --------------- Total liabilities 12,841,000 COMMITMENTS AND CONTINGENCIES - note 10 LIQUIDITY - note 15 SHAREHOLDERS' EQUITY Preferred stock $.01 par value; 2,000,000 shares authorized and 220,087 shares issued and outstanding, liquidation preference $6,830,000 2,000 Common stock $.01 par value; 20,000,000 shares authorized and 17,301,200 shares issued and outstanding 173,000 Unearned compensation (254,000) Additional paid-in capital 36,843,000 Accumulated deficit (30,528,000) --------------- Total shareholders' equity 6,236,000 --------------- Total liabilities and shareholders' equity $ 19,077,000 =============== See accompanying notes to consolidated financial statements
F-2 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, ----------------------------------- 1998 1997 ---- ---- Revenues Publishing, net $ 6,880,000 $ 6,800,000 Film 8,920,000 9,872,000 --------------- --------------- 15,800,000 16,672,000 Cost of sales Publishing 5,306,000 9,164,000 Film 7,077,000 11,979,000 --------------- --------------- 12,383,000 21,143,000 --------------- --------------- 3,417,000 (4,471,000) Selling, general and administrative expenses 9,285,000 9,898,000 Employee separation costs -- 1,614,000 --------------- --------------- 9,285,000 11,512,000 --------------- --------------- Loss from operations (5,868,000) (15,983,000) Gain on sale of land and building 1,734,000 -- Interest expense, net (798,000) (358,000) --------------- --------------- Loss before income taxes (4,932,000) (16,341,000) Income tax expense 4,000 229,000 --------------- --------------- Net loss $ (4,936,000) $ (16,570,000) =============== =============== Basic and diluted loss attributable to common shareholders $ (5,246,000) $ (19,018,000) =============== =============== Basic and diluted loss per common share $ (0.61) $ (3.27) =============== =============== Weighted average number of common and common equivalent shares outstanding 8,563,000 5,819,000 =============== ===============
See accompanying notes to consolidated financial statements F-3 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
Additional Preferred Stock Common Stock Paid-in Unearned Accumulated Shares Amount Shares Amount Capital Compensation Deficit Total ----------- ----------- ----------- ----------- ------------ ------------ ------------- ------------ January 1, 1997 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 Net loss -- -- -- -- -- -- (4,936,000) (4,936,000) Issuance of common stock in payment of debt, vendors and legal settlements -- -- 776,645 8,000 707,000 -- -- 715,000 Issuance of common stock in payment of compensation to executive -- -- 400,000 4,000 496,000 (254,000) -- 246,000 Issuance of common stock to deferred profit sharing plan -- -- 26,492 -- 44,000 -- -- 44,000 Issuance of common stock to related parties as payment of fees earned -- -- 342,042 3,000 447,000 -- -- 450,000 Accrued preferred stock dividend -- -- -- -- -- -- (310,000) (310,000) Issuance of common stock as payment of preferred stock dividend -- -- 563,911 6,000 680,000 -- -- 686,000 Issuance of preferred stock in payment of expenses to former officers of the Company 189 -- -- -- 189,000 -- -- 189,000 Conversion of preferred stock to common stock (135) -- 88,173 1,000 (1,000) -- -- -- Sale of common stock to related parties -- -- 8,762,393 88,000 6,252,000 -- -- 6,340,000 ----------- ----------- ----------- ----------- ------------ ------------ ------------- ------------ December 31, 1998 220,087 $ 2,000 17,301,200 $ 173,000 $36,843,000 ($254,000) ($30,528,000) $ 6,236,000 =========== =========== =========== =========== ============ ============ ============= ============
See accompanying notes to consolidated financial statements F-4 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, ----------------------------------- 1998 1997 ---- ---- OPERATING ACTIVITIES Net loss $ (4,936,000) $ (16,570,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 725,000 513,000 Amortization of goodwill 249,000 253,000 Amortization of production masters 1,809,000 4,338,000 Amortization of film costs 6,561,000 10,235,000 Provision for bad debts 516,000 90,000 Gain on sale of building and land (1,734,000) -- Changes in operating assets and liabilities: Accounts receivable (925,000) 111,000 Inventory 277,000 1,000,000 Prepaid expenses and other assets (241,000) (159,000) Expenditures for production masters (1,541,000) (2,462,000) Film cost additions (9,561,000) (8,184,000) Accounts payable and accrued expenses (1,620,000) 1,681,000 Income taxes -- 727,000 Advances and deferred income (264,000) (637,000) Other 26,000 373,000 --------------- --------------- Net cash used in operating activities (10,659,000) (8,691,000) --------------- --------------- INVESTING ACTIVITIES Proceeds from sale of building and land 4,166,000 -- Purchases of property and equipment (86,000) (166,000) Proceeds from the sale of equipment -- 26,000 --------------- --------------- Net cash provided by (used in) investing activities 4,080,000 (140,000) --------------- --------------- FINANCING ACTIVITIES Proceeds from sale of common stock 6,340,000 -- Proceeds from sale of preferred stock -- 5,113,000 Proceeds of bank borrowings and notes payable 11,130,000 5,800,000 Repayments of bank borrowings and notes payable (10,740,000) (2,173,000) Proceeds from exercise of common stock options -- 3,000 --------------- --------------- Net cash provided by financing activities 6,730,000 8,743,000 --------------- --------------- Net increase (decrease) in cash and cash equivalents (88,000) 151,000 Cash and cash equivalents at beginning of year 302,000 390,000 --------------- --------------- Cash and cash equivalents at end of year $ 453,000 $ 302,000 =============== ===============
See accompanying notes to consolidated financial statements F-5 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D) For the Years Ended December 31, ----------------------------------- 1998 1997 ---- ---- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 650,000 $ 319,000 Refunds received for income taxes $ -- $ 555,000 NON-CASH TRANSACTIONS: Common stock issued as payment for debt, vendors, legal settlements and publishing rights $ 715,000 $ 1,734,000 Preferred stock issued as payment for expenses, loans and commissions payable to former officers of the Company $ 189,000 $ 676,000 Common stock issued as payment for compensation expense to an executive $ 500,000 $ -- Common stock issued to deferred profit sharing plan $ 44,000 $ -- Common stock issued as payment of fees earned to related parties $ 450,000 $ -- Common stock issued as payment of preferred stock dividends $ 686,000 $ -- Preferred stock dividends accrued $ 310,000 $ 305,000
See accompanying notes to consolidated financial statements F-6 NEWSTAR MEDIA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND BUSINESS NewStar Media Inc. is a diversified entertainment company primarily engaged in the publication of audio and printed books, the production of television programming and the distribution of feature films and television product, both domestically and internationally. The Company commenced business in 1985 and changed its name from Dove Entertainment, Inc. to NewStar Media Inc. in May 1998. Through the NewStar Publishing division, the Company produces and distributes audio books and publishes printed books. Through Dove Four Point, Inc. and NewStar Television Inc. (collectively "New Star Television"), wholly owned subsidiaries of the Company, the Company is engaged in the production and development of television programming. NewStar Worldwide Inc. (NewStar Worldwide") is engaged in the distribution of feature films and television programming. All significant intercompany accounts have been eliminated in consolidation. 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, 1998 and 1997 was as follows: Years Ended December 31, -------------------------------- 1998 1997 ---- ---- Balance at beginning of year $ 1,035,000 $ 1,825,000 Provision for returns 2,456,000 6,025,000 Actual returns (2,568,000) (6,815,000) --------------- --------------- Balance at end of year $ 923,000 $ 1,035,000 =============== =============== The activity relating to the allowance for doubtful accounts during the years ended December 31, 1998 and December 31, 1997 was as follows: Years Ended December 31, -------------------------------- 1998 1997 ---- ---- Balance at beginning of year $ 90,000 $ 170,000 Provision for doubtful debts 516,000 90,000 Write-offs (217,000) (170,000) --------------- --------------- Balance at end of year $ 389,000 $ 90,000 =============== =============== F-7 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. In 1997, the Company amortized 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, and audio book titles were 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. Beginning October 1, 1998, the Company changed the amortization of costs on audio titles so that 50% of a title's production master costs are amortized in the first twelve months of release, 30% over the second twelve months of release and the remaining amount over the next 36 months. This change in estimate was made pursuant to an updated review of the revenue earned over the past five years of previously released titles. The effect of the change in the fourth quarter of 1998 amounted to approximately $218,000. 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 residuals 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 GOODWILL Goodwill, representing the excess of the purchase price of Four Point Entertainment, Inc. ("Four Point") over its net assets, is included in other assets and is being amortized over a twenty-five year period. Goodwill amounted to $5,711,000 net of accumulated amortization of $1,163,000 at December 31, 1998. 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, consisting of furniture, fixtures and equipment, is stated at cost and is depreciated using the straight-line method over the estimated useful lives of five to seven years. Leasehold improvements are amortized over the estimated useful life or the remaining lease term, whichever is less. NET LOSS PER COMMON SHARE Basic earnings per share ("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. Potential dilutive securities of 8,729,639, consisting of preferred stock, outstanding options and warrants (in the form of equivalent common shares), 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 dividends on Preferred Stock of $305,000 and $310,000 during 1997 and 1998, respectively, and imputed dividends of $2,143,000 on Preferred Stock issued during 1997. Such imputed dividends have 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 The Company accounts for its stock option plan (the "Plan") pursuant to 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 Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations and provide pro forma net income and pro forma earnings per share 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. F-9 RECLASSIFICATION Certain prior year accounts have been reclassified to conform to the current year's presentation. COMPREHENSIVE INCOME 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. The Company adopted this SFAS No. 130 in 1998. There were no items of comprehensive income in 1998. 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 expenses and advances and deferred income approximate fair value because of the short maturity of those instruments. 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, 1998 is as follows: Furniture, fixtures and equipment $ 2,514,000 Leasehold improvements 6,000 ------------- Total 2,520,000 Less: Accumulated depreciation and amortization 1,568,000 ------------- $ 952,000 ============= In September 1998, the Company sold its principal office building and land for approximately $4,166,000 and realized a gain of approximately $1,734,000. NOTE 5 - PRODUCTION MASTERS Production masters, net of accumulated amortization of $5,761,000 at December 31, 1998 consist of the following: Released titles $ 1,069,000 Unreleased titles 190,000 ------------- Total $ 1,259,000 ============= NOTE 6 - FILM COSTS Film costs, net of accumulated amortization of $22,339,000 at December 31, 1998 consist of the following: Television and theatrical projects in development $ 222,000 Television and theatrical projects released less accumulated amortization 4,422,000 ------------- Total $ 4,644,000 ============= As of December 31, 1998, approximately 39% of the unamortized balance of film costs will be amortized within the next three-year period, while 60% of the unamortized balance of film costs will be amortized within the next five-year period, based upon the Company's revenue estimates at that date. The five-year period of amortization that is required to amortize 60% of the Company's unamortized film costs is primarily due to the length of existing distribution licenses for certain significant markets related to the underlying film asset "Futuresport". F-1 NOTE 7 - INCOME TAXES The provision for income taxes is as follows: Years Ended December 31, -------------------------------- 1998 1997 ---- ---- Current tax expense Federal $ -- $ -- State 4,000 -- --------------- --------------- Total current 4,000 -- Deferred tax expense Federal -- 229,000 State -- -- --------------- --------------- Total deferred -- 229,000 --------------- --------------- Total $ 4,000 $ 229,000 =============== =============== Net deferred tax assets at December 31, 1998 comprises the following: Deferred tax assets: Net operating loss carryforward $ 8,945,000 Sales returns reserve 178,000 Inventory reserve 105,000 Film amortization reserve 561,000 Accrued expenses 225,000 Royalty payable 110,000 Deferred income 111,000 State taxes 503,000 Other 252,000 --------------- Total 10,990,000 Valuation allowance (10,990,000) --------------- Net deferred taxes $ -- =============== F-11 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, on an after-tax basis, expire as follows: Year ending December 31, 2011 $ 1,989,000 2012 4,550,000 2018 2,406,000 --------------- Total $ 8,945,000 =============== 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, 1998 and 1997, respectively, as a result of the following differences: Years Ended December 31, -------------------------------- 1998 1997 ---- ---- Federal income tax expense (benefit) based on federal statutory rates $ (1,574,000) $ (5,556,000) Increase (reduction) in taxes resulting from: State income taxes (99,000) (786,000) Non-deductible expenses 96,000 72,000 Increase in valuation allowance 1,581,000 6,499,000 --------------- --------------- $ 4,000 $ 229,000 =============== =============== NOTE 8 - NOTES PAYABLE Notes payable at December 31, 1998 consist of the following: Chase Manhattan Bank revolving credit loan $ 7,434,000 Other 36,000 --------------- Total notes payable $ 7,470,000 =============== Maturity of notes payable: Year Ending December 31, 1999 $ 16,000 2000 7,454,000 --------------- $ 7,470,000 =============== In September 1998, the long-term note payable and accrued interest to Asahi Bank of California was fully paid following the sale of the Company's principal office building and land. F-12 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"). In May 1998, the Chase Loan facility was increased to $10,000,000 with the other terms of the original agreement remaining substantially the same. The Chase Loan is secured by substantially all of the Company's assets. 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 or have letters of credit issued for a further $4,000,000 (increased from $2,000,000 upon amendment of the Chase Loan agreement in May 1998) provided the aggregate amount borrowed does not exceed $10,000,000, and with the consent and guarantee of Media Equities International, LLC ("MEI"), a significant shareholder of the Company. The Chase Loan provides for interest at the bank prime rate (7 3/4 % at December 31, 1998) plus 2% per annum or the bank's LIBOR rate (5.12% six-month rate at December 31, 1998) 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, 1998. 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. The Company was not in compliance with certain of the financial compliance tests at December 31, 1998 and has requested waivers from Chase Bank. As of April 12, 1999, the Company has not received any such waivers and there is no assurance that the Company will receive the waivers in the future. Accordingly, the Company has classified Notes Payable to Chase Bank as a Current Liability. At December 31, 1998, the Company had borrowed $7,434,000 against the facility and had $2,566,000 of available funds for borrowing. In addition, Chase Bank had provided a letter of credit for $287,000 in respect to certain litigation. On January 28, 1999, the Company and Chase Bank were notified by one of the principals of MEI that there would be no approvals for further extensions of credit under the Chase Loan. Accordingly, as of January 28, 1999, the Company had borrowed the maximum amount permitted to be borrowed under the Chase Loan. In view of the current status of the Company's credit facility and the need for additional financing the Company is involved in in-depth discussions with a number of parties in connection with providing substantial additional equity capital. Although the Company believes it may be close to consummation of such additional financing there is no assurance that it will be successful. In February 1998, the Company and Chase Bank amended the Chase Loan to provide the Company with an additional loan of a maximum of $3,289,000 for the purpose of partly financing the made for television motion picture "Futuresport" ("Futuresport Loan"). The Futuresport Loan principal was due on October 31, 1998 but subject to earlier payments from the Company's receipts of certain distribution amounts. Interest accrued based on the bank prime rate plus 2% and was payable in accordance with the terms of the Chase Loan. The Futuresport Loan and accrued interest was fully paid in September 1998. In July 1998, the Company entered into a loan agreement with Apollo Partners LLC ("Apollo"), whereby the Company borrowed $1,500,000 with a due date of the earlier of January 17, 1999 or the sale of the Company's principal office building ("Apollo Loan"). Interest accrued at the Chase Bank prime rate plus 2% and was payable upon the principal due date. The Apollo Loan was secured by a second mortgage on the Company's principal office building and land. In September 1998, the Apollo Loan and accrued interest was fully paid. NOTE 9 - RELATED PARTY TRANSACTIONS As of January 1, 1995, the Company entered into employment agreements with Michael Viner and Deborah Raffin ("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 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. F-13 As an alternative to making the Payment in cash, 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 unless the Payments are not made in cash by the Company. If the Payments are not made in cash, the Series E Preferred Stock may be released to the Former Principals, as the case may be, in an amount equal to the portion of the Payments not paid in cash 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. As of December 31, 1998, 189 shares of the Series E Preferred Stock had been released to the Former Principals in consideration of Payments not made in cash. In addition to full-time salary and payments pursuant to the Termination Agreement, the Company made the following payments to the Former Principals during the year ended December 31, 1997: Reimbursement of condominium rental $ 2,000 Accrued non-accountable expenses paid 181,000 Automobile lease, insurance and repair payments 15,000 Medical expense and life insurance reimbursements 1,000 Executive producer fees and per-diem in respect of television productions 103,000 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 =============== The above amounts were all paid or incurred prior to the date of the Termination Agreement. 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, Gerald J. 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 was to be terminated, the Company may have been required to pay all amounts accrued through the date Mr. Leider was terminated and his consulting compensation for a period of time following the date of termination. Further, the purported agreement provided that if Mr. Leider's consultancy was terminated for any reason other than death, disability, retirement or for cause, as defined in the agreement, or Mr. Leider terminated 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 have been 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. 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. F-14 The Company paid $52,000 in consulting retainer fees to Mr. Leider during the year ended December 31, 1997: 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 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. On July 21, 1998, a Judgment Pursuant to Terms of Settlement was issued in connection with litigation over Mr. Soloway's purported employment agreement and other matters and the terms of the settlement and judgment have been fully performed. As part of a certain agreement dated March 27, 1997, 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 is required to pay MEI $300,000 per year, of which $200,000 is payable in cash on a quarterly basis in advance and the remaining $100,000 is payable 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. Subsequently, the Company and MEI amended the consulting agreement to reduce the 1998 consulting fees by $100,000. 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. 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 the 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. In July 1998, and in connection with the increase of Chase Loan facility from $8,000,000 to $10,000,000, the principals of MEI have agreed to increase the guaranty on the obligations of the Company under the Chase Loan to an amount not to exceed the lesser of $4,000,000 and the outstanding principal of and any interest on all loans made under the credit facility in excess of the borrowing base. The remaining terms of the agreement remain substantially the same as those of the terms made under the initial agreement. As consideration for the increase in the guaranty, the Company has agreed to pay MEI an additional fee of $25,000 for such guaranty by its principals. In August 1998, the Company issued common stock to MEI, at the fair market value of the stock on the date of issuance, as payment of $50,000 for such guarantee fees. On January 28, 1999, the Company and Chase Bank were notified by one of the principals of MEI that there would be no approvals for further extensions of credit under the Chase Loan. Accordingly, as of January 28, 1999, the Company had borrowed the maximum amount permitted to be borrowed under the Chase Loan. F-15 The Company acquired audio book rights for fifteen titles which were written by a substantial shareholder. The Company recorded $610,000 in net audio sales (net of returns) from these titles during the year ended December 31, 1997. In 1997, the Company agreed to issue 50,000 shares of Common Stock to a 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 year ended December 31, 1997, the Company paid $1,885,000 in respect of audio duplication to Tin Man Enterprises which was an affiliate of Mr. Al Bussen, a substantial shareholder from June 10, 1997 until August 1997. 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. Pursuant to an employment agreement dated as of February 4, 1998, Ronald Lightstone was 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 ("Award"). Pursuant to SFAS No. 123, the Company has elected to apply the provisions of APB No. 25 in accounting for the Award. Under such provisions, unearned compensation of $500,000 was recorded upon the date of grant based upon the fair value of the Company's Common Stock on such date and as a reduction to Common Stock and Additional Paid-in Capital in Shareholders' Equity. The Company is amortizing the unearned compensation under the straight-line method over the 36 month term. Accordingly, the Company has recorded $246,000 in related compensation expense for the year ended December 31, 1998 and has reduced Stockholders' Equity by $254,000 of unearned compensation as of December 31, 1998. 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. 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. 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. In July 1998, the Company entered into a loan agreement with Apollo, whereby the Company borrowed $1,500,000 with a due date of the earlier of January 17, 1999 or the sale of the Company's principal office building. Interest accrued at the Chase Bank prime rate plus 2% and was payable upon the principal due date. The Apollo Loan was secured by a second mortgage on the Company's principal office building and land. In September 1998, the Apollo Loan and accrued interest was fully paid. In August 1998, the Company issued 392,854 shares of Common Stock to MEI as payment of approximately $589,000 of accrued dividends on the Company's Preferred Stock. In November 1998, the Company authorized the issuance of 189,146 shares of Common Stock to MEI as payment of approximately $107,000 of accrued dividends on the Company's Preferred Stock. 171,057 of those shares were issued in December 1998 and 18,089 were issued in January 1999. F-16 Pursuant to a Stock Purchase Agreement, dated as of July 30, 1998, between Apollo and Ronald Lightstone and the Company and a Stock Purchase Agreement, dated as of November 12, 1998, between Apollo, Mr. Lightstone and the Company, the Company sold an aggregate of 8,122,393 shares of Common Stock of the Company to Elkes Limited Partnership ("ELP") (as assignee of Apollo), Gorman Limited Partnership ("GLP") (as assignee of Apollo) and Ronald Lightstone for an aggregate price of $5,840,000 (or $0.719 per share). The managing general partner of ELP is Terrence Elkes, the Chairman of the Board of Directors of the Company. The managing general partner of GLP is Kenneth Gorman, the Vice-Chairman of the Board of Directors of the Company. Mr. Lightstone is the President and Chief Executive Officer of, and a member of the Board of Directors of, the Company. In December 1998, the Company sold an aggregate of 640,000 shares of Common Stock to ELP and GLP for $500,000. NOTE 10 - COMMITMENTS AND CONTINGENCIES LITIGATION PENDING LEGAL PROCEEDINGS On July 10, 1998 an action entitled Palisades Pictures LLC, Nothing to Lose Productions Inc., CUB Films, Mark Severini, Eric Bross and Jeff Dowd v. Dove International, Inc., Dove Audio, Inc. and NewStar Media, Inc. was filed in Los Angeles Superior Court (BC 194069). Plaintiffs allege breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty, interference with prospective economic advantage and promissory estoppel, arising out of an alleged distribution agreement pursuant to which Dove International, Inc. was to have distributed the motion picture "Nothing to Lose." Plaintiffs are seeking damages in excess of $1,000,000, plus punitive and exemplary damages. The Company believes that it has good and meritorious defenses to the action. Nevertheless, there is no assurance that the Company will prevail in the action. In February 1999, the Company was served with a complaint in an action entitled Norton Herrick v. NewStar Media Inc., Michael Viner and Deborah Raffin Viner (Los Angeles Superior Court Case No. SC055421). The action was brought by one of the shareholders who opted out of the Class Action Settlement described below. The complaint alleges fraud, negligent misrepresentation, violation of sections 25400 and 25401 of the California Corporations Code and breach of fiduciary duty, and seeks recovery of in excess of $1,000,000 plus exemplary and punitive damages. While the Company believes that it has good and meritorious defenses to the remaining claims in the action, the Company may not prevail. On September 28, 1998, the Former Principals commenced an arbitration against the Company, alleging breach of, and seeking specific performance of a termination agreement to which they and the Company are a party. In December 1998, the Former Principals asserted that they were entitled to rescission of the termination agreement for material failure of consideration, or, in the alternative, unspecified damages against the Company. In a decision dated March 31, 1999, the arbitrator determined that the Former Principals may not rescind the termination agreement on the grounds presented to the arbitrator. While the Company believes that it has good and meritorious defenses to the remaining claims in the action, the Company may not prevail. F-17 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. On April 21, 1998, Mr. Leider obtained a writ of attachment for approximately $287,000 in respect of his claims, for which the Company has substituted an undertaking for the amount of attachment. 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 (Dove Entertainment v. Gerald Leider, et. al., Los Angeles Superior Court Case No. SC050414) 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. On July 6, 1998, a first amended complaint in the action entitled Mattken Corp. and Gerald J. Leider v. NewStar Media, Inc. was filed in the Los Angeles Superior Court (BC 191736). The plaintiffs allege breach of contract arising out of a purported agreement between Mr. Leider and the Company in connection with executive producer services on the motion picture "Morning Glory", and a purported sales agency agreement between Mattken Corp. and the Company. Plaintiffs are seeking in excess of $350,000. The Company believes that it has good and meritorious defenses to the action. Nevertheless, there is no assurance that the Company will prevail in the action. In August 1993, a trial court confirmed an arbitration award in favor of the Company against Steven Stern and Sharmhill Productions in the approximate amount of $4.5 million relating to the film "Morning Glory" ("Stern Judgment"). In a related matter, the Company sought to restore certain alleged 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 and the Company is pursuing its own adversary proceeding 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 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 in excess of the amount of the Stern 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. LEGAL PROCEEDINGS SETTLED, DISMISSED OR ON APPEAL In 1998, the class action cases, Alan Fields v. Dove Entertainment, Inc., et al. (Los Angeles Superior Court No. BC174659), Global Asset Allocation Consultants, L.L.C. v. Dove Entertainment, Inc., et al. (United States District Court for the Central District of California Civil Action No. 97-6253-WDK) and George, et al. v. Dove Entertainment, Inc. et al. (United States District Court for the Central District of California Civil Action No. 97-7482-R) were settled between the parties (the "Class Action Settlement") Subsequently, the Class Action Settlement was approved by both the federal and state courts. The state court approval became final and non-appealable in the fourth quarter of 1998 and the federal court approval became final and non-appealable in the first quarter of 1999. 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). In November 1998, the Company entered into a settlement agreement with the plaintiffs, with all payments thereunder to be made by the Company's insurance carrier, and the action was dismissed. F-18 In August 1997, the Former Principals commenced an arbitration against the Company seeking specific performance of, and alleging breach of, the Termination Agreement, and claimed damages in excess of $165,000 and additional reimbursements allegedly due for other items. The Company filed its own claims against the Former Principals. On July 17, 1998, the arbitrator ruled in favor of the Company on some issues and in favor of the Former Principals on other issues, resulting in a net recovery by the Former Principals of approximately $30,000. The arbitrator also confirmed an earlier ruling that a provision of the Termination Agreement 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 enjoined and restrained the Former Principals from engaging in the audio book business during that period. On December 30, 1998, the Los Angeles Superior Court entered its Judgment Confirming the Arbitration Award. On February 25, 1999 the Former Principals filed a Notice of Appeal from the Judgment. In another arbitration proceeding between the Company and the Former Principals and one of their companies relating to an alleged breach of the Termination Agreement by the Company for, among other things, failing to prepare office space for use by the Former Principals, 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. A petition is pending in the Los Angeles County Superior Court to confirm the arbitrator's award. 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 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 complaint alleged among other things that the book "You'll Never Make Love In This Town Again" defamed Mr. Bass and violated his rights of publicity under New York statutes. The complaint sought 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 action in New York was voluntarily stayed after Mr. Bass filed a similar action in the State of California entitled Michael Bass v. Penguin USA et. al. (California Superior Court Case No. SC049191) seeking essentially the same damages. The action in California was dismissed with prejudice on July 6, 1998. In March 1999, the Company entered into a settlement agreement with the plaintiff in connection with the action entitled Robert H. Tourtelot v. Dove Audio, Inc. etc. et al. (Los Angeles Superior Court Case No. SC040739). Pursuant to the settlement agreement, the Company will make payments over time to Mr. Tourtelot totaling $60,000. On July 21, 1998 a Judgment Pursuant to Terms of Settlement was issued in connection with the action Soloway v. Dove Entertainment (Los Angeles Superior Court Case No. BC175516) and the terms of the settlement and judgment have been fully performed. 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. At December 31, 1998, the Company has reserved $1,021,000 in respect of such claims served against the Company. OFFICE LEASE Prior to 1997, the Company maintained its principal offices pursuant to non-cancelable operating leases which expired over periods from January 31, 1999 to March 26, 1999. These leases were subject to annual rent escalations and the pass-through of certain costs of the landlord. In connection with the Company's move to its current principal offices, the Company accrued the rent expense associated with the minimum future non-cancelable lease payments. F-19 In January 1998, the Company sub-leased the above office space for the remainder of the term of the lease at an annual rent of $194,000. In connection with the sale of the Company's principal office building and land, the Company entered into a one year operating lease to provide office space and parking, that expires August 31, 1999. Rent expense for the years ended December 31, 1998 and 1997, was $133,000 and $292,000, respectively. Minimum future non-cancelable lease payments as of December 31, 1998 amounts to $304,000 in 1999. RIGHTS ACQUISITIONS In the ordinary course of business, the Company enters into agreements with authors and publishers for rights and other materials to publish and produce audio book titles and printed books. NOTE 11 - CAPITAL ACTIVITIES PREFERRED STOCK The Company has 2,000,000 shares designated as Preferred Stock. At December 31, 1998, 220,087 of such shares are issued and outstanding and include the following: (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). (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. Each of the Series D 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-20 (4) 54 shares of Series E Preferred Stock. The Series E Preferred Stock has a stated value of $1,000 per share. The holders of the Series E Preferred Stock do not have voting rights and are not entitled to receive any dividends in respect thereof. The Series E Preferred Stock bears a liquidation preference in an amount equal to the stated value. Each share of Series E Preferred Stock is convertible at the option of the holder at any time into that number of shares of common stock of the Company calculated by dividing $1,000 by the applicable "conversion price." With respect to a share of Series E Preferred Stock, the conversion price is the average of the closing prices of the Company's common stock for the five consecutive days prior to the date such share of Series E Preferred Stock was released from escrow. The Series E Preferred Stock is redeemable by the Company, in whole or in part, at any time 30 days after termination of the Escrow Agreement dated June 1997 among Michael Viner, Deborah Raffin, the Company and U.S. Trust Company of California, N.A., at a price equal to 80% of the stated value. Series B, Series C and Series D Preferred Stock rank pari passu with respect to liquidation and dividends. The Series E Preferred Stock is junior to the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock. 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 Note 9 -- 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 The shares issued in the acquisition of 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-21 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 ended December 31, 1997, the Company issued 250,000 shares of Common Stock in exercise of options. During the year ended December 31, 1998, the Company issued the following shares of Common Stock: o 739,646 shares in satisfaction of vendor payables amounting to $652,000. o 19,608 shares to Steven Soloway as settlement of the Soloway Action in the amount of $38,000. o 17,391 shares to Spacetime Publications, Ltd. representing $25,000 in connection with the settlement of claims. o 400,000 shares to Ronald Lightstone, the Company's President and Chief Executive, amounting to $500,000 and pursuant to an employment agreement between Mr. Lightstone and the Company. o 308,028 shares to MEI as payment of consulting fees in the amount of $400,000. o 34,014 shares to MEI as consideration for certain guarantees amounting to $50,000 made by MEI in connection with the Chase Loan. o 563,911 shares to MEI as payment of $686,000 of accrued preferred dividends. o 88,173 shares to the Former Principals pursuant to a certain Termination Agreement were converted from 135 shares of Series E Preferred Stock issued in the amount of $135,000. o 26,492 shares to the Company's deferred profit sharing plan. The Company sold an aggregate of 8,122,393 shares of Common Stock to ELP, GLP and Ronald Lightstone for an aggregate price of $5,840,000 pursuant to a Stock Purchase Agreement, dated as of July 30, 1998, among the Company, Apollo and Ronald Lightstone and a Stock Purchase Agreement, dated as of November 12, 1998, among the Company, Apollo and Ronald Lightstone. F-22 In December 1998, the Company sold the following shares of Common Stock to the parties indicated below: o 320,000 shares to Elkes Limited Partnership for $250,000. o 320,000 shares to Gorman Limited Partnership for $250,000. 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, 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 Options issued 521,000 $1.50 $1.50 Options canceled (16,500) $1.50 - $6.00 $1.77 ------------- Options outstanding at December 31, 1998 593,500 $1.50 - $6.00 $1.73 =============
At December 31, 1997 and 1998, respectively, options to acquire 78,998 and 238,000 shares of Common Stock under the Plan were exercisable. In addition to the above options issued under the Plan, at December 31, 1998, 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 of which 50,000 were fully vested and the balance to vest over the next two years. F-23 (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. As of December 31, 1998, the Company has terminated the agreement with the public relations firm and the options were cancelled. (3) 50,000 options at $2.50 per share in 1996 to a former acting officer. All of these options were exercisable at December 31, 1998 and none were exercised as of December 31, 1998. 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, 1998, the weighted average remaining contractual life of all outstanding options was 9.21 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, -------------------------------- 1998 1997 ---- ---- Basic and diluted loss attributable to Common Shareholders As reported $ (4,936,000) $ (19,018,000) Pro forma (5,350,000) (19,081,000) Basic and diluted loss per share As reported (.61) (3.27) Pro forma (.62) (3.28)
Pro forma net loss reflects only options granted in the years ended December 31, 1995 through December 31, 1998. 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, 1998 was $1.27 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 5%, expected volatility of 134%, and an expected life of 4 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, 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 Warrants issued -- -- Warrants exercised -- -- -------------- ------------------ -------------- -------------- Warrants outstanding as of December 31, 1998 4,712,763 4,664,013 $2.00 - $12.00 $ 5.06 ============== ==================
At December 31, 1998 all warrants were exercisable. F-24 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 - OPERATING SEGMENTS AND MAJOR CUSTOMERS AND SUPPLIERS The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", as of December 31, 1998. SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments and related disclosures about products and services, geographic areas and major customers. The Company is engaged in the publication of audio and printed books, the production of television programming and the distribution of feature films and television product. Revenues are generated from two reportable operating segments - publishing and film - based upon the nature of their products. Publishing produces and distributes audio book titles and publishes various printed books. Film aggregates the television and distribution divisions and, collectively, develops, produces and distributes television programming and engages in the distribution of feature films. F-25 The information in the following tables is derived from the segments' internal financial reporting for corporate management purposes:
December 31, 1998 1997 ----------------- ---------------- Net revenues Publishing $ 6,880,000 $ 6,800,000 Film 8,920,000 9,872,000 ----------------- ---------------- Total $ 15,800,000 $ 16,672,000 Loss before income taxes Publishing $ (1,521,000) $ (5,224,000) Film (224,000) (4,539,000) Unallocated corporate (4,123,000) (6,220,000) ----------------- ---------------- Total $ (5,868,000) $ (15,983,000) Depreciation and amortization Publishing $ 26,000 $ 31,000 Film 711,000 607,000 Unallocated corporate 237,000 128,000 ----------------- ---------------- Total $ 974,000 $ 766,000 Purchases of property and equipment Publishing $ 86,000 $ 133,000 Film -- 33,000 ----------------- ---------------- Total $ 86,000 $ 166,000 Total assets Publishing $ 6,197,000 $ 5,915,000 Film 11,636,000 9,736,000 Unallocated corporate 1,244,000 3,420,000 ----------------- ---------------- Total $ 19,077,000 $ 19,071,000
The Company earned net revenues in excess of 10% of the Company's total net revenues from various customers in the film operating segment. Net revenues and net revenues as a percentage of the Company's total net revenues from these customers were as follows: Year Ended December 31, --------------------------------------- 1998 1997 ---- ---- ABC $ 5,200,000 33% $ 2,663,000 16% Buena Vista $ 719,000 5% $ 4,416,000 26% Columbia Tri-Star $ 1,718,000 11% -- -- Three manufacturers supply a significant quantity of audio inventory. The Company believes there are other suppliers and accordingly, the Company is not dependent on these manufacturers as its sole source of product. NOTE 13 - 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. F-26 NOTE 14 - LIQUIDITY The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced significant negative cash flows from operations, including $10,659,000 and $8,691,000 for the years ended December 31, 1998 and December 31, 1997, 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, which was increased to $10,000,000 in May 1998, and the Company had borrowed $7,434,000 against the facility as of December 31, 1998. As discussed in Note 8 of Notes to Consolidated Financial Statements, as of January 28, 1999, the Company had borrowed the maximum amount permitted to be borrowed under the Chase Loan. The Company was not in compliance with certain of the financial compliance tests at December 31, 1998 and has requested waivers from Chase Bank. As of April 12, 1999, the Company has not received any such waivers and there is no assurance that the Company will receive the waivers in the future. Accordingly, the Company has classified Notes Payable to Chase Bank as a Current Liability. The Company believes that its current capital resources may not be sufficient to cover its immediate capital requirements and accordingly is recently in discussions with a number of potential sources to provide additional working capital whether through the issuance of additional equity or debt securities, additional bank financing or otherwise. There are however, no assurances that such financing will be obtained. In addition, the Company has 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 acquisitions of rights involving significantly greater outlays of capital than required in the business conducted to date by the Company. In the event that additional working capital is not obtained or not obtained in sufficient amounts, the Company's operations may be significantly curtailed. NOTE 15 - FOURTH QUARTER ADJUSTMENTS 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. During the fourth quarter of 1998, the Company recorded a write-down of $199,000 in audio and book inventories still maintained at the warehouse of a former distributor. F-27 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 15th day of April, 1999. NEWSTAR MEDIA INC. By: /s/ RONALD LIGHTSTONE ----------------------------------------- Ronald Lightstone, President and Chief Executive Officer 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 15, 1999 --------------------- Officer and Director Ronald Lightstone /s/ JOHN T. BRADY Chief Financial Officer and April 15, 1999 --------------------- Chief Accounting Officer John T. Brady /s/ TERRENCE A. ELKES Chairman of the April 15, 1999 --------------------- Board of Directors Terrence A. Elkes /s/ KENNETH F. GORMAN Vice-Chairman of the April 15, 1999 --------------------- Board of Directors Kenneth F. Gorman /s/ JOHN T. HEALY Director April 15, 1999 --------------------- John T. Healy /s/ BRUCE MAGGIN Director April 15, 1999 --------------------- Bruce Maggin Director April __, 1999 --------------------- Steven Mayer /s/ LEE MASTERS Director April 15, 1999 --------------------- Lee Masters
