-----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, QCaqp8ZXgpzBDTwqXF8Yr+QdxthVNnP6H0PNL9dS9Rw6xoWhFy1f2YtyRaCL2MLA mBgeIm0m/RWqukBU18LJmA== 0001019687-00-000459.txt : 20000417 0001019687-00-000459.hdr.sgml : 20000417 ACCESSION NUMBER: 0001019687-00-000459 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 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: 601899 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 NEWSTAR MEDIA INC. ================================================================================ 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, 1999 [ ] 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 Offices) (Zip Code) (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, 1999 were $11,087,000. As of April 10, 2000, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the issuer was approximately $3,805,000 based upon the closing sales 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 10, 2000: 21,612,058 DOCUMENTS INCORPORATED BY REFERENCE Portions of the issuer's definitive proxy statement for its 2000 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 I. 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 publishers (i.e., unaffiliated with any single book publishing company) of audio books in the United States. The Company changed its name from Dove Entertainment, Inc. to NewStar Media Inc. in May 1998. Through NewStar Publishing and Internet Services, our audio book publishing division, we have produced and distributed under the Dove Audio imprint an average of approximately 100 to 120 audio titles annually since our inception and have built a library of over 1,000 audio titles currently offered for sale. We have also published printed books through our NewStar Press division. Through Dove Four Point, Inc. and NewStar Television Inc. (collectively "NewStar Television"), wholly owned subsidiaries of the Company, we are engaged in the production and development of television programming. In 1995, we 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. Our 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 Harlan Ellison and are read by the author, trained readers or celebrity readers such as Linda Hamilton, Patrick Macnee, Theodore Bikel, Artie Johnson and Gregory Peck. Between 1998 and 1999, 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." Our audio books range from best-selling fiction and non-fiction to movie tie-in audios, self-help, humor and foreign language product. Our 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. We generally produce our own masters for our audio book products, the majority of which are recorded at our own recording studios located at the Company's principal offices. In June of 1999, we expanded the business through the acquisition of the assets of American Audio Literature, Inc. a privately held audio book company with a backlist of approximately 300 titles most of which are in the spiritual/inspirational genre with "Conversations With God" being their best selling title. The printed book operations commenced in 1994. We published approximately 35 titles in 1996. In that year we 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, we substantially curtailed the printed book program. We published approximately fifteen titles in 1998, four titles in 1999 and are not currently developing any books for publication in 2000. Our current backlist includes more than fifty titles. Prior to our acquisition of Four Point Entertainment, Inc., ("Four Point Entertainment") we had from time to time produced television and theatrical films. In April 1996, we expanded our presence in television programming through the acquisition of 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 27 television shows (accounting for over 1,480 episodes of national television programming), including "American Gladiators" and "Amazing America." Recent productions include "The Courage To Love" starring Vanessa Williams, Gil Bellows, Diahann Carroll and Stacy Keach, "Random Acts of Comedy" a 65 episode series that aired on the Fox Family Channel, "Futuresport" staring Wesley Snipes, Dean Cain and Vanessa Williams, which aired on ABC in October 1998 and the syndicated series "Make Me Laugh", which aired on Comedy Central in 1998. 2 In July 1995, we acquired through NewStar Worldwide, certain rights with respect to 48 films in the Skouras Pictures, Inc. library (plus certain other films). In July 1996, we embarked on a program to acquire independent films and videos for distribution in the United States and Canada on an all rights basis 4 (including theatrical, home video and all forms of television and a video output arrangement), but following review in 1997, we discontinued the theatrical production and video distribution operations and have limited the film and television distribution operations to our film and television library, film and television libraries which may be acquired for the purpose of distribution, and television programs provided by NewStar Television. In 1999, NewStar Worldwide acquired two films for international distribution; "It Had To Be You" starring Natasha Henstridge and Michael Vartan and "Last Call" with Elizabeth Berkley and Peter Coyote. Also in 1999, NewStar Worldwide acquired the distribution rights to two reality programs currently in production entitled "World's Craziest Parties" and "Extreme Sports Gone Wrong". None of these acquisitions required us to advance significant funds. 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) our growth strategy, (ii) our intention to acquire or develop additional audio book, printed book and television product, (iii) our intention to enter or broaden distribution markets, (iv) our internet strategy and (v) our ability to successfully implement our 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; need for additional financing; potential for liability claims; dependence on certain outlets for publishing product; competition and legal proceedings and claims. Other factors which may materially affect actual results include, among others, the following: general economic and business conditions, industry capacity, changes in political, social and economic conditions and various other factors beyond our control. We do not undertake and specifically decline 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. 