(2) EXHIBITS EXHIBIT NO. DESCRIPTION --------------- -------------------------------------------- 3.1 Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Registration Statement on Form SB-2 filed with the Commission on October 7, 1994 (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 (filed as Exhibit 3.8 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 3.9 Certificate of Amendment of Articles of Incorporation of the Company filed with the Secretary of State of California on May 4, 1998 (filed as Exhibit 3.9 to the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1998) 4.1 Specimen Series A Preferred Stock certificate of the Company (filed as Exhibit 4.2 to Amendment No. 2 to the Registration Statement filed with the Commission on November 29, 1994 ("Amendment No. 2")) 4.2 Form of Certificate of Determination of the Series A Preferred Stock of the Company (filed as Exhibit 4.3 to the Registration Statement) 4.3 Form of Underwriter's Warrant Agreement (filed as Exhibit 4.4 to the Registration Statement) EXHIBIT NO. DESCRIPTION --------------- -------------------------------------------- 4.4 Form of Warrant Agreement (filed as Exhibit 4.5 to the Registration Statement) 4.5 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) 4.6 Placement Agency Agreement dated August 1, 1994 between the Company and Joseph Stevens & Company, LP (filed as Exhibit 4.7 to Amendment No. 1 ) 4.7 Placement Agent Warrant Agreement dated December 24, 1995 between Whale Securities Co., LP and Dove Audio (filed as Exhibit 4.8 to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.8 Placement Agent Warrant (filed as Exhibit 4.9 to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.9 Form of Registration Rights Agreement (filed Exhibit 4.10 to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.10 Form of Common Stock Purchase Warrant (filed as Exhibit 4.11 to the Annual Report on Form 10-KSB for the fiscal year ended 1995) 4.11 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) 4.12 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) 4.13 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) 4.14 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) 4.15 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) 4.16 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) 4.17 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) EXHIBIT NO. DESCRIPTION --------------- -------------------------------------------- 4.18 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) 4.19 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) 4.20 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) 10.1 Form of Publishing Agreement (filed as Exhibit 10.16 to Amendment No. 1) 10.2 Form of Artist Agreement (filed as Exhibit 10.17 to Amendment No. 1) 10.3 Form of Company's 1994 Stock Incentive Plan (filed as Exhibit 10.18 to the Registration Statement) 10.4 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) 10.5 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) 10.6 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) 10.7 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) 10.8 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) 10.9 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) 10.10 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) EXHIBIT NO. DESCRIPTION --------------- -------------------------------------------- 10.11 Loan Agreement, dated as of September 26, 1997, between the Company and Dove Four Point, Inc. and Media Equities International, Inc. (filed as Exhibit 10.47 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.12 Debt Subordination and Intercreditor Agreement, dated September 26, 1997, among the Company, Dove Four Point, Inc., Media Equities International, Inc. and Sanwa Bank California (filed as Exhibit 10.48 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.13 Security Agreement, dated as of September 26, 1997, between the Company, Dove Four Point, Inc. and Media Equities International, Inc. (filed as Exhibit 10.49 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.14 Copyright Security Agreement, dated as of September 26, 1997, by Dove Four Point, Inc. in favor of Media Equities International, Inc. (filed as Exhibit 10.50 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.15 Copyright Security Agreement, dated as of September 26, 1997 by the Company in favor of Media Equities International, Inc. (filed as Exhibit 10.51 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.16 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") (filed as Exhibit 10.52 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.17 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") (filed as Exhibit 10.53 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.18 Security Agreement, dated as of November 4, 1997 between the Company and Media Equities International (filed as Exhibit 10.54 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.19 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 (filed as Exhibit 10.55 to the Annual Report on Form 10-KSB for the fiscal year ended 1997). EXHIBIT NO. DESCRIPTION --------------- -------------------------------------------- 10.20 Contribution Agreement, dated as of November 4, 1997, among, the Company Dove Four Point, Inc. and Dove International, Inc. (filed as Exhibit 10.56 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.21 Fee Agreement, made as of November 4, 1997 between the Company and Media Equities International, LLC (filed as Exhibit 10.57 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.22 Employment Agreement, dated as of February 4, 1998 between the Company and Ronald Lightstone (filed as Exhibit 10.58 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.23 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 (filed as Exhibit 10.59 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.24 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 (filed as Exhibit 10.60 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.25 Amendment No. 2 to the Credit Agreement, dated as of April 1, 1998, between the Company, Dove International, Inc., Dove Four Point, Inc. and the Chase Manhattan Bank (filed as Exhibit 10.61 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.26 Form of Publishing Agreement (1997) (filed as Exhibit 10.62 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.27 Form of Artist Agreement (1997) (filed as Exhibit 10.63 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.28 Form of Executive Publication Agreement (filed as Exhibit 10.64 to the Annual Report on Form 10-KSB for the fiscal year ended 1997) 10.29 Loan Agreement, dated as of July 21, 1998, between NewStar Media Inc. and Dove Four Point, Inc. and Apollo Partners, LLC (filed as Exhibit 10.65 to the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1998) EXHIBIT NO. DESCRIPTION --------------- -------------------------------------------- 10.30 Deed of Trust, dated July 21, 1998, among NewStar Media Inc., Apollo Partners, LLC and North American Title Company (filed as Exhibit 10.66 to the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1998) 10.31 Employment Agreement dated as of January 1, 1998, between Dove Four Point, Inc. and Ron Ziskin (filed as Exhibit 10.68 to the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1998) 10.32 Incentive Stock Option Agreement, dated as of January 1, 1998, between NewStar Media Inc. and Ron Ziskin on behalf of the Wedner-Ziskin Family Trust (filed as Exhibit 10.68 to the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1998) 10.33 Stock Purchase Agreement, dated as of July 30, 1998, among NewStar Media Inc., Apollo Partners, LLC and Ronald Lightstone (filed as Exhibit 10.67 to the Company's Current Report on Form 8-K filed with the Commission on September 3, 1998) 10.34 Registration Rights Agreement, dated as of July 30, 1998, by and among NewStar Media Inc., Apollo Partners, LLC and Ronald Lightstone 10.35 Standard Offer, Agreement and Escrow Instruction for Purchase of Real Estate, dated July 13, 1998, between Barry Beitler and Tony Dorn, as buyers and NewStar Media Inc., as seller 10.36 Residential Purchase Agreement, dated July 20, 1998, between Barry Beitler and Tony Dorn, as buyers, and NewStar Media Inc., as seller 10.37 Standard Industrial Lease - Special Net, dated August 5, 1998, between NewStar Media Inc. and 8955 Beverly Partnership 10.38 Stock Purchase Agreement, made as of November 12, 1998, among NewStar Media Inc., Apollo Partners, LLC and Ronald Lightstone 10.39 Registration Rights Agreement, dated as of November 12, 1998, by and among NewStar Media Inc., Apollo Partners, LLC and Ronald Lightstone 10.40 Agreement, dated as of July 30, 1998, between Media Equities International, LLC and NewStar Media Inc. 10.41 Incentive Stock Option Agreement, entered into as of January 1, 1998, by and between NewStar Media Inc. and Neil Topham 10.42 Incentive Stock Option Agreement, entered into as of January 1, 1998, by and between NewStar Media Inc. and Robert Murray 10.43 Trust Agreement, made December 30, 1998, by and between NewStar Media Inc. and Robert Murray, as trustee EXHIBIT NO. DESCRIPTION --------------- -------------------------------------------- 10.44 Letter Agreement, dated July 1, 1998, among NewStar Media Inc., Dove Four Point, Inc., Dove Entertainment, Inc., Dove Audio, Inc., NewStar Worldwide Inc., Terrence A. Elkes, Kenneth F. Gorman, Ronald Lightstone, Jack Healy, Bruce Maggin, Media Equities International, LLC and The Chase Manhattan Bank 10.45 Consent Regarding "Limitations on Indebtedness" and "Limitations on Liens" dated July 14, 1998 between The Chase Manhattan Bank and NewStar Media Inc., Dove Four Point, Inc., NewStar Worldwide Inc., NewStar Television Inc., Dove Entertainment, Inc. and Dove Audio, Inc. 10.46 Consent, dated April 28, 1998, between The Chase Manhattan Bank and Dove Entertainment, Inc. 10.47 Consent regarding "Limitation on Indebtedness", dated December 5, 1997, between The Chase Manhattan Bank and Dove Entertainment, Inc., Dove Four Point, Inc. and Dove International, Inc. 10.48 Limited Waiver regarding "Consolidated Capital Base", dated July 29, 1998, between The Chase Manhattan Bank and NewStar Media Inc., NewStar Worldwide Inc., NewStar Television Inc., Dove Four Point, Inc. Dove Entertainment, Inc. and Dove Audio, Inc. 10.49 Modification Agreement, dated as of May 21, 1998 among Terrence A. Elkes, Kenneth F. Gorman, Bruce Maggin, John T. Healy, Ronald Lightstone, NewStar Media Inc., NewStar Worldwide Inc., Dove Four Point, Inc., Dove Entertainment, Inc., Dove Audio, Inc., Media Equities International, LLC., and The Chase Manhattan Bank 10.50 Instrument of Assumption and Joinder dated as of May 14, 1998 made by Dove Entertainment, Inc. in favor of The Chase Manhattan Bank 10.51 Instrument of Assumption and Joinder dated as of May 14, 1998 made by Dove Audio, Inc. in favor of The Chase Manhattan Bank 10.52 Supplement No. 2 to the Copyright Security Agreement dated as of May 14, 1998 by NewStar Media Inc. in favor of The Chase Manhattan Bank 10.53 Amendment No. 3 to the Credit Agreement dated as of May 21, 1998, between the Company, Dove International Inc., Dove Four Point, Inc. and the Chase Manhattan Bank 10.54 Agreement, dated as of December 31, 1998, between Media Equities International, LLC and NewStar Media Inc. 21.1 Subsidiaries of NewStar Media Inc. 27.1 Financial Data Schedule EX-10.34 2 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated as of July 30, 1998, by and among NewStar Media Inc., a California corporation (the "COMPANY"), and Apollo Partners, LLC and Ronald Lightstone, as Purchasers (each a "PURCHASER" and collectively, the "PURCHASERS"). WHEREAS, the Purchasers are acquiring securities of the Company pursuant to a Stock Purchase Agreement dated the date hereof among the Company and the Purchasers (the "STOCK PURCHASE AGREEMENT"; capitalized terms used in this Registration Rights Agreement without definition shall have the meanings ascribed thereto in the Stock Purchase Agreement). NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein and intending to be legally bound, the parties hereto agree as follows: 1. REGISTRATION RIGHTS ------------------- 1.1 (a) The Company shall as expeditiously as practicable, but in any event not later than December 31, 1998, prepare and file with the Securities and Exchange Commission (the "COMMISSION") one or more registration statements (individually and collectively, the "REGISTRATION STATEMENT") under the Securities Act of 1933 (the "1933 ACT"), providing for the registration of the Shares (together with all shares of Common Stock issued in connection therewith, including by way of a stock split or other adjustment or stock dividend, the "REGISTRABLE SECURITIES") for sale by the Purchasers, then holding such securities (including with respect to Apollo Partners, LLC., its principals who for the purpose of this Agreement shall be included in the term "PURCHASER"). Thereafter, the Company shall use its reasonable best efforts to cause such Registration Statement to be declared effective not later than February 26, 1999. If at any time after the Registration Statement becomes effective, the Registration Statement is not available for sales by any Purchaser, then the Company shall, as expeditiously as possible, prepare and file with the Commission, to the extent required, an amendment or new registration statement in order to afford such Purchaser the benefit of the registration contemplated in this Section 1.1, and shall use its reasonable best efforts to have such amendment or new registration statement declared effective as promptly as practicable. (b) Notwithstanding the foregoing, in the event that the Company proposes to undertake an underwritten public offering immediately prior to the filing of or during the pendency or effectiveness of the Registration Statement, each Purchaser will be obligated to either (x) join the underwritten offering with respect to all or a portion of the Registerable Securities requested by such Purchaser to be included therein (subject to the approval of the managing underwriter, which may exclude such shares entirely or require pro rata cut-back with other selling shareholders, and/or (y) execute a "lock-up" agreement with respect to the sale or other disposition of any Registrable Securities not so included or permitted to be included for a period commencing with the filing of the related registration statement and ending 90 days after the effective date of the related Registration Statement, but in any event not more than 135 in the aggregate. 1.2. REGISTRATION PROCEDURES. (a) The Registration Statement may be in any form for which the Company then qualifies or which counsel for the Company deems appropriate; (b) Before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to counsel selected by the Purchasers, copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel, and after the filing of the Registration Statement, the Company will promptly notify the Purchasers of any stop order issued or, to the knowledge of the Company, threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered; (c) The Company shall prepare and file with the Commission such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep the registration statement effective for so long as any of the Registrable Securities remain owned by a Purchaser, and so long as such registration is necessary to permit the public resale thereof without any limitation on the amount of such sales pursuant to Rule 144 under the Securities Act or otherwise, and comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities during such period in accordance with the intended methods of disposition set forth in the registration statement; (d) The Company shall furnish to each Purchaser, before filing the Registration Statement, if requested, copies of the Registration Statement as proposed to be filed, and thereafter furnish to each Purchaser such number of copies of the Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in the registration statement (including each preliminary prospectus) and such other document as the Purchasers may reasonably request in order to facilitate the disposition of the Registrable Securities; -2- (e) The Company shall use its commercially reasonable efforts to register or qualify the Registerable Securities covered by such Registration Statement under the securities or blue sky laws of such jurisdictions as the Purchasers shall reasonably request (provided that the Company shall not be required to consent to general service of process for all purposes in any jurisdiction where it is not then qualified to do business) and do any and all other acts or things which may be necessary or advisable to enable such seller to consummate the public sale or other disposition in such jurisdictions of such Registrable Securities; (f) The Company shall notify the each Purchaser, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, of the happening of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of the Purchasers prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (g) The Company shall furnish, at the request of each Purchaser on the date that the Registration Statement becomes effective, (a) an opinion, dated such date, of the independent counsel representing the Company for the purposes of such registration, addressed to the Purchasers, stating that such registration statement has become effective under the 1993 Act; and (b) a letter, dated such date, from the independent certified public accountants of the Company addressed to the Purchasers making such request, stating that they are independent certified public accountants within the meaning of the 1933 Act, and that in the opinion of such accountants, the financial statements and other financial data of the Company included in the registration statement or the prospectus, or any amendment or supplemental thereto, comply as to form in all material respects with the applicable accounting requirements of the 1933 Act, and covering such other matters (including information as to the period ending not more than five (5) business days prior to the date of such letter) with respect to the registration, if independent certified public accountants are normally requested to provide comfort on such matters, as such Purchaser may reasonably request. -3- (h) The Company shall make available for inspection by the Purchasers and any attorney, accountant or other professional retained by any Purchaser or any underwriter (collectively, the "INSPECTORS"), all financial and other records, permanent corporate documents and properties of the Company (collectively, the "RECORDS") as are reasonably necessary to enable them to exercise due diligence, and cause the Company's officers, directors, and employees to supply all information reasonably requested by such Inspectors in connection with the registration statement. The Purchasers further agree that they will, upon learning that disclosure of such Records is sought in a court of component jurisdiction, give notice to the Company and allow the Company at its expense to undertake appropriate action to prevent disclosure of the Records deemed confidential; (i) The Company shall otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders, as soon as reasonably practicable an earnings statement satisfying the provisions of Section 11(a) of the 1933 Act and covering a period of twelve months, beginning within three months after the effective date of the Registration Statement; (j) The Company shall use its commercially reasonable efforts to cause all Registrable Securities to be listed on each securities exchange (if any) on which similar securities issued by the Company are then listed; and (k) The Company shall provide a transfer agent and registrar for all of the Registrable Securities not later then the effective date of such Registration Statement. 1.3. DISCONTINUANCE OF DISPOSITION. The Purchasers, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 1.2 (f) shall forthwith discontinue disposition of the Registrable Securities until the Purchaser receives copies of the supplemented or amended prospectus contemplated by Section 1.2 (f) or until it is advised in writing (the "ADVICE") by the Company that the use of the prospectus may be resumed and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus. 1.4. INFORMATION TO BE FURNISHED BY PURCHASERS. Each Purchaser all furnish to the Company such information and execute such documents regarding the Registrable Securities held by such Purchaser and the intended method of disposition thereof as the Company shall reasonably request in connection with the action to be taken by the Company. -4- 1.5. EXPENSES OF REGISTRATION. The Company shall pay all expenses incurred by the Company in complying with Section 1.1 and 1.3 (other than the underwriter's discounts and commissions and fees and expenses of special counsel to the Purchasers, if any), including, without limitation, all registration and filing fees (including all expenses incident to filing with the National Association of Securities Dealers, Inc.), fees and expenses of complying with securities and blue sky laws, printing expenses, fees, and disbursements of counsel to the Company, and of the Company's independent public accountants. 1.6. INDEMNIFICATION. (a) The Company shall indemnify and hold harmless each Purchaser, its executive officers, directors and controlling persons (within the meaning of the 1933 Act) and each person who participates as an underwriter or controlling person of an underwriter (within the meaning of the 1933 Act) with respect to a Registration Statement pursuant to Section 1.1 against any losses, claims, damages or liabilities to which any of them may become subject under the 1933 Act or otherwise insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or allegedly untrue statement of any material fact contained in a registration statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, and will reimburse any of them for any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable hereunder in any such case if any such loss, claim, damage or liability arise out of or is based upon any untrue statement or allegedly untrue statement or omission or alleged omission made in such registration statement, prospectus or amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company for such purpose by such Purchaser or by its representative. (b) Each Purchaser shall indemnify and hold harmless the Company, its executive officers, directors and controlling persons (within the meaning of the 1933 Act) and each person who participates as an underwriter or controlling person of an underwriter (within the meaning of the 1933 Act) with respect to a registration statement pursuant to Section 1.1 against any losses, claims, damages or liabilities to which any of them may become subject under the 1933 -5- Act or otherwise insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, in reliance upon and in conformity with written information furnished to the supplement thereof, in reliance upon and in conformity with written information furnished to the Company by each Purchaser or by its representative, and will reimbursement any of them for any legal or other expenses reasonably incurred by them in connection with investigating or defending, any such, loss, claim, damage, liability or action. (c) A party's obligation to indemnify (the "indemnifying party") and the other party's rights to indemnity and payment (the "indemnified party") under Section 1.6 is contingent upon the indemnified party (i) giving the indemnifying party prompt written notice of such claim; (ii) allowing the indemnifying party to have sole right to control and direct the investigation, preparation and defense of any such claim or action and all negotiations for its settlement or compromise; and (iii) providing reasonable assistance to the indemnifying party, such assistance to be solely at the cost and expense of the indemnifying party. The indemnified party, at its own expense, shall be entitled to participate in the defense and to receive copies of all pleadings and other papers in connection with the claim. (d) If for any reason the indemnification provided for in the preceding Sections 1.6 (a) and 1.6 (b) is unavailable to an indemnified party as contemplated by those sections, then the indemnifying party will contribute to the amount paid or payable to the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided that no Purchaser will not be required to contribute in an amount greater than the difference between the net proceeds received by such Purchaser with respect to the sale of any Registrable Securities and all amounts already contributed by such Purchaser with respect to such claims. 1.7. UNDERWRITING AGREEMENT. If the Registrable Securities are to be sold pursuant to a registration statement in an underwritten offering in which no shares of the Company are being sold for the account of the Company, the Company agrees to enter into an underwriting agreement with the underwriter or underwriters (who shall be subject to the approval of the Company) containing customary representations and warranties with respect to the business and operations of the Company, including without limiting the generality of the foregoing, customary provisions with respect to indemnification by the Company of the underwriters of such offering. -6- 2. MISCELLANEOUS ------------- 2.1. OWNER OF REGISTRABLE SECURITIES. The Company may deem and treat the person in whose name the Registrable Securities are registered as the absolute owner thereof for all purposes whatsoever. 2.2. SUCCESSORS. This Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of each Purchaser, and the term "Purchaser" shall be deemed to be include each such holder of Registrable Securities. This Agreement shall be binding upon and shall inure to the benefit of the Company and its successors and assigns. 2.3. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to such state's conflicts of law principles. 2.4. NOTICE. Any notice or other communication required or permitted hereunder shall be sufficiently given only if sent by facsimile transmission or by registered or certified mail, postage prepaid, addressed as follows or to such other address or addresses as may hereafter be furnished in writing by notice similarly given by one party to the other: To the Company: NewStar Media Inc. 8955 Beverly Blvd. Los Angeles, CA 90048 Telephone: (310) 786-1600 Facsimile: (310) 247-2932 The Purchasers: Apollo Partners Ltd. 1 Stamford Plaza, 12th Floor Stamford, CT 06901 Ron Lightstone NewStar Media 8955 Beverly Blvd. Los Angeles, CA 90048 -7- With a required copy to: Morrison Cohen Singer & Weinstein, LLP 770 Lexington Avenue New York, New York 10022 Attn: Peter D. Weinstein, Esq. Jack Levy, Esq. Telephone: 212-734-8600 Facsimile: 212-735-8708 2.5. FULL AGREEMENT. This Agreement sets forth the entire understanding of the parties with respect to transactions contemplated hereby, and shall not be modified or amended except by written agreement of all parties hereto. 2.6. HEADINGS. The headings of the Sections of this Agreement are inserted for convenience of reference only and shall not be considered a part hereof. 2.7. COUNTERPARTS. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. [Remainder of Page Intentionally Left Blank] -8- IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date first forth above. THE COMPANY: NEWSTAR MEDIA INC. By: /s/ NEIL TOPHAM ------------------------------------- Name: Neil Topham Title: Vice President & Chief Financial Officer THE PURCHASERS: APOLLO PARTNERS, LLC By: /s/ TERRENCE A. ELKES ------------------------------------- Terrence Elkes Manager /s/ RON LIGHTSTONE ------------------------------------- Ronald Lightstone -9- EX-10.35 3 STANDARD OFFER FOR REAL ESTATE STANDARD OFFER, AGREEMENT AND ESCROW INSTRUCTIONS FOR PURCHASE OF REAL ESTATE (NON-RESIDENTIAL) AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION July 13, 1998 ----------------------------- (Dale for Reference Purposes) 1. BUYER. 1.1 Barry Beitler and Tony Dorn and/or Assignee/Nominee ,(the Buyer) hereby offers to purchase the real property, hereinafter described, from the owner thereof (the "Seller") (collectively, the "Parties" or individually, a "Party"), through an escrow (the "Escrow") to close on August 28, 1998 (the "Expected Closing Date") to be held by Professional Escrow (Linda Drumm) (the "Escrow Holder") whose address is 415 N. Crescent Drive, Beverly Hills, CA 90212, Phone No. (310) 274-0366, Facsimile No. (310) 275-2144 upon the terms and conditions set forth in this agreement (the "Agreement"). Buyer shall have the right to assign Buyer's rights hereunder, but any such assignment shall not relieve Buyer of Buyer's obligations herein unless the Seller expressly releases Buyer. 1.2 The term "Date of Agreement" as used herein shall be the date when by execution and delivery (as defined in paragraph 20.2) of this document or a subsequent counter-offer thereto, Buyer and Seller have reached agreement in writing whereby Seller agrees to sell, and Buyer agrees to purchase, the Property upon terms accepted by both Parties. 2. PROPERTY. 2.1 The real property (the "Property") that is the subject of this offer consists of (insert a brief physical description) a 2-story approximate 22,000 square foot office building on approximately 32,800 square feet of fee simple land is located in the City of West Hollywood, County of Los Angeles State of CA, is commonly known by the street address of 8955 Beverly Boulevard, West Hollywood and is legally described as: To be supplied to escrow 2.2 If the legal description of the Property is not complete or is inaccurate, this Agreement shall not be invalid and the legal description shall be completed or corrected to meet the requirements of First American Title Company (Larry Schmidt and Joe Galarze) (the "Title Company"), which Title Company shall issue the title policy hereinafter described. 2.3 The Property includes, at no additional cost to Buyer, the permanent improvements thereon, including those items which the law of the state in which the Property is located provides is part of the Property, as well as the following items, if any, owned by Seller and presently located in the Property: electrical distribution systems (power panels, buss ducting, conduits, disconnects, lighting fixtures), telephone distribution systems (lines, jacks and connections), space heaters, air conditioning equipment, air lines, fire sprinkler systems, security systems, carpets, window coverings, wall coverings, and any and all personal property used in connection with the operation of the Property as distinguished from the operation of Seller's business (collectively, the "Improvements"). 2.4 If the Property is located in the State of California, the Broker(s) is/are required under the Alquist-Priolo Special Studies Zones Act, to disclose to a prospective purchaser of real property whether the property being purchased is located within a delineated special studies zone (a zone that encompasses a potentially or recently active trace of an earthquake fault that is deemed by the State Geologist to be sufficiently active and well defined enough to constitute a potential hazard to structures from surface faulting or fault (creep). If the Property is located within such a special studies zone, its development may require a geologic report from a state registered geologist. In accordance with such law, the Broker(s) hereby inform(s) Buyer that the Property [X] (a) Is not within such a special studies zone. [ ] (b) Is within such a special studies zone. 2.5 If (1) the Property is located in the State of California, (2) the Improvements were constructed prior to 1975, and (3) the Improvements include structures with (i) pre-cast (e.g., tilt-up) concrete or reinforced masonry walls together with wood frame floors or roofs or (ii) unreinforced masonry walls, California law requires that Seller or Sellers Broker provide Buyer with a copy of The Commercial Property Owners Guide to Earthquake Safety (the "Booklet") published by the California Seismic Safety Commission. Seller and Sellers Broker hereby inform Buyer that the Property: [ ] (a) meets the foregoing requirements, and Seller and Seller's Broker are required to provide Buyer with a copy of the Booklet. Seller or Seller's Broker shall, within five (5) business days of the Date of Agreement, deliver to Buyer a copy of the Booklet and a completed "Commercial Property Earthquake Weakness Disclosure Report" contained in the Booklet duly executed by Seller. Within five (5) business days of Buyers receipt of said Disclosure Report, Buyer shall deliver a duly countersigned copy of the same to Escrow Holder, with a copy to Seller and Seller's Broker. Escrow Holder is hereby instructed that the Escrow shall not close unless and until Escrow Holder has received the Disclosure Report duly signed by both Seller and Buyer. [X] (b) does not meet the foregoing requirements requiring the delivery of the Booklet. 3. PURCHASE PRICE. 3.1 The purchase price (the "Purchase Price") to be paid by Buyer to Seller for the Property shall be
$3,800,000.00, payable as follows: - ------------- (a) Cash down payment, including the Deposit as defined in paragraph 4.3 (or if an all cash transaction, the Purchase Price): $ 1,900,000.00 (STRIKE IF NOT APPLICABLE) (b) Amount of "New Loan" as defined in paragraph 5.1, if any: $ _____________ (c) Buyer shall take title to the Property subject to the following existing deed(s) of trust ("Existing Deed(s) of Trust") securing the existing promissory note(s) ("Existing Note(s)"): (i) An Existing Note (the "First Note") with an unpaid principal balance as of the Closing of approximately: $ 1,500,000.00 Said existing note is payable at $________________________per month, including interest at the rate of Prime Rate* plus 2% per annum until paid (and/or the entire unpaid balance is due on or before September 8, 1998). (ii) An Existing Note (the "Second Note") with an unpaid principal balance as of the Closing of approximately: $ _____________ Said Existing Note is payable at $_____________________ per month, including interest at the rate of _______ % per annum until paid (and/or the entire unpaid balance is due on _____________________________). (d) Buyer shall give Seller a deed of trust (the "Purchase Money Deed of Trust") on the Property, to secure the promissory note of Buyer to Seller described in Paragraph 6 (the "Purchase Money Note") in the amount of: $ 400,000.00 Total Purchase Price $ 3,800,000.00
3.2 If an Existing Deed of Trust permits the beneficiary thereof to require payment of a transfer fee as a condition to the transfer of the Property subject to such Existing Deed of Trust, Buyer agrees to pay transfer fees and costs of up to one and one-half percent (1 1/2%) of the unpaid principal balance of the applicable Existing Note. 4. DEPOSITS 4.1 Buyer hereby delivers a check in the sum of $100,000.00, payable to Professional Escrow Company, to be (CHECK APPLICABLE BOX) [X] forthwith deposited in the payee's trust account [ ] held uncashed until the Date of Agreement. when cashed, the check shall be deposited into the payee's trust account to be applied toward the Buyer's check or funds shall, upon request by Buyer, be promptly returned to Buyer. *Prime Rate means the rate that Chase Manhattan Bank announces from time-to-time as its prime lending rate, as in effect from time-to-time PAGE 1 /s/ T.D. /s/ R.M. /s/ B.B. /s/ N.T. 4.2 Within five (5) business days after the Day of Agreement, Buyer shall deposit with Escrow Holder the additional sum of $ -0- to be applied to the Purchase Price at the Closing. 4.3 The funds deposited with Escrow Holder by or on behalf of Buyer under paragraphs 4.1 and 4.2 above (collectively, the "Deposit"), shall be deposited by Escrow Holder in such State or Federally chartered bank as Buyer may select and in such interest-bearing account or accounts as Escrow Holder or Broker(s) deem appropriate and consistent with the timing requirements of this transaction. The interest therefrom shall accrue to the benefit of Buyer, who hereby acknowledges that there may be penalties or interest forfeitures if the applicable instrument is redeemed prior to its specified maturity. Buyer's Federal Tax Identification Number is _______________________. 5. FINANCING CONTINGENCY. - THIS SECTION IS CROSSED OUT AND DELETED 6. PURCHASE MONEY NOTE. (STRIKE IF NOT APPLICABLE) 6.1 The Purchase Money Note shall provide for interest on unpaid principal at the rate of 8.000 % per annum, with principal interest to be paid as follows: all interest shall accrue and the entire Note and Deed of Trust shall be due and payable on or before September 8, 1998. The Purchase Money Note and Purchase Money Deed of Trust shall be on the current forms commonly used by Escrow Holder, and be junior and subordinate only to the Existing Note(s) and/or New Loan expressly called for by this Agreement. 6.2 The Purchase Money Note and the Purchase Money Deed of Trust shall contain provisions regarding the following: (a) PREPAYMENT. Principal may be prepaid in whole or in part at any time without penalty, at the option of Buyer. (b) LATE CHARGE. A late charge of 6% shall be payable with respect to any payment of principal, interest, or other charges, not made within ten (10) days after it is due. (c) DUE ON SALE. In the event the Buyer sells or transfers title to the Property or any portion thereof, then the Seller may, at Sellers option, require the entire unpaid balance of the Purchase Money Note to be then paid in full. 7. REAL ESTATE BROKERS. THIS SECTION IS CROSSED OUT AND DELETED 8. ESCROW AND CLOSING. 8.1 Upon acceptance hereof by Seller, this Agreement, including any counter-offers incorporated herein by the Parties, shall constitute not only the agreement of purchase and sale between Buyer and Seller, but also instructions to Escrow Holder for the consummation of the Agreement through the Escrow. Escrow Holder shall not prepare any further escrow instructions restating or amending this Agreement unless specifically so instructed by the Parties or a Broker herein. 8.2 Escrow Holder is hereby authorized and instructed to conduct the Escrow in accordance with this Agreement, applicable law, custom and practice of the community in which Escrow H older is located, including any reporting requirements of the Internal Revenue Code. In the event of a conflict between the law of the state where the Property is located and the law of the state where the Escrow Holder is located, the law of the state where the Property is located shall prevail. 8.3 Subject to satisfaction of the contingencies herein described, Escrow Holder shall close this escrow (the "Closing") by recording the grant deed and other documents required to be recorded and by disbursing the funds and documents in accordance with this Agreement. 8.4 If this transaction is terminated for non-satisfaction and non-waiver of a Buyer's Contingency, as defined in paragraph 9.4, then neither of the Parties shall thereafter have any liability to the other under this Agreement, except to the extent of the breach of any affirmative covenant or warranty in this Agreement that may have been involved. In the event of such termination, Buyer shall be promptly refunded all funds deposited by or on behalf of Buyer with a Broker, Escrow Holder or Seller, less only Title Company and Escrow Holder cancellation fees and costs, all of which shall be Buyers obligation. 8.5 The Closing shall occur on the Expected Closing Date, or as soon thereafter as the Escrow is in condition for Closing; provided, however, that if the Closing does not occur by the Expected Closing Date and the Expected Closing Date is not extended by mutual instructions of the Parties, a Party hereto not then in default under this Agreement may notify the other Party, Escrow Holder, and Broker(s), in writing that, unless the Closing occurs within five (5) business days following said notice, the Escrow and this Agreement shall be deemed terminated without further notice or instructions. 8.6 Should the Closing not occur during said five (5) day period, this Agreement and Escrow shall be deemed terminated and Escrow Holder shall forthwith return all monies and documents less only Escrow Holder's reasonable fees and expenses, to the party who deposited them. Such Party shall indemnify and hold escrow holder harmless in connection with such return. However, no refunds or documents shall be returned to a party claimed by written notice to Escrow Holder to be in default under this Agreement. 8.7 Except as otherwise provided herein, the termination of Escrow and this Agreement and/or the return of deposited funds or documents shall not relieve or release either Buyer or Seller from any obligation to pay Escrow Holder's fees and costs or constitute a waiver, release or discharge of any breach or default that has occurred in the performance of the obligations, agreements, covenants or warranties contained herein. 8.8 If this Agreement terminates for any reason other than Seller's breach or default, then at Seller's request, and as a condition to the return of Buyer's deposit, Buyer shall within five (5) days after written request deliver to Seller, at no charge, copies of all surveys, engineering studies, soil reports, maps, master plans, feasibility studies and other similar items prepared by or for Buyer that pertain to the Property. 9. CONTINGENCIES TO CLOSING. THERE ARE NO CONTINGENCIES TO CLOSING. PAGE 2 /s/ T.D. /s/ R.M. /s/ B.B. /s/ N.T. ALL OF SECTION 9 IS CROSSED OUT AND DELETED 10. DOCUMENT REQUIRED AT CLOSING: 10.1 Escrow Holder shall cause to be issued to Buyer a standard coverage (or ALTA extended, if so elected under paragraph 9.1(f) owner's form policy of title insurance effective as of the Closing, issued by the Title Company in the full amount of the Purchase Price, insuring title to the Property vested in Buyer, subject only to the exceptions approved by Buyer. In the event there is a Purchase Money Deed of Trust in this transaction, the policy of title insurance shall be a joint protection policy insuring both Buyer and Seller. "IMPORTANT: IN A PURCHASE OR EXCHANGE OF REAL PROPERTY, IT MAY BE ADVISABLE TO OBTAIN TITLE INSURANCE IN CONNECTION WITH THE CLOSE OF ESCROW SINCE THERE MAY BE PRIOR RECORDED LIENS AND ENCUMBRANCES WHICH AFFECT YOUR INTEREST IN THE PROPERTY BEING ACQUIRED. A NEW POLICY OF TITLE INSURANCE SHOULD BE OBTAINED IN ORDER TO ENSURE YOUR INTEREST IN THE PROPERTY THAT YOU ARE ACQUIRING." 10.2 Seller shall deliver or cause to be delivered to Escrow Holder in time for delivery to Buyer at the Closing, an original ink signed: (a) Grant deed (or equivalent), duly executed and in recordable form, conveying fee title to the Property to Buyer. (b) If paragraph 3.1(c) has not been stricken, the Beneficiary Statements concerning Existing Note(s). PAGE 3 /s/ T.D. /s/ R.M. /s/ B.B. /s/ N.T. (c) If applicable, the Existing Leases and Other Agreements together with duly executed assignments thereof by Seller and Buyer. The assignment of Existing Leases shall be on the most recent Assignment and Assumption of Lessor's Interest in Lease form published by the A.I.R. or its equivalent. (d) If applicable, the Tenancy Statements executed by Seller and the Tenant(s) of the Property. (e) An affidavit executed by Seller to the effect that Seller is not a "foreign person" within the meaning of Internal Revenue Code Section 1445 or successor statutes. If Seller does not provide such affidavit an form reasonably satisfactory to Buyer at least three (3) business days prior to the Closing. Escrow Holder shall at the Closing deduct from Seller's proceeds and remit to Internal Revenue Service such sum as is required by applicable Federal law with respect to purchases from foreign sellers. 10.3 Buyer shall deliver or cause to be delivered to Seller through escrow: (a) The cash portion of the Purchase Price and such additional sums as are required of Buyer under this Agreement for prorations, expenses and adjustments. The balance of the cash portion of the Purchase Price. including Buyer's escrow charges and other cash charges, if any, shall be deposited by Buyer with Escrow Holder, by cashier's check drawn upon a local major banking institution, federal funds wire transfer, or any other method acceptable to Escrow Holder as Immediately collectable funds, no later than 11:00 am. on the business day prior to the Expected Closing Date. (b) If a Purchase Money Note and Purchase Money Deed of Trust are called for by this Agreement, the duly executed originals of those documents, the Purchase Money Deed of Trust being in recordable form, together with evidence of fire insurance on the improvements in the amount of the full replacement cost naming Seller as a mortgage loss payee, and a real estate tax service contract (at Buyers expense), assuring Seller of notice of the status of payment of real property taxes during the life of the Purchase Money Note. (c) The assumption portion of the Assignment and Assumption of Lessor's Interest in Lease form specified in paragraph 10.2(c), above, duly executed by Buyer with respect to the obligations of the Lessor accruing after the Closing as to each Existing Lease. (d) Assumptions duly executed by Buyer of the obligations of Seller that accrue after Closing under any Other Agreements. (e) If applicable, a written assumption duly executed by Buyer of the loan documents with respect to Existing Notes. 11. PRORATIONS, EXPENSES AND ADJUSTMENTS. 11.1 TAXES. Real property taxes payable by the owner of the Property shall be prorated through Escrow as of the date of the Closing, based upon the latest tax bill available. The Parties agree to prorate as of the Closing any taxes assessed against the Property by supplemental bill levied by reason of events occurring prior to the Closing. Payment shall be made promptly in cash upon receipt of a copy of any such supplemental bill of the amount necessary to accomplish such proration. Seller shall pay and discharge in full at or before the Closing the prorated unpaid balance of any special assessment bonds. 11.2 INSURANCE. If Buyer elects to take an assignment of the existing casualty and/or liability insurance that is maintained by Seller, the current premium therefor shall be prorated through Escrow as of the date of Closing. 11.3 RENTALS, INTEREST AND EXPENSES. Collected rentals, interest on Existing Notes, utilities, and operating expenses shall be prorated as of the date of Closing. The Parties agree to promptly adjust between themselves outside of Escrow any rents received after the Closing. 11.4 SECURITY DEPOSIT. Security Deposits held by Seller shall be given to Buyer by a credit to the cash required of Buyer at the Closing. 11.5 POST CLOSING MATTERS. Any item to be prorated that is not determined or determinable at the Closing shall be promptly adjusted by the Parties by appropriate cash payment outside of Escrow when the amount due is determined. 11.6 VARIATIONS IN EXISTING NOTE BALANCES. In the event that Buyer is taking title to the Property subject to an Existing Deed of Trust(s), and in the event that a Beneficiary Statement as to the applicable Existing Note(s) discloses that the unpaid principal balance of such Existing Note(s) at the Closing will be more or less than the amount set forth in paragraph 3.1(c) hereof (the "Existing Note Variation"), then the Purchase Money Note(s) shall be reduced or increased by an amount equal to such Existing Note Variation. If there is to be no Purchase Money Note, the cash required at the Closing per paragraph 3.1(a) shall be reduced or increased by the amount of such Existing Note Variation. 11.7 VARIATIONS IN NEW LOAN BALANCE. In the event Buyer is obtaining a New Loan and in the event that the amount of the New Loan actually obtained is greater than the amount set forth in paragraph 5.1 hereof, the Purchase Money Note, if one is called for in this transaction, shall be reduced by the excess of the actual face amount of the New Loan over such amount as designated in paragraph 5.1 hereof. 11.8 ESCROW COSTS AND FEES. Buyer and Seller shall each pay one-half of the Escrow Holder's charges and Seller shall pay the usual recording fees and any required documentary transfer taxes. Seller shall pay the premium for a standard coverage owners or Joint protection policy of title insurance. 12. REPRESENTATION AND WARRANTIES OF SELLER AND DISCLAIMER. 12.1 Seller's warranties and representations shall survive the Closing and delivery of the deed and unless otherwise noted herein, are true, material and relied upon by Buyer and Broker(s) in all respects, both as of the Date of Agreement, and as of the date of Closing. Seller hereby makes the following warranties and representations to Buyer and Broker(s): (a) AUTHORITY OF SELLER. Seller is the owner of the Property and/or has the full right, power and authority to sell, convey and transfer the Property to Buyer as provided herein, and to perform Seller's obligations hereunder. (b) MAINTENANCE DURING ESCROW AND EQUIPMENT CONDITION AT CLOSING. Except as otherwise provided in paragraph 9.1(l) hereof dealing with destruction, damage or loss, Seller shall maintain the Property until the Closing in its present condition, ordinary wear and tear excepted. The heating. ventilating, air conditioning, PLUMBING, elevators, loading doors and electrical systems shall be in good operating order and condition at the time of Closing. (c) HAZARDOUS SUBSTANCES/STORAGE TANKS. Seller has no knowledge, except as otherwise disclosed to Buyer in writing, of the existence or prior existence on the Property of any Hazardous Substance (as defined in paragraph 9.1(c)). nor of the existence or prior existence of any above or below ground storage tank or tanks. (d) COMPLIANCE. Seller has no knowledge of any aspect or condition of the Property which violates applicable laws, rules, regulations, codes, or covenants, conditions or restrictions, or of improvements or alterations made to the Property without a permit where one was required, or of any unfulfilled order or directive of any applicable governmental agency or casualty insurance company that any work of investigation. remediation, repair, maintenance or improvement is to be performed on the Property. (e) CHANGES IN AGREEMENTS. Prior to the Closing. Seller will not violate or modify, orally or in writing, any Existing Lease or Other Agreement, or create any new leases or other agreements affecting the Property, without Buyer's written approval, which approval will not be unreasonably withheld. (f) POSSESSORY RIGHTS. Seller has no knowledge that anyone will, at the Closing, have any right to possession of the Property, except as disclosed by this Agreement or otherwise in writing to Buyer. (g) MECHANICS' LIENS. There are no unsatisfied mechanic's or materialman's lien rights concerning the Property. (h) ACTIONS, SUITS OR PROCEEDINGS. Seller has no knowledge of any actions, suits or proceedings pending or threatened before any commission, board, bureau, agency, instrumentality, arbitrator(s) court or tribunal that would affect the Property or the right to occupy or utilize same. (i) NOTICE OF CHANGES. Seller will promptly notify Buyer and Broker(s) in writing of any Material Change (as defined in paragraph 9.1(m)) affecting the Property that becomes known to Seller prior to the Closing. (j) NO TENANT BANKRUPTCY PROCEEDINGS. Seller has no notice or knowledge that any tenant of the Property is the subject of a bankruptcy or insolvency proceeding. (k) NO SELLER BANKRUPTCY PROCEEDINGS. Seller is not the subject of a bankruptcy, insolvency or probate proceeding. 12.2 Buyer hereby acknowledges that, except as otherwise stated in this Agreement, Buyer is purchasing the Property in its existing condition and will, by the time called for herein, make or have waived all inspections of the Property Buyer believes are necessary to protect its own interest in. and its contemplated use of, the Property. The Parties acknowledge that, except as otherwise stated in this Agreement, no representations, inducements, promises, agreements, assurances, oral or written, concerning the Property, or any aspect of the Occupational Safety and Health Act, hazardous substance laws, or any other act, ordinance or law, have been made by either Party or Broker, or relied upon by either Party hereto. 13. POSSESSION. 13.1 Possession of the Property shall be given to Buyer at the Closing subject to the rights of tenants under Existing Leases. 14. BUYER'S ENTRY. 14. BUYER'S ENTRY. 14.1 At any time during the Escrow period, Buyer, and its agents and representatives, shall have the right at reasonable times and subject to rights of tenants under Existing Leases, to enter upon the Property for the purpose of making inspections and tests specified in this Agreement. Following any such entry or work, unless otherwise directed in writing by Seller, Buyer shall return the Property to the condition it was in prior to such entry or work, including the recompaction or removal of any disrupted soil or material as Seller may reasonably direct. All such Inspections and tests and any other work conducted or materials furnished with respect to the Property by or for Buyer shall be paid for by Buyer as and when due and Buyer shall indemnity, defend, protect and hold harmless Seller and the Property of and from any and all claims, liabilities, demands, losses, costs, expenses (including reasonable attorneys fees), damages or recoveries, including those for injury to person or property, arising out of or relating to any such work or materials or the acts or omissions of buyer, its agents or employees in connection therewith. 15. FURTHER DOCUMENTS AND ASSURANCES. 15.1 Buyer and Seller shall each, diligently and in good faith, undertake all actions and procedures reasonably required to place the escrow in condition for closing as and when required by this agreement. buyer and seller agree to provide all further information, and to execute and deliver all further documents and instruments, reasonably required by escrow holder or the title company. 16. ATTORNEYS' FEES. 16.1 In the event of any litigation or arbitration between the Buyer, Seller, and Broker(s), or any of them, concerning this transaction, the prevailing party shall be entitled to reasonable attorney's fees and costs. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred in good faith. 17. PRIOR AGREEMENTS/AMENDMENTS. 17.1 The contract in effect as of the date of agreement supersedes any and all prior agreements between seller and buyer regarding the property. 17.2 Amendments to this agreement are effective only if made in writing and executed by buyer and seller. PAGE 4 /s/ R.M. /s/ B.B. /s/ N.T. 18. BROKER'S RIGHTS. 18.1 If this sale shall not be consummated due to the default of either the Buyer or Seller, the defaulting party shall be liable to and shall pay to Broker(s) the commission that Broker(s) would have received had the sale been consummated. This obligation of Buyer, if Buyer is the defaulting party, is in addition to any obligation with respect to liquidated damages. 18.2 Upon the Closing. Broker(s) is/are authorized to publicize the facts of this transaction. 19. NOTICES. 19.1 Whenever any Party hereto, Escrow Holder or Broker(s) herein shall desire to give or serve any notice, demand request approval or other communication, each such communication shall be in writing and shall be delivered personally. by messenger or by mail. postage prepaid, addressed as set forth adjacent to that Party's or Broker's signature on this Agreement or by telecopy with receipt confirmed by telephone. Service of any such communication shall be deemed made on the date of actual receipt at such address. 19.2 Any Party or Broker hereto may from time to time, by notice In writing served upon the other Party as aforesaid, designate a different address to which, or a different person or additional persons to whom, all communications are thereafter to be made. 20. DURATION OF OFFER. 20.1 If this offer shall not be accepted by Seller on or before 5:00 p.m. according to the time standard applicable to the city of Los Angeles on the date of July 25, 1998, .it shall be deemed automatically revoked. 20.2 The acceptance of this offer, or of any subsequent counter-offer hereto, that creates an agreement between the Parties as described in paragraph 1.2, shall be deemed made upon delivery to the other Party or either Broker herein of a duly executed writing unconditionally accepting the last outstanding offer or counter-offer. 21. LIQUIDATED DAMAGES. (THIS LIQUIDATED DAMAGES PARAGRAPH IS APPLICABLE ONLY IF INITIALED BY BOTH PARTIES.) 21.1 THE PARTIES AGREE THAT IT WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO FIX, PRIOR TO SIGNING THIS AGREEMENT, THE ACTUAL DAMAGES WHICH WOULD BE SUFFERED BY SELLER IF BUYER FAILS TO PERFORM ITS OBLIGATIONS UNDER THIS AGREEMENT. THEREFORE, IF, AFTER THE SATISFACTION OR WAIVER OF ALL CONTINGENCIES PROVIDED FOR THE BUYER'S BENEFIT, BUYER BREACHES THIS AGREEMENT, SELLER SHALL BE ENTITLED TO LIQUIDATED DAMAGES IN THE AMOUNT OF $ 50,000.00 PLUS INTEREST, IF ANY, ACCRUED THEREON. UPON PAYMENT OF SAID SUM TO SELLER, BUYER SHALL BE RELEASED FROM ANY FURTHER LIABILITY TO SELLER, AND ANY ESCROW CANCELLATION FEES AND TITLE COMPANY CHARGES SHALL BE PAID BY SELLER. ------------------------- --------------------------- BUYER INITIALS SELLER INITIALS 22. ARBITRATION OF DISPUTES: THIS SECTION IS CROSSED OUT AND DELETED 23. APPLICABLE LAW 23.1 This Agreement shall be governed by, and paragraph 22.3 amended to refer to, the laws of the state In which the Property is located. 24. TIME OF ESSENCE. 24.1 Time is of the essence of this Agreement. 25. COUNTERPARTS. 25.1 This Agreement may be executed by Buyer and Seller in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. Escrow Holder, after verifying that the counterparts are identical except for the signatures, is authorized and instructed to combine the signed signature pages on one of the counterparts, which shall then constitute the Agreement. 26. DISCLOSURES REGARDING THE NATURE OF A REAL ESTATE AGENCY RELATIONSHIP. 26.1 The Parties and Broker(s) agree that their relationship(s) shall be governed by the principles set forth in California Civil Code, Section 2375, as summarized in the following paragraph 26.2. 26.2 When entering Into a discussion with a real estate agent regarding a real estate transaction, a Buyer or Seller should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Buyer and Seller acknowledge being advised by the Broker(s) in this transaction, as follows: (a) SELLER'S AGENT. A Seller's agent under a listing agreement with the Seller acts as the agent for the Seller only. A Seller's agent or subagent has the following affirmative obligations: (1) TO THE SELLER: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Seller. (2) TO THE BUYER AND THE SELLER: a. Diligent exercise of reasonable skill and care in performance of the agent's duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above. (b) BUYER'S AGENT: A selling agent can, with a Buyer's consent, agree to act as agent for the Buyer only. In these situations, the agent is not the Seller's agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Seller. An agent acting only for a Buyer has the following affirmative obligations: (1) TO THE BUYER: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Buyer. (2) TO THE BUYER AND THE SELLER: a. Diligent exercise of reasonable skill and care in performance of the agent's duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of the Parties. An agent is not obligated to reveal to either Party any confidential information obtained form the other Party which does not involve the affirmative duties set forth above. PAGE 5 /s/ T.D. /s/ R.M. /s/ B.B. /s/ N.T. (c) AGENT REPRESENTING BOTH SELLER AND BUYER. A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Seller and the Buyer in a transaction, but only with the knowledge and consent of both the Seller and the Buyer. (1) IN a DUAL AGENCY SITUATION, the agent has the following affirmative obligations to both the Seller and the Buyer: a. A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either Seller or the Buyer. b. Other duties to the Seller and the Buyer as stated above in their respective sections (a) or ~b) of this paragraph 26.2. (2) In representing both Seller and Buyer, the agent may not without the express permission of the respective Party, disclose to the other Party that the Seller will accept a price less than the listing price or that the Buyer will pay a price greater than the price offered. (3) The above duties of the agent In a real estate transaction do not relieve a Seller or Buyer from the responsibility to protect their own interests Buyer and Seller should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate, If legal or tax advice is desired, consult a competent professional. (d) FURTHER DISCLOSURES. Throughout this transaction Buyer and Seller may receive more than one disclosure, depending upon the number of agents assisting in the transaction, Buyer and Seller should each read its contents each time it is presented, considering the relationship between them and the real estate agent in this transaction and that disclosure. 26.3 CONFIDENTIAL INFORMATION: Buyer and Seller agree to Identify to Broker(s) as "Confidential" any communication or information given Broker(s) that is considered by such Party to be confidential. 27. ADDITIONAL PROVISIONS: Additional provisions of this offer, If any, are as follows or are attached hereto by an addendum consisting of paragraphs 29 through 32. It will be presumed no other provisions are included unless specified here.) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ BUYER AND SELLER HEREBY ACKNOWLEDGE THAT THEY HAVE BEEN AND ARE NOW ADVISED BY THE BROKER(S) TO CONSULT AND RETAIN THEIR OWN EXPERTS TO ADVISE AND REPRESENT THEM CONCERNING THE LEGAL AND INCOME TAX EFFECTS OF THIS AGREEMENT, AS WELL AS THE CONDITION AND/OR LEGALITY OF THE PROPERTY, THE IMPROVEMENTS AND EQUIPMENT THEREIN. THE SOIL THEREOF, THE CONDITION OF TITLE THERETO, THE SURVEY THEREOF. THE ENVIRONMENTAL ASPECTS THEREOF, THE INTENDED AND/OR PERMITTED USAGE THEREOF. THE EXISTENCE AND NATURE OF TENANCIES THEREIN. THE OUTSTANDING OTHER AGREEMENTS, IF ANY. WITH RESPECT THERETO, AND THE EXISTING OR CONTEMPLATED FINANCING THEREOF, AND THAT THE BROKER(S) IS/ARE NOT TO BE RESPONSIBLE FOR PURSUING THE INVESTIGATION OF ANY SUCH MATTERS UNLESS EXPRESSLY OTHERWISE AGREED TO IN WRITING BY BROKER(S) AND BUYER OR SELLER. THIS FORM IS NOT FOR USE IN CONNECTION WITH THE SALE OF RESIDENTIAL PROPERTY. IF THIS AGREEMENT HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS AGREEMENT OR THE TRANSACTION INVOLVED HEREIN. THE UNDERSIGNED BUYER OFFERS AND AGREES TO BUY THE PROPERTY ON THE TERMS AND CONDITIONS STATED AND ACKNOWLEDGES RECEIPT OF A COPY HEREOF. BUYER: BARRY BEITLER AND TONY DORN AND/OR ASSIGNEE / NOMINEE By /s/ Barry Beitler /Date 8-31-98 ------------------------------ --------------------- Name Printed: Barry Beitler -------------------------------- /s/ Tony Dorn - ------------------------- Tony Dorn 825 So. Barrington Avenue - ------------------------- Address Los Angeles, CA 90049 - ------------------------- (310) 820-2955 (310) 820-7224 - ---------------------------- ---------------------------- Telephone Facsimile No. 28. ACCEPTANCE. 28.1 Seller accepts the foregoing offer to purchase the Property and hereby agrees to sell the Property to Buyer on the terms and conditions therein specified. SECTIONS 28.2 and 28.3 ARE CROSSED OUT AND DELETED NOTE: A PROPERTY INFORMATION SHEET IS REQUIRED TO BE DELIVERED TO BUYER BY SELLER UNDER THIS AGREEMENT. SELLER: NEWSTAR MEDIA, INC. a California corporation - -------------------------------------------------- By /s/ Robert Murray Date 8-31-98 Name Printed: Robert Murray Title: Vice President and General Counsel /s/ Neil Topham Chief Financial Officer 8955 Beverly Boulevard - ---------------------------------------- Address West Hollywood, CA 90048 - ---------------------------------------- (310) 786-1600 - -------------------------------- ------------------------------- Telephone Facsimile No. PAGE 6 ADDENDUM TO THAT CERTAIN OFFER, AGREEMENT & ESCROW INSTRUCTIONS FOR PURCHASE OF REAL ESTATE DATED JULY 13,1998 BY AND BETWEEN BARRY BEITLER AND TONY DORN AND/OR NOMINEE AS BUYER AND NEWSTAR MEDIA, INC., A CALIFORNIA CORPORATION AS SELLER FOR THE PROPERTY KNOWN AS 8955 BEVERLY BOULEVARD WEST HOLLYWOOD, CALIFORNIA This Addendum shall serve to amend the above Purchase Agreement. It is understood and agreed between the parties that should the typed portion of this Addendum ever be construed to be in conflict with the printed portion of the Purchase Agreement, the typed portions of this Addendum shall prevail. 29. BUYER'S CONTINGENCY PERIOD. All contingencies to the close of escrow other than clean title at closing have been removed. Buyer reserves the right to perfect title to its satisfaction prior to closing. 30. The first sentence of paragraph 14.1 shall be deleted and the following substituted: "If Buyer intends to go onto the Property before the close of escrow, Buyer shall provide verbal notice to the Seller at least one (1) day in advance. The Seller or the Seller's Agent shall have the right to accompany the Buyer at all times on the Property, the intention being to avoid alerting tenants and other of Buyer's purchase of the Property. If Buyer conducts any tests, surveys, or investigations on the Property during the period prior to the close of escrow, Buyer shall provide to Seller copies of any written reports obtained by Buyer pursuant to Buyer's inspection of the Property and Buyer shall indemnify and hold the Seller harmless from any and all costs associated with such tests, surveys, or investigations." 31. DESIGNATION OF NOMINEE OR ASSIGNEE/1031 EXCHANGE. Buyer has made Seller aware that it intends to use this Property to complete a 1031 Tax Deferred Exchange, presently in escrow at Timcor Financial Corp. and set to close approximately August 28, 1998. Seller agrees to cooperate whenever necessary, at no cost to Seller, to complete the exchange; provided that (i) completion of such Tax Deferred Exchange shall not be a condition to the purchase of the Property by Buyer; (ii) the Tax Deferred Exchange shall not delay the Closing Date; and (iii) Seller shall not be required to take title to any other property in connection with such Tax Deferred Exchange. 32. SELLER LEASEBACK. Buyer has entered escrow on the Property based upon Seller's representations of a sale/leaseback under the following terms and conditions: 32.1 Seller shall lease the Property from Buyer from close of escrow for a period of one (1) year (12 months) on an "as is, where is" basis at a rental of Three Hundred Eighty Thousand Dollars ($380,000.00) per annum, payable on the first (1St) day of each month at Thirty-One Thousand Six Hundred Sixty-Six Dollars and Sixty-Six Cents ($31,166.66). 32.2 Buyer shall have no obligations whatsoever for any tenant improvement costs or any maintenance or upkeep costs during the lease term. 32.3 The lease, to be prepared and executed during Buyer's contingency period, shall be an AIR (American Industrial Real Estate Association) Single-Tenant Net lease. 32.4 At the end of the lease, the building and all of its systems shall be kept and returned to Buyer/Landlord in the same condition as of the close of escrow, reasonable wear and tear excepted. /s/ T.D. /s/ R.M. /s/ B.B. /s/ N.T. 32.5 Parking shall be free during the term. 32.6 There will be no options or rights to extend the lease term. 32.7 The Property shall be leased on an "as is, where is" basis. 32.8 All other terms to be negotiated in final lease documents.
Agreed to & ACCEPTED: "SELLER" AGREED TO & ACCEPTED: "BUYER" NEWSTAR MEDIA INC., BARRY BEITLER AND TONY DORN AND/OR NOMINEE A CALIFORNIA CORPORATION BY:/s/ Robert Murray BY: /s/ Barry Beitler - -------------------------------- -------------------------------- Its Authorized Representative Barry Beitler DATE: 8-31-98 DATE: 8-31-98 ---------------------------- --------------------------- /s/ Neil Topham BY: /s/ Tony Dorn Chief Financial Officer ----------------------------- Tony Dorn DATE: ----------------------------
ADDENDUM Page 2 of 2 EX-10.36 4 RESIDENTIAL PURCHASE AGREEMENT CALIFORNIA RESIDENTIAL PURCHASE AGREEMENT ASSOCIATION RECEIPT FOR DEPOSIT OF REALTORS Date: July 20, 1998, at Los Angeles, California, Received From Barry Beitler and Tony Dorn and/or Nominee ("Buyer"), A Deposit Of Ten Thousand and No/100 Dollars $ 10,000.00, toward the Purchase Price Of Five Hundred Thousand and No/l00 Dollars $ 500,000.00, For Purchase Of Property Situated in West Hollywood, County Of Los Angeles, California, Described As 8944 and 8948 Rosewood Avenue, ("Property').
1. FINANCING: Obtaining the loans below is not a contingency of this Agreement. Buyer shall act diligently and in good faith to obtain the designated loans. Obtaining deposit, down payment and closing costs is not a contingency. A. BUYER'S DEPOSIT shall be held uncashed until Acceptance and then deposited within 3 business days after Acceptance or [X]____________________________, [ ] with Escrow Holder, [ ] into Broker's trust account or [ ] __________________________, by Personal Check [ ] Cashier's Check [ ] Cash or [ ] _____________.................$ 50,000.00 B. INCREASED DEPOSIT shall be deposited with _____________________________ within _____ Days After Acceptance, or [ ] ____________________________ $ -0- C. FIRST LOAN IN THE AMOUNT OF.............................................$ 405,000.00 NEW First Deed of Trust In favor of SELLER, encumbering the Property, at 8% per annum until paid; no other points or fees D. ADDITIONAL FINANCING TERMS: all due and payable September 8, 1998........$ __________ [ ] seller financing. (CAR. Form SFA-141: [ ] junior or assumed financing. (C.A.R. Form PAA-14. paragraph 5) E. BALANCE OF PURCHASE PRICE (not including costs of obtaining loans and other closing costs) to be deposited....................................$ __________ with escrow holder within sufficient time to close escrow. F. TOTAL PURCHASE PRICE....................................................$ 455,000.00
G. THIS SECTION IS CROSSED OUT AND DELETED H. LOAN APPLICATIONS; PREOUALIFICATION: For NEW financing, within 5 (or 5 [ ] N/A) DAYS After Acceptance, Buyer shall provide Seller a letter from lender or mortgage loan broker stating that, based on a review of Buyer's written application and credit report. Buyer is prequalified for the NEW loan indicated above. If Buyer fails to provide such letter within that lime, Seller may cancel this Agreement in writing. I. [ ] APPRAISAL CONTINGENCY: (If checked) This Agreement is contingent upon Property appraising at no less than the specified total purchase price. The Appraisal contingency shall remain in effect for the same period as specified for the Loan Contingency in paragraph 1G. J. ALL CASH OFFER: If this is an all cash offer, Buyer shall, within 5 (or 5 [ ] N/A) Days After Acceptance, provide Seller written verification of sufficient funds to close this transaction. Seller may cancel this Agreement in writing within 5 Days After: (1) time to provide verification expires, if Buyer fails to provide verification; or (2) receipt of verification, If Seller reasonably disapproves it. 2. ESCROW: Close Of Escrow shall occur ____ DAYS After Acceptance (or [X] on September 1, 1998 (date)). Buyer and Seller shall deliver signed escrow instructions consistent with this Agreement [ ] within 5 Days After Acceptance, [ ] at least ____ Days before Close Of Escrow, or [ ] __________________. Seller shall deliver possession and occupancy of the Property to Buyer at ________ AM/PM, [ ] on the date of Close Of Escrow, or [ ] no later than _____ DAYS After date of Close Of Escrow, or [ ] _____________ Property shall be vacant, unless otherwise agreed in writing. If transfer of title and possession do not occur at the same lime, Buyer and Seller are advised to (a) consult with their insurance advisors, and (b) enter Into a written occupancy agreement.. Escrow instructions may include matters required to close this transaction which are not covered by this Agreement. The omission from escrow Instructions of any provision in this Agreement shall not constitute a waiver of that provision. 3. OCCUPANCY: Buyer [ ] does, [ ] does not, intend to occupy Property as Buyer's primary residence. 4. ALLOCATION OF COSTS: (Check boxes which apply. If needed, insert additional instructions in blank lines.) TRANSFER FEES: A. [ ] Buyer [X] Seller shall pay County transfer tax or transfer fee. B. [ ] Buyer [X] Seller shall pay City transfer tax or transfer fee. C. [ ] Buyer [ ] Seller shall pay Homeowners' Association transfer fee. TITLE AND ESCROW COSTS: D. [ ] Buyer [X] Seller shall pay for owner's title insurance policy, issued by FATCOLA (Larry Schmidt & Joe Galarze) company. E. [X] Buyer [X] Seller shall pay escrow fee. one-half (50%) each Escrow holder shall be Professional Escrow SEWER/SEPTIC/WELL COSTS: F. [X] Buyer [ ] Seller shall pay for sewer connection, if required by Law prior to Close Of Escrow. G. [X] Buyer [ ] Seller shall pay to have septic or private sewage disposal system inspected. H. [ ] Buyer [ ] Seller shall pay to have wells tested for water quality, potability, productivity, and recovery rate. OTHER COSTS: I. [ ] Buyer [ ] Seller shall pay for zone disclosure reports, if any (paragraph 7). J. [ ] Buyer [ ] Seller shall pay for Smoke Detector Installation and/or Water Heater bracing. Seller, prior to close of escrow, shall provide Buyer a written statement of compliance In accordance with state and local Law, unless exempt. K. [X] Buyer [ ] Seller shall pay the cost of compliance with any other minimum mandatory government retrofit standards and Inspections required as a condition of closing escrow under any Law. ________________________________________________ L. [ ] Buyer [ ] Seller shall pay the cost of a one-year home warranty plan, issued by ________________________, with the following optional coverage: ________________________. Policy cost not to exceed $ __________________. PEST CONTROL REPORT: M. [ ] Buyer [X] Seller shall pay for the Pest Control Report ("Report"), which shall be prepared by a company of Seller's choosing, a registered structural pest control company. N. [X] Buyer [ ] Seller shall pay for work recommended to correct conditions described in the Report as "Section 1,". O. [X] Buyer [ ] Seller shall pay for work recommended to correct conditions described in the Report as "Section2," if requested by buyer. Buyer and Seller acknowledge receipt of copy of this page, which constitutes Page 1 of 5 Pages. Buyers Initials /s/T.D. (/s/ B.B.) Seller's Initials (/s/ R.M.) (/s/ N.T.) Property Address: 8944 and 8948 Rosewood Avenue, West Hollywood, CA Date: July 20, 1998 5. PEST CONTROL TERMS: A. The Report shall cover the main building and attached structures and, if checked: [ ] detached garages and carports, [ ] detached decks, [ ] the following other structures on the Property:_____________________________ B. If Property is a unit in a condominium, planned development, or residential stock cooperative, the Report shall cover only the separate interest and any exclusive-use areas being transferred, and shall not cover common areas, unless otherwise agreed. C. If inspection of inaccessible areas is recommended in the Report, Buyer has the option, within 5 Days After receipt of the Report, either to accept and approve the Report by the method specified in paragraph 16B, to request in writing that further Inspection be made. If further inspection recommends "Section 1" and/or "Section 2" corrective work, such work, and the cost of inspection, entry, and closing of the inaccessible areas shall be paid for, respectively, by the party designated in paragraph 4N or 4O. If no infestation or infection is found In the inaccessible areas, the cost of the inspection, entry, and closing of those areas shall be paid for by Buyer. D. If no infestation or infection by wood destroying pests or organisms is found, the Report shall include a written Pest Control Certification. Certification shall be issued prior to Close Of Escrow, unless otherwise agreed in writing. E. Inspections, corrective work and Pest Control Certification in this paragraph refers only to the presence or absence of wood destroying pests or organisms, and does not Include the condition of roof coverings. Read paragraphs 9 and 12 concerning roof coverings. F. Nothing in paragraph 5 shall relieve Seller of the obligation to repair or replace shower pans and shower enclosures due to leaks, if required by paragraph 9B(3). Water test of shower pans on upper level units may not be performed unless the owners of property below the shower consent. 6. TRANSFER DISCLOSURE STATEMENT; SUBSEQUENT DISCLOSURES; MELLO-ROOS NOTICE: A. Within 5 (or [ ] _____) DAYS After Acceptance, unless exempt, a Real Estate Transfer Disclosure Statement ("TDS") shall be completed and delivered to Buyer, who shall sign and return a copy of it to Seller. B. In the event Seller, prior to Close Of Escrow, becomes aware of adverse conditions materially affecting the Property, or any material inaccuracy in disclosures, information, or representations previously provided to Buyer (including those made in a TDS) of which Buyer is otherwise unaware, Seller shall promptly provide a subsequent or amended disclosure, in writing, covering those items except for those conditions and material inaccuracies disclosed in reports obtained by Buyer. C. Seller shall make a good faith effort to obtain a disclosure notice from any local agencies which levy a special tax on the Property pursuant to the Mello-Roos Community Facilities Act, and shall promptly deliver to Buyer any such notice made available by those agencies. D. If the TDS, the Mello-Roos disclosure notice, or a subsequent or amended disclosure Is delivered to Buyer after the offer is signed, Buyer shall have the right to terminate this Agreement within 3 days after delivery in person, or 5 days after delivery by deposit in the mail, by giving written notice of termination to Seller or Seller's agent. 7. DISCLOSURES: Within the time specified In paragraph 16, Seller shall provide to Buyer the following disclosures and information, take the following actions, and disclose facts pertaining to the following conditions. Buyer shall then, within the time specified in paragraph 16, investigate the disclosures and information, and provide written notice to Seller of any Item disapproved. A. PROPERTY DISCLOSURES: Earthquake Fault Zones, Seismic Hazard Zones (when available), Special Flood Hazard Areas, State Fire Responsibility Areas, Earthquake Guides, Lead-Based Paint Disclosures, Environmental Hazards Booklet, and Energy Efficiency Booklet (when published), or any other federal, state, or locally designated zone for which disclosure is required by Law. B. CONDOMINIUM/COMMON INTEREST SUBDIVISION: If Property is a unit In a condominium, planned development, or other common interest subdivision, Seller shall request from the Homeowners' Association ("HOA'), and upon receipt provide to Buyer, a statement indicating any current regular dues and assessments; known pending regular or special assessments, claims, or litigation and the location and number of parking and storage spaces; copies of covenants, conditions, and restrictions; articles of incorporation; "by-laws"; other governing documents; most current financial statement distributed; statement regarding limited enforceability of age restrictions, if applicable; current HOA statement showing any unpaid assessments; any other documents required by Law; and the most recent 12 months of HOA minutes for regular and special meetings, if available. C. NOTICE OF VIOLATION: If, prior to Close Of Escrow. Seller receives notice or is made aware of any notice filed or issued against the Property, of violations of city, county, state, or federal building, zoning, fire or health Laws, Seller shall immediately notify Buyer in writing. Buyer shall, within the time specified in paragraph 16, provide written notice to Seller of any items disapproved. 8. TITLE AND VESTING: A. Within the time specified in paragraph 16A, Buyer shall be provided a current preliminary (title) report (which Is only an offer by the title insurer to issue a policy of title insurance, and may not contain every item affecting title). Buyer shall, within the time specified in paragraph 16, provide written notice to Seller of any items reasonably disapproved. B. At Close 0f Escrow, Buyer shall receive a grant deed conveying title (or, for stock cooperative, an assignment of stock certificate), including oil, mineral and water rights if currently owned by Seller. Title shall be subject to all encumbrances, easements, covenants, conditions, restrictions. rights, and other matters which are of record or disclosed to Buyer prior to Close Of Escrow, unless disapproved in writing by Buyer within the time specified in paragraph 16. However, title shall not be subject to any liens against the Property, except for those specified in the Agreement. Buyer shall receive an ALTA-R owner's title insurance policy, if reasonably available. If not, Buyer shall receive a standard coverage owner's policy (e.g. CLTA or ALTA with regional exceptions). Buyer shall pay for Lender's title insurance policy. Title shall vest as designated In Buyers escrow instructions. The title company, at Buyer's request, can provide information about availability, desirability and cost of various title insurance coverages. THE MANNER OF TAKING TITLE MAY HAVE SIGNIFICANT LEGAL AND TAX CONSEQUENCES. 9. NO WARRANTIES EXCEPT AS SPECIFIED: A. EXCEPT AS SPECIFIED BELOW, AND ELSEWHERE IN THIS AGREEMENT, Property is sold "AS IS", in its present physical condition. B. (IF CHECKED) SELLER WARRANTS THAT AT THE TIME POSSESSION IS MADE AVAILABLE TO BUYER: [ ] (1) Roof shall be free of leaks KNOWN to Seller or DISCOVERED during escrow. [ ] (2) Built-in appliances (including free-standing oven and range, if included in sale), heating, air conditioning, electrical, water, sewer and pool/spa systems, if any, shall be repaired, if KNOWN by Seller to be inoperative or DISCOVERED to be so during escrow. (Septic/Well systems are not covered in this paragraph. Read paragraphs 4G and H.) [ ] (3) Plumbing systems, shower pans and shower enclosures shall be free of leaks KNOWN to Seller or DISCOVERED during escrow. [ ] (4) All fire, safety, and structural defects in chimneys and fireplaces KNOWN to Seller or DISCOVERED during escrow shall be repaired. [ ] (5) All broken or cracked glass, torn existing window and door screens, and broken seals between multi-pane windows, shall be replaced. [ ] (6) All debris and all personal property not included in the sale shall be removed. [ ] (7) ___________________________________________________________ C. PROPERTY MAINTENANCE: Unless otherwise agree, Property, including pool, spa, landscaping and grounds, is to be maintained in substantially the same condition as on the date of Acceptance. D. PROPERTY IMPROVEMENTS may not (a) be built according to codes or in compliance with Law, or (b) have had permits issued. E. INSPECTIONS AND DISCLOSURES: Items discovered in Buyer's inspections which are not covered by paragraph 9B, shall be governed by the procedure in paragraphs 12 and 16. Buyer retains the right to disapprove the condition of the Property based upon items discovered in Buyer's inspections. Disclosures in the TDS and items discovered in Buyer's inspections do NOT eliminate Seller's obligations under paragraph 9B, unless specifically agreed in writing. WHETHER OR NOT SELLER WARRANTS ANY ASPECT OF THE PROPERTY, SELLER IS OBLIGATED TO DISCLOSE KNOWN MATERIAL FACTS AND TO MAKE OTHER DISCLOSURES REQUIRED BY LAW. Buyer and Seller acknowledge receipt of copy of this page, which constitutes Page 2 of 5 Pages. Buyers Initials /s/T.D. (/s/ B.B.) Seller's Initials (/s/ R.M.) (/s/N.T.) 10. FIXTURES: All EXISTING fixtures and fittings that are attached to the Property, or for which special openings have been made, are INCLUDED IN THE PURCHASE PRICE (unless excluded below). and shall be transferred free of liens and "AS IS." unless specifically warranted. Fixtures shall include, but are not limited to, existing electrical, lighting, plumbing and heating fixtures, fireplace Inserts, solar systems. built-in appliances, window and door screens, awnings, shutters, window coverings, attached floor coverings, television antennas, satellite dishes and related equipment, private integrated telephone systems, air coolers/conditioners, pool/spa equipment, water softeners (if owned by Seller), security systems/alarms (if owned by Seller), garage door openers/remote controls, attached fireplace equipment, mailbox, in-ground landscaping including trees/shrubs, and_____________________________________________________________________. FIXTURES EXCLUDED: _______________________________________________________. 11. PERSONAL PROPERTY: The following items of personal property, free of liens and "AS IS." unless specifically warranted, are INCLUDED IN THE PURCHASE PRICE: ____________________________________. 12. BUYER'S INVESTIGATION OF PROPERTY CONDITION: Buyer shall have the right, at Buyer's expense, to conduct inspections, investigations, tests, surveys, and other studies ("Inspections"), including the right to inspect for lead-based paint and other lead hazards. No Inspections shall be made by any governmental building or zoning inspector or government employee without Seller's prior written consent, unless required by Law. Buyer shall, within the time specified in Paragraph 16, complete these Inspections and notify Seller in writing of any items reasonably disapproved. Seller shall make Property available for all Inspections. Buyer shall: keep Property free and clear of liens; indemnify and hold Seller harmless from all liability, claims, demands, damages and costs; and repair all damages arising from Inspections. Buyer shall carry, or Buyer shall require anyone acting on Buyers behalf to carry, policies of liability, worker's compensation, and other applicable insurance, defending and protecting Seller from liability for any injuries to persons or property occurring during any work done on the Property at Buyer's direction, prior to Close Of Escrow. Seller is advised that certain protections may be afforded Seller by recording a notice of non-responsibility for work done on the Property at Buyer's direction. At Seller's request Buyer shall give Seller, at no cost, complete copies of all Inspection reports obtained by Buyer concerning the Property. Seller shall have water, gas, and electricity on for Buyer's Inspections, and through the date possession is made available to Buyer. 13. FINAL WALK-THROUGH; VERIFICATION OF CONDITION: Buyer shall have the right to make a final inspection of the Property within 5 (or[ ] ______) DAYS prior to Close Of Escrow, NOT AS A CONTINGENCY OF THE SALE, but solely to confirm that Repairs have been completed as agreed in writing, and that Seller has complied with Seller's other obligations. 14. PRORATIONS AND PROPERTY TAXES: Unless otherwise agreed in writing, real property taxes and assessments interest, rents, HOA regular dues and regular assessments, premiums on insurance assumed by Buyer, payments on bonds and assessments assumed by Buyer, payments on Mello-Roos and other Special Assessment District bonds and assessments which are now a lien, and payments on HOA bonds and special assessments which have been imposed prior to Close Of Escrow, shall be PAID CURRENT and prorated between Buyer and Seller as of Close Of Escrow, except: ______________________. Prorated payments on Mello-Roos and other Special Assessment District bonds and assessments and HOA special assessments that are now a lien but not yet due, shall be assumed by Buyer WITHOUT CREDIT toward the purchase price. Property wilt be reassessed upon change of ownership. Any supplemental tax bills shall be paid as follows: (1) For periods after Close Of Escrow, by Buyer; and, (2) For periods prior to Close Of Escrow, by Seller. TAX BILLS ISSUED AFTER CLOSE OF ESCROW SHALL BE HANDLED DIRECTLY BETWEEN BUYER AND SELLER. 15. SALE OF BUYER'S PROPERTY: A. This Agreement is NOT contingent upon the sale of Buyer's property, unless paragraph 158 Is checked, OR B. [ ] (if checked) This Agreement IS CONTINGENT on the Close Of Escrow of Buyer's property, described as (address)___________________________________ ("Buyer's Property"), which is (If checked) [ ] listed for sale with __________________________________________________________________________ Company, and/or (if checked) [ ] in Escrow No. ____________________ with ________________________________________ Escrow Holder, scheduled to Close Escrow on ________________ (date). Buyer shall deliver to Seller, within 5 Days After Seller's request, a copy of the contract for the sale of Buyer's Property, escrow instructions, and all amendments and modifications thereto. If Buyer's Property does not close escrow by the date specified for Close Of Escrow in this paragraph, then either Seller or Buyer may cancel this Agreement In writing. (Check ONLY 1 or 2; do NOT check both.) After Acceptance: [ ] (1) Seller SHALL have the right to continue to offer the Property for sale. If Seller accepts another written offer, Seller shall give Buyer written notice to (a) remove this contingency in writing, (b) provide written verification of sufficient funds to close escrow on this sale without the sale of Buyer's Property, and (c) comply with the following additional requirement(s)_________________________________________________. If Buyer fails to complete those actions within ____ hours or Days After receipt of such notice, Seller may cancel this Agreement in writing. OR [ ] (2) Seller SHALL NOT have the right to continue to offer the Property for sale, except for back-up offers. 16. THERE ARE NO CONTINGENCIES Buyer and Seller acknowledge receipt of copy of this page, which constitutes Page 3 of 5 Pages. Buyers Initials /s/T.D. (/s/ B.B.) Seller's Initials (/s/ R.M.) (/s/N.T.) D. CANCELLATION OF SALE/ESCROW; RETURN OF DEPOSITS: It Buyer or Seller gives written NOTICE OF CANCELLATION pursuant to rights duly exercised under the terms of this Agreement, Buyer and Seller agree to sign mutual instructions to cancel the sale and escrow and release deposits, less fees and costs, to the party entitled to the funds Fees and costs may be payable to service providers and vendors for services and products provided during escrow. Release of funds will require mutual, signed release instructions from both Buyer and Seller, judicial decision, or arbitration award. A PARTY MAY BE SUBJECT TO A CIVIL PENALTY OF UP TO $1,000 FOR REFUSAL TO SIGN SUCH INSTRUCTIONS, IF NO GOOD FAITH DISPUTE EXISTS AS TO WHO IS ENTITLED TO THE DEPOSITED FUNDS (CIVIL CODE SS. 1057.3). 17. REPAIRS: Repairs under this Agreement shall be completed prior to Close Of Escrow, unless otherwise agreed in writing. Work to be performed at Seller's expense may be performed by Seller or through others, provided that work complies with applicable laws, including governmental permit, inspection, and approval requirements. Repairs shall be performed in a skillful manner with materials of quality comparable to existing materials. It is understood that exact restoration of appearance or cosmetic items following all Repairs may not be possible. 18. WITHHOLDING TAXES: Seller and Buyer agree to execute and deliver any instrument, affidavit, statement, or instruction reasonably necessary to comply with state and federal withholding Laws, if required. (For example, C.A.R. FIRPTA and California compliance Forms AS-14 and AB- 11.) 19. KEYS: At the time possession is made available to Buyer, Seller shall provide keys and/or means to operate all Property locks, mailboxes, security systems, alarms, and garage door openers. If the Property is a unit in a condominium or subdivision, Buyer may be required to pay a deposit to the HOA to obtain keys to accessible HOA facilities. 