333-82553), in the Company's 8-K (dated February 3, 2000) filed on March 9, 2000, in the Company's filing under Rule 424b, filed on March 10, 2000, in the Company's 8K (dated March 13, 2000) filed on March 16, 2000, and in our 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 Our principal business strategies are to: (i) expand our library of audio books by acquiring and/or producing new titles licensed from established authors and classic literature in the public domain, and through the acquisition of other companies which may complement or expand our existing businesses, (ii) build our audio book business by appealing via direct mail and Internet marketing to the mass audience of people engaged in activities that permit the simultaneous enjoyment of audio books which occupy their eyes but not their minds (such as auto commuters and joggers) in addition to aiming at the traditional audience of book buyers which has been the primary target of the audio industry to date, (iii) increase distribution of our audio book library through direct marketing and premium sales, (iv) maintain an internet presence to sell audio books through our new website AudioUniverse.com, (v) continue to diversify our operations through the production of television programming (concentrating on movies for broadcast/cable/pay television and reality programming for network, cable and syndication), and (vi) continue our feature film and television programming distribution operations. 3 Historically, we have focused our audio book development efforts on assembling a group of best-selling authors as source material for our audio books. We seek to establish and expand our library of audio book titles by establishing long-term relationships directly with book authors. We believe that these types of arrangements are attractive to authors because we will be able to obtain wider distribution of the authors' works than is usually possible. We plan to continue to expand our audio book library by licensing new titles from book authors, by publishing in audio 5 format classic literature in the public domain, through strategic acquisitions of audio libraries currently owned by others, and through strategic relationships. We believe that our 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 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 has considered the acquisition of businesses complementary to our current operations. Along with our acquisition of Four Point Entertainment and the assets of American Audio Literature, Inc. we have from time to time entered into discussions or submitted bids to acquire other companies or assets in related entertainment fields. Our business is dependent on our ability to acquire rights to exploit new audio, book and television properties that will have broad market appeal. To the extent we are unable to effectively identify, acquire and exploit products and concepts that will achieve commercial success, or if we are unable to identify, acquire and exploit rights to the works of new popular authors and to obtain the services of popular readers, our operating results will be adversely affected. Furthermore, if we are 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 our current or new authors, our operating results also may be adversely affected. Ultimately, our future success in our television and other operations will depend on our ability to exploit successfully existing opportunities and to establish new sources of product. There is no assurance that we will be able to maintain or expand our sources of audio, book, television and other product. We are currently experiencing a severe shortage of working capital and accordingly are 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. In the event that additional funding is not obtained in the near future, we will not be able to continue operations. The Company's operations are comprised of two segments, publishing and filmed entertainment. The management reviews the operations of these segments in evaluating performance and making decisions as to the allocation of resources. PUBLISHING SEGMENT The publishing segment is comprised of audio book and printed books AUDIO BOOKS Industry Overview - ----------------- "Audio books" consist of single- or multi-voice 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 1997 valued the market at $2.0 billion annually. However, this includes audiotapes sold as part of educational or infomercial packages. We believe that book-based recordings account for estimated annual sales of about $500 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 bookstores. Subsequently, the importance of direct marketing has grown again, and audio books are increasingly being sold through book clubs such as 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 selling exclusively 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 4 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 consistent annual increases in the consumer base for audio books, the ultimate growth of the industry is unclear. We believe that successful audio book publishing is achieved by similar strategies and capacities as those required for successful print book publishing. We have not operated profitably in this line of business in the last three years and there is no assurance that we will be able to operate profitably in this line of business in the future. Audio Book Operations - --------------------- We believe we are one of the leading independent (i.e. not affiliated with any major book publishing company) publishers of abridged and unabridged books on audio with over 1,000 titles in our audio book library currently offered for sale. We have released over 150 new audio book titles in 1999 and plan to release approximately 100 new titles 6 in 2000. We are engaged in the simultaneous sale of abridged, unabridged and foreign language translation versions of our audio books and our audio products represent virtually all categories of books. Although historically we have published audio books primarily on cassette tape, we have also published new and existing titles in CD format on a selective basis. In June 1999, we acquired the assets of American Audio Literature, Inc., an audio book company with approximately 300 titles in its audio book library. In the first quarter of 2000, we transferred approximately 250 audio titles from our library in settlement of certain litigation and a $900,000 contractual obligation. We do not expect the absence of these titles to have any significant impact on our future operations. We typically