20. LIQUIDATED DAMAGES: If Buyer fails to complete this purchase by reason of any default of Buyer, Seller shall retain, as liquidated damages for breach of contract, the deposit actually paid. However, if the Property is a dwelling with no more than four units, one of which Buyer Intends to occupy, then the amount retained shall be no more than 3% of the purchase price. Any excess shah be returned to Buyer. Buyer and Seller shall also sign a separate liquidated damages provision for any increased deposit. (C.A.R. Form RID-11 shall fulfill this requirement.) Buyer's Initials / Seller's Initials 21. DISPUTE RESOLUTION: A. MEDIATION: Buyer and Seller agree to mediate any dispute or claim arising between them out of this Agreement, or any resulting transaction, before resorting to arbitration or court action, subject to paragraphs 21C and D below. Mediation fees, if any, shall be divided equally among the parties involved. If any party commences an action based on a dispute or claim to which this paragraph applies, without first attempting to resolve the matter through mediation, then that party shall not be entitled to recover attorney's fees, even if they would otherwise be available to that party in any such action. THIS MEDIATION PROVISION APPLIES WHETHER OR NOT THE ARBITRATION PROVISION IS INITIALED. B. ARBITRATION OF DISPUTES: Buyer and Seller agree that any dispute or claim In Law or equity arising between them out of this Agreement or any resulting transaction, which is not settled through mediation, shall be decided by neutral, binding arbitration, subject to paragraphs 21C and D below. The arbitrator shall be a retired judge or justice, unless the parties mutually agree to a different arbitrator, who shall render an award in accordance with substantive California Law. In all other respects, the arbitration shall be conducted in accordance with Part Ill, Title 9 of the California Code of Civil Procedure. Judgment upon the award of the arbitrator(s) may be entered In any court having jurisdiction. The parties shall have the right to discovery in accordance with Code of Civil Procedure ss. 1283.05. "NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MA11'ERS INCLUDED IN THE `ARBITRATION OF DISPUTES' PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL, BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE `ARBITRATION OF DISPUTES' PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY." "WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION TO NEUTRAL ARBITRATION." Buyer's Initials ___/___ Seller's Initials ___/___ C. EXCLUSIONS FROM MEDIATION AND ARBITRATION: The following matters are excluded from Mediation and Arbitration hereunder: (a) A judicial or non-judicial foreclosure or other action or proceeding to enforce a deed of trust, mortgage, or installment land sale contract as defined in Civil Code ss. 2985; (b) An unlawful detainer action; (c) The filing or enforcement of a mechanic's lien; (d) Any matter which is within the jurisdiction of a probate, small claims, or bankruptcy court; and (e) An action for bodily Injury or wrongful death, or for latent or patent defects to which Code of Civil Procedure ss. 337.1 or ss. 337.15 applies. The filing of a court action to enable the recording of a notice of pending action, for order of attachment, receivership, injunction, or other provisional remedies, shall not constitute a violation of the mediation and arbitration provisions. D. BROKERS: Buyer and Seller agree to mediate and arbitrate disputes or claims Involving either or both Brokers, provided either or both Brokers shall have agreed to such mediation or arbitration, prior to, or within a reasonable time after the dispute or claim is presented to Brokers. Any election by either or both Brokers to participate in mediation or arbitration shall not result in Brokers being deemed parties to the purchase and sale Agreement. 22. DEFINITIONS: As used in this Agreement; A. "ACCEPTANCE" means the time the offer or final counter offer is accepted by the other party, in accordance with paragraph 30 of the Agreement or the terms of the final counter offer. B. "AGREEMENT" means the terms and conditions of this Residential Purchase Agreement and any counter offer. C. "DAYS" means calendar days, unless otherwise required by Law, D. "DAYS AFTER.." means the specified number of calendar days after the occurrence of the event specified, not counting the calendar date on which the specified event occurs. E. "CLOSE OF ESCROW" means the date the grant deed, or other evidence of transfer of title, is recorded. F. "LAW" means any law, code, statute, ordinance, regulation, or rule, which is adopted by a controlling city, county, state or federal legislative or judicial body or agency. G. "REPAIRS" means any repairs, alterations, replacements, or modifications, (including pest control work) of the Property. H. "PEST CONTROL CERTIFICATION" means a written statement made by a registered structural pest control company that on the date of inspection or re-inspection, the Property if "free" or is "now free" of "evidence of active infestation in the visible and accessible areas". I. Singular and Plural terms each include the other, when appropriate. 23. MULTIPLE LISTING SERVICE ("MLS"): Brokers are authorized to report the terms of this transaction to any MLS, to be published and disseminated to persons authorized to use the information on terms approved by the MLS> Buyer and Seller acknowledge receipt of copy of this page, which constitutes Page 4 of 5 Pages. Buyers Initials /s/T.D. (/s/ B.B.) Seller's Initials (/s/ R.M.) (/s/N.T.) 24. MISSING FROM THE COPY OF THE LEASE. 25. ATTORNEY'S FEES: In any action, proceeding, or arbitration between Buyer and Seller arising out of this Agreement, the prevailing Buyer or Seller shall be entitled to reasonable attorney's fees and costs from the non-prevailing Buyer or Seller, except as provided in paragraph 21A. 26. SELECTION OF SERVICE PROVIDERS: If Brokers give Buyer or Seller referrals to persons, vendors, or service or product providers ("Provider s"), Brokers do not guarantee the performance of any OF those Providers. Buyer and Seller may select ANY Providers of their own choosing. 27. TIME OF ESSENCE; ENTIRE CONTRACT; CHANGES: Time is of the essence. All understandings between the parties are incorporated in this Agreement. Its terms are intended by the parties as a final, complete, and exclusive expression of their agreement with respect to its subject matter, and may not be contradicted by evidence of any prior agreement or contemporaneous oral agreement. This Agreement may not be extended, amended, modified, altered, or changed, except in writing signed by Buyer and Seller. 28. OTHER TERMS AND CONDITIONS, including ATTACHED SUPPLEMENTS: [X] Buyer Inspection Advisory (C. A. R. Form BIA-14) [ ] Purchase Agreement Addendum (C A R Form PAA- 14 paragraph number(s) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 29. THIS SECTION IS CROSSED OUT AND DELETED. 30. OFFER: This is an offer to purchase the Property on the above terms and conditions. All paragraphs with spaces for initials by Buyer and Seller are incorporated in this Agreement only if initialed by all parties. If at least one but not all parties Initial, a counter offer is required until agreement is reached. Unless Acceptance of Offer is signed by Seller, and a signed copy delivered in person, by mail, or facsimile, and personally received by Buyer, or by _______________________________________,who is authorized to receive it, by ________ (date), at _______ AM/PM, the offer shall be deemed revoked and the deposit shall be returned. Buyer has read and acknowledges receipt of a copy of the offer and agrees to the above confirmation of agency relationships. If this offer is accepted and Buyer subsequently defaults, Buyer may be responsible for payment of Brokers compensation. This Agreement and any supplement, addendum, or modification, including any photocopy or facsimile, may be signed in two or more counterparts, all of which shall constitute one and the same writing. Buyer and Seller acknowledge and agree that Brokers: (a) Do not decide what price Buyer should pay or Seller should accept; (b) Do not guarantee the Condition of the Property; (c) Shall not be responsible for defects that are not known to Broker(s) and are not Visually observable in reasonably accessible areas of the Property; (d) Do not guarantee the performance or Repairs of others who have provided services or products to Buyer or Seller; (e) Cannot Identify Property boundary lines; (f) Cannot verify inspection reports or representations of others; (g) Cannot provide legal or tax advice; (h) Will not provide other advice or information that exceeds the knowledge, education and experience required to obtain a real estate license. Buyer and Seller agree that they will seek legal, tax, Insurance, and other desired assistance from appropriate professionals. BUYER /s/ Tony Dorn BUYER /s/ Barry Beitler 8-31-98 - ----------------------------- ------------------------------- 31. BROKER COMPENSATION: Seller agrees to pay compensation for services as follows: _____________________________________, to ______________________ Broker, and _________________________, to ____________________________________________________________________ Broker, payable: (a) On recordation of the deed or other evidence of title; or (b) If completion of sale is prevented by default of Seller, upon Seller's default; or, (c) If completion of sale is prevented by default of Buyer, only if and when Seller collects damages from Buyer, by suit or otherwise, and then in an amount equal to one-half of the damages recovered, but not to exceed the above compensation, after first deducting title and escrow expenses and the expenses of collection, if any. Seller hereby irrevocably assigns to Brokers such compensation from Seller's proceeds, and irrevocably instructs Escrow Holder to disburse those funds to Brokers at close of escrow. Commission Instructions can be amended or revoked only with the consent of Brokers. In any action, proceeding or arbitration relating to the payment of such compensation, the prevailing party shall be entitled to reasonable attorney's fees and costs, except as provided in paragraph 21A. 32. ACCEPTANCE OF OFFER: Seller warrants that Seller is the owner of this Properly or has the authority to execute this Agreement. Seller accepts the above offer, agrees to sell the Property on the above terms and conditions, and agrees to the above confirmation of agency relationships. Seller has read and acknowledges receipt of a copy of this Agreement, end authorizes Broker to deliver a signed copy to Buyer. If checked: [ ] SUBJECT TO ATTACHED COUNTER OFFER, DATED _______________ SELLER NewStar Media, Inc., a California corporation Date 8-31-98 ------------------------------------------------ ------------ By: /s/ Robert Murray, Vice President and General Counsel SELLER /s/ Neil Topham, Chief Financial Officer Date ____________ (__/__) ACKNOWLEDGMENT OF RECEIPT: Buyer or authorized agent acknowledges receipt of signed Acceptance on (date) __________, at ____AM/PM. Agency relationships are confirmed as above. Real Estate Brokers are not parties to the Agreement between Buyer and Seller. Receipt for deposit is acknowledged:
Real Estate Broker (Selling Firm name) ____________________ By______________________ Date ______________ Address ___________________________________________________ Telephone ______________ Fax _______________ Real Estate Broker (Listing Firm Name _____________________ By _____________________ Date ______________ Address ___________________________________________________ Telephone ______________ Fax _______________
Page 5 of 5 Pages BUYER'S INSPECTION ADVISORY Property Address: 8944 and 8948 Rosewood Avenue, West Hollywood, CA ("Property") IMPORTANCE OF PROPERTY INSPECTION: The physical condition of the land and improvements being purchased are not guaranteed by either Seller or Brokers, except as specifically set forth in the purchase agreement. For this reason, Buyer should conduct a thorough inspection of the Property personally and with professionals, who should provide a written report of their inspections, lithe professionals recommend further investigation, tests, or inspections, Buyer should contact qualified experts to conduct such additional investigations, tests, or inspections. DISCLOSURE DUTIES: The law requires Seller and Brokers to disclose to Buyer all material facts known to them which affect the value or desirability of the Property. In sales involving residential dwellings with no more than tour units, Brokers have a duty to make a diligent visual inspection of the accessible areas of the Property, and to disclose the results of that inspection. However, as some Property defects or conditions may not be discoverable from a visual inspection, it is possible neither Seller nor Brokers are aware of them. BUYER DUTIES: Buyer has an affirmative duty to exercise reasonable care to protect himself or herself, including discovery and investigation of information and facts which are known to Buyer, or are within the diligent attention and observation of Buyer. PROPERTY INSPECTIONS: Brokers do not have expertise, and therefore cannot advise Buyer on many items, such as soil stability, geologic conditions, hazardous substances, structural conditions of the foundation or other improvements, or the condition of the roof, heating, air conditioning, plumbing, electrical, sewer, septic, waste disposal or other systems. The only way to accurately determine the condition of the Property is through an inspection by an appropriate professional selected by Buyer. YOU ARE ADVISED TO CONDUCT INSPECTIONS OF THE ENTIRE PROPERTY, INCLUDING BUT NOT LIMITED TO THE FOLLOWING: 1. GENERAL CONDITION OF THE PROPERTY, ITS SYSTEMS AND COMPONENTS: Foundation, roof, plumbing, heating, air conditioning, electrical, mechanical, security, pool/spa, and other structural and non-structural systems and components, built-in appliances, any personal property included in the sale, and energy efficiency of the Property. (Structural engineers are best suited to determine possible design or construction detects, and whether improvements are structurally sound.) 2. SQUARE FOOTAGE, AGE, BOUNDARIES: Square footage, room dimensions, lot size, age of improvements, and boundaries. Any numerical statements regarding these items are APPROXIMATIONS ONLY, and have not been and cannot be verified by Brokers. Fences, hedges, walls, retaining walls, and other natural or constructed barriers or markers do not necessarily identify true Property boundaries. (An appraiser, architect. surveyor, or civil engineer is best suited to determine respectively square footage, dimensions and boundaries of the Property.) 3. SOIL STABILITY/GEOLOGIC CONDITIONS: Existence of fill or compacted soil, or expansive or contracting soil, susceptibility to slippage, settling or movement, and the adequacy of drainage. These types of inspections are particularly important for hillside or sloped properties, but the referenced conditions may also exist on flat land. (Geotechnical engineers are best suited to determine such conditions, causes, and remedies.) 4. ROOF: Present condition, approximate age, leaks, and remaining useful life. (Roofing contractors are best suited to determine these conditions) 5. POOL/SPA: Whether there are any cracks, leaks or operational problems. (Pool contractors are best suited to determine these conditions.) 6. WASTE DISPOSAL: Type, size, adequacy, capacity and condition of sewer and septic systems and components, connection to sewer, and applicable fees. 7. WATER AND UTILITIES; WELL SYSTEMS AND COMPONENTS: Water and utility availability, use restrictions, and costs. Adequacy, condition, and performance of well systems and components, 8. ENVIRONMENTAL HAZARDS: Potential environmental hazards, Including asbestos, lead-based paint and other lead contamination, methane, other gases, fuel, oil or chemical storage tanks, contaminated soil or water, hazardous waste, waste disposal sites, electromagnetic fields, nuclear sources, and other substances, materials, products, or conditions. (For further Information, read the booklet "Environmental Hazards: A Guide for Homeowners and Buyers," or consult an appropriate professional.) 9. EARTHQUAKE AND FLOOD; INSURANCE AVAILABILITY: Susceptibility of the Property to earthquake hazards and propensity of the Property to flood. These and other conditions may affect the availability and need for certain types of insurance, (Geologist, Geotechnic Engineer and insurance agents are best suited to provide information on these conditions.) 10. GOVERNMENTAL REQUIREMENTS AND LIMITATIONS: Permits, Inspections, certificates, zoning, other governmental limitations, restrictions, and requirements affecting the current or future use of the Property, its development or size. (such information is available through appropriate governmental agencies and private Information providers. Brokers are not qualified to obtain, review, or interpret any such information.) 11. RENT AND OCCUPANCY CONTROL: Some cities and counties impose restrictions which may limit the amount of rent that can be charged, the maximum number of persons who can occupy the Property, and the circumstances in which tenancies can be terminated. (Information about such restrictions can be obtained from local governmental agencies.) 12. NEIGHBORHOOD, AREA, SUBDIVISION CONDITIONS; PERSONAL FACTORS: Neighborhood or area conditions, including schools, proximity and adequacy of law enforcement, crime statistics, registered felons or offenders, fire protection, other governmental services, proximity to commercial, industrial or agricultural activities, existing and proposed transportation, construction and development which may affect noise, view, or traffic, airport noise, noise or odor from any source, wild and domestic animals, other nuisances, hazards, or circumstances, facilities and condition of common areas of common interest subdivisions, and possible lack of compliance with any governing documents or Homeowners' Association requirements, conditions and influences of significance to certain cultures and/or religions, and personal needs, requirements and preferences of Buyer. Buyer acknowledges and agrees that Brokers: (a) Do not guarantee the condition of the Property; (b) Shall not be responsible for defects that are not known to Broker(s) or are not visually observable In reasonably and normally accessible areas of the Property; (c) Cannot verify information contained in inspection reports or representations made by others; (d) Do not guarantee the performance of others who have provided services or products to Buyer or Seller; (e) Do not guarantee the adequacy or completeness of repairs made by Seller or others; (f) Cannot Identify Property boundary lines; and (g) Do not decide what price a buyer should pay or a seller should accept. Buyer agrees to seek desired assistance from appropriate professionals. YOU ARE STRONGLY ADVISED TO INVESTIGATE THE CONDITION AND SUITABILITY OF ALL ASPECTS OF THE PROPERTY. IF YOU DO NOT DO 50, YOU ARE ACTING AGAINST THE ADVICE OF BROKERS. By signing below, Buyer acknowledges receipt of a copy of this document. Buyer is encouraged to read it carefully. /s/ Tony Dorn /s/ Barry Beitler 8-31-98 - -------------------------------- ---------------------------------------- Buyer Signature Date Buyer Signature Date Buyer(s) (Print Name(s)) Barry Beitler and Tony Dorn and/or Nominee THIS FORM HAS BEEN APPROVED BY THE CALIFORNIA ASSOCIATION OF REALTORS(R) (C.A.R.) NO REPRESENTATION IS MADE AS TO THE LEGAL VALIDITY OR ADEQUACY OF ANY PROVISION IN ANY SPECIFIC TRANSACTION. A REAL ESTATE BROKER IS THE PERSON QUALIFIED TO ADVISE ON REAL ESTATE TRANSACTIONS. IF YOU DESIRE LEGAL OR TAX ADVICE, CONSULT AN APPROPRIATE PROFESSIONAL. NewStar Media Inc. By: /s/ Robert Murray /s/ Neil Topham ADDENDUM TO THAT CERTAIN RESIDENTIAL PURCHASE AGREEMENT DATED JULY 20, 1998 BY AND BETWEEN BARRY BEITLER AND TONY DORN AND/OR NOMINEE, AS BUYER, AND NEWSTAR MEDIA, INC., A CALIFORNIA CORPORATION, AS SELLER, FOR THOSE RESIDENTIAL PROPERTIES LOCATED AT 8944 AND 8948 ROSEWOOD AVENUE, WEST HOLLYWOOD, CALIFORNIA This Addendum shall serve to modify the terms of the above Agreement. In the event of any conflict between the terms of this Addendum and the terms of the Purchase Contract, the Terms of this Addendum shall control. 1. Buyer and Seller have agree to the following changes to the terms of the Purchase Agreement: Seller shall enter into a separate Lease Agreement for both houses With Buyer for one (1) year from the close of escrow at Two Thousand Four Hundred Dollars ($2,400.00) per month on a Triple Net basis and on an "as is" basis. Buyer, as Landlord, under said lease shall have the right at any time during the one (1) year lease to cancel the lease on thirty (30) days prior written notice for any reason. BUYERS: SELLER: /s/ Barry Beitler 8-31-98 - ------------------------------------ --------------------------------- Barry Beitler NewStar Media, Inc. a California corporation By: /s/ Robert Murray Vice President and General Counsel /s/ Tony Dorn - ----------------------------------- Tony Dorn /s/ Neil Topham Chief Financial Officer EX-10.37 5 STANDARD INDUSTRIAL LEASE STANDARD INDUSTRIAL LEASE -- SPECIAL NET AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. PARTIES. This Lease, dated, lot reference purposes only, August 5, 1998, is made by and between - 8955 Beverly Partnership (herein called "Lessor") and NewStar Media, Inc., a California corporation (herein called "Lessee"). 2. PREMISES. Lessor hereby teases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, that certain real property situated in the County of Los Ange1es State of California, commonly known as 8935-8955 Beverly Boulevard, West Hollywood and described as a 2-story approximate 22,000 square foot office building with on-grade parking for approximately 48 cars Said real property including the land and all improvements therein, is herein called "the Premises". 3. TERM. 3.1 TERM. The term of this Lease shall be for one (1) year commencing on September 1, 1998 and ending on August 31, 1999 unless sooner terminated pursuant to any provision hereof. 3.2 DELAY IN POSSESSION. Notwithstanding said commencement date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date. Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof, but in such case, Lessee shall not be obligated to pay rent until possession of the Premises is tendered to Lessee; provided, however, that if Lessor shall not have delivered possession at the Premises within sixty (60) days from said commencement date, Lessee may, at Lessee's option, by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said commencement date, such occupancy shall be subject to all provisions hereof, such occupancy shall not advance the termination date, and Lessee shall pay rent for such period at the initial monthly rates set forth below. 4. RENT: SPECIAL NET LEASE. 4.1 RENT. Lessee shall pay to Lessor as rent for the Premises, monthly payments at $ 31,666.67, in advance, on the 1st day of each month of the term hereof. Lessee shall pay Lessor upon the execution hereof $ 63,333.34 as rent for the first month of the lease term and one (1) month's security deposit of $31,666.67. Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the monthly installment. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. Except as provided in the Addendum hereto, 4.2 SPECIAL NET LEASE. This Lease is what is commonly called a "Net, Net, Net Lease", it being understood that the Lessor shall receive the rent set forth in Paragraph 4.1 free and clear of any and all other impositions, taxes, liens, charges or expenses at any nature whatsoever in connection with the ownership and operational the Premises. In addition to the rent reserved by Paragraph 4.1, Lessee shall pay to the parties respectively entitled thereto all impositions, insurance premiums, operating charges, maintenance charges, construction costs, and any other charges, costs and expenses which arise or may be contemplated under any provisions of this Lease during the term hereof. All of such charges, costs and expenses shall constitute additional rent, and upon the failure of Lessee to pay any of such costs, charges or expenses. Lessor shall have the same rights and remedies as otherwise provided in this Lease for the failure of Lessee to pay rent. It is the intention of the parties hereto that this Lease shall not be terminable for any reason by the Lessee, and that Lessee shall in no event be entitled to any abatement of or reduction in rent payable under this Lease, except as herein expressly provided. Any present or future law to the contrary shall not alter this agreement of the parties 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof $ 31,666.67* as security for Lessees faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. It Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount hereinabove stated and Lessee's failure to do so shall be a material breach of this Lease. If the monthly rent shall, from time to time, increase during the term of this Lease, Lessee shall thereupon deposit with Lessor additional security deposit so that the amount of security deposit held by Lessor shall at all times bear the same proportion to current rent as the original security deposit bears to the original monthly rent set forth in paragraph 4 hereof. Lessor shall not be required to keep said deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not theretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any. of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. *as part of the above advance consideration 6. USE. 6.1 USE. The Premises shall be used and occupied only for general office purposes/storage/recording studio or any other use which is reasonably comparable and for no other purpose. 6.2 COMPLIANCE WITH LAW. (a) Lessor warrants to Lessee that the Premises, in its state existing on the date that the Lease term commences, but without regard to the use for which Lessee will use the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect on such Lease term commencement date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, alter written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. In the event Lessee does not give to Lessor written notice of the violation of this warranty within six months from the date that the Lease term commences, the correction of same shall be the obligation of the Lessee at Lessee's sole cost. The warranty contained in this paragraph 6.2 (a) shall be of no force or effect if, prior to the date of this Lease, Lessee was the owner or occupant of the Premises, and, in such event, Lessee shall correct any such violation at Lessee's sole cost. (b) Except as provided in paragraph 6.2(a), Lessee shall, at Lessee's expense, comply promptly with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements in effect during the term or any part of the term hereof, regulating the use by Lessee of the Premises. Lessee shall not use nor permit the use of the Premises in any manner that will tend to create waste or a nuisance or, if there shall be more than one tenant in the building containing the Premises, shall tend to disturb such other tenants. 6.3 CONDITION OF PREMISES. (a) Lessor shall deliver the Premises to Lessee clean and free of debris on Lease commencement date )unless Lessee is already in possession) and lessor further warrants to Lessee that the plumbing, lighting, air conditioning, heating, and loading doors in the Premises shall be in good operating condition on the Lease commencement date. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. Lessee's failure to give such written notice to Lessor within thirty (30) days after the Lease commencement date shall cause the conclusive presumption that Lessor has complied with all of Lessor's obligations hereunder. The warranty contained in this paragraph 6.3(a) shall be of no force or effect if prior to the date of this Lease, Lessee was the owner or occupant of the Premises. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises in their condition existing as of the Lease commencement date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Lessee's business. SPECIAL NET (This is a special form containing unique provisions and should only be used in special situations where the LESSEE will pay rent under all circumstances and in the event of destruction the LESSEE will rebuild under all circumstances. /s/ T.D. /s/ R.M. /s/ B.B. /s/ N.T. 7. MAINTENANCE, REPAIRS AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. Lessee shall keep in good order, condition and repair the Premises and every part thereof, structural and non structural, (whether or not such portion of the Premises requiring repair, or the means of repairing the same after reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessees use, any prior use, the elements or the age of such portion of the Premises) including, without limiting the generality of the foregoing, all plumbing, heating, air conditioning. (Lessee shall procure and maintain, at Lessees expense, an air conditioning system maintenance contract) ventilating, electrical, lighting facilities and equipment within the Premises, fixtures, walls (interior and exterior), foundations, ceilings, roofs (interior and exterior), floors, windows, doors, plate glass and skylights located within the Premises, and all landscaping, driveways, parking lots, fences and signs located on the Premises and sidewalks and parkways adjacent to the Premises. 7.2 SURRENDER. On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as when received, ordinary wear and tear excepted, clean and free of debris. Lessee shall repair any damage to the Premises by the installation or removal of Lessee's trade fixtures, furnishings and equipment. Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing on the premises in good operating condition. 7.3 LESSOR'S RIGHTS. It Lessee fails to perform Lessee's obligations under this Paragraph 7, or under any other paragraph of this Lease, Lessor may at its option (but shall not be required to) enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf and put the same in good order, condition and repair, and the cost thereof together with interest thereon at the maximum rate than allowable by law shall become due and payable as additional rental to Lessor together with Lessee's next rental installment. 7.4 LESSOR'S OBLIGATIONS. Except for the obligations of Lessor under Paragraph 6.2(a) and 6.3(a) (relating to Lessor's warranty), Paragraph 9 (relating to destruction of the Premises) and under Paragraph 14 (relating to condemnation of the Premises), it is intended by the parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises nor the building located thereon nor the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. Lessee expressly waives the benefit of any statute now or hereinafter in effect which would otherwise afford Lessee the right to make repairs at Lessors expense or to terminate this Lease because of Lessor's failure to keep the premises in good order, condition and repair. 7.5 ALTERATIONS AND ADDITIONS. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, or Utility Installations in, on or about the Premises, except for nonstructural alterations not exceeding $2,500 in cumulative costs during the term of this Lease In any event, whether or not in excess of $2.500 in cumulative cost, Lessee shall make no change or alteration to the exterior of the Premises nor the exterior of the building(s) on the Premises without Lessor's prior written consent As used in this Paragraph 7.5 the term "Utility Installation" shall mean carpeting, window coverings, air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing, and fencing. Lessor may require that Lessee remove any or all of said alterations, improvements, additions or Utility Installations at the expiration of the term, and restore the Premises to their prior condition. Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, Lessor may require that Lessee remove any or all of the same. (b) Any alterations, improvements, additions or Utility Installations in, or about the Premises that Lessee shall desire to make and which requires the consent of the Lessor shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to Lessor prior to the commencement of the work and the compliance by Lessee of all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at for use in the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises, and Lessor shall have time right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, upon the condition that if Lessor shall require. Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. (d) Unless Lessor requires their removal, as set forth in Paragraph 7.5(a), all alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made on the Premises, shall become the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the term. Notwithstanding the provisions of this Paragraph 7.5(d), Lessee's machinery and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of Paragraph 7.2. 8. INSURANCE INDEMNITY. 8.1 INSURING PARTY. As used in this Paragraph 8. the term "insuring party" shall mean the party who has the obligation to obtain the Property Insurance required hereunder. The insuring party shall be designated in Paragraph 46 hereof. In the event Lessor is the insuring party, Lessor shall also maintain the liability insurance described in paragraph 8.2 hereof, in addition to, and not in lieu of, the insurance required to be maintained by Lessee under said paragraph 8.2, but Lessor shall not be required to name Lessee as an additional insured on such policy. Whether the insuring party is the Lessor or the Lessee, Lessee shall, as additional rent for the Premises, pay the cost of all insurance required hereunder, except for that portion of the cost attributable to Lessor's liability insurance coverage in excess of $1,000,000 per occurrence. If Lessor is the insuring party Lessee shall, within ten (10) days following demand by Lessor, reimburse Lessor for the cost of the insurance so obtained. 8.2 LIABILITY INSURANCE. Lessee shall, at Lessee's expense obtain and keep in force during the term of this Lease a policy of Combined Single Limit, Bodily Injury and Property Damage insurance insuring Lessor and Lessee against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be a combined single limit policy in an amount not less than $500,000 per occurrence. The policy shall insure performance by Lessee of the indemnity provisions of this Paragraph 8. The limits of said insurance shall not, however, limit the liability of Lessee hereunder. 8.3 PROPERTY INSURANCE. (a) The insuring party shall obtain and keep in force during the term of this Leases policy or policies of insurance covering loss or damage to the Premises, in the amount of the full replacement value thereof, as the same may exist from time to time, which replacement value is now $4,000,000.00, , but in no event less than the total amount required by lenders having liens on the Premises, against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, flood (in the event same is required by a lender having a lien on the Premises), and special extended perils ("all risk" as such term is used in the insurance industry). Said insurance shall provide for payment of loss thereunder to Lessor onto the holders of mortgages or deeds of trust on the Premises, The insuring party shall, in addition, obtain and keep in force during the term of this Lease a policy of rental value insurance covering a period of one year, with loss payable to Lessee, which insurance shall also cover all real estate taxes and insurance costs for said period. A stipulated value or agreed amount endorsement deleting the coinsurance provision of the policy shall be procured with said insurance as well as an automatic increase in insurance endorsement causing the increase in annual property insurance coverage by 2% per quarter. If the insuring party shall fail to procure and maintain said insurance the other party may, but shall not be required to, procure and maintain the same, but at the expense of Lessee. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount. (b) If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, then Lessee shall pay for any increase in the property insurance of such other building or buildings if said increase us caused by Lessee's acts, omissions, use or occupancy of the Premises. (c) If the Lessor is the insuring party the Lessor will not insure Lessee's fixtures, equipment or tenant improvements unless the tenant improvements have become a part of the Premises under paragraph 7, hereof. But if Lessee is the insuring party the Lessee shall insure its fixtures, equipment and tenant improvements 8.4. INSURANCE POLICIES. Insurance required hereunder shall be in companies holding a "General Policyholders Rating" of at least B plus, or such other rating as may be required by a lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide". The insuring party shall deliver to the other party copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with loss payable clauses as required by this paragraph 8. No such policy shall be cancelable or subject to reduction of coverage or other modification except after thirty (30) days' prior written notice to Lessor. If Lessee is the insuring party Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals or "binders" thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee upon demand. Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in Paragraph 8.3. If Lessee does or permits to be done anything which shall increase the cost of the insurance policies referred to in Paragraph 8.3, then Lessee shall forthwith upon Lessor's demand reimburse Lessor for any additional premiums attributable to any act or omission or operation of Lessee causing such increase in the cost of insurance. if Lessor is the insuring party, and if the insurance policies maintained hereunder cover other improvements in addition to the Premises, Lessor shall deliver to Lessee a written statement setting forth the amount of any such insurance cost increase and showing in reasonable detail the manner in which it has been computed. 8.5 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and relieve the other, and waive their entire right of recovery against the other for loss or damage arising out of or incident to the perils insured against under paragraph 8.3, which perils occur in, on or about the Premises, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. Lessee and Lessor shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 8.6 INDEMNITY. Lessee shall indemnify and hold harmless Lessor from and against any all claims arising from Lessee's use of the Premises, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims arising from any breach or default /s/ T.D. /s/ R.M. /s/ B.B. /s/ N.T. in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any negligence of the Lessee, or any of Lessee's agents, contractors, or employees, and from and against all costs, attorney's fees. expenses and liabilities incurred in the defense of any such claim or any action or any action or proceeding brought thereon; and in case any action or proceeding be brought against Lessor by reason of any such claim, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel satisfactory to Lessor. Lessee, as a material pant of the consideration to Lessor, hereby assumes all risk of damage to property or injury to persons, in, upon or about the Premises arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.7 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor shall not be liable for injury to Lessees business or any loss of income therefrom or for damage to the goods, wares, merchandise or other property of Lessee. Lessee's employees, invitees, customers, on any other person in or about the Premises, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction on other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said damage or injury results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places and regardless of whether the cause of such damage on injury or the means of repairing the same is inaccessible to Lessee. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant, if any, of the building in which the Premises are located. 9. SEE ADDENDUM #59 ATTACHED HERETO. THE REMAINING SECTIONS 9.1 THROUGH 9.6 ARE CROSSED OUT AND DELETED. 10. REAL PROPERLY TAXES. 10.1 PAYMENT OF TAXES. Lessee shall pay the real property tax, as defined in paragraph 10.2, applicable to the Premises during the term of this Lease. All such payments shall be made at least ten (10) days prior to the delinquency date of such payment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes paid by Lessee shall cover any period of time prior to or after the expiration of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year during which this Lease shall be in effect, and Lessor shall reimburse Lessee to the extent required. If Lessee shall fail to pay any such taxes, Lessor shall have the right to pay the same, in which case Lessee shall repay such amount to Lessor with Lessee's next rent installment together with ... maximum rate then allowable by law. 10.2 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy on tax (other than inheritance, personal income or estate taxes) imposed on the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, as against Lesson's right to rent or other income therefrom, and as against Lessor's business of leasing the Premises. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real properly tax." or (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a transfer, either partial or total, of Lessor's interest in the Premises or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such transfer, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the real property taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 PERSONAL PROPERTY TAXES. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from time real property of Lessor. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. UTILITIES. Lessee shall pay for all water, gas, heat, tight, power, telephone and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in this Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request tar consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a breach of this Lease. 12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or potion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the premises, provided that said assignee assumes, in full, the obligations of Lessee under this Lease. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 NO RELEASE OF LESSEE. Regardless of Lessor's consent, no subletting or assignment shall release Lessee of Lessee's obligation or alter the primary liability of Lessee to pay the rent and to perform all other obligations to be performed by Lessee hereunder. The acceptance of rent by Lessor from any other person shall not be deemed to be a waiver by Lessor of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignments or subletting of this Lease or amendments or modifications to this Lease with assignees of Lessee, without notifying Lessee, or any successor of Lessee, and without obtaining its or their consent thereto and such action shall not relieve Lessee of liability under this Lease. 12.4 ATTORNEY'S FEES. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection therewith, such attorneys fees not to exceed $350.00 for each such request. /s/ T.D. /s/ R.M. /s/ B.B. /s/ N.T. 13. DEFAULTS; REMEDIES 13.1 DEFAULTS. The occurrence of any one or more of the following events shall constitute a material default and breach of thus Lease by Lessee: (a) The vacating or abandonment of the Premises by Lessee. (b) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (c) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee, other than described in paragraph (b) above, where such failure shall continue for a period of 30 days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's default is such that more than 30 days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said 30-day period and thereafter diligently prosecutes such cure to completion. (d) (i) The making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within 30 days: or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure us not discharged within 30 days Provided, however, in the event that any provision of this paragraph 13.1(d) is contrary to any applicable law, such provision shall be of no force or effect. (e) The discovery by Lessor that any financial statement given to Lessor by Lessee, any assignee at Lessee, any subtenant of Lessee, any successor in interest of Lessee or any guarantor of Lessee's obligation hereunder, and any at them, was materially false. 13.2 REMEDIES. In the event of any such material default or breach by Lessee, Lessor may at any time thereafter, with or without notice on demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default on breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee alt damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fees, and any real estate commission actually paid: the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided, that portion of the leasing commission paid by Lessor pursuant to Paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such 30-day period and thereafter diligently prosecutes the same to completion. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of rent, then rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding paragraph 4 or any other provision of this Lease to the contrary. 13.5 IMPOUNDS. In the event that a late charge is payable hereunder, whether or not collected, for three (3) installments of rent or any other monetary obligation of Lessee under time terms of this Lease. Lessee shall pay to Lessor, if Lessor shall so request, in addition to any other payments required under this Lease, a monthly advance installment, payable at time same time as the monthly rent, as estimated by Lessor, for real property tax and insurance expenses on the Premises which are payable by Lessee under the terms of this Lease. Such fund shall be established to insure payment when due, before delinquency, of any or all such real property taxes and insurance premiums. If the amounts paid to Lessor by Lessee under the provisions of this paragraph are insufficient to discharge the obligations of Lessee to pay such real property taxes and insurance premiums as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums necessary to pay such obligations All moneys paid to Lessor under thus paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a default in the obligations of Lessee to perform under this Lease, then any balance remaining from funds paid to Lessor under the provisions of this paragraph may, at the option of Lessor, be applied to the payment of any monetary default of Lessee in lieu of being applied to the payment of real property tax and insurance premiums. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the floor area of the building on the Premises, or more than 25% of the land area of the Premises which is not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing only within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent shall be reduced in the proportion that the floor area of the building taken bears to the total floor area of the building situated on the Premises. No reduction of rent shall occur if the only area taken is that which does not have a building located thereon. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided. however, that Lessee shall be entitled to any award for loss of or damage to Lessee's trade fixtures and removable personal property. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent at severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. BROKER'S FEE. (a) Upon execution of this Lease by bath parties, Lessor shall pay to - -0- Licensed real estate broker(s), a fee as set forth in a separate agreement between Lessor and said broker(s), or in the event there is no separate agreement between Lessor and said broker(s), the sum of $ -0-, for brokerage services rendered by said broker(s) to Lessor in this transaction. (b) Lessor further agrees that if Lessee exercises any Option as defined in paragraph 39.1 of this Lease, which is granted to Lessee under thus Lease, or any subsequently granted option which is substantially similar to an Option granted to Lessee under this Lease, or if Lessee acquires any nights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or if Lessee remains in possession of the Premises after the expiration of the term of this Lease after having failed to exercise an Option, or if said broker(s) are the procuring cause of any other lease or sale entered into between the parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, then as to any of said transactions, Lessor shall pay said broker(s), a fee in accordance with the schedule of said broker(s) in effect at the home at execution of this Lease. (c) Lessor agrees to pay said fee not only on behalf of Lessor but also on behalf of any person, corporation, association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. 16. ESTOPPEL CERTIFICATE. (a) Lessee shall at any time upon not less than ten (10) days' prior written notice from Lessor execute, acknowledge and deliver to Lessor a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. (b) at Lessor's option, Lessee's failure to deliver such statement within such time shall be a material breach of this Lease or shall be conclusive upon Lessee (i) that this Lease is in full force and effect, without modification except as may be represented by Lessor, (ii) that there are no uncured defaults in Lessor's performance, and (iii) that not more than one month's rent has been paid in advance or such failure may be considered by Lessor as a default by lessee under this Lease. (c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three years' financial statements of Lessee. All such financial statements shall be received by lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. /s/ T.D. /s/ R.M. /s/ B.B. /s/ N.T. 17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners at the time in question of the fee title or a lessee's interest in a ground lease of the Premises, and except as expressly provided in Paragraph 15, in the event of any transfer of such title or interest, Lesser herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the dale of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee The obligations contained in thus Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law from the date due. Payment of such interest shall not excuse or cure any default by Lessee under thus Lease, provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. TIME AT ESSENCE. Time is of the essence. 21. ADDITIONAL RENT. Any monetary obligations of Lessee to Lessor under the terms of this Lease shall be deemed to be rent. 22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements at the parties with respect to any matter mentioned herein. No prior agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in Paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employees on agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of said Premises and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease except as otherwise specifically stated in this Lease. 23. NOTICES. Any notice required or permitted lobe given hereunder shall be in writing and may be given by personal delivery or by certified mail, and if given personally or by mail, shall be deemed sufficiently given if addressed to Lessee or to Lessor at the address noted below the Signature of the respective parties, as the case may be. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a waiver of any other provision hereof and any subsequent breach by Lessee of the same or any other provision. Lessor's consent to or approval of any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time at acceptance of such rent. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. 26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, but all options and rights of first refusal, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible. be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of Paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of time State wherein the Premises are located 30. SUBORDINATION. (a) This Lease, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the real property of which the Premises are a part and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination; Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease shall be deemed prior to such mortgage, deed of trust, or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage, deed, trustee or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attainment, a subordination or to make this Lease prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within 10 days after written demand shall constitute a material default by Lessee hereunder, or, at Lessor's option. Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. ATTORNEY'S FEES. If either party or the broker named herein brings an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the court. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part as Lessor may deem necessary or desirable. Lessor may at any time place on or about the Premises any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs, all without rebate of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises without Lessor's prior written consent except that Lessee shall have the right, without the prior permission of Lessor to place ordinary and usual for rent or sublet signs thereon. 35. MERGER. The voluntary or other surrender at this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lesser, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. CONSENTS. Except for paragraph 33 hereof. wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld. 37. GUARANTOR. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Premises. 39. OPTIONS. THERE ARE NO OPTIONS TO THIS LEASE. THIS SECTION HAS BEEN CROSSED OUT AND DELETED. /s/ T.D. /s/ R.M. /s/ B.B. /s/ N.T. THIS SECTION CONTINUES FROM THE PREVIOUS PAGE. THIS SECTION HAS BEEN CROSSED OUT AND DELETED. 40. MULTIPLE TENANT BUILDING. In the event that the Premises are part of a larger building or group of buildings then Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the building and grounds, the parking of vehicles, and the preservation of good order therein as well as for the convenience of other occupants and tenants of the building. The violations of any such rules and regulations shall be deemed a material breach of this Lease by Lessee. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of Lessee, its agents and invitees from acts of third parties. 42. EASEMENTS. Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions so long as such easements, rights, dedications. Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material breach of this Lease. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment `under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum if it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions oh this Lease. 44. AUTHORITY. If Lessee is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lesser. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. INSURING PARTY. The insuring party under this lease shall be the Lessee. 47. ADDENDUM. Attached hereto is an addendum or addenda containing paragraphs 48 through 60 which constitutes a part of this Lease. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT. OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. The parties hereto have executed this Lease at the place on the dates specified immediately adjacent to their respective signatures. Executed at ____________________________ 8955 Beverly Partnership on _____________________________________ By: /s/ Tony Dorn Address_________________________________ By /s/ Barry Beitler 8/31/98 ________________________________________ "LESSOR"(Corporate seal) Executed at ____________________________ NewStar Media, Inc., a California corporation on______________________________________ By /s/ Robert Murray 8/31/98 Vice President and General Counsel Address_________________________________ By /s/ Neil Topham ________________________________________ Chief Financial Officer "LESSEE" (Corporate seal) ADDENDUM This addendum ("Addendum") to that Certain Standard Industrial Lease-Special Net dated as of July 27, 1998 by and between 8955 Beverly Partnership, as Lessor, and NewStar Media, Inc., a California Corporation, as Lessee, is dated as of the date of the Lease. The terms and provisions of this Addendum shall have the same force and effect as if set forth in full in the text of the Lease and in the event of any conflict between the terms of the Addendum and the terms of the Lease, the Terms of this Addendum shall control. Unless otherwise expressly defined in this Addendum, any capitalized terms used in this Addendum shall have the meaning, if any, given to such terms in the Lease. 48. LESSOR'S OBLIGATIONS. Irrespective of Paragraph 7.4 or any other term in the Lease to the contrary, Lessor and Lessee agree: 48.1 Lessor shall, at Lessor's sole expense, keep all structural elements of the Premises (exclusive of roof), including without limitation all exterior walls and foundations in good order, condition and repair throughout the term of the Lease. All other systems of the Building, including the roof and roof membrane and all mechanical, electrical and air conditioning systems shall be maintained and repaired by Lessee, at Lessee's sole cost and expense. Additionally, Lessee agrees, at its cost, to maintain a monthly maintenance contract for the air conditioning systems of the Building. 48.2 Lessor agrees that in the case of any entry or access to the Premises by Lessor or agents or representatives of Lessor during the Lease, any of such access or entry will be undertaken with due regard for Lessee's privacy. 49. PARKING. Lessor shall grant Lessee the right to utilize the entire parking area at the rear of the Building (approximately 48 spaces). Lessee shall have the right to stack, as desired and as is legal, as many cars into said area as feasible, at no additional charge to that stipulated herein. There shall be no charge for the parking area or individual spaces during the term of the Lease. 49.1 Lessee agrees to maintain the parking area and all landscaping in and around it during the lease term, at its sole cost, in the same condition as of the commencement of the Lease, reasonable wear and tear excepted. 50. LEASEHOLD IMPROVEMENTS. The Premises shall be leased to Lessee on an "as is, where is" basis (with no Lessor obligations whatsoever for any improvements). Lessee agrees to maintain the Premises and the improvements in the same condition as when the Lease commenced, reasonable wear and tear excepted. 51. ALTERATIONS & ADDITIONS. With reference to Paragraph 7.5 of the Lease (entitled "Maintenance, Repairs and alterations"), it is agreed that at such time as Lessee requires alterations to the Premises after commencement of the Lease, permission from Lessor for said alterations shall be reasonable. Lessor further agrees to permit Lessee to install equipment in the Premises, even if subject to liens, installment sales, contractors, or chattel mortgages, so long as they do not materially affect the Building or title to the Building. ADDENDUM Page 1 of 5 /s/ B.B. /s/ N.T. /s/ R.C.M. 52. CONDITION OF PREMISES. With reference to Paragraph 6.3 of the Lease, it is agreed that Lessor shall use its best efforts to insure the suitability of the Premises for the conduct of Lessee's business. Lessor shall take no action which would interfere with Lessee's usage, except in the case of an emergency or by reasonable notice granted by Lessee. Acknowledgment is hereby made that Lessee under this Lease was a former owner of the subject Property who has sold the Building with a lease-back to Lessor/Landlord, therefore, Lessee hereby waives any rights as to latent defects or patent defects, if any, in the Building or Premises. 53. JANITORIAL & GARDENING. Lessee shall be responsible for all interior and exterior janitorial and gardening for the Premises and the Building, at its sole cost and expense. Gardening shall include replacing flowers and plants where necessary, regular watering and trimming of plants, and overall maintenance of the interior and exterior in the same condition or better as of the commencement of the Lease. 54. REASONABLENESS. Where applicable, Lessor's approval shall not be unreasonably withheld or delayed. Lessor hereby agrees that all action taken under the Lease shall be exercisable in a reasonable and timely manner, without altering specific time provisions set forth in the Lease. Lessor and Lessee shall use diligence and exercise reasonableness in the discharge of all duties and obligations as required in the Lease. 55. SIGNAGE. Lessee shall be granted signage of a size, nature, and character, to be approved by Lessor and the City of West Hollywood, on the exterior of the Building, facing south towards Beverly Boulevard, west towards Almont Drive, and in the monument sign if desired. All building signage is to be at Lessee's sole cost and expense. At the expiration of the lease term, Lessee shall be solely responsible, at its sole cost and expense, to remove said signage from the building and to repair any and all damage to the building caused by said signage by restoring the building to its original condition prior to the installation of said signage. 56. STORAGE. Any and all storage available in the Building's parking garage shall be provided to Lessee free of charge during the Lease term. 57. TERM. The lease term in Paragraph 3 of the lease shall be adjusted as necessary to reflect a full one (1) year lease term from the close of escrow between Buyer and Seller under that Certain Purchase Contract and Escrow Instructions dated July 13, 1998. Therefore, the commencement and termination dates shall adjust accordingly. 58. LESSOR'S RIGHT TO MARKET THE PROPERTY FOR LEASE. Due to the short term nature of the lease, as stated in Paragraph 32 of the lease, Lessor shall have the right to place its standard "For Lease" sign on the building or in the planters in front of the building and shall have access to the building to show the property to prospective tenants during the last one hundred twenty (120) days of the lease. Said showings shall not be considered as hampering Lessee's right to quiet enjoyment in any manner and Lessee agrees to cooperate with same. Lessor agrees to notify by telephone Lessee's designated representative prior to any such showing. ADDENDUM Page 2 of 5 /s/ N.T. /s/ R.C.M. /s/ B.B. 59. DAMAGE & DESTRUCTION. Section 9 of the Lease is deleted and the following substituted in its place: 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "Premises Partial Damage" shall herein mean damage or destruction to the Premises to the extent that the cost of repair is less than fifty percent (50%) of the then replacement cost of the Premises. "Premises Building Partial Damage" shall herein mean damage or destruction to the building of which the Premises are a part to the extent that the cost of repair is less than fifty percent (50%) of the then replacement cost of such building as a whole. (b) "Premises Total Destruction" shall herein mean damage or destruction to the Premises to the extent that the cost of repair is fifty percent (50%) or more of the then replacement cost of the Premises. "Premises Building Total Destruction" shall herein mean damage or destruction to the building of which the Premises are a part to the extent that the cost of repair is fifty percent (50%) or more of the then replacement cost of such building as a whole. 9.2 PARTIAL DAMAGE-INSURED LOSS. Subject to the provisions of paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of Premises Partial Damage or Premises Building Partial Damage, then Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements unless the same have become a part of the Premises pursuant to Paragraph 7.5 hereof as soon as reasonably possible and this Lease shall continue in full force and effect. Notwithstanding the above, if the Lessee is the insuring party, and if the insurance proceeds received by Lessor are not sufficient to effect such repair, Lessor shall give notice to Lessee of the amount required in addition to the insurance proceeds to effect such repair. Lessee shall contribute the required amount to Lessor within ten (10) days after Lessee has received notice from Lessor of the shortage in the insurance. When Lessee shall contribute such amount to Lessor, Lessor shall make such repairs as soon as reasonably possible and this Lease shall continue in full force and effect. Lessee shall in no event have any right to reimbursement for any such amounts so contributed. 9.3 PARTIAL DAMAGE-UNINSURED LOSS. Subject to the provisions of paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Partial Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease, as of the date of the occurrence of such damage. In the event Lessor elects to give such notice of Lessor's intention to cancel and terminate this Lease, Lessee shall have the right within ten (10) days after receipt of such notice to give written notice to Lessor of Lessee's intention to repair such damage at Lessee's expense, without reimbursement from Lessor, in which event this Lease shall continue in full force and effect, and Lessee shall proceed to make such repairs as soon as reasonably possible. If Lessee does not give such notice within such ten (10) day period, this Lease shall be canceled and terminated as of the date of the occurrence of such damage. ADDENDUM Page 3 of 5 /s/ N.T. /s/ B.B. /s/ R.C.M. 9.4 TOTAL DESTRUCTION. If at any time during the term of this Lease there is damage, whether or not an Insured Loss (including destruction required by an authorized public authority), which falls into the classification of Premises Total Destruction or Premises Building Total Destruction, this Lease shall automatically terminate as of the date of such total destruction. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage, whether or not an Insured Loss, which falls within the classification of Premises Partial Damage, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of damage described in paragraphs 9.2 or 9.3, and Lessor or Lessee repairs or restores the Premises pursuant to the provisions of this Paragraph 9, the rent payable hereunder for the period during which such damage, repair or restoration continues shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such obligations shall accrue, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. 9.7 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.8 WAIVER. Lessor and Lessee waive the provisions of any statutes which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 60. CONSULTATIONS. This Agreement is being entered into in good faith by the parties and was negotiated through arms-length bargaining. Each party acknowledges that is has been represented or has been given the opportunity and recommendation to be represented by an attorney of its choice in connection with the development, negotiation and execution of the Lease. Furthermore, the parties acknowledge that the original form of the Lease was developed by the Lessor, and modified and restated by the Lessee, and that the Lease shall not be construed against either party by virtue of the fact that the party or the party's counsel or agent had drafted or revised the Lease or any portion thereof. Wherever in this Lease there is a conflict, it is understood that the typed portions supersede the printed portions. ADDENDUM Page 4 of 5 /s/ N.T. /s/ B.B. /s/ R.C.M. IN WITNESS HEREOF, the parties have executed this Addendum the day and year first above written. FOR LESSEE: FOR LESSOR: NewStar Median Inc., a California Corporation 8955 Beverly Partnership By: /s/ Robert Murray By: /s/ Tony Dorn ------------------------------- ----------------------------- Its: Vice President and General Counsel Its: President ----------------------------------- ---------------------------- Date: 8-31-98 Date: 8-31-98 --------------------------- ---------------------------- /s/ Neil Topham Chief Financial Officer ADDENDUM Page 5 of 5 EX-10.38 6 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (the "AGREEMENT") made as of November 12, 1998 among NewStar Media Inc., a California corporation (the "COMPANY"), Apollo Partners, LLC and Ronald Lightstone (each a "PURCHASER" and collectively the "PURCHASERS"). WITNESSETH: WHEREAS, the Company desires to sell, and Purchasers desire to purchase, subject to the terms and conditions of this Agreement, shares of the Common Stock of the Company, par value $.01 per share (the "COMMON STOCK"); WHEREAS, a special committee of the Board of Directors, at a meeting held on November 12, 1998, approved the sale and issuance of Common Stock of the Company to the Purchasers on the terms set forth in this Agreement; WHEREAS, the Company and the Purchasers are parties to that certain Stock Purchase Agreement, dated as of July 30, 1998 (the "Stock Purchase Agreement"); WHEREAS, the Company and the Purchasers desire to adjust the purchase price of the shares of Common Stock purchased by the Purchasers under the Stock Purchase Agreement; WHEREAS, a special committee of the Board of Directors, at a meeting held on November 12, 1998, approved the adjustment in the purchase price of the shares of Common Stock purchased under the Stock Purchase Agreement on the terms set forth in this Agreement; WHEREAS, this Agreement memorializes the agreement between the Purchasers and the Company concerning the issuance and sale of Common Stock of the Company as approved by the special committee on November 12, 1998 and the adjustment of the purchase price of the shares of Common Stock purchased under the Stock Purchase Agreement. NOW, THEREFORE, in the consideration of the foregoing and the covenants, agreements, representations and warranties herein contained, and intending to be legally bound, the parties hereby mutually agree as follows: 1 SECTION 1 SALE AND PURCHASE OF THE COMPANY'S SECURITIES; CLOSING 1.1. SALE OF THE SECURITIES. (a) Subject to the terms and conditions herein set forth, the Company agrees to sell and issue to the Purchasers, and each Purchaser agrees to purchase from the Company, Common Stock of the Company as follows: (i) On the Closing Date (as hereinafter defined) Apollo Partners, LLC ("Apollo") shall purchase 425,591 of Common Stock of the Company for a purchase price of $0.719 per share or an aggregate of $305,999.93 (ii) On the Closing Date, Ronald Lightstone ("LIGHTSTONE") shall purchase 47,288 shares of Common Stock of the Company for $0.719 per share or an aggregate of $34,000.07. The shares being purchased hereunder are hereinafter referred to as the "PURCHASED SHARES". (b) In connection with the purchase of the Purchased Shares, each Purchaser shall have the right to assign all or a portion of its rights (but not its obligation) to purchase such Purchased Shares from the Company under this Agreement to any person, provided such person submits to the Company at the Closing a certificate setting forth the representations in Section 3 below. Any such assignees shall be deemed a "Purchaser" hereunder. (c) In connection with the sale and issuance of the Purchased Shares, the Company agrees to register the Purchased Shares as set forth in the form of Registration Rights Agreement annexed hereto as Exhibit A (the "REGISTRATION RIGHTS AGREEMENT"). 1.2. CLOSING. The closing of the issuance and sale of the Purchased Shares to the Purchasers (the "CLOSING") shall take place at the offices of the Company on or before November 16, 1998 (the date on which the Closing actually takes place being referred to as the "CLOSING DATE"). 1.3. DELIVERY. At the Closing, the Company shall issue and deliver to each Purchaser a certificate or certificates, registered in the name of the Purchaser, representing the Purchased Shares being purchased by such Purchaser, 2 against delivery to the Company of the Purchase Price therefor by wire transfer and shall execute and deliver the Registration Rights Agreement. 1.4. ADJUSTMENT TO NUMBER OF SHARES PURCHASED. Notwithstanding anything to the contrary contained herein, if, after the date of this Agreement and prior to the Closing Date, the Company shall have issued Common Stock to persons other than Apollo and Lightstone with the effect of increasing the net tangible assets of the Company above $2,360,000 (a "Stock Issuance"), the number of shares of Common Stock to be purchased by the Purchasers hereunder shall be determined in accordance with the following formula: Number of Shares = $2,700,000 - Net Tangible Assets -------------------------------- $0.719 Where "Net Tangible Assets" is the net tangible assets of the Company based on the Company's balance sheet as at September 30, 1998 and giving pro forma affect to all Stock Issuances. The number of shares of Common Stock to be purchased by Apollo shall equal 90% of such adjusted number of shares and the number of shares of Common Stock to be purchased by Lightstone shall equal 10% of such adjusted number of shares. 1.5 ADJUSTMENT OF PURCHASE PRICE (a) In consideration of the purchase of the Purchased Shares by Apollo and Lightstone, the Company hereby grants to Apollo and Lightstone the option to, and upon exercise of such option agrees to, adjust the purchase price of the shares of Common Stock purchased by Apollo and Lightstone under the Stock Purchase Agreement. The purchase price shall be adjusted to equal $0.719 per share. (b) The adjustment to the purchase price shall be effective at the option of Apollo and/or Lightstone on any date during the period commencing on November 16, 1998 and ending on January 10, 1999. Apollo and/or Lightstone shall also have the option of electing not to adjust the purchase price. If Apollo and/or Lightstone do not notify the Company on or before January 10, 1999 that it and/or he elects to adjust the purchase price, the purchase price shall not be adjusted. (c) Upon notification by Apollo that it has elected to exercise its option to adjust the purchase price, the Company shall issue 1,738,526 shares of Common Stock to Elkes Limited Partnership (an assignee of Apollo under the Stock Purchase Agreement) and 1,738,526 shares of Common Stock to Gorman 3 Limited Partnership (an assignee of Apollo under the Stock Purchase Agreement). Upon notification by Lightstone that he has elected to exercise his option to adjust the purchase price, the Company shall issue 347,705 shares of Common Stock to Lightstone. The shares to be issued upon exercise of such option are referred to as the "OPTION SHARES", and together with the Purchased Shares are referred to as the "Shares". The Option Shares shall be deemed shares issued under the Stock Purchase Agreement and shall have all of the registration rights of the shares issued under the Stock Purchase Agreement in accordance with the Registration Rights Agreement, dated as of August 31, 1998, entered into in connection therewith. (d) This Section 1.5 shall supersede Section 1.4 of the Stock Purchase Agreement. SECTION 2 THE COMPANY'S REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Purchasers the following: 2.1. ORGANIZATION AND STANDING OF THE COMPANY. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California, and has all requisite corporate power and authority to own and lease its properties and assets and to conduct its business as currently conducted. The Company is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction where its ownership, lease or operation of property in the course of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on the business, operations or financial condition of the Company and its subsidiaries taken as a whole. 2.2. AUTHORIZATION. The Company has all requisite corporate power and authority to execute and deliver this Agreement and the Registration Rights Agreement and to carry out the transactions contemplated hereby and thereby. The terms and provisions of this Agreement and the Registration Rights Agreement have been reviewed by a Special Committee of the Board of Directors composed of independent directors of the Company. The members of the Special Committee have unanimously recommended that this Agreement and the Registration Rights Agreement be approved, authorized, executed and delivered. The execution, delivery, and performance of this agreement and the Registration Agreement by the Company have been duly authorized by all requisite corporate action, and this Agreement has been, and the Registration Rights Agreement when executed and delivered by the Company will be, duly executed and delivered by the Company and constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 4 2.3. CAPITAL STOCK. The authorized shares of the Company consist of 20,000,000 shares of Common Stock and 2,000,000 shares of preferred stock, $.01 par value per share, of which 400,000 shares have been designated Series A Preferred Stock, 5,000 shares have been designated Series B Preferred Stock, and 5,000 shares have been designated Series C Preferred Stock, 400,000 shares have been designated Series D Preferred Stock and 1,500 shares have been designated Series E Preferred Stock. There are no voting trusts or other agreements or understandings known to the Company with respect to the voting of the capital stock of the Company. 2.4. ISSUANCE OF THE SHARES. The sale, issuance and delivery of the Shares in accordance with the terms of this Agreement have been authorized by all necessary corporate action, and the Shares when sold, issued and delivered, against the full payment of the purchase price will be duly and validly issued, fully paid and nonassessable. The sale, issuance and delivery of the Shares are not subject to any preemptive rights of stockholders of the Company or to any right of first refusal or other similar right in favor of any person. 2.5. CONSENTS AND APPROVALS. Except for filings under Federal and applicable state securities laws, no permit, consent, approval or authorization of or declaration to or filing with any governmental authority, not made or obtained, is required in connection with the execution or delivery of this Agreement by the Company, the offer, sale, issuance or delivery of the Shares, or the carrying out by the Company of the transactions contemplated hereby. 2.6. PRIVATE OFFERING. Neither the Company nor anyone acting on behalf of the Company has offered the Shares for sale to, or solicited offers to buy from, or otherwise approached or negotiated with, any individual or entity in connection with the sale of such securities other than a limited number of investors, including the Purchasers. Assuming the accuracy of each Purchaser's representations contained in Section 3 of this Agreement, the offer, issuance and delivery of the Shares are exempt from registration under the Securities Act of 1933, as amended (the "1933 ACT"), and all action required to be taken prior to the offer or sale of the Shares has been taken under the applicable state securities laws. 2.7. NO CONFLICT WITH LAW OR DOCUMENTS. The execution, delivery, and performance by the Company of this Agreement and the Registration Rights Agreement, and the performance by the Company of its obligations under such 5 documents, and the sale, issuance and delivery of the Shares, will not violate any provision of law, any order of any court or other agency of government, the Articles of Incorporation or By-laws, or any provision of any indenture, agreement or other instrument by which the Company or any of its properties or assets is bound or affected, or conflict with, result in a breech of, result in or permit the termination of or acceleration of rights or obligations under, or constitute (with due notice or lapse of time or both) 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 the properties or assets of the Company. 2.8. DISCLOSURE. Neither this Agreement nor any other document, certificate, instrument or statement furnished or made to the Purchasers by or on behalf of the Company in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading in light of the circumstances under which they were made. 2.9. LITIGATION. Except as disclosed in the Company's public filings and in Schedule 2.9, there are no (a) actions or suits individually in excess of $50,000 or in the aggregate in excess of $250,000, or any proceedings or investigations at law or in equity or by or before any governmental instrumentality or other agency now pending or to the Company's knowledge, threatened against or adversely affecting the Company, or (b) judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator against or affecting the Company, except as in all matters under (a) and (b), which are not reasonably expected to result in a material adverse effect on the business, operations or financial condition of the Company and its subsidiaries taken as a whole (a "MAE"), or are covered by appropriate amounts of insurance. 2.10. SUBSIDIARIES. Except for NewStar Worldwide Inc., NewStar Television Inc., Dove Four Point, Inc., Dove Audio, Inc., Dove Entertainment, Inc., Dove Retail, Inc., Family Blessings Productions Inc. and Empire Burbank Studios, the Company has no subsidiaries and does not own any interest directly or indirectly, in any other corporation, partnership, joint venture or other enterprise or entity. 2.11. INTELLECTUAL PROPERTY. (a) To the best knowledge of the Company the Company, owns, is licensed or otherwise has the right to all intellectual property relating to its 6 audio titles, books, films and television products (the "Products") and all rights to use all patents, trademarks, service marks, trade names, copyrights, licenses, franchises and other rights (collectively, including with respect to the intellectual property relating to the Products, the "RIGHTS") being used to conduct its business as now operated. The Company has made available to the Purchasers a complete set of all agreements permitting the Company to use the Rights of the third parties or allowing third parties to use the Rights of the Company. (b) No Right or Product presently sold by or employed by the Company, or which the Company contemplates selling or employing, infringes upon the Rights that are owned by any third party except as would not result in a MAE. (c) No litigation is pending and no claim has been made against the Company, or to the best of the Company's knowledge, is threatened, contesting the right of the Company to sell or use any Right or Product presently sold or employed by the Company, except as disclosed in the Company's public filings or except which would result in a MAE. (d) Except as disclosed in the Company's public filings, no employee, officer or consultant of the Company has any proprietary, financial or other interest in any Right owned or used by the Company which entitles such person to the payment of an amount in excess of $10,000 with respect to any single Right, or $25,000 with respect to all Rights in which such person has an interest. (e) The Company has taken reasonable measures to protect and preserve the security, confidentiality and value of its Rights, including trade secrets and other confidential information. 2.12. UNDISCLOSED LIABILITIES. Except for the agreements and obligations listed on the balance sheet for the Company included in its Quarterly Report on Form 10-QSB for the three months ended September 30, 1997, to the best of the Company's knowledge, the Company does not have any outstanding liability except for liabilities incurred in the ordinary course of business which are either for amounts less than $50,000 or are cancelable on not more than 30 days notice. The Company is not in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party that could reasonably be expected to result in a MAE. 2.13. TITLE TO PROPERTIES. The Company has good and marketable title to all of its owned properties and assets, free and clear of all mortgages, 7 pledges, security interests, liens, charges and encumbrances, except for Permitted Encumbrances (as defined below). The Company enjoys peaceful and undisturbed possession under all leases relating to real property and all other leases (other than immaterial leases which can be replaced on substantially the same terms) necessary for the operation of the business; and all such leases are valid and subsisting and in full force and effect. As used herein, "PERMITTED ENCUMBRANCES" means any mortgages, pledges, security interests, liens, charges and other encumbrances (i) disclosed in the Company's public filings to the date hereof or permitted under the Company's credit facility with The Chase Manhattan Bank, (ii) liens for current taxes, assessment and other governmental charges not overdue (other than liens, assessments or charges being contested in good faith), (iii) mechanic's material men's and similar liens which may have arisen in the ordinary course of business and which, in the aggregate, would not be material to the financial condition of the Company, (iv) security interests securing indebtedness not in default for the purchase price of or lease rental payments on property purchased or leased under capital lease arrangements in the ordinary course of business, and (v) minor imperfections of title, if any, not material in amount and not materially detracting from the values or impairing the use of the property subject thereto or impairing the operations or proposed operations of the Company. 2.14. REAL PROPERTY. Other than the premises containing the Company's headquarters located at 8955 Beverly Boulevard, Los Angeles, California, the Company owns no real property. 2.15. TAXES. (a) The Company has timely filed all federal, state and local income tax returns and has timely filed with all appropriate governmental agencies all sales, ad valorem, franchise and other tax, license, gross receipts and other similar returns and reports required to be filed by the Company. The Company has reported all taxable income and losses on those returns on which such information is required to be reported, and paid or provided for the payment of all taxes on said returns or taxes due pursuant to any assessment received by it, including without limitation, any taxes by law to be withheld and/or paid in connection with any officer's or employee's compensation or due pursuant to any assessment received by it. There are no agreements for the extension of time for the assessment or payment of any amounts of tax. The Company had made available to the Purchasers for inspection copies of income tax returns that are true and complete copies of the federal applicable state, local or other income tax returns filed by the Company. 8 (b) The Company had paid all tax liabilities of the Company arising through the end of the taxable year ended December 31, 1997. All tax liabilities of the Company arising after December 31, 1997 have been paid or adequately disclosed and properly reserved for on the books and records and financial statements of the Company. Except for current audits by the Internal Revenue Service of Dove Four Point, Inc. for the 1994 tax year and Dove Audio for the 1994 tax year, no federal or applicable state, local or other tax return of the Company for any period has been or is currently under audit by the Internal Revenue Service or any state, local or other tax authorities. Except for an assessment by Michigan, for approximately $90,000, no claim has been made by federal, state, local or other authorities relating to such returns or any audit. For purposes of this section the word "timely" shall mean that such returns were filed within the time prescribed by law for the filing thereof, including the time permitted under any applicable extensions. The Company is not aware of any facts which it believes would constitute the basis for the proposal of any material tax deficiencies for any unexamined year. All taxes which the Company is required by law to withhold and collect have been duly withheld and collected, and has been timely paid over to the proper authorities to the extent due and payable. 2.16. ENVIRONMENTAL MATTERS. The Company has complied with each and is not in violation of any, federal, state or local law, regulation, permit, provision or ordinance relating to the generation, storage, transportation, treatment or disposal of hazardous, toxic or polluting substances, except where such noncompliance or violation could not reasonably be expected to result in a MAE. The Company has obtained and adhered to all necessary permits and other approvals necessary to store, dispose, and otherwise handle hazardous, toxic and polluting substances, the failure of which to obtain or adhere to could not reasonably be expected to result in a MAE. The Company has reported, to the extent required by federal, state and local law, all past and present sites where hazardous, toxic or polluting substances, if any, from the Company have been treated, stored or disposed. The Company has not transported any hazardous, toxic or polluting substances or arranged for the transportation of such substances to any location which is the subject of federal, state or local enforcement actions or other investigations which may lead to claims against the Company for clean-up costs, remedial work, damages to natural resources or for personal injury claims, including, but not limited to, claims under the Compensation and Liability Act of 1980, as amended which claims would result in a MAE. 9 2.17. COMPLIANCE WITH LAW. (a) The Company is not in default under any order of any court, governmental authority or arbitration board or tribunal to which the Company was subject or in violation of any laws, ordinances, governmental rules or regulations (including, but not limited to, those relating to environmental, safety, building, product safety or health standards or employment matters) to which the Company is or was subject, in each case, that could reasonably be expected to result in a MAE. The business is being conducted in compliance with all applicable laws ordinances, rules and regulations applicable to the Company, the non-compliance with which could reasonably be expected to have a MAE. The Company has not failed to obtain any licenses, permits, franchises or other governmental authorizations necessary to the ownership of its properties or to the conduct of its business, which failure could have a MAE. (b) The Company has filed all documents (the "FILINGS") required to be filed with the Securities and Exchange Commission (the "COMMISSION") pursuant to the 1933 Act and the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") and true, correct and complete copies of the Filings have been made available to the Purchasers. The Filings complied in all material respects with the requirements of the 1933 Act and the Exchange Act, as applicable, and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to render the statement not misleading in the light of the circumstances in which they were made. The Company has filed in a timely manner all reports required to be filed since June 10, 1997. For purposes of this section the word "timely" shall have the meaning given in Section 2.15 2.18. EMPLOYEE BENEFIT PLANS. (a) The Company has complied and currently is in compliance, both as to form and operation, with the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the Internal Revenue Codes of 1954 and/or 1986,as amended respectively (the "CODE"), with respect to each "employee benefit plan" as defined under Section 3(3) of ERISA ("PLAN") which the Company (i) has ever adopted, maintained, established or to which the Company has ever been required to contribute or to which the Company has ever contributed or (ii) currently maintains or to which the Company currently contributes or is required to contribute or (iii) currently participates in or is required to participate in or is required to participate in, except in each case or all cases in the aggregate where such noncompliance would not result in a MAE. (b) The Company has never maintained, adopted or established, contributed or been required to contribute to, or otherwise participated in or been required to contribute to, or otherwise participated in or been required to participate in, a "multi-employer plan" (as defined in Section 3 (37) of ERISA). No amount is due or owing from the Company on account of a "multi-employer plan" (as defined in Section 3(37) of ERISA) of on account of any withdrawal therefrom. 10 (c) Notwithstanding anything else set forth herein, the Company has not incurred any material liability with respect to a Plan, including, without limitation, under ERISA (including, without limitation, Title I or Title IV or ERISA and other than liability for premiums due to the Pension Benefit Guaranty Corporation), the Code or other applicable law, which has not been satisfied or reserved in full, and no event has occurred, and there exists no condition or set of circumstances which could result in the imposition of any material liability with respect to the Plan, including, without limitation, under ERISA (including, without limitation, Title I or Title IV or ERISA), the Code or other applicable law with respect to the Plan. (d) The Company has not committed itself, orally or in writing, to (i) provide or cause to be provided to any person now or at any time covered by an Plan and payments or benefits, which are material either singly or in the aggregate, in addition to, or in lieu of, those payments or benefits set forth under any Plan, or (ii) continue the payment of, or accelerate the payment of, benefits, which are material either singly or in the aggregate, under any Plan, except as expressly set forth thereunder. Complete and correct copies of all written arrangements described in the preceding sentence as in effect on the date hereof have been made available to the Purchasers. (e) Except for the Employment Termination Agreement with the Viners, the employment agreements with Messrs. Ziskin and Lightstone and agreements with various industry guilds, the Company has not committed itself, orally or in writing, to provide or cause to be provided any severance or other post-employment benefit, salary continuation, termination, disability, death, retirement, health or medical benefit, or similar benefit to any person (including, without limitation, any former or current employee) except as set forth under any Plan, except for such benefits which individually or in the aggregate are not material. Complete and correct copies of all written arrangements described in the preceding sentence as in effect on the date hereof have been made available to the Purchasers. 2.19. INSURANCE. All policies of liability, theft, fidelity, business interruption, life, fire, product liability, workmen's compensation, health and other forms of insurance held by the Company are valid and enforceable policies 11 and are outstanding and duly in force and all premiums with respect thereto are paid to date. To the best of the Company's knowledge, the amounts of coverage under such policies of insurance for the assets and properties of the Company are adequate against risks usually insured against by persons operating similar businesses and operating similar properties. 2.20. REGISTRATION RIGHTS. Except as contemplated by or described in the Registration Rights Agreement, as disclosed in the Stock Purchase Agreement dated as of March 27, 1997 among Dove Entertainment, Inc. and the persons listed therein and as contemplated by the agreements with Media Equities International, Michael Viner and Deborah Raffin, Apollo, Lightstone, Michael Yageman, John Tinker, Steven Soloway, Tin Man, Leopold, Petrich & Smith and Custom Duplicating, no person has any right to cause the Company to effect the registration under the 1933 Act of any of the Company's debt or equity securities. SECTION 3 PURCHASERS' REPRESENTATIONS AND WARRANTIES Each Purchaser represents and warrants to the Company the following: 3.1. AUTHORIZATION. Such Purchaser has all requisite power and authority to execute this Agreement and the Registration Rights Agreement and to carry out the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement by such Purchaser have been duly authorized by all requisite corporate action, and this Agreement has been duly executed and delivered by such Purchaser and the Registration Rights Agreement when duly executed and delivered by such Purchaser will constitute its valid and binding obligation, enforceable against such Purchaser in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 3.2. PURCHASE FOR INVESTMENT. The Shares are being acquired by such Purchaser for its own account, not as a nominee or agent, for investment and not with a view to resale or distribution within the meaning of the 1933 Act, and the rules and regulations thereunder, and such Purchaser will not distribute the Shares in violation or contravention of the 1933 Act. Such Purchaser is not aware of any facts or circumstances that contradict the representation in the first sentence of Section 2.6. 3.3. RESTRICTIONS ON TRANSFER. The Purchaser acknowledges that (a) the Shares are not registered under the 1933 Act as of the Closing Date, (b) the 12 Shares will not be transferable unless so registered or unless an exception for such registration is applicable and (c) certificates representing the Shares will bear a legend substantially in the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES MAY BE MADE BY THE COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM." 3.4. SOPHISTICATION: ACCESS TO INFORMATION. (a) Such Purchaser represents and warrants to the Company, that such Purchaser and if such Purchaser is a limited liability company each member of such Purchaser (i) is an "accredited investor" as defined in the 1933 Act and is financially able to purchase the Shares (ii) is fully capable of understanding the type of investment being made pursuant to this Agreement, and the risks involved in connection therewith, (iii) believes that the nature of the Shares is consistent with their overall investment programs and financial position, (iv) recognizes that there are substantial risks involved in their purchase of the Shares, (v) is capable of bearing the economic risk of its investment for an indefinite period of time and can afford a complete loss of its investment, (vi) has adequate means of providing for their current liquidity needs, (vii) has no need for liquidity of their investment, (viii) is not expecting any short term income from their investment and (ix) has no reason to anticipate any change in personal circumstances, financial or otherwise, which may cause or require any sale of the Shares. (b) Such Purchaser acknowledges to the Company that it has had the opportunity to ask questions of and receive answers from the Company's officers and directors concerning the terms and conditions of the (i) purchase and delivery of the Shares and (ii) business and financial conditions of the Company; and such Purchaser has received to its satisfaction, such additional information about the business and financial conditions of the Company and the terms and conditions of the purchase and delivery of the Shares, as it has requested. 13 SECTION 4 CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS The Company's obligation to sell, issue and deliver the Purchased Shares on the Closing Date as specifically provided, is subject to the fulfillment to its satisfaction of the following conditions: 4.1. REPRESENTATIONS AND WARRANTIES. On the Closing Date, the representations and warranties contained in Section 3 hereof shall be true and correct with the same effect as though made on and as of the Closing Date. 4.2. NO INJUNCTION. There shall not be any pending or threatened suit, action or litigation, or administrative, arbitration or other proceeding or governmental inquiry or investigation questioning the validity of this Agreement or the transactions contemplated hereby. SECTION 5 AFFIRMATIVE COVENANTS OF THE COMPANY 5.1. ANNOUNCEMENTS. The Purchasers acknowledge that the Company may be required by law to make certain announcements regarding the transaction contemplated hereby. The content of any such public announcement by either party will be subject to review and approval of the other party, such delivery and review of content constituting such public announcement shall be timely and approval shall not be unreasonably withheld. 5.2. INDEMNIFICATION. (a) The Company (together with its successors and assigns, the "INDEMNIFYING PARTY") shall indemnify and hold harmless each Purchaser, its principals, employees (each, an "INDEMNIFIED PARTY") to the fullest extent permitted by law from and against any and all losses, claims, damages, expenses (including, without limitation, reasonable fees, disbursements and other charges of counsel incurred by an Indemnified Party) in any action or proceeding between an Indemnifying Party and Indemnified Party (or Indemnified Parties) or between an Indemnified Party (or Indemnified Parties) and any third party or otherwise, or other liabilities (collectively, the "LIABILITIES") resulting from or arising out of any breach of any representation or warranty, covenant or agreement of an Indemnifying Party to such Indemnified Party in this Agreement, or any legal, administrative or other actions (including actions brought by any equity holder of the Company) or derivative actions brought by any third party claiming through or in Indemnifying Party's name), proceedings or investigations whether formal or informal), or written threats thereof, based upon, relating to or arising out of any breach of any representation or warranty, covenant or agreement of an Indemnifying Party to such Indemnified Party in this Agreement; including the enforcement by any Indemnified Party of its rights hereunder. For purposes of this Section 5.2, "losses" shall include, but not be limited to, a diminution in value of the Purchased Shares resulting from or arising out of any breach of any representation or warranty, covenant or agreements of an Indemnifying Party in this Agreement. 14 (b) To the extent that such indemnification is unenforceable for any reason, the Indemnifying Party shall make the maximum contribution to the payment and satisfaction of the Liabilities which shall be permissible under applicable laws. (c) In connection with the obligation of the Indemnifying Party to indemnify for or contribute towards expenses as set forth above, the Indemnifying Party further agrees, upon presentation of appropriate invoices containing reasonable detail, to reimburse each Indemnified Party for all such expenses (including fees, disbursements and other charges of counsel incurred by an Indemnified Party in any action or proceeding between the Indemnifying Party and such Indemnified Party, or Parties, and any third party otherwise) as they are incurred by such Indemnified Party subject to an undertaking to reimburse such amounts if determined not entitled to it. 5.3. FINANCIAL STATEMENTS AND REPORTS. For so long as the Purchasers continue to hold in the aggregate at least 1% of the outstanding shares of Common Stock, the Company shall furnish to the Purchasers the following financial statements and reports: (a) Within the period prescribed by the Securities and Exchange Commission (the "COMMISSION"), an audited balance sheet, and related audited statements of income, cash flows and shareholders' equity of the Company as of and for such fiscal year prepared in accordance with GAAP, consistently applied, and accompanied by the opinion of the Company's regularly engaged firm of independent certified public accountants. (b) Within the period prescribed by the Commission, a quarterly balance sheet and statements of income, cash flows and stockholders' equity of the Company as of and for such quarter and the year to date and as of and for the corresponding periods of the preceding fiscal year. The interim statements described above shall be unaudited, but prepared in accordance with GAAP, subject only to normal year-end adjustments and shall be certified by the Chief Financial Officer of the Company; and (c) Promptly upon their becoming available, the Company shall deliver to the Purchasers copies of (i) all financial statements, reports, notices and proxy statements sent or made available to shareholders by the 15 Company, (ii) all regular and periodic reports and all registration statements and prospectuses, if any, filed by the Company with any securities exchange or with the Commission or any governmental or private regulatory authority, and (iii) all press releases and other statements made available by the Company to the public concerning material developments in the business of the Company. 5.4. ACCESS. The Company shall during usual business hours and upon reasonable notice, permit the Purchasers' duly authorized representatives to visit and inspect the properties of the Company, to examine the stock register, books and record of account and records of the proceedings of the incorporators, stockholders and directors and to make copies or extracts therefrom, and to discuss the Company's business with its officers and directors. 5.5. OTHER FILINGS AND DISSEMINATION OF MATERIAL. For so long as the Purchasers continue to hold in the aggregate at least 1% of the outstanding shares of Common Stock: (a) The Company shall make and keep public information available as those terms are understood and defined in Rule 144 promulgated under the 1933 Act. (b) The Company shall file with the Commission in a timely manner all reports and other documents as the Commission may prescribe under the Exchange Act at any time. (c) The Company shall furnish to the Purchasers a written statement by the Company as to its compliance with the reporting requirements of the Exchange Act as the Purchasers may reasonably request to avail itself of any rule or regulation of the Commission allowing such holder to sell any such securities without registration. SECTION 6 NEGATIVE COVENANTS OF THE COMPANY 6.1. NEGATIVE COVENANTS. (a) So long as the Purchasers continue to hold not less than an aggregate of 750,000 shares of Common Stock, the Company hereby covenants and agrees with the Purchasers that without the consent of the Purchasers, which right of consent shall be exercised in good faith and in a commercially reasonable manner, 16 (i) the Company will not; (A) adopt an annual budget; (B) incur any debt for borrowed money or sell and issue any debt or equity securities other than compensation for employees, directors and consultants or pursuant to any options, warrants or convertible securities outstanding on the date hereof; (C) change or alter its principal business or enter into any new business (it being understood that exploiting ancillary rights shall not be considered new business). (ii) no executive officer of the Company will knowingly: (A) hire any executive that earns in excess of $100,000 per year; (B) make any changes or additions to the Company's auditors, consultants or principal outside counsel; (D) commence any litigation not in the ordinary course of business or settle any litigation not in the ordinary course of business or where the amount to be paid by the Company is $25,000 or more; (E) acquire any assets where the required payment by the Company is in excess of $155,000 or sell or license outside of the ordinary course of business assets where the payment to the Company is in excess of $155,000, including film, audio or publishing rights; (F) commence active pre-production for (I) any television movie-of-the-week, special or mini-series, unless the license fee payable (or previously paid) for such program by the U.S. broadcast or cable network together with bankable foreign licenses is at least equal to the budgeted negative cost (including all normal and customary production budget items including for functions performed by the Company and including a customary contingency of 10%, minus $250,000 and the Company 17 reasonably believes that additional revenues from uncommitted territories is reasonably likely to generate revenues in excess of $250,000 in the two years from the date of commencement of such pre-production, (II) any episodic television series unless the budgeted negative cost (including all normal and customary production budget items including for functions performed by the Company and including a customary contingency of 10%) per episode is less than $150,000 and at least 80% of such negative cost will be funded by a U.S. broadcast or cable network and the Company reasonably believes that additional revenues from uncommitted territories is reasonably likely to generate revenues in excess of the unfunded amount within two years from the date of commencement of such production; or (III) engage in the production of a theatrical feature film, except to the extent the Company's commitments are less than $250,000 and the Company reasonably believes that expected revenue from such film will be in excess of all costs relating thereto, including the amount of the Company's commitment; (G) issue any financial press releases or publicly issue or otherwise publicly discuss the Company's projected financial results (it being understood that the foregoing is not intended to restrict comments in general terms as to the anticipated success of any particular project). (b) For purposes of this Section 6.1 only, Apollo and Lightstone jointly shall from time to time designate a person (a "Representative") by written notice to the Company, who shall have the authority as between the Company and the Purchasers to give or withhold the Purchasers' consent as contemplated in this Section 6.1, which Representative shall, until further notice, be Ronald Lightstone. 6.2. REMEDY. In the event that the Company breaches any of the covenants set forth in Section 6.1, and such breach is continuing unremedied for a period of thirty (30) days after notice thereof is given to the Company by both of Apollo and Lightstone, then the Company shall immediately upon written demand by both of Apollo and Lightstone take all steps necessary or appropriate to elect its Board of Directors two additional directors nominated by both of Apollo and Lightstone, including calling a special meeting for such purpose, 18 which directors shall continue to serve until the earlier of the annual meeting of the shareholders of the Company next following the cure of the breach which gave rise to the exercise of rights under this Section 6.2, or until the Purchasers no longer own at least 750,000 common shares. If shareholder approval shall be required for such election of such additional directors, whether for an approval of an amendment to the Company's By-Laws or otherwise, such appointment shall be subject to such shareholder approval and the Company shall use its best efforts to obtain such shareholder approval. The rights afforded to the Purchaser hereunder shall arise each time there is a breach of the covenants set forth in section 6.1 and shall be severable with respect thereto, provided in no event shall this Section entitled the Purchasers to have more than two additional directors designated at any one time. SECTION 7 MISCELLANEOUS 7.1. PAYMENT OF EXPENSES: COUNSEL. The Company shall pay all expenses, including the reasonable fees and expenses of the Purchasers' counsel (if any), incurred by the Company and/or the Purchasers in connection with the sale, issuance and delivery of the Shares pursuant to this Agreement and the execution, delivery and performance of this Agreement. 7.2. TRANSFER OF TAXES. The Company will pay, and hold the Purchasers harmless against, liability for the payment of any transfer or similar taxes payable in connection with the initial sale, issuance and delivery of the Shares. 7.3. BROKER OR FINDER. The parties individually represent and warrant that, to the best of their individual knowledge, no broker or finder has acted for it in connection with this Agreement or the transactions contemplated by this Agreement and that no broker or finder is entitled to any broker's or finder's fee or other commission in respect thereof based in any way on agreements, arrangements or understandings made by such party. The Company shall indemnify the Purchasers and the Purchasers shall indemnify the Company against, and hold it harmless from, any claim, liability, cost or expense (including reasonable attorneys' fees and expenses) resulting from any agreement, arrangement or understanding made by the Company or the Purchasers, as the case may be. 7.4. GOVERNING LAW. This agreement shall be governed by and construed and enforced in accordance with laws of the State of New York, without reference to conflict of law provisions. 19 7.5. NOTICE. Any notice or other communication required or permitted hereunder shall be sufficiently given only if sent by facsimile transmission or by registered or certified mail, postage prepaid, addressed as follows or to such other address or addresses as may hereafter be furnished in writing by notice similarly given by one party or to the other: To the Company: NewStar Media Inc. 8955 Beverly Boulevard Los Angeles, CA 90048 Facsimile: (310) 724-7146 The Purchasers: Apollo Partners Ltd. 1 Stamford Plaza, 12th Floor Stamford, CT 06901 Ron Lightstone NewStar Media 8955 Beverly Blvd. Los Angeles, CA 90048 With a required copy to: Morrison Cohen Singer & Weinstein, LLP 750 Lexington Avenue New York, New York 10022 Attn: Peter D. Weinstein, Esq. Jack Levy, Esq. Telephone: 212-734-8600 Facsimile: 212-735-8708 7.6. ENTIRE AGREEMENT. This Agreement including the Appendix, Schedules and Exhibits hereto, contain the entire agreement and understanding among the parties with respect to the subject matter hereof and shall not be modified or affected by any offer, proposal, statement or representation, oral or written, made by or for any party in connection with the negotiation of the terms hereof. All references herein to this Agreement shall specifically include, incorporate and refer to the Appendix, Schedules and exhibits attached hereto which are hereby made a part hereof. There are no representations, promises, warranties, covenants, undertakings or assurances (express or implied) other than those expressly set forth or provided for herein and in the other documents referred to herein. This Agreement may not be modified or amended orally, but only by a writing signed by the parties. 20 7.7. SEVERABILITY. If any part of this Agreement is held to be unenforceable or invalid under, or in conflict with, the applicable law of any jurisdiction, the unenforceable, invalid or conflicting part shall, to the extent permitted by applicable law, be narrowed or replaced, to the extent possible, with a judicial construction in such jurisdiction that effects the intent of the parties regarding this Agreement and such unenforceable, invalid or conflicting part. To the extent permitted by applicable law, notwithstanding the unenforceability, invalidity or conflict with applicable law of any part of this Agreement, the remaining parts shall be valid, enforceable and binding on the parties. 7.8. HEADINGS. The headings of the Sections of this Agreement are reinstated for convenience of reference only and shall not be considered a part hereof. 7.9. COUNTERPARTS. This agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date set forth above. THE COMPANY: NEWSTAR MEDIA INC. By: /s/ NEIL TOPHAM ------------------------------------- Name: Neil Topham Title: Vice President & Chief Financial Officer THE PURCHASERS: APOLLO PARTNERS, LLC By: /s/ TERRENCE A. ELKES /s/ KENNETH F. GORMAN ------------------------------------- Name: Title: /s/ RON LIGHTSTONE ------------------------------------------ Ronald Lightstone S-1 SCHEDULE 2.9 Saskatchewan Film and Video Development Corporation and The Edge Productions Corp. v. Dove Audio, Inc. (United States District Court Central District of California 98-3760 GHK (SHx)) Larry Flynt v. Dove Audio, Inc.; Dove Books; Dove Entertainment, Inc. (Los Angeles Superior Court BC194869) Creditors' House v. NewStar Media Inc. (Los Angeles Municipal Court 98E05530) National Commercial Recovery v. Dove Audio (Los Angeles Municipal Court 98K08000) Goodman v. Buena Vista Television, Inc. et al. (U.S.D.C. No. CV 98-0218 DT (VAPx)) R.R. Donnelly Receivable v. NewStar Inc. (Los Angeles Superior Court BC187902) Time Warner City Cable Advertising, Inc. v. Dove Entertainment (Beverly Hills Municipal Court 90 C 00639) Joanne Parrent v. Michael Viner and Dove Entertainment (Los Angeles Superior Court BC183507) Mattken Corp. V. NewStar Media (Los Angeles Superior Court BC 191736) Palisades Pictures LLC, Nothing to Lose Productions Inc., CUB Films, Mark Severini, Eric Bross and Jeff Dowd v. Dove International, Inc., Dove Audio, Inc. and NewStar Media Inc. (Los Angeles County Superior Court BC 194069) EXHIBIT A REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated as of November 12, 1998, by and among NewStar Media Inc., a California corporation (the "COMPANY"), and Apollo Partners, LLC and Ronald Lightstone, as Purchasers (each a "PURCHASER" and collectively, the "PURCHASERS"). WHEREAS, the Purchasers are acquiring securities of the Company pursuant to a Stock Purchase Agreement dated the date hereof among the Company and the Purchasers (the "STOCK PURCHASE AGREEMENT"; capitalized terms used in this Registration Rights Agreement without definition shall have the meanings ascribed thereto in the Stock Purchase Agreement). NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein and intending to be legally bound, the parties hereto agree as follows: 1. REGISTRATION RIGHTS 1.1 (a) The Company shall as expeditiously as practicable, but in any event not later than December 31, 1998, prepare and file with the Securities and Exchange Commission (the "COMMISSION") one or more registration statements (individually and collectively, the "REGISTRATION STATEMENT") under the Securities Act of 1933 (the "1933 ACT"), providing for the registration of the Shares (together with all shares of Common Stock issued in connection therewith, including by way of a stock split or other adjustment or stock dividend, the "REGISTRABLE SECURITIES") for sale by the Purchasers, then holding such securities (including with respect to Apollo Partners, LLC., its principals who for the purpose of this Agreement shall be included in the term "PURCHASER"). Thereafter, the Company shall use its reasonable best efforts to cause such Registration Statement to be declared effective not later than February 26, 1999. If at any time after the Registration Statement becomes effective, the Registration Statement is not available for sales by any Purchaser, then the Company shall, as expeditiously as possible, prepare and file with the Commission, to the extent required, an amendment or new registration statement in order to afford such Purchaser the benefit of the registration contemplated in this Section 1.1, and shall use its reasonable best efforts to have such amendment or new registration statement declared effective as promptly as practicable. (b) Notwithstanding the foregoing, in the event that the Company proposes to undertake an underwritten public offering immediately prior to the filing of or during the pendency or effectiveness of the Registration Statement, each Purchaser will be obligated to either (x) join the underwritten offering with respect to all or a portion of the Registerable Securities requested by such Purchaser to be included therein (subject to the approval of the managing underwriter, which may exclude such shares entirely or require pro rata cut-back with other selling shareholders, and/or (y) execute a "lock-up" agreement with respect to the sale or other disposition of any Registrable Securities not so included or permitted to be included for a period commencing with the filing of the related registration statement and ending 90 days after the effective date of the related Registration Statement, but in any event not more than 135 in the aggregate. 1.2. REGISTRATION PROCEDURES. (a) The Registration Statement may be in any form for which the Company then qualifies or which counsel for the Company deems appropriate; (b) Before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to counsel selected by the Purchasers, copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel, and after the filing of the Registration Statement, the Company will promptly notify the Purchasers of any stop order issued or, to the knowledge of the Company, threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered; (c) The Company shall prepare and file with the Commission such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep the registration statement effective for so long as any of the Registrable Securities remain owned by a Purchaser, and so long as such registration is necessary to permit the public resale thereof without any limitation on the amount of such sales pursuant to Rule 144 under the Securities Act or otherwise, and comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities during such period in accordance with the intended methods of disposition set forth in the registration statement; (d) The Company shall furnish to each Purchaser, before filing the Registration Statement, if requested, copies of the Registration Statement as proposed to be filed, and thereafter furnish to each Purchaser such number of copies of the Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in the registration statement (including each preliminary prospectus) and such other document as the Purchasers may reasonably request in order to facilitate the disposition of the Registrable Securities; -2- (e) The Company shall use its commercially reasonable efforts to register or qualify the Registerable Securities covered by such Registration Statement under the securities or blue sky laws of such jurisdictions as the Purchasers shall reasonably request (provided that the Company shall not be required to consent to general service of process for all purposes in any jurisdiction where it is not then qualified to do business) and do any and all other acts or things which may be necessary or advisable to enable such seller to consummate the public sale or other disposition in such jurisdictions of such Registrable Securities; (f) The Company shall notify the each Purchaser, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, of the happening of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of the Purchasers prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (g) The Company shall furnish, at the request of each Purchaser on the date that the Registration Statement becomes effective, (a) an opinion, dated such date, of the independent counsel representing the Company for the purposes of such registration, addressed to the Purchasers, stating that such registration statement has become effective under the 1993 Act; and (b) a letter, dated such date, from the independent certified public accountants of the Company addressed to the Purchasers making such request, stating that they are independent certified public accountants within the meaning of the 1933 Act, and that in the opinion of such accountants, the financial statements and other financial data of the Company included in the registration statement or the prospectus, or any amendment or supplemental thereto, comply as to form in all material respects with the applicable accounting requirements of the 1933 Act, and covering such other matters (including information as to the period ending not more than five (5) business days prior to the date of such letter) with respect to the registration, if independent certified public accountants are normally requested to provide comfort on such matters, as such Purchaser may reasonably request. -3- (h) The Company shall make available for inspection by the Purchasers and any attorney, accountant or other professional retained by any Purchaser or any underwriter (collectively, the "INSPECTORS"), all financial and other records, permanent corporate documents and properties of the Company (collectively, the "RECORDS") as are reasonably necessary to enable them to exercise due diligence, and cause the Company's officers, directors, and employees to supply all information reasonably requested by such Inspectors in connection with the registration statement. The Purchasers further agree that they will, upon learning that disclosure of such Records is sought in a court of component jurisdiction, give notice to the Company and allow the Company at its expense to undertake appropriate action to prevent disclosure of the Records deemed confidential; (i) The Company shall otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders, as soon as reasonably practicable an earnings statement satisfying the provisions of Section 11(a) of the 1933 Act and covering a period of twelve months, beginning within three months after the effective date of the Registration Statement; (j) The Company shall use its commercially reasonable efforts to cause all Registrable Securities to be listed on each securities exchange (if any) on which similar securities issued by the Company are then listed; and (k) The Company shall provide a transfer agent and registrar for all of the Registrable Securities not later then the effective date of such Registration Statement. 1.3. DISCONTINUANCE OF DISPOSITION. The Purchasers, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 1.2 (f) shall forthwith discontinue disposition of the Registrable Securities until the Purchaser receives copies of the supplemented or amended prospectus contemplated by Section 1.2 (f) or until it is advised in writing (the "ADVICE") by the Company that the use of the prospectus may be resumed and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus. 1.4. INFORMATION TO BE FURNISHED BY PURCHASERS. Each Purchaser all furnish to the Company such information and execute such documents regarding the Registrable Securities held by such Purchaser and the intended method of disposition thereof as the Company shall reasonably request in connection with the action to be taken by the Company. -4- 1.5. EXPENSES OF REGISTRATION. The Company shall pay all expenses incurred by the Company in complying with Section 1.1 and 1.3 (other than the underwriter's discounts and commissions and fees and expenses of special counsel to the Purchasers, if any), including, without limitation, all registration and filing fees (including all expenses incident to filing with the National Association of Securities Dealers, Inc.), fees and expenses of complying with securities and blue sky laws, printing expenses, fees, and disbursements of counsel to the Company, and of the Company's independent public accountants. 1.6. INDEMNIFICATION. (a) The Company shall indemnify and hold harmless each Purchaser, its executive officers, directors and controlling persons (within the meaning of the 1933 Act) and each person who participates as an underwriter or controlling person of an underwriter (within the meaning of the 1933 Act) with respect to a Registration Statement pursuant to Section 1.1 against any losses, claims, damages or liabilities to which any of them may become subject under the 1933 Act or otherwise insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or allegedly untrue statement of any material fact contained in a registration statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, and will reimburse any of them for any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable hereunder in any such case if any such loss, claim, damage or liability arise out of or is based upon any untrue statement or allegedly untrue statement or omission or alleged omission made in such registration statement, prospectus or amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company for such purpose by such Purchaser or by its representative. (b) Each Purchaser shall indemnify and hold harmless the Company, its executive officers, directors and controlling persons (within the meaning of the 1933 Act) and each person who participates as an underwriter or controlling person of an underwriter (within the meaning of the 1933 Act) with respect to a registration statement pursuant to Section 1.1 against any losses, claims, -5- damages or liabilities to which any of them may become subject under the 1933 Act or otherwise insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, in reliance upon and in conformity with written information furnished to the supplement thereof, in reliance upon and in conformity with written information furnished to the Company by each Purchaser or by its representative, and will reimbursement any of them for any legal or other expenses reasonably incurred by them in connection with investigating or defending, any such, loss, claim, damage, liability or action. (c) A party's obligation to indemnify (the "indemnifying party") and the other party's rights to indemnity and payment (the "indemnified party") under Section 1.6 is contingent upon the indemnified party (i) giving the indemnifying party prompt written notice of such claim; (ii) allowing the indemnifying party to have sole right to control and direct the investigation, preparation and defense of any such claim or action and all negotiations for its settlement or compromise; and (iii) providing reasonable assistance to the indemnifying party, such assistance to be solely at the cost and expense of the indemnifying party. The indemnified party, at its own expense, shall be entitled to participate in the defense and to receive copies of all pleadings and other papers in connection with the claim. (d) If for any reason the indemnification provided for in the preceding Sections 1.6 (a) and 1.6 (b) is unavailable to an indemnified party as contemplated by those sections, then the indemnifying party will contribute to the amount paid or payable to the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided that no Purchaser will not be required to contribute in an amount greater than the difference between the net proceeds received by such Purchaser with respect to the sale of any Registrable Securities and all amounts already contributed by such Purchaser with respect to such claims. 1.7. UNDERWRITING AGREEMENT. If the Registrable Securities are to be sold pursuant to a registration statement in an underwritten offering in which no shares of the Company are being sold for the account of the Company, the Company agrees to enter into an underwriting agreement with the underwriter or underwriters (who shall be subject to the approval of the Company) containing customary representations and warranties with respect to the business and operations of the Company, including without limiting the generality of the foregoing, customary provisions with respect to indemnification by the Company of the underwriters of such offering. -6- 2. MISCELLANEOUS ------------- 2.1. OWNER OF REGISTRABLE SECURITIES. The Company may deem and treat the person in whose name the Registrable Securities are registered as the absolute owner thereof for all purposes whatsoever. 2.2. SUCCESSORS. This Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of each Purchaser, and the term "Purchaser" shall be deemed to be include each such holder of Registrable Securities. This Agreement shall be binding upon and shall inure to the benefit of the Company and its successors and assigns. 2.3. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to such state's conflicts of law principles. 2.4. NOTICE. Any notice or other communication required or permitted hereunder shall be sufficiently given only if sent by facsimile transmission or by registered or certified mail, postage prepaid, addressed as follows or to such other address or addresses as may hereafter be furnished in writing by notice similarly given by one party to the other: To the Company: NewStar Media Inc. 8955 Beverly Blvd. Los Angeles, CA 90048 Telephone: (310) 786-1600 Facsimile: (310) 247-2932 The Purchasers: Apollo Partners Ltd. 500 5th Avenue Suite #3520 New York, NY 10110 Ron Lightstone NewStar Media 8955 Beverly Blvd. Los Angeles, CA 90048 -7- With a required copy to: Morrison Cohen Singer & Weinstein, LLP 770 Lexington Avenue New York, New York 10022 Attn: Peter D. Weinstein, Esq. Jack Levy, Esq. Telephone: 212-734-8600 Facsimile: 212-735-8708 2.5. FULL AGREEMENT. This Agreement sets forth the entire understanding of the parties with respect to transactions contemplated hereby, and shall not be modified or amended except by written agreement of all parties hereto. 2.6. HEADINGS. The headings of the Sections of this Agreement are inserted for convenience of reference only and shall not be considered a part hereof. 2.7. COUNTERPARTS. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. [Remainder of Page Intentionally Left Blank] -8- IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date first forth above. THE COMPANY: NEWSTAR MEDIA INC. By: ------------------------------------- Name: Neil Topham Title: Vice President & Chief Financial Officer THE PURCHASERS: APOLLO PARTNERS, LLC By: ------------------------------------- Terrence Elkes Manager ---------------------------------------- Ronald Lightstone -9- EX-10.39 7 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated as of November 12, 1998, by and among NewStar Media Inc., a California corporation (the "COMPANY"), and Apollo Partners, LLC and Ronald Lightstone, as Purchasers (each a "PURCHASER" and collectively, the "PURCHASERS"). WHEREAS, the Purchasers are acquiring securities of the Company pursuant to a Stock Purchase Agreement dated the date hereof among the Company and the Purchasers (the "STOCK PURCHASE AGREEMENT"; capitalized terms used in this Registration Rights Agreement without definition shall have the meanings ascribed thereto in the Stock Purchase Agreement). NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein and intending to be legally bound, the parties hereto agree as follows: 1. REGISTRATION RIGHTS 1.1 (a) The Company shall as expeditiously as practicable, but in any event not later than December 31, 1998, prepare and file with the Securities and Exchange Commission (the "COMMISSION") one or more registration statements (individually and collectively, the "REGISTRATION STATEMENT") under the Securities Act of 1933 (the "1933 ACT"), providing for the registration of the Shares (together with all shares of Common Stock issued in connection therewith, including by way of a stock split or other adjustment or stock dividend, the "REGISTRABLE SECURITIES") for sale by the Purchasers, then holding such securities (including with respect to Apollo Partners, LLC., its principals who for the purpose of this Agreement shall be included in the term "PURCHASER"). Thereafter, the Company shall use its reasonable best efforts to cause such Registration Statement to be declared effective not later than February 26, 1999. If at any time after the Registration Statement becomes effective, the Registration Statement is not available for sales by any Purchaser, then the Company shall, as expeditiously as possible, prepare and file with the Commission, to the extent required, an amendment or new registration statement in order to afford such Purchaser the benefit of the registration contemplated in this Section 1.1, and shall use its reasonable best efforts to have such amendment or new registration statement declared effective as promptly as practicable. (b) Notwithstanding the foregoing, in the event that the Company proposes to undertake an underwritten public offering immediately prior to the filing of or during the pendency or effectiveness of the Registration Statement, each Purchaser will be obligated to either (x) join the underwritten offering with respect to all or a portion of the Registerable Securities requested by such Purchaser to be included therein (subject to the approval of the managing underwriter, which may exclude such shares entirely or require pro rata cut-back with other selling shareholders, and/or (y) execute a "lock-up" agreement with respect to the sale or other disposition of any Registrable Securities not so included or permitted to be included for a period commencing with the filing of the related registration statement and ending 90 days after the effective date of the related Registration Statement, but in any event not more than 135 in the aggregate. 1.2. REGISTRATION PROCEDURES. (a) The Registration Statement may be in any form for which the Company then qualifies or which counsel for the Company deems appropriate; (b) Before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to counsel selected by the Purchasers, copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel, and after the filing of the Registration Statement, the Company will promptly notify the Purchasers of any stop order issued or, to the knowledge of the Company, threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered; (c) The Company shall prepare and file with the Commission such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep the registration statement effective for so long as any of the Registrable Securities remain owned by a Purchaser, and so long as such registration is necessary to permit the public resale thereof without any limitation on the amount of such sales pursuant to Rule 144 under the Securities Act or otherwise, and comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities during such period in accordance with the intended methods of disposition set forth in the registration statement; (d) The Company shall furnish to each Purchaser, before filing the Registration Statement, if requested, copies of the Registration Statement as proposed to be filed, and thereafter furnish to each Purchaser such number of copies of the Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in the registration statement (including each preliminary prospectus) and such other document as the Purchasers may reasonably request in order to facilitate the disposition of the Registrable Securities; -2- (e) The Company shall use its commercially reasonable efforts to register or qualify the Registerable Securities covered by such Registration Statement under the securities or blue sky laws of such jurisdictions as the Purchasers shall reasonably request (provided that the Company shall not be required to consent to general service of process for all purposes in any jurisdiction where it is not then qualified to do business) and do any and all other acts or things which may be necessary or advisable to enable such seller to consummate the public sale or other disposition in such jurisdictions of such Registrable Securities; (f) The Company shall notify the each Purchaser, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, of the happening of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of the Purchasers prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (g) The Company shall furnish, at the request of each Purchaser on the date that the Registration Statement becomes effective, (a) an opinion, dated such date, of the independent counsel representing the Company for the purposes of such registration, addressed to the Purchasers, stating that such registration statement has become effective under the 1993 Act; and (b) a letter, dated such date, from the independent certified public accountants of the Company addressed to the Purchasers making such request, stating that they are independent certified public accountants within the meaning of the 1933 Act, and that in the opinion of such accountants, the financial statements and other financial data of the Company included in the registration statement or the prospectus, or any amendment or supplemental thereto, comply as to form in all material respects with the applicable accounting requirements of the 1933 Act, and covering such other matters (including information as to the period ending not more than five (5) business days prior to the date of such letter) with respect to the registration, if independent certified public accountants are normally requested to provide comfort on such matters, as such Purchaser may reasonably request. -3- (h) The Company shall make available for inspection by the Purchasers and any attorney, accountant or other professional retained by any Purchaser or any underwriter (collectively, the "INSPECTORS"), all financial and other records, permanent corporate documents and properties of the Company (collectively, the "RECORDS") as are reasonably necessary to enable them to exercise due diligence, and cause the Company's officers, directors, and employees to supply all information reasonably requested by such Inspectors in connection with the registration statement. The Purchasers further agree that they will, upon learning that disclosure of such Records is sought in a court of component jurisdiction, give notice to the Company and allow the Company at its expense to undertake appropriate action to prevent disclosure of the Records deemed confidential; (i) The Company shall otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders, as soon as reasonably practicable an earnings statement satisfying the provisions of Section 11(a) of the 1933 Act and covering a period of twelve months, beginning within three months after the effective date of the Registration Statement; (j) The Company shall use its commercially reasonable efforts to cause all Registrable Securities to be listed on each securities exchange (if any) on which similar securities issued by the Company are then listed; and (k) The Company shall provide a transfer agent and registrar for all of the Registrable Securities not later then the effective date of such Registration Statement. 1.3. DISCONTINUANCE OF DISPOSITION. The Purchasers, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 1.2 (f) shall forthwith discontinue disposition of the Registrable Securities until the Purchaser receives copies of the supplemented or amended prospectus contemplated by Section 1.2 (f) or until it is advised in writing (the "ADVICE") by the Company that the use of the prospectus may be resumed and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus. 1.4. INFORMATION TO BE FURNISHED BY PURCHASERS. Each Purchaser all furnish to the Company such information and execute such documents regarding the Registrable Securities held by such Purchaser and the intended method of disposition thereof as the Company shall reasonably request in connection with the action to be taken by the Company. -4- 1.5. EXPENSES OF REGISTRATION. The Company shall pay all expenses incurred by the Company in complying with Section 1.1 and 1.3 (other than the underwriter's discounts and commissions and fees and expenses of special counsel to the Purchasers, if any), including, without limitation, all registration and filing fees (including all expenses incident to filing with the National Association of Securities Dealers, Inc.), fees and expenses of complying with securities and blue sky laws, printing expenses, fees, and disbursements of counsel to the Company, and of the Company's independent public accountants. 1.6. INDEMNIFICATION. (a) The Company shall indemnify and hold harmless each Purchaser, its executive officers, directors and controlling persons (within the meaning of the 1933 Act) and each person who participates as an underwriter or controlling person of an underwriter (within the meaning of the 1933 Act) with respect to a Registration Statement pursuant to Section 1.1 against any losses, claims, damages or liabilities to which any of them may become subject under the 1933 Act or otherwise insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or allegedly untrue statement of any material fact contained in a registration statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, and will reimburse any of them for any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable hereunder in any such case if any such loss, claim, damage or liability arise out of or is based upon any untrue statement or allegedly untrue statement or omission or alleged omission made in such registration statement, prospectus or amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company for such purpose by such Purchaser or by its representative. (b) Each Purchaser shall indemnify and hold harmless the Company, its executive officers, directors and controlling persons (within the meaning of the 1933 Act) and each person who participates as an underwriter or controlling person of an underwriter (within the meaning of the 1933 Act) with respect to a registration statement pursuant to Section 1.1 against any losses, claims, -5- damages or liabilities to which any of them may become subject under the 1933 Act or otherwise insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, in reliance upon and in conformity with written information furnished to the supplement thereof, in reliance upon and in conformity with written information furnished to the Company by each Purchaser or by its representative, and will reimbursement any of them for any legal or other expenses reasonably incurred by them in connection with investigating or defending, any such, loss, claim, damage, liability or action. (c) A party's obligation to indemnify (the "indemnifying party") and the other party's rights to indemnity and payment (the "indemnified party") under Section 1.6 is contingent upon the indemnified party (i) giving the indemnifying party prompt written notice of such claim; (ii) allowing the indemnifying party to have sole right to control and direct the investigation, preparation and defense of any such claim or action and all negotiations for its settlement or compromise; and (iii) providing reasonable assistance to the indemnifying party, such assistance to be solely at the cost and expense of the indemnifying party. The indemnified party, at its own expense, shall be entitled to participate in the defense and to receive copies of all pleadings and other papers in connection with the claim. (d) If for any reason the indemnification provided for in the preceding Sections 1.6 (a) and 1.6 (b) is unavailable to an indemnified party as contemplated by those sections, then the indemnifying party will contribute to the amount paid or payable to the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations, provided that no Purchaser will not be required to contribute in an amount greater than the difference between the net proceeds received by such Purchaser with respect to the sale of any Registrable Securities and all amounts already contributed by such Purchaser with respect to such claims. 1.7. UNDERWRITING AGREEMENT. If the Registrable Securities are to be sold pursuant to a registration statement in an underwritten offering in which no shares of the Company are being sold for the account of the Company, the Company agrees to enter into an underwriting agreement with the underwriter or underwriters (who shall be subject to the approval of the Company) containing customary representations and warranties with respect to the business and operations of the Company, including without limiting the generality of the foregoing, customary provisions with respect to indemnification by the Company of the underwriters of such offering. -6- 2. MISCELLANEOUS ------------- 2.1. OWNER OF REGISTRABLE SECURITIES. The Company may deem and treat the person in whose name the Registrable Securities are registered as the absolute owner thereof for all purposes whatsoever. 2.2. SUCCESSORS. This Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of each Purchaser, and the term "Purchaser" shall be deemed to be include each such holder of Registrable Securities. This Agreement shall be binding upon and shall inure to the benefit of the Company and its successors and assigns. 2.3. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to such state's conflicts of law principles. 2.4. NOTICE. Any notice or other communication required or permitted hereunder shall be sufficiently given only if sent by facsimile transmission or by registered or certified mail, postage prepaid, addressed as follows or to such other address or addresses as may hereafter be furnished in writing by notice similarly given by one party to the other: To the Company: NewStar Media Inc. 8955 Beverly Blvd. Los Angeles, CA 90048 Telephone: (310) 786-1600 Facsimile: (310) 247-2932 The Purchasers: Apollo Partners Ltd. 500 5th Avenue Suite #3520 New York, NY 10110 Ron Lightstone NewStar Media 8955 Beverly Blvd. Los Angeles, CA 90048 -7- With a required copy to: Morrison Cohen Singer & Weinstein, LLP 770 Lexington Avenue New York, New York 10022 Attn: Peter D. Weinstein, Esq. Jack Levy, Esq. Telephone: 212-734-8600 Facsimile: 212-735-8708 2.5. FULL AGREEMENT. This Agreement sets forth the entire understanding of the parties with respect to transactions contemplated hereby, and shall not be modified or amended except by written agreement of all parties hereto. 2.6. HEADINGS. The headings of the Sections of this Agreement are inserted for convenience of reference only and shall not be considered a part hereof. 2.7. COUNTERPARTS. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. [Remainder of Page Intentionally Left Blank] -8- IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date first forth above. THE COMPANY: NEWSTAR MEDIA INC. By: /s/ NEIL TOPHAM ------------------------------------- Name: Neil Topham Title: Vice President & Chief Financial Officer THE PURCHASERS: APOLLO PARTNERS, LLC By: /s/ TERRENCE A. ELKES ------------------------------------- Terrence Elkes Manager /s/ RON LIGHTSTONE ---------------------------------------- Ronald Lightstone -9- EX-10.40 8 AGREEMENT 7/30/98 MEDIA EQUITIES AND NEWSTAR AGREEMENT, dated as of July 30, 1998, between Media Equities International, LLC ("MEI") and NewStar Media Inc., (formerly known as Dove Entertainment, Inc.) ("NewStar"). WHEREAS, MEI and Dove Entertainment, Inc. are parties to that certain Stock Purchase Agreement, dated as of March 27, 1997, pursuant to which NewStar is required to pay MEI $300,000 per year as a consulting fee (the "Consulting Fee"); WHEREAS, MEI and Dove Entertainment, Inc., are parties to that certain Fee Agreement, dated as of November 4, 1997, pursuant to which NewStar is required to pay MEI $25,000 per year as a guarantee fee (the "Guarantee Fee"); WHEREAS, MEI and NewStar have agreed to increase the Guarantee Fee to $50,000 per year and such increase has been authorized and approved by a special committee of the Board of Directors of NewStar; WHEREAS, MEI is the record and beneficial owner of all of the Series B Preferred Stock , Series C Preferred Stock and Series D Preferred Stock of NewStar; WHEREAS, as of the date hereof, the outstanding amount of the Guarantee Fee is $50,000; WHEREAS, as of the date hereof, the outstanding amount of the Consulting Fee is $100,000; WHEREAS, MEI has agreed to accept payment of the outstanding Consulting Fee and Guarantee Fee and the accrued dividends on NewStar's Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock in the form of Common Stock of NewStar. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. MEI agrees to accept payment of accrued dividends on NewStar's Series B Preferred Stock, Series C Preferred Stock and Series C Preferred Stock for the year ended December 31, 1997 in the form of Common Stock of NewStar. The aggregate amount of such dividends (plus accrued interest) is $375,807. The Common Stock shall be issued at the average of the closing prices of NewStar's Common Stock on July 1, 2, 3, 6 and 7, 1998. 2. MEI agrees to accept payment of the outstanding Consulting Fee (i.e. $100,000) in the form of Common Stock of NewStar. The Common Stock shall be issued at the average of the closing prices of NewStar's Common Stock on July 23, 24, 27, 28 and 29, 1998. 3. MEI agrees to accept payment of the outstanding Guarantee Fee (i.e. $50,000) in the form of Common Stock of NewStar. The Common Stock shall be issued at the average of the closing prices of NewStar's Common Stock on July 23, 24, 27, 28 and 29, 1998. -1- 4. MEI agrees to accept payment of accrued dividends on NewStar's Series B Preferred Stock, Series C Preferred Stock and Series E Preferred Stock, for the quarters ended March 31, 1998 and June 30, 1998, in the form of Common stock of NewStar. The aggregate amount of such dividends (plus accrued interest) is $213,090. The Common Stock shall be issued at the average of the closing prices of NewStar's Common Stock on July 23, 24, 27, 28 and 29, 1998. 5. The issuance of the Common Stock shall be subject to approval and authorization of the Board of Directors of NewStar. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. MEDIA EQUITIES INTERNATIONAL, LLC By: /s/ RON LIGHTSTONE ------------------------------------- NEWSTAR MEDIA INC. By: /s/ NEIL TOPHAM ------------------------------------- Neil Topham Vice President -2- EX-10.41 9 INCENTIVE STOCK OPTION WITH NEIL TOPHAM INCENTIVE STOCK OPTION AGREEMENT THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement") is entered into as of January 1, 1998, by and between NEWSTAR MEDIA INC., a California Corporation (the "Corporation"), and NEIL TOPHAM (the "Participant"). W I T N E S S E T H WHEREAS, pursuant to the Corporation's 1994 Stock Incentive Plan (the "Plan"), the Corporation's Stock Incentive Plan Committee (the "Committee") committed to grant to the Participant, effective as of January 1, 1998 (the "Grant Date"), an Option (the "Option") to purchase all or any part of 100,000 shares of Common Stock, par value $0.01 per share, of the Corporation (the "Common Stock") upon the terms and conditions hereinafter set forth (capitalized terms not otherwise defined herein shall have the respective meanings assigned to them in the Plan). NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Grant of Option. The Corporation has granted to the Participant as a matter of separate inducement and agreement in connection with the Participant's employment with, or other services provided by the Participant to, the Corporation, but not in lieu of any salary or other compensation for such employment or services, the right and option to purchase, in accordance with the Plan and on the terms and conditions hereinafter set forth, all or any part of an aggregate of 100,000 shares (the "Shares") of Common Stock at the price of $1.50 per share (the "Exercise Price"), exercisable from time to time subject to the provisions of this Agreement and the Plan prior to the close of business on March 31, 2000 (the "Expiration Date"). 2. Vesting and Exercise of Option. The Option is to vest in three equal parts; 33-1/3% of Shares are to vest on April 1, 1997 and 33-1/3% are to vest on April 1, 1998 and 33-1/3% are to vest on December 30, 1998. Notwithstanding the vesting of any portion or all of the Option may not be exercised as to less than 100 shares at any one time unless the number of Shares purchased is the total number at the time available for purchase under an installment of the Option. The Option may be exercised only as to whole shares; fractional share interests shall be disregarded except that they may be accumulated. Notwithstanding anything in the Plan to the contrary, if the Participant's employment with the Corporation terminates for any reason, the vesting schedule, Expiration Date, and all other terms of the Option and this Agreement shall remain in full force and effect. -1- 3. Method of Exercise and Payment. Each exercise of the Option shall be by means of written notice of exercise in the form attached hereto as Exhibit A duly delivered to the Corporation, specifying the number of whole Shares with respect to which the Option is being exercised (the "Exercised Shares"), together with any written statements required hereunder and payment equaling the Exercise Price multiplied by the number of Exercised Shares (the "Aggregate Price"), in cash or by check payable to the order of the Corporation. The Participant may also deliver in payment of a portion or all of the Aggregate Price certificates for Common Stock, which shall be valued at the Fair Market Value of such Common Stock on the date of exercise of the Option. With the prior written consent of the Committee, the Participant may pay for all or a portion of the Aggregate Price by means of a promissory note to the Corporation, on such terms and conditions as the Committee may determine. 4. Continuance of Employment. Nothing contained in this Agreement or in the Plan shall confer upon the Participant any right to continue in the employ of, or to continue rendering services to, the Corporation or constitute any contract or agreement of engagement or employment. The Participant acknowledges that the Corporation has the right to terminate the Participant's employment or services at will except as may be otherwise provided by separate agreement. Nothing contained in this Agreement or in the Plan shall interfere in any way with the right of the Corporation to (i) terminate the employment or services of the Participant at any time for any reason whatsoever, with or without cause, or (ii) reduce the compensation received by the Participant from the rate in existence on the Grant Date. 5. Non-Assignability of Option. Other than by will or the laws of descent and distribution, or pursuant to a "qualified domestic relations order" as defined by the Code, no benefit payable under, or interest in, the Plan or in any Grant shall be subject in any manner to anticipation, alienation, sale transfer, assignment, pledge, encumbrance or charge, regardless of any community property or other interest therein of the Participant's spouse or such spouse's successor in interest, and any such attempted action shall be void and no such benefit or interest shall be, in any manner, liable for, or subject to, debts, contracts, liabilities, engagements or torts of any Eligible Person, Participant or Beneficiary. In the event that the spouse of the Participant shall have acquired a community property interest in the Option, the Participant, or his or her permitted transferee, may exercise it on behalf of the spouse of the Participant or such spouse's successor in interest. Amounts payable pursuant to a Grant shall be paid only to the Participant or, in the event of the Participant's death, to the Participant's Beneficiary or, in the event of the Participant's Total Disability, to the Participant's Personal Representative or, if there is none, to the Participant. -2- 6. Adjustments Upon Specified Changes. Upon the occurrence of certain Events relating to the Corporation's stock, such as stock splits, combinations, extraordinary cash dividends, or mergers in which the Corporation is not the Surviving Corporation as further set forth in the Plan, adjustments will be made in the number and kind of shares that may be issuable under, or in the consideration payable with respect to, the Option. 7. Acceleration. Upon the occurrence of certain Events, the Option may become immediately exercisable to the full extent theretofore not exercisable unless prior to an Event the Committee determines otherwise. However, no Option may become exercisable on a date less than six months after the Grant Date. 8. Application of Securities Laws. (a) No shares of Common Stock may be purchased pursuant to the Option unless and until any then applicable requirements of the Commission, and any other regulatory agencies, including any other state securities agencies having jurisdiction over the Corporation or such issuance, and any exchanges upon which the Common Stock may be listed, shall have been fully satisfied. The Participant represents, agrees and certifies that: (1) The Participant (A) can bear the economic risk of losing the Participant's entire investment in the Shares; and (B) has adequate means of providing for the Participant's current needs and possible personal contingencies. (2) The Participant has had an opportunity to ask questions of and receive answers from the Chief Financial Officer and President concerning the terms and conditions of this investment. The Participant has received and reviewed a copy of the Plan. (3) The Participant understands that the Option and the Shares issuable upon exercise of the Option may not have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities act, in reliance on available exemptions from registration or qualification thereunder, as the case may be, and that the Corporation is relying upon the Participant's representations and warranties herein in availing itself of said exemptions. (4) The Option hereby granted to the Participant is being acquired solely for the Participant's own account for investment purposes, and is not being purchased with a view to or for the purposes of the resale, transfer or other distribution thereof; and the Participant has no present plans -3- to enter into any contract, undertaking, agreement or arrangement for such resale, transfer or distribution, and the Participant further agrees that the Option and Common Stock acquired pursuant to the Option will not be transferred or distributed without (a) first having presented to the Corporation a written opinion of legal counsel in form and substance satisfactory to the Corporation's counsel indicating the proposed transfer will not be in violation of any of the provisions of the Securities Act and applicable state securities laws and the rules and regulations promulgated thereunder, or (b) a registration statement covering the resale of such Common Stock being effective. Finally, the Participant recognizes that, if applicable, a legend reading substantially as follows shall be placed on all certificates representing the Common Stock and a stop order shall be placed against a transfer of same in accordance with the following legend: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED. (5) The Participant either has a preexisting personal or business relationship with the Corporation or any of its officers, directors or controlling persons, or by reason of the Participant's business or financial experience reasonably can be assumed to have the capacity to protect his or her own interests in connection with acquisition of the Option and exercise thereof. The foregoing representations and warranties are and will be true and accurate as of both the Grant Date and the date of delivery of Common Stock acquired pursuant to the Option and shall survive such delivery. (b) The Committee may impose such conditions on the Option or on its exercise or acceleration or on the payment of any withholding obligation (including without limitation restricting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements, including, without limitation restricting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements, including, without limitation, Rule 16b-3 (or any successor rule) promulgated by the Commission pursuant to the Securities Exchange Act of 1934, as amended. -4- 9. Notices. Any notice to be given to the Corporation under the terms of this Agreement or pursuant to the Plan shall be in writing and addressed to the Secretary of the Corporation at its principal office and any notice to be given to the Participant shall be sent to the Participant at the address given beneath the Participant's signature hereto, or at such other address as either party may hereafter designate in writing to the other party. Any such notice shall be deemed to have been duly given on the date of delivery, if delivered by hand, or 3 days after deposit into U.S. mails of a notice sent by registered or certified mail (postage and registry or certification fee prepaid). 10. Effect of Agreement. This Agreement shall be assumed by, be binding upon and inure to the benefit of any successor or successors of the Corporation to the extent provided in the Plan. This Agreement constitutes the entire agreement of the parties and supersedes all prior agreements of the parties (whether oral or in writing) with respect to the subject matter hereof. 11. Tax Withholding. The provisions of the Plan are hereby incorporated and shall govern any withholding that the Corporation is required to make with respect to an exercise of the Option as well as the Corporation's right to condition a transfer of Common Stock upon compliance with the applicable withholding requirements of federal, state and local authorities. No Common Stock acquired pursuant to an exercise of the Option may be transferred until the Corporation has withheld, or has received payment from the Participant of, all amounts the Corporation is required to withhold. 12. Terms of the Plan Govern. Except with respect to terms specifically set forth in this Agreement, the Option and this Agreement are subject to, and the Corporation and the Participant agree to be bound by, all of the terms and conditions of the Plan, which terms and conditions are hereby incorporated as though set forth at length. In the event of a conflict between this Agreement and the Plan, the terms of the Plan shall govern (except for a conflict between this Agreement and the Plan with respect to the last sentence of Section 2 of this Agreement, in which case the terms of this Agreement shall govern). The rights of the Participant are subject to limitations, adjustments, modifications, suspension and termination in certain circumstances and upon the occurrence of certain conditions as set forth in the Plan. 13. Liability of Corporation. The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to the Option shall relieve the Corporation of any liability in respect of the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. -5- 14. Stockholder Rights. The Participant shall not have any rights of a stockholder with respect to any Shares covered by this Option unless such Shares have been issued to the Participant by the Corporation pursuant to the valid exercise of the Option and the full payment by the Participant of the Exercise Price in respect thereof. 15. Laws Applicable to Construction. The interpretation, performance and enforcement of the Participant's Grant and this Agreement shall be governed by the laws of the State of California. -6- IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed on its behalf by a duly authorized officer and the Participant has hereunto set his or her hand as of the date and year first above written. NEWSTAR MEDIA INC. By: /s/ RON LIGHTSTONE ------------------------------------- Title: President and Chief Executive Officer PARTICIPANT /s/ NEIL TOPHAM ------------------------------------- NEIL TOPHAM 1783 Upper Ranch Rd. ------------------------------------- (Address) Westlake Village CA 91302 ------------------------------------- (City, State, Zip Code) 118 72 6645 ------------------------------------- (Social Security Number) -7- EX-10.42 10 INCENTIVE STOCK OPTION WITH ROBERT MURRAY INCENTIVE STOCK OPTION AGREEMENT THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement") is entered into as of January 1, 1998 by and between NEWSTAR MEDIA INC., a California corporation (the "Corporation"), and ROBERT MURRAY (the "Participant"). W I T N E S S E T H WHEREAS, pursuant to the Corporation's 1994 Stock Incentive Plan (the "Plan"), the Corporation's Stock Incentive Plan Committee (the "Committee") committed to grant to the Participant, effective as of January 1, 1998 (the "Grant Date"), an Option (the "Option") to purchase all or any part of 30,000 shares of Common Stock, par value $0.01 per share, of the Corporation (the "Common Stock") upon the terms and conditions hereinafter set forth (capitalized terms not otherwise defined herein shall have the respective meanings assigned to them in the Plan). NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Grant of Option. The Corporation has granted to the Participant as a matter of separate inducement and agreement in connection with the Participant's employment with, or other services provided by the Participant to, the Corporation, but not in lieu of any salary or other compensation for such employment or services, the right and option to purchase, in accordance with the Plan and on the terms and conditions hereinafter set forth, all or any part of an aggregate of 30,000 shares (the "Shares") of Common Stock at the price of $1.50 per share (the "Exercise Price"), exercisable from time to time subject to the provisions of this Agreement and the Plan prior to the close of business on January 2, 2009 (the "Expiration Date"). 2. Vesting and Exercise of Option. The Option is to vest in three equal parts; 33-1/3% of Shares are to vest on January 1, 1999 and 33-1/3% are to vest on each of the first and second anniversaries of January 1, 1999. Notwithstanding the vesting of any portion or all of the Option, the Option may not be exercised as to less than 100 shares at any one time unless the number of Shares purchased is the total number at the time available for purchase under an installment of the Option. The Option may be exercised only as to whole shares; fractional share interests shall be disregarded except that they may be accumulated. -1- 3. Termination/Acceleration of Options. (a) If the Participant's employment by the Corporation terminates for any reason other than Retirement, death or Total Disability, the Participant shall have, subject to earlier termination pursuant to or as contemplated by Section 1, three months from the date of termination of employment to exercise any Option to the extent it shall have become exercisable on or prior to that date, and any Option not exercisable up to that date shall terminate. Notwithstanding the preceding sentence, in the event the Participant is discharged for cause as determined by the Corporation in its sole discretion, all Options shall lapse immediately upon such termination of employment. (b) If the Participant's employment by the Corporation terminates as a result of Retirement or Total Disability, the Participant or Participant's Personal Representative, as the case may be, shall have, subject to earlier termination pursuant to or as contemplated by Section 1, 12 months from the date of termination of employment to exercise any Option to the extent it shall have become exercisable on or prior to that date, and any Option not exercisable on that date shall terminate. (c) If the Participant's employment by the Corporation terminates as a result of death while the Participant is employed by the Corporation or during the 12 month period referred to in subsection (b) above, the Participant's Option shall be exercisable by the Participant's Beneficiary, subject to earlier termination pursuant to or as contemplated by Section 1, during the 12-month period following the Participant's death, as to all or any part of the shares of Common Stock covered thereby, including all shares as to which the Option would not otherwise be exercisable. (d) In the event of termination of employment with the Corporation for any reason, other than discharge for cause, the Corporation may, in its discretion, increase the portion of the Option available to the Participant, or Participant's Beneficiary or Personal Representative, as the case may be, upon such terms as the Corporation shall determine. (e) If any entity ceases to be a Subsidiary, such action shall be deemed for purposes of this Section 3 to be a termination of employment of each employee of that entity. (f) Upon the occurrence of an Event each Option shall become immediately exercisable to the full extent theretofore not exercisable. Acceleration of the vesting of the Option shall comply with applicable regulatory requirements, including, without limitation, Rule 16b-3 promulgated by the Commission pursuant to the Exchange Act and Section 422 of the Code. -2- (g) For purposes of this Section 3, the following terms shall have the following meanings: a. "Beneficiary" shall mean the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive the benefits specified under this Plan in the event of a Participant's death. b. "Event" shall mean any of the following: (i) Approval by the shareholders of the Corporation of the dissolution or liquidation of the Corporation; (ii) Approval by the shareholders of the Corporation of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities which are not Subsidiaries, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity are, or are to be, owned by former shareholders of the Corporation; or (iii) Approval by the shareholders of the Corporation of the sale of substantially all of the Corporation's business and/or assets to a person or entity which is not a Subsidiary. (iv) "Personal Representative" shall mean the person or persons who, upon the disability or incompetence of a Participant, shall have acquired on behalf of the Participant by legal proceeding or otherwise the power to exercise the rights and receive the benefits specified in this Plan. (v) "Retirement" shall mean retirement as defined in termination of employment with the Corporation pursuant to the Corporation's retirement policy, as in effect from time to time. (vi) "Total Disability" shall mean a permanent and total disability" within the meaning of Section 22(e)(3) of the Code. -3- 3. Method of Exercise and Payment. (a) Exercise of Option. Each exercise of the Option shall be by means of written notice of exercise in the form attached hereto as Exhibit A duly delivered to the Corporation, specifying the number of whole Shares with respect to which the Option is being exercised (the "Exercised Shares"), together with any written statements required hereunder and payment equaling the Exercise Price multiplied by the number of Exercised Shares (the "Aggregate Price"), in cash or by check payable to the order of the Corporation. The Participant may also deliver in payment of a portion or all of the Aggregate Price certificates for Common Stock, which shall be valued at the Fair Market Value of such Common Stock on the date of exercise of the Option. With the prior written consent of the Committee, the Participant may pay for all or a portion of the Aggregate Price by means of a promissory note to the Corporation, on such terms and conditions as the Committee may determine. 4. Continuance of Employment. Nothing contained in this Agreement or in the Plan shall confer upon the Participant any right to continue in the employ of, or to continue rendering services to, the Corporation or constitute any contract or agreement of engagement or employment. The Participant acknowledges that the Corporation has the right to terminate the Participant's employment or services at will except as may be otherwise provided by separate agreement. Nothing contained in this Agreement or in the Plan shall interfere in any way with the right of the Corporation to (i) terminate the employment or services of the Participant at any time for any reason whatsoever, with or without cause, or (ii) reduce the compensation received by the Participant from the rate in existence on the Grant Date. 5. Non-Assignability of Option. Other than by will or the laws of descent and distribution, or pursuant to a "qualified domestic relations order" as defined by the Code, no benefit payable under, or interest in, the Plan or in any Grant shall be subject in any manner to anticipation, alienation, sale transfer, assignment, pledge, encumbrance or charge, regardless of any community property or other interest therein of the Participant's spouse or such spouse's successor in interest, and any such attempted action shall be void and no such benefit or interest shall be, in any manner, liable for, or subject to, debts, contracts, liabilities, engagements or torts of any Eligible Person, Participant or Beneficiary. In the event that the spouse of the Participant shall have acquired a community property interest in the Option, the Participant, or his or her permitted transferee, may exercise it on behalf of the spouse of the Participant or such spouse's successor in interest. Amounts payable pursuant to a Grant shall be paid only to the Participant or, in the event of the Participant's death, to the Participant's Beneficiary or, in the event of the Participant's Total Disability, to the Participant's Personal Representative or, if there is none, to the Participant. -4- 6. Adjustments Upon Specified Changes. Upon the occurrence of certain Events relating to the Corporation's stock, such as stock splits, combinations, extraordinary cash dividends, or mergers in which the Corporation is not the Surviving Corporation as further set forth in the Plan, adjustments will be made in the number and kind of shares that may be issuable under, or in the consideration payable with respect to, the Option. 7. Acceleration. Upon the occurrence of certain Events, the Option may become immediately exercisable to the full extent theretofore not exercisable unless prior to an Event the Committee determines otherwise. However, no Option may become exercisable on a date less than six months after the Grant Date. 8. Application of Securities Laws. (a) No shares of Common Stock may be purchased pursuant to the Option unless and until any then applicable requirements of the Commission, and any other regulatory agencies, including any other state securities agencies having jurisdiction over the Corporation or such issuance, and any exchanges upon which the Common Stock may be listed, shall have been fully satisfied. The Participant represents, agrees and certifies that: (1) The Participant (A) can bear the economic risk of losing the Participant's entire investment in the Shares; and (B) has adequate means of providing for the Participant's current needs and possible personal contingencies. (2) The Participant has had an opportunity to ask questions of and receive answers from the Chief Financial Officer and President concerning the terms and conditions of this investment. The Participant has received and reviewed a copy of the Plan. (3) The Participant understands that the Option and the Shares issuable upon exercise of the Option may not have been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities act, in reliance on available exemptions from registration or qualification thereunder, as the case may be, and that the Corporation is relying upon the Participant's representations and warranties herein in availing itself of said exemptions. -5- (4) The Option hereby granted to the Participant is being acquired solely for the Participant's own account for investment purposes, and is not being purchased with a view to or for the purposes of the resale, transfer or other distribution thereof; and the Participant has no present plans to enter into any contract, undertaking, agreement or arrangement for such resale, transfer or distribution, and the Participant further agrees that the Option and Common Stock acquired pursuant to the Option will not be transferred or distributed without (a) first having presented to the Corporation a written opinion of legal counsel in form and substance satisfactory to the Corporation's counsel indicating the proposed transfer will not be in violation of any of the provisions of the Securities Act and applicable state securities laws and the rules and regulations promulgated thereunder, or (b) a registration statement covering the resale of such Common Stock being effective. Finally, the Participant recognizes that, if applicable, a legend reading substantially as follows shall be placed on all certificates representing the Common Stock and a stop order shall be placed against a transfer of same in accordance with the following legend: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED. (5) The Participant either has a preexisting personal or business relationship with the Corporation or any of its officers, directors or controlling persons, or by reason of the Participant's business or financial experience reasonably can be assumed to have the capacity to protect his or her own interests in connection with acquisition of the Option and exercise thereof. The foregoing representations and warranties are and will be true and accurate as of both the Grant Date and the date of delivery of Common Stock acquired pursuant to the Option and shall survive such delivery. (b) The Committee may impose such conditions on the Option or on its exercise or acceleration or on the payment of any withholding obligation (including without limitation restricting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements, including, without limitation restricting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements, including, without limitation, Rule 16b-3 (or any successor rule) promulgated by the Commission pursuant to the Securities Exchange Act of 1934, as amended. -6- 9. Notices. Any notice to be given to the Corporation under the terms of this Agreement or pursuant to the Plan shall be in writing and addressed to the Secretary of the Corporation at its principal office and any notice to be given to the Participant shall be sent to the Participant at the address given beneath the Participant's signature hereto, or at such other address as either party may hereafter designate in writing to the other party. Any such notice shall be deemed to have been duly given on the date of delivery, if delivered by hand, or 3 days after deposit into U.S. mails of a notice sent by registered or certified mail (postage and registry or certification fee prepaid). 10. Effect of Agreement, Entire Agreement. This Agreement shall be assumed by, be binding upon and inure to the benefit of any successor or successors of the Corporation to the extent provided in the Plan. This Agreement constitutes the entire agreement of the parties and supersedes all prior agreements of the parties with respect to the subject matter hereof. 11. Tax Withholding. The provisions of the Plan are hereby incorporated and shall govern any withholding that the Corporation is required to make with respect to an exercise of the Option as well as the Corporation's right to condition a transfer of Common Stock upon compliance with the applicable withholding requirements of federal, state and local authorities. No Common Stock acquired pursuant to an exercise of the Option may be transferred until the Corporation has withheld, or has received payment from the Participant of, all amounts the Corporation is required to withhold. 12. Terms of the Plan Govern. Except with respect to terms specifically set forth in this Agreement (including, without limitation, Section 3 and the definition of "Event"), the Option and this Agreement are subject to, and the Corporation and the Participant agree to be bound by, all of the terms and conditions of the Plan, which terms and conditions are hereby incorporated as though set forth at length. In the event of a conflict between this Agreement and the Plan, the terms of the Plan shall govern (except for a conflict between this Agreement and the Plan with respect to Section 3 of this Agreement, in which case the terms of this Agreement shall govern). The rights of the Participant are subject to limitations, adjustments, modifications, suspension and termination in certain circumstances and upon the occurrence of certain conditions as set forth in the Plan. 13. Liability of Corporation. The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to the Option shall relieve the Corporation of any liability in respect of the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. -7- 14. Stockholder Rights. The Participant shall not have any rights of a stockholder with respect to any Shares covered by this Option unless such Shares have been issued to the Participant by the Corporation pursuant to the valid exercise of the Option and the full payment by the Participant of the Exercise Price in respect thereof. 15. Laws Applicable to Construction. The interpretation, performance and enforcement of the Participant's Grant and this Agreement shall be governed by the laws of the State of California. -8- IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed on its behalf by a duly authorized officer and the Participant has hereunto set his or her hand as of the date and year first above written. NEWSTAR MEDIA INC. By: /s/ RON LIGHTSTONE ------------------------------------- Title: PARTICIPANT /s/ ROBERT MURRAY ------------------------------------- ROBERT MURRAY 950 S. Flower St. ------------------------------------- (Address) Los Angeles, CA 90015 ------------------------------------- (City, State, Zip Code) ###-##-#### ------------------------------------- (Social Security Number) -9- EX-10.43 11 TRUST AGREEMENT NEWSTAR MEDIA INC. COMPENSATION AND PAYMENT TRUST FOR CONSULTANTS AND PROFESSIONAL ADVISORS This Trust Agreement ("Agreement") is made this 30th day of December, 1998, by and between NEWSTAR MEDIA INC., a California corporation (the "Company") and Robert Murray (the "Trustee"), as Trustee, with reference to the following facts: A. WHEREAS, the Company has agreed to and adopted a plan and procedure for providing deferred compensation, on a voluntary basis, to various consultants and professional advisors of the Company; and B. WHEREAS, the Company has incurred various liabilities to consultants and professional advisors of the Company; and C. WHEREAS, certain of such consultants and professional advisors have agreed to accept deferred compensation in the manner provided herein; and D. WHEREAS, the Company wishes to establish a trust (the "Trust") and to contribute to the Trust shares of the duly authorized and issued common stock of the Company to be held therein, subject to the claims of the Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to the Participants, as herein defined, in such amounts and at such times as herein provided; and E. WHEREAS, it is the intention of the Company to make contributions to the Trust to provide itself with a source of funds to assist it in meeting its liabilities to the consultants and professional advisors of the Company who are Participants, as hereinafter defined. NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed as follows: 1. ESTABLISHMENT OF TRUST. 1. The Company and the Trustee hereby establish a trust (the "Trust") for the purposes and subject to the terms and conditions hereinafter provided. The Company hereby deposits in the Trust a total of Three Hundred Nine Thousand Five Hundred Eighty-eight (309,858) shares of the duly authorized, validly issued and fully paid common stock of the Company, which shall become the principal of the Trust, to be held, administered and disposed of by the Trustee as provided herein. 2. The Trust established hereby shall be irrevocable. 3. The Trust is intended to be a grantor trust, of which the Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. 4. The principal of the Trust, and any earnings thereon, shall be held separate and apart from other funds and assets of the Company and shall be used exclusively for the uses and purposes of the Participants and general creditors as herein set forth. Participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created hereunder shall be mere unsecured contractual rights of the Participants and their beneficiaries against the Company. Any assets held by the Trust will be subject to the claims of the Company's general creditors under federal and state law in the event of Insolvency, as defined herein. 2. DISTRIBUTIONS TO PARTICIPANTS AND THEIR BENEFICIARIES. 1. The term "Participants," when used in this Trust, shall mean those persons, who are all consultants or professional advisors of the Company, listed on EXHIBIT A attached hereto and incorporated herein by this reference. 2. As promptly as practicable following the date on which a registration statement of the Company, covering the shares of common stock which are the principal of this Trust, has been declared effective by the Securities and Exchange Commission, the Trustee shall distribute the entire principal of this Trust, including such shares and any earnings thereon, to the Participants, in the percentages set forth on EXHIBIT A, at the addresses listed on EXHIBIT A. All such payments or distributions shall be made in lump sums; provided, however, that the Trustee may make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the distribution pursuant to the terms of this Trust, and shall pay the amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Company. 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO PARTICIPANTS WHEN THE COMPANY IS INSOLVENT. 1. The Trustee shall cease payment or distribution of any portion of the principal hereunder to the Participants and their beneficiaries if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. 2. At all times during the continuance of this Trust, the principal of this Trust, and any income thereon, shall be subject to claims of the general creditors of the Company under federal and state law as set forth below. 1. The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing of the Company's Insolvency. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company has become Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Participants and their beneficiaries. 2. Unless the Trustee has actual knowledge of the Company's Insolvency, or has received notice from the Company or a person claiming to be a creditor of the Company alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's solvency. 3. If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments or distributions to the Participants and their beneficiaries and shall hold the assets of the Trust for the benefit of the Company's general creditors. Nothing in this Trust shall in any way limit or diminish the rights of Participants or their beneficiaries to pursue their rights as general creditors of the Company with respect to distributions or payments due to them under this Trust or otherwise. 4. The Trustee shall resume payments and distributions to the Participants or their beneficiaries in accordance with Section 2 of this Trust only after the Trustee has determined that the Company is no longer Insolvent. 4. INVESTMENT AUTHORITY. 1. In no event may any rights or powers of or associated with the Trustee hereunder be exercisable by any Participant, and all such rights and powers shall be exercised solely by the Trustee or persons designated by the Trustee. 2. The Trustee may invest any amounts of cash which now or hereafter become a part of the principal of this Trust in securities (including stock or rights to acquire stock) or obligations issued by any issuer, including the Company. In investing such cash portion of the principal, the Trustee shall be held only to the business judgment standard applicable to officers and directors of corporations, as established under Section 309 of the California Corporations Code. 5. DISPOSITION OF INCOME. 1. During the term of this Trust, any and all income received by the Trust, including but not limited to dividends paid on the shares of common stock of the Company held by the Trust, net of expenses and taxes, shall be accumulated and reinvested. 2. All income or earnings of the Trust, including dividends paid in kind, shall be distributed, at the time of such distributions, in the manner provided in Section 3.b. hereof. 6. ACCOUNTING BY THE TRUSTEE. 1. The Trustee shall keep accurate and detailed records of all investments, receipts, distributions and payments by the Trust. The Trustee shall cause to be prepared and filed by the Trust, any tax filings, returns or reports required to be filed by the Trust with any state, federal or local taxing authority, and shall cause any and all taxes shown thereon to be due to be paid prior to delinquency, all at the sole cost and expense of the Company. 2. The Trustee shall provide the Company with the following reports: 1. Within sixty (60) days following the end of each calendar year commencing with calendar year 1999, a report showing all transactions of the Trust for the prior year; 2. Concurrently with the filing thereof, copies of any and all tax filings, returns or reports required to be filed by the Trust with any state, federal or local taxing authority; and 3. Within sixty (60) days following the distribution of all remaining assets of the Trust, a report reflecting all transactions of the Trust from the date of the last annual report provided to the Company and the date of such final distribution. 7. RESPONSIBILITY OF THE TRUSTEE. 1. The Trustee shall, in any and all actions hereunder, be held only to the business judgment standard applicable to officers and directors of corporations, as established under Section 309 of the California Corporations Code. 2. If the Trustee undertakes or defends any litigation or proceeding, including but not limited to any action or proceeding in respect of the assets of the Trust arising out of any Insolvency of the Company, the Company agrees to indemnify the Trustee against all costs, expenses, fees and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust; provided, however, that the Trustee shall thereafter continue to seek reimbursement from the Company of such expenses, and shall reimburse the Trust to the extent any such amounts are thereafter received from the Company. 3. The Trustee may consult with legal counsel (who may also be counsel for the Company) with respect to the Trustee's duties or obligations hereunder. The Trustee may hire agents, accountants, actuaries, investment advisors or other professionals to assist in performing its duties hereunder, all at the sole cost and expense of the Company, and the Company shall be primarily liable for the payment of the fees of such persons. 4. The Trustee shall have, without exclusion, all powers conferred on trustees by applicable law, unless expressly otherwise herein provided. 5. Notwithstanding any powers granted to the Trustee herein, or under applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and hiding the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. 8. COMPENSATION AND EXPENSES OF THE TRUSTEE. 1. The initial Trustee shall serve without compensation or fees. In the event the Company is required, pursuant to this Trust, to retain a replacement Trustee which is a trust company or the trust department of a bank, the Company shall pay all fees payable to such replacement Trustee in accordance with the schedule of fees normally used by such trust company or bank trust department. 2. The Company shall be responsible for, and shall promptly pay in full, all administrative fees and expenses incurred by the Trustee. 9. RESIGNATION AND REPLACEMENT OF THE TRUSTEE. 1. The Trustee may resign at any time by written notice to the Company, which shall be effective not fewer than ninety (90) days following the date of such notice. 2. Upon the resignation, death or incapacity of the initial Trustee, or any successor Trustee, the Company shall appoint as a successor any trust company, or the trust department of any bank, qualified to do business in the State of California, which appointment shall become effective on or before the effective date of the resignation of such Trustee, or as promptly as possible following the death or incapacity of such Trustee. 3. Upon the resignation, death or incapacity of the initial Trustee, or any successor Trustee, all assets of the Trust shall subsequently be transferred to the successor Trustee appointed as provided in Section 9.b. hereof. 4. A successor Trustee need not examine the records and acts of the prior Trustee(s) and may retain or dispose of existing Trust assets, subject to Sections 4, 5, 6 and 7 hereof. The successor Trustee shall not be responsible for and the Company shall defend and indemnify the successor Trustee against any claim or liability resulting from any action or inaction of the prior Trustee or from any other past event, or any condition existing at the time it becomes the successor Trustee. 10. AMENDMENT OR TERMINATION. 1. This Trust may be amended by a written instrument executed by the Trustee and the Company. Notwithstanding the foregoing, no such amendment shall conflict with the stated purpose of this Trust, or make this Trust revocable. 2. The Trust shall not terminate until the date on which all assets of the Trust have been paid out or distributed in accordance with Section 3.b. hereof. Upon the payment or distribution to the Participants of all of the assets of the Trust, this Trust shall automatically terminate. 11. MISCELLANEOUS. 1. Any provision of this Trust prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. 2. Benefits or payments payable or distributable to Participants or their beneficiaries may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution, or other legal or equitable process. 3. This Trust Agreement shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, this Trust Agreement has been executed, and the Trust established, as of the date first written above. TRUSTEE: /s/ ROBERT MURRAY ---------------------------- NEWSTAR MEDIA INC. By: /s/ NEIL TOPHAM ------------------------- Its: Vice President and Chief Financial Officer ------------------------- EXHIBIT A --------- List of Participants Name and Address Percentage of Benefits ---------------- ---------------------- Stanton L. Stein 33 1/3% c/o Alschuler, Grossman, Stein & Kahan 2049 Century Park East 39th Floor Los Angeles, CA 90067 Robert L. Kahan 16 2/3% c/o Alschuler, Grossman, Stein & Kahan 2049 Century Park East 39th Floor Los Angeles, CA 90067 Marcia J. Harris 5 5/9% c/o Alschuler, Grossman, Stein & Kahan 2049 Century Park East 39th Floor Los Angeles, CA 90067 Samuel R. Pryor 5 5/9% c/o Alschuler, Grossman, Stein & Kahan 2049 Century Park East 39th Floor Los Angeles, CA 90067 Steven E. Peden 5 5/9% c/o Alschuler, Grossman, Stein & Kahan 2049 Century Park East 39th Floor Los Angeles, CA 90067 Susan A. Grueneberg 5 5/9% c/o Alschuler, Grossman, Stein & Kahan 2049 Century Park East 39th Floor Los Angeles, CA 90067 Bennett A. Bigman 5 5/9% c/o Alschuler, Grossman, Stein & Kahan 2049 Century Park East 39th Floor Los Angeles, CA 90067 David G. Baram 5 5/9% c/o Alschuler, Grossman, Stein & Kahan 2049 Century Park East 39th Floor Los Angeles, CA 90067 Joseph R. Taylor 5 5/9% c/o Liner, Yankelevitz, Sunshine, Weinhart & Regenstreif LLP 3130 Wilshire Boulevard 2nd Floor Santa Monica, CA 90403 Steven J. Rosenwasser 5 5/9% c/o NewStar Media Inc. 8955 Beverly Boulevard Los Angeles, CA 90048 Karen L. Dillon 5 5/9% 8971 Wonderland Avenue Los Angeles, CA 90046 EX-10.44 12 LETTER AGREEMENT NEWSTAR MEDIA INC. 8955 BEVERLY BOULEVARD LOS ANGELES, CALIFORNIA 90048 July 1, 1998 The Chase Manhattan Bank 270 Park Avenue - 37th Floor New York, New York 10017 Re: Credit, Security, Guaranty and Pledge Agreement, dated as of November 4, 1997 among Dove Entertainment, Inc., the Corporate Guarantors named therein and The Chase Manhattan Bank (as amended, the "Credit Agreement") -------------------------------------------------------------- Ladies and Gentlemen: Pursuant to Section 2.14 of the Credit Agreement referenced above, The Chase Manhattan Bank has issued the following Letters of Credit (the "Guaranteed L/C's"): L/C Number Issue Date Beneficiary Amount - ---------- ---------- ----------- ------ 5-362650 April 17, 1998 Amwest Surety US$174,703.11 Insurance Company 5-364581 May 6, 1998 Amwest Surety US$286,649.00 Insurance Company Capitalized terms used herein and not otherwise defined herein shall have the meanings given such terms in the Credit Agreement. NewStar Media Inc., formerly known as Dove Entertainment, Inc. (the "Borrower"), and each of the Individual Guarantors hereby requests that, in consideration of the guaranty by Messrs. Elkes, Gorman and Lightstone of the Borrower's obligations under and with respect to the Guaranteed L/C's as provided below, The Chase Manhattan Bank (the "Lender") consent to the following: (i) for purposes of each Guaranty Agreement, the term "Guaranteed Obligations" exclude the Guaranteed L/C Obligations (as hereinafter defined) and (ii) each Individual Guarantor having no liability under its respective Guaranty Agreement for the Guaranteed L/C Obligations. As an inducement to the Lender to consent to the foregoing, each of Terrence Elkes, Ken Gorman and Ronald Lightstone (the "L/C Guarantors") agree as follows: 1. The L/C Guarantors, jointly and severally, unconditionally and irrevocably guarantee (the "L/C Guaranty") the due and punctual payment by the Borrower of all of the Borrower's obligations with respect to the Guaranteed L/C's, as and when such shall become due and payable (the "Guaranteed L/C Obligations"). 2. In furtherance of the provisions of the L/C Guaranty, 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 L/C Obligations, upon failure of the Borrower to pay any of the Guaranteed L/C Obligations when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, the L/C Guarantors hereby promise 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 L/C Obligations then due and payable. 3. The L/C Guarantors, to the extent permitted by applicable law, waive presentation to, demand for payment from and protest to the Borrower and also waive notice of protest for nonpayment, notice of acceleration and notice of intent to accelerate. The obligations of the L/C Guarantors 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 L/C Obligations; (ii) any extension or renewal of any provisions of the Guaranteed L/C's; (iii) any recession, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions; (iv) the release, exchange, waiver or foreclosure of any security held by the Lender for the Guaranteed L/C Obligations; or (v) the failure of the Lender to exercise any right or remedy against any other Guarantor of the Guaranteed L/C Obligations. 4. The L/C Guarantors further agree 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 L/C 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. 5. The L/C Guarantors hereby expressly assume all responsibilities to remain informed of the financial condition of the Borrower and each other guarantor of the Guaranteed L/C Obligations and the ability of the Borrower to perform under the Guaranteed L/C's. 6. This guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed L/C Obligations or any other instrument evidencing any of the Guaranteed L/C Obligations, or by the existence, validity, enforceability, perfection or extent of any collateral therefor or by any other circumstance relating to the Guaranteed L/C Obligations which might otherwise constitute a defense to the guaranty under this guaranty. -2- 7. The obligation of the L/C Guarantors 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 L/C Obligations) or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed L/C Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the L/C Guarantors hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lenders to assert any claim or demand or to enforce any remedy with respect to the Guaranteed L/C's, by any waiver or modification of any provision thereof, by any default, failure, or delay, willful or otherwise, in the performance of the Guaranteed L/C 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 L/C Guarantors or would otherwise operate as a discharge of the L/C Guarantors as a matter of law, unless and until the Guaranteed L/C Obligations are paid in full. 8. The L/C Guarantors further agree that the 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 Guaranteed L/C 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 L/C Obligations or otherwise. 9. To the extent of payments received by the Lender from the L/C Guarantors on the Guaranteed L/C Obligations, the L/C Guarantors shall be subrogated to the rights of the Lenders to receive payments or distributions of cash, property or securities of the Borrower applicable to the Guaranteed L/C Obligations; provided, that all such rights of subrogation shall be subordinated and junior in right of payment to the prior payment in full of all Obligations to the Lender. 10. The provisions of Sections 2 and 4.1 through 4.9, inclusive, of the Guaranty Agreements of Messrs. Elkes, Gorman and Lightstone are incorporated by reference herein with regard to the Guaranteed L/C Obligations as if set forth in their entirety therein. Each of the Individual Guarantors, Media Equities International LLC ("MEI") and the Lender hereby agree that upon the release of the Guaranteed L/C Obligations from the Guaranty Agreements in accordance herewith, the Borrower may request a Loan under the Credit Agreement in an amount equal to the L/C Exposure of the Guaranteed L/C's and no further approval for the making of such Loan shall be required by any Individual Guarantor, MEI or the Lender, including, without limitation, approval under Section 2.2(c) of the Credit Agreement, any Guaranty Agreement or any agreement between or among the Individual Guarantors. -3- By signing where indicated below, the Lender hereby agrees to the consent requested above. Sincerely, /s/ TERRENCE A. ELKES NEWSTAR MEDIA INC. ---------------------------------------- DOVE FOUR POINT, INC. Terrence A. Elkes DOVE ENTERTAINMENT, INC. DOVE AUDIO, INC. NEWSTAR WORLDWIDE INC. /s/ KENNETH F. GORMAN ---------------------------------------- Kenneth F. Gorman By /S/ NEIL TOPHAM ---------------------------------- Neil Topham Vice President and Chief Financial Officer /S/ RON LIGHTSTONE ---------------------------------------- Ronald Lightstone /S/ JACK HEALY ---------------------------------------- Jack Healy /S/ BRUCE MAGGIN ---------------------------------------- Bruce Maggin MEDIA EQUITIES INTERNATIONAL, LLC By: /S/ RON LIGHTSTONE ----------------------------------- Name: Ronald Lightstone Title: Partner AGREED AND ACKNOWLEDGED THE CHASE MANHATTAN BANK By: /s/ JOHN J. HUBER ----------------------------------- Name: John J. Huber III Title: Managing Director -4- EX-10.45 13 CONSENT RE: LIMITATIONS ON INDEBTEDNESS CONSENT REGARDING "LIMITATIONS ON INDEBTEDNESS" AND "LIMITATIONS ON LIENS" JULY 14, 1998 NewStar Media Inc. 8955 Beverly Boulevard Los Angeles, CA 90048 Attention: Neil Topham, Chief Financial Officer Ladies and Gentlemen: Reference is made to that certain Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended to the date hereof (said Credit Agreement, as so amended, being the "Credit Agreement", the terms defined therein being used herein as therein defined), among Dove Entertainment, Inc. (now known as NewStar Media Inc.), a California corporation ("Borrower"), the Guarantors named therein and The Chase Manhattan Bank, as Lender ("Lender"). Borrower has informed Lender that Borrower desires to borrow from Apollo Partners, LLC ("Apollo") and Apollo desires to lend to Borrower, $1,500,000, such loan to be secured by a lien on all of the Borrower's real property located at 8955 Beverly Boulevard, Los Angeles, California (as such real property is more fully described in that certain Deed of Trust (the "Deed of Trust") dated April 24, 1996 in favor of Asahi Bank of California (the "Real Property")) second in priority to the lien granted to Asahi Bank of California under the Deed of Trust. At the request of Borrower, Lender hereby consents to the incurrence of Indebtedness by Borrower in the amount of $1,500,000 from Apollo (the "Apollo Indebtedness") and the granting of a Lien to Apollo on all of the Real Property to secure repayment of the Apollo Indebtedness (such Lien to be second in priority to the Lien granted to Asahi Bank of California under the Deed of Trust); provided that the Apollo Indebtedness shall not bear interest at a rate greater than 14% and shall be paid in full upon the sale of the Real Property. Without limiting the generality of the provisions of Section 12.8 of the Credit Agreement, the consent set forth herein shall be limited precisely as written and is provided solely for the purpose of permitting Borrower to borrow from Apollo up to $1,500,000, with such Indebtedness being secured by a second priority Lien on the Real Property without violating the provisions of Sections 6.1 or 6.2 of the Credit Agreement, and this Consent does not constitute, nor should it be construed as, a waiver of compliance by Borrower with respect to (i) Sections 6.1 or 6.2 of the Credit Agreement in any other instance or (ii) any other term, provision or condition of the Credit Agreement or any other instrument or agreement referred to therein (whether in connection with the incurrence of the Apollo Indebtedness or otherwise). In order to induce Lender to enter into this Consent, Borrower, by its execution of a counterpart of this Consent, represents and warrants that after giving effect to this Consent (a) no Default or Event of Default exists under the Credit Agreement, (b) all representations and warranties contained in the Credit Agreement are true, correct and complete in all material respects on and as of the date hereof except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date, and (c) Borrower has performed all agreements to be performed on its part as set forth in the Credit Agreement. This Consent may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. The consent set forth herein shall become effective as of the date hereof upon the execution of counterparts hereof by Borrower, NewStar Worldwide Inc., Dove Four Point, Inc., NewStar Television Inc., Dove Entertainment, Inc., and Dove Audio Inc., and by Lender and receipt by Borrower and Lender of written or telephonic notification of such execution and authorization of delivery thereof. THIS CONSENT 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. THE CHASE MANHATTAN BANK By: /s/ TRACEY A. NAVIN ------------------------------------- Title: Vice President NEWSTAR MEDIA INC. DOVE FOUR POINT, INC. NEWSTAR WORLDWIDE INC. NEWSTAR TELEVISION INC. DOVE ENTERTAINMENT, INC. DOVE AUDIO, INC. By: /s/ NEIL TOPHAM ------------------------------------- Title: Vice President and Chief Financial Officer -2- EX-10.46 14 CONSENT DATED 4/28/98 THE CHASE MANHATTAN BANK 270 PARK AVENUE NEW YORK, NEW YORK 10017 April 28, 1998 Dove Entertainment, Inc. 8955 Beverly Boulevard Los Angeles, CA 90048 Attention: Neil Topham Ladies and Gentlemen: Reference is made to that Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended (as so amended, the "Credit Agreement") among Dove Entertainment, Inc. (the "Borrower"), the Corporate Guarantors named therein and The Chase Manhattan Bank (the "Lender"). All capitalized terms used herein and not otherwise defined herein shall have the meanings given them in the Credit Agreement. The Borrower has requested that the Lender consent to the exclusion of the Excluded Prepayments (as defined below) from the prepayment and other payment requirements set forth in Sections 2.9(h) and 3A(c) of the Credit Agreement. By its signature below, the Lender hereby consents to the exclusion of the Excluded Prepayments from the respective prepayment and payment requirements set forth in Sections 2.9(h) and 3A(c) of the Credit Agreement; provided, that (i) that portion of the Excluded Prepayments consisting of the $215,000 advance by American Broadcasting Companies, Inc. under the Futuresport ABC Contract shall be deposited in the production account for "Futuresport" (as set forth in Section 2.2(g) of the Credit Agreement), (ii) that portion of the Excluded Prepayments consisting of the $165,000 advance by Columbia TriStar Home Video under the Futuresport Columbia Contract shall be deposited in the production account for "Futuresport" (as set forth in Section 2.2(g) of the Credit Agreement) and (iii) that portion of the Excluded Prepayments consisting of the Home Video Residual Amount shall be paid to the Screen Actors Guild, the Directors Guild of America and/or the Writers Guild of America (or their respective designees) as applicable. The term "Excluded Prepayments" means, collectively, (i) the $215,000 advance payable to the Futuresport Borrower by American Broadcasting Companies, Inc. under the Futuresport ABC contract as part of the payment payable on completion of principal photography of "Futuresport", (ii) the $165,000 advance payable by Columbia TriStar Home Video under the Futuresport Columbia Contract upon execution of such agreement and delivery of chain of title and (iii) payments under the Futuresport Columbia Contract in an amount equal to the Home Video Residual Amount. The "Home Video Residual Amount" is the amount payable to the Screen Actors Guild, the Directors Guild of America and the Writers Guild of America for residuals (including pension, health and welfare payments) for the exploitation of "Futuresport" on home video; provided, that the amount payable to such guilds shall not exceed $120,000 in the aggregate. 1 By execution hereof, the Credit Parties hereby represent and warrant that as of the date hereof, there exists no Default of Event of Default. This letter agreement may be executed in counterparts, each of which shall constitute an original, but all of which when taken together, shall constitute one and the same instrument. Except to the extent expressly set forth above, this Letter Agreement does not constitute a modification or waiver of any provision of the Credit Agreement. Except as expressly modified herein, and all terms of the Credit Agreement shall remain in full force and effect. Please acknowledge your agreement with the foregoing by signing in the space indicated below. Very truly yours, THE CHASE MANHATTAN BANK By: /s/ MITCHELL J. GERVIS -------------------------------- Name: Mitchell J. Gervis Title: Vice President AGREED as of the date written above: DOVE ENTERTAINMENT, INC. By: /s/ NEIL TOPHAM -------------------------------- Name: Neil Topham Title: Vice President & Chief Financial Officer 2 EX-10.47 15 CONSENT WITH CHASE AND DOVE [CHASE GRAPHIC/LOGO] THE CHASE MANHATTAN BANK 270 PARK AVENUE NEW YORK, NEW YORK 10017 December 5, 1997 Dove Entertainment, Inc. 8955 Beverly Boulevard Los Angeles, California 90048 Attention: Neil Topham Re: Consent Regarding "Limitations on Indebtedness" ----------------------------------------------- Ladies and Gentlemen: Reference is made to that certain Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (said agreement being the "Credit Agreement", the terms defined therein being used herein as therein defined), among Dove Entertainment, Inc., a California corporation (the "Company"), the Guarantors named therein and The Chase Manhattan Bank (the "Lender"). The Company has informed the Lender that the Company desires to enter into that certain Commercial Insurance Premium Finance and Security Agreement, a form of which is attached hereto (the "Finance Agreement"), and incur Indebtedness in accordance therewith for the purpose of financing the payment of premiums for the Company's directors and officers liability insurance policies (the "Specified Indebtedness"). At the request of the Company, the Lender hereby consents to the execution, delivery and performance by the Company of the Finance Agreement, the incurrence of the Specified Indebtedness, and the granting of the security interest as provided in the Finance Agreement (collectively, the "Transaction"). Without limiting the generality of the provisions of Section 1210 of the Credit Agreement, the consent set forth herein shall be limited precisely as written and is provided solely for the purpose of permitting the Company to enter into and perform the Transaction without violating the provisions of Sections 6.1 and 6.2 of the Credit Agreement, and this Consent does not constitute, nor should it be construed as, a waiver of compliance by the Company with respect to (i) Sections 6.1 or 6.2 of the Credit Agreement in any other instance or (ii) any other term, provision or condition of the Credit Agreement or any other instrument or agreement referred to therein. In order to induce the Lender to enter into this Consent, the Company, by its execution of a counterpart of this Consent, represents and warrants that after giving effect to this Consent (a) no Default or Event of Default exists under the Credit Agreement, (b) all representations and warranties contained in the Credit Agreement and the other Fundamental Documents are true, correct and complete in all material respects on and as of the date hereof except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date, and (c) the Company has performed all agreements to be performed on its part as set forth in the Credit Agreement. This Consent may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. The consent set forth herein shall become effective as of the date hereof upon the execution of counterparts hereof by the Company, the Corporate Guarantors and the Lender and receipt by the Company and the Lender of written or telephonic notification of such execution and authorization of delivery thereof. THIS CONSENT 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. THE CHASE MANHATTAN BANK By: /s/ JOHN P. HALTMEIER ----------------------------- Title Vice President DOVE ENTERTAINMENT, INC. By: /s/ NEIL TOPHAM ----------------------------- Title VP & CFO DOVE FOUR POINT, INC. By: /s/ NEIL TOPHAM ----------------------------- Title VP & CFO DOVE INTERNATIONAL, INC. By: /s/ NEIL TOPHAM ----------------------------- Title VP & CFO EX-10.48 16 LIMITED WAIVER LIMITED WAIVER REGARDING "CONSOLIDATED CAPITAL BASE" July 29, 1998 NewStar Media Inc. 8955 Beverly Boulevard Los Angeles, California 90048 Attention: Neil Topham Ladies and Gentlemen: Reference is made to that certain Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (as amended to the date hereof, the "Credit Agreement", the terms defined therein being used herein as therein defined), among Dove Entertainment, Inc., a California corporation (now known as NewStar Media Inc.) (the "Company"), the Guarantors named therein and The Chase Manhattan Bank (the "Lender"). The Company has informed the Lender that the Consolidated Capital Base at the end of the Company's fiscal quarter ended June 30, 1998 is less than the minimum permitted amount under Section 6.16 of the Credit Agreement. At the request of the Company, the Lender hereby waives compliance with Section 6.16 of the Credit Agreement to the extent, and only to the extent, necessary to permit the Consolidated Capital Base of the Company at the end of the Company's fiscal quarter ended June 30, 1998 to be less than $1,000,000 plus 80% of all net new equity invested plus 80% of accumulated net earnings during the period commencing on the Closing Date and ending on June 30, 1998; provided that the Consolidated Capital Base shall not be less than $500,000. Without limiting the generality of the provisions of Section 12.10 of the Credit Agreement, the Limited Waiver set forth herein shall be limited precisely as written and relates solely to the noncompliance by the Company with the provisions of Section 6.16 of the Credit Agreement in the manner and to the extent described above, and nothing in this Limited Waiver shall be deemed to (a) constitute a waiver of compliance by the Company with respect to (i) Section 6.16 of the Credit Agreement in any other instance or (ii) any other term, provision or condition of the Credit Agreement or any other instrument or agreement referred to therein or (b) prejudice any right or remedy that the Lender may now have (except to the extent such right or remedy was based upon existing defaults that will not exist after giving effect to this Limited Waiver) or may have in the future under or in connection with the Credit Agreement or any other instrument or agreement referred to therein. Except as expressly set forth herein, the terms, provisions and conditions of the Credit Agreement shall remain in full force and effect and in all other respects are hereby ratified and confirmed. -1- In order to induce the Lender to enter into this Limited Waiver, the Company, by its execution of a counterpart of this Limited Waiver, represents and warrants that after giving effect to this Limited Waiver (a) no Default or Event of Default exists under the Credit Agreement, (b) all representations and warranties contained in the Credit Agreement and the other Fundamental Documents are true, correct and complete in all material respects on and as of the date hereof except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date, and (c) the Company has performed all agreements to be performed on its part as set forth in the Credit Agreement. This Limited Waiver may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. The consent set forth herein shall become effective as of the date hereof upon the execution of counterparts hereof by the Company, the Corporate Guarantors and the Lender and receipt by the Company and the Lender of written or telephonic notification of such execution and authorization of delivery thereof. THIS LIMITED WAIVER 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. THE CHASE MANHATTAN BANK By: /s/ TRACEY A. NAVIN ----------------------------- Title: Vice President -2- NEWSTAR MEDIA INC. NEWSTAR WORLDWIDE INC. NEWSTAR TELEVISION INC. DOVE FOUR POINT, INC. DOVE ENTERTAINMENT, INC. DOVE AUDIO, INC. By: /s/ NEIL TOPHAM ----------------------------- Title: -3- EX-10.49 17 MODIFICATION AGREEMENT ---------------------- Reference is hereby made to the following: (i) Guaranty Agreement dated as of November 4, 1997 between Terrence A. Elkes ("Elkes") and The Chase Manhattan Bank (the "Lender"), as Lender under that certain Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (the "Credit Agreement") among NewStar Media Inc. (formerly known as Dove Entertainment, Inc.; the "Borrower"), the Corporate Guarantors named therein and the Lender; (ii) Guaranty Agreement dated as of November 4, 1997 between Kenneth F. Gorman ("Gorman") and the Lender; (iii) Guaranty Agreement dated as of November 4, 1997 between Bruce Maggin ("Maggin") and the Lender; (iv) Guaranty Agreement dated as of November 4, 1997 between John T. Healy ("Healy") and the Lender; (v) Guaranty Agreement dated as of November 4, 1997 between Ronald Lightstone ("Lightstone") and the Lender; and (vi) Subordination Agreement dated as of November 4, 1997 among the Borrower, NewStar Worldwide Inc. (formerly known as Dove International, Inc.), Dove Four Point, Inc., Elkes, Gorman, Lightstone, Healy, Maggin, Media Equities International, L.L.C. and the Lender. The agreements described in items (i) through (v) above are collectively referred to as the "Guaranties", the agreement described in item (vi) is referred to as the "Subordination Agreement", and all the above agreements are collectively referred to as the "Agreements". Capitalized terms used herein and not otherwise defined shall have the meanings given such terms in the Credit Agreement. The parties hereto hereby agree that the Agreements are each hereby modified and amended so that the definition of "Maximum Guaranty Amount" appearing in the third paragraph of each of the Guaranties and in the second paragraph of the Subordination Agreement shall be amended by deleting the amount "$2,000,000" appearing in clause (x) of such paragraph and replacing it with "$4,000,000." Except as expressly amended hereby, each of the Agreements shall continue in full force and effect in accordance with the provisions thereof on the date hereof. This Modification Agreement is effective at such time that the Lender shall have received executed counterparts of this Modification Agreement which, when taken together, bear the signatures of each party hereto. This Modification 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. THIS MODIFICATION AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereby have caused this Modification Agreement to be duly executed as of this 21st day of May, 1998. /S/ TERRENCE A. ELKES ---------------------------------------- Terrence A. Elkes /S/ KENNETH F. GORMAN ---------------------------------------- Kenneth F. Gorman /S/ BRUCE MAGGIN ---------------------------------------- Bruce Maggin /S/ JOHN T. HEALY ---------------------------------------- John T. Healy /S/ RON LIGHTSTONE ---------------------------------------- Ronald Lightstone NEWSTAR MEDIA INC. (formerly known as Dove Entertainment, Inc.) By: /S/ NEIL TOPHAM ------------------------------------- Name: Neil Topham Title: Vice President & Chief Financial Officer -2- NEWSTAR WORLDWIDE INC. (formerly known as Dove International, Inc.) DOVE FOUR POINT, INC. DOVE ENTERTAINMENT INC. DOVE AUDIO INC. By /S/ NEIL TOPHAM ------------------------------------- Name: Neil Topham Title: Vice President MEDIA EQUITIES INTERNATIONAL, L.L.C. By /S/ BRUCE MAGGIN ------------------------------------- Name: Title: THE CHASE MANHATTAN BANK By /S/ DAVID STAPLES ------------------------------------- Name: David G. Staples Title: Vice President -3- MODIFICATION AGREEMENT ---------------------- SPOUSAL CONSENT --------------- The undersigned acknowledges that she has read the foregoing Modification Agreement (the "Modification Agreement") and that she knows its content. The undersigned is aware that by its provisions her spouse agrees to increase the amount of his guarantee pursuant to that certain Guaranty Agreement dated as of November 4, 1997 between Ronald Lightstone and The Chase Manhattan Bank (the "Lender"), of certain obligations owed by NewStar Media Inc. (formerly known as Dove Entertainment, Inc.) to 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 Modification Agreement and accepts all of the provisions of such Modification Agreement to the extent of her community property interests in whatever property is subject to the Modification Agreement, and further agrees that the undersigned will take no action at any time to hinder the enforcement of the Guaranty Agreement as amended by the Modification Agreement, the Credit Agreement, or any related document or instrument, or any provision contained therein. Dated: As of May 21, 1998 /S/ NANCY LIGHTSTONE -------------------------------- Nancy Lightstone -4- EX-10.50 18 INSTRUMENT OF ASSUMPTION & JOINDER INSTRUMENT OF ASSUMPTION AND JOINDER Instrument of ASSUMPTION AND JOINDER AGREEMENT dated as of May 14, 1998 (the "Assumption Agreement") made by Dove Entertainment, Inc., a California 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. (now known as NewStar Media 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 California corporation and is a Subsidiary of NewStar Media Inc. Pursuant to Section 6.22 of the Credit Agreement, the Company is required to execute this document (as a newly formed Subsidiary of NewStar Media Inc). 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, 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. 2 (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. 3 (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. (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. 4 (e) The chief executive office of the Company is located at 8955 Beverly Boulevard, Los Angeles, CA 90048. 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. 5 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. DOVE ENTERTAINMENT, INC. By: /S/ ROBERT MURRAY --------------------------- Robert Murray Vice President 6 SCHEDULE 1 Capital Stock of Dove Entertainment, Inc. ----------------------------------------- Authorized capitalization: 1,000 shares of Common Stock Number of shares of capital stock 1,000 shares of Common Stock outstanding: Ownership of the outstanding capital stock: NewStar Media Inc. Owns all of the Outstanding Capital Stock 7 SCHEDULE 2 Location of Collateral ---------------------- 8955 Beverly Blvd. Los Angeles, CA 90048 EX-10.51 19 INSTRUMENT OF ASSUMPTION & JOINDER FOR DOVE AUDIO INSTRUMENT OF ASSUMPTION AND JOINDER Instrument of ASSUMPTION AND JOINDER AGREEMENT dated as of May 14, 1998 (the "Assumption Agreement") made by Dove Audio, Inc., a California 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. (now known as NewStar Media 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 California corporation and is a Subsidiary of NewStar Media Inc. Pursuant to Section 6.22 of the Credit Agreement, the Company is required to execute this document (as a newly formed Subsidiary of NewStar Media Inc). 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 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, 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. 2 (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. 3 (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. (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. 4 (e) The chief executive office of the Company is located at 8955 Beverly Boulevard, Los Angeles, CA 90048. 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. 5 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. DOVE AUDIO, INC. By: /s/ ROBERT MURRAY --------------------------- Name: Robert Murray Title: Vice President 6 SCHEDULE 1 Capital Stock of Dove Audio, Inc. --------------------------------- Authorized capitalization: 1,000 shares of Common Stock Number of shares of capital stock 1,000 shares of Common Stock outstanding: Ownership of the outstanding capital stock: NewStar Media Inc. owns all of all of the outstanding Capital Stock 7 SCHEDULE 2 Location of Collateral ---------------------- 8955 Beverly Blvd. Los Angeles, CA 90048 EX-10.52 20 SUPPLEMENT NO. 2 TO THE COPYRIGHT SECURITY AGREEMENT DATED AS OF NOVEMBER 4, 1997 -------------------------------------- WHEREAS, NewStar Media Inc. (formerly known as Dove Entertainment, Inc.), a California 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 the Grantor, 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; 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. 2 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 Registration Title Registration No. Applied For ----- ---------------- ------------------ The Book of Prayers: A Man's Guide to Reaching God 2/9/98 Another City, Not My Own 12/17/97 Animal Tales From Many Lands 12/17/97 Always Outnumbered, Always Outgunned 12/17/97 Abuse of Power 12/7/97 Then Came Heaven 12/4/97 Sudden Mischief 4/3/98 Stone Soup For The World 4/3/98 Sin 12/17/97 The Poetry of Walt Whitman 12/17/97 The Poetry of the Romantics 12/4/97 Peter Rabbit and Other Stories 12/17/97 Perfect Witness 12/17/97 Only Love 12/4/97 The Old Curiosity Shop 2/9/97 Night Train 4/3/98 Nancy Pickard Presents Malice Domestic Vol. 3 2/9/98 The Last Valentine 2/9/98 The Last Hostage 2/9/98 Irish Whiskey 4/3/98 Hit Man 2/9/98 The High-Tech Personal Efficiency Program 12/4/97 The Greatest Mysteries of All Time (Volume 4) 2/9/98 The Greatest Mysteries of All Time (Volume 3) 12/17/97 The Gospel According to the Son 12/4/97 Golden Age of Radio: Sir Arthur Conan Doyle's Sherlock Holmes 2/9/98 Diana: A Tribute to the People's Princess 12/4/97 Damage 2/9/98
3 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 or other instrument executed by the Grantor and heretofore filed in any state or country in the United States of America or elsewhere. 5 IN WITNESS WHEREOF, the Grantor has caused this Supplement No. 2 to the Copyright Security Agreement to be duly executed by its duly authorized officer as of May 14, 1998. NEWSTAR MEDIA INC. (formerly known as Dove Entertainment, Inc.) By: /S/ ROBERT MURRAY --------------------------- Robert Murray Vice President 6 STATE OF California ) : ss.: COUNTY OF Los Angeles ) On this the 19th day of May, 1998, before me, Victoria Kaye, the undersigned Notary Public, personally appeared Robert Murray [X] personally known to me, [ ] proved to me on the basis of satisfactory evidence, to be the Vice President of the corporation known as NewStar Media 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 [SEAL] 7 EX-10.53 21 AMENDMENT NO. 3 dated as of May 21, 1998 to the Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (the "Credit Agreement"), among NEWSTAR MEDIA INC. (formerly known as 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 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) The definition of "Maximum Guaranty Amount" appearing in the second sentence of the fourth paragraph of the Introductory Statement of the Credit Agreement is hereby amended by deleting the figure A$2,000,000@ set forth in clause (x) of such sentence and replacing it with "$4,000,000." (B) The definition of "Commitment" appearing in Article 1 of the Credit Agreement is hereby amended by deleting the figure "$8,000,000" and replacing it with "$10,000,000". -1- (C) Section 6.1 of the Credit Agreement is hereby amended by deleting the period at the end of clause (k), inserting a semi-colon in lieu thereof, and adding the following clause (l) at the end thereof: "(l) Indebtedness incurred by a Credit Party in connection with unsecured loans from MEI in an amount not to exceed $1,000,000 in the aggregate at any one time outstanding." (D) Section 6.5 of the Credit Agreement is hereby amended by adding the following proviso at the end thereof: "; provided, further, that the Credit Parties may make payments of principal and interest on the Indebtedness owing to MEI permitted by Section 6.1(k) hereof, but only if no Default would occur after giving effect to each such payment." 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. 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 5. 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. -2- Section 6. FUNDAMENTAL DOCUMENTS. This Amendment is designated a Fundamental Document by the Lender. Section 7. 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 8. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Section 9. 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 10. 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 11. 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 -3- IN WITNESS WHEREOF, the parties hereby have caused this Amendment to be duly executed as of the date first written above. BORROWER: NEWSTAR MEDIA INC. (formerly known as Dove Entertainment, Inc.) By: /S/ NEIL TOPHAM ------------------------------------- Name: Neil Topham Title: Vice President & Chief Financial Officer CORPORATE GUARANTORS: NEWSTAR WORLDWIDE INC. (formerly known as Dove International, Inc.) DOVE FOUR POINT, INC. DOVE ENTERTAINMENT INC. DOVE AUDIO 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/ DAVID STAPLES ------------------------------------- Name: David G. Staples Title: Vice President -4- EX-10.54 22 AGREEMENT, dated as of December 31, 1998, between Media Equities International, LLC ("MEI") and NewStar Media Inc. (formerly known as Dove Entertainment, Inc.) ("NewStar"). WHEREAS, MEI and NewStar are parties to that certain Stock Purchase Agreement, dated as of March 27, 1997, pursuant to which NewStar is required to pay MEI $300,000 per year as a consulting fee (the "Consulting Agreement"); WHEREAS, MEI is the record and beneficial owner of all of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock of NewStar; WHEREAS, MEI has agreed to amend the terms of the Consulting Agreement to reduce the amount of consulting fees to be paid to MEI for 1998 and to forgive the accrued dividends on NewStar's Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock for the quarter ended December 31, 1998 and a portion of accrued dividends accrued during the quarter ended September 30, 1998. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. The Consulting Agreement is hereby amended by providing that the consulting fee payable to MEI for the year ended December 31, 1998 shall be $200,000 instead of $300,000. 2. MEI agrees to forever forgive the payment by NewStar of all accrued dividends on the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock for the quarter ended December 31, 1998, and a portion of accrued dividends accrued during the quarter ended September 30, 1998 which accrued dividends in the aggregate equal $102,000. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. MEDIA EQUITIES INTERNATIONAL, LLC By: /s/ Ron Lightstone ------------------------------------- NEWSTAR MEDIA INC. By: /s/ Robert C. Murray ------------------------------------- Robert C. Murray Vice President EX-21.1 23 Exhibit 21.1 Subsidiaries of NewStar Media Inc.
Name of Subsidiary Jurisdiction of Incorporation Ownership - ------------------ ----------------------------- --------- NewStar Worldwide Inc. California 100% by NewStar Media Inc. NewStar Television Inc. California 100% by NewStar Media Inc. Dove Four Point, Inc. Florida 100% by NewStar Television Inc. Dove Entertainment, Inc. California 100% by NewStar Media Inc. Dove Audio, Inc. California 100% by NewStar Media Inc. Dove Retail, Inc. California 100% by NewStar Media Inc. Case Closed, Inc. California 100% by Dove Four Point, Inc. Family Blessings Productions Inc. Saskatshewan, Canada 75% by NewStar Media Inc. NewStar Media Inc. does business under the names NewStar Publishing, NewStar Press, NewStar Audio and Dove Audio. Dove Four Point, Inc. does business under the name NewStar Television.
EX-27.1 24 FINANCIAL DATA SCHEDULE
5 1000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 453 0 3794 1312 2760 6822 2520 1568 19077 620 0 0 2 173 36589 19077 15800 17534 12383 12383 9285 516 798 (4932) 4 (4936) 0 0 0 (4936) (0.61) (0.61)
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