acquire titles for publication by entering into exclusive agreements with book authors pursuant to which we obtain the rights to record audio versions of current works and seek to obtain an option or right of first refusal or negotiation as to one or more future works. Authors are typically compensated by advances against royalties. We typically seek to acquire audio publishing rights for specific titles or groups of titles on a worldwide basis, including foreign language rights. We use talented professional readers and occasionally celebrities for our recordings. Books are also frequently read by the authors themselves. We believe that, by virtue of our Los Angeles base, we have an advantage in gaining access to highly capable and/or recognizable celebrity reading talent. We seek 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. We currently utilize several manufacturing sources for tape duplication and packaging and so are not dependent on any one manufacturer as our sole source of physical product. We believe we would have access to alternate sources at competitive prices and quality in the event that we were to lose the services of any single manufacturer. We are looking to acquire both abridged and unabridged rights, and to publish lead titles in both formats and are also looking to strengthen our frontlist program both in the traditional Dove Audio and newly acquired Audio Literature lines. The Audio Literature acquisition provides substantial penetration into the self-help, spiritual, and inspirational genre. 5 Production, Sales, Marketing and Distribution - --------------------------------------------- We typically produce our own masters for our audio book products, a majority of which are recorded at the recording studios located at the Company's Los Angeles offices. Virtually all recordings are produced under the supervision of our in house staff. Once a master is produced, we contract with one of several duplication contractors who then duplicate and assemble the audio books for distribution. We design our own product packaging to help enhance the marketability of our audio books. We also seek to acquire and use original book art, when available. We also design alternative packaging using multi-packs, box sets and gift box designs to present our products more effectively by making the products easier to display and increasing consumer awareness of audio books as a gift option. Our audio books are sold by booksellers, book clubs, audio book-only retailers, catalog retailers and other merchandisers. We currently sell 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 and our own website AudioUniverse.com. While we do not believe there is any significant risk of losing any of these bookstore chains as outlets for our product, the level of our sales of audio books through these and other outlets significantly depends on the amount of product ordered by them and shelf space allocated to such products as to which there is no assurance. We also sell to rack jobbers and are represented in all major wholesale clubs, including Sam's, Costco and BJ's Wholesale Clubs. Sales to retail and other outlets have been effected through a combination of our own sales force and third party distributors and wholesalers. We established our audio book sales operation in 1989 and have historically independently sold audio books primarily to booksellers. During 1999, we maintained an internal sales and marketing force of eight people. We also utilized a network of independent sales representatives throughout the country and distributed the Audio Literature line through the third party distributor Publishers Group West Inc. In November 1997, we entered into an agreement with Mercedes Distribution Center ("Mercedes") under which Mercedes performs storage and distribution services on our behalf. The agreement has a term of five years and7 provides for Mercedes to receive, store, pack and ship our products, and process returned shipments. Further, Mercedes provides a computer inventory control and invoicing system. Under the agreement, we have been responsible for all order solicitation, order entry, invoicing and customer service, as well as marketing, promotion, publicity, and advertising. In June of 1999, we entered into an exclusive agreement with Publishers Group West Inc. ("PGW") to sell and distribute our Audio Literature line. PGW provides all storage, selling, shipping, invoicing and collection functions with regard to the Audio Literature imprint. In October 1998, we entered into a distribution agreement with HarperCollins Canada Limited pursuant to which HarperCollins Canada sells and distributes all of our audio books in Canada. The agreement continues in effect until terminated upon six months written notice, but neither party may terminate prior to August 31, 2001. During 1999, we experimented with low priced ($7.99 and $4.99) audio book lines in mass-market retail venues. Individual titles were abridged versions of currently active full-priced titles. Two staff sales people and several independent brokers were hired to place these lines in supermarket and drug store chains and other mass-market retailers. Several multi-store placements resulted in mostly disappointing sell-through rates and very high returns. In March 2000 we discontinued the entire program and have accepted an offer to sell off most of the low-priced line inventory at cost. The sales staff has been reduced accordingly. In June of 1999, we launched our website AudioUniverse.com to market and sell both our own line of audio books as well as other publishers' audio books. To date, this website has had limited activity and there is no assurance as to the future success of this effort. In accordance with industry practice, substantially all of our 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, we have experienced significant returns and there is no assurance that we will not experience returns of our audio and printed book products in excess of our historical returns, which in certain cases have been substantial. Although we make allowances and reserves for returned products, significant increases in return rates could materially and adversely impact our results of operations or financial condition. In addition, from time to time we make price concessions or 6 allowances or grant 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 our 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 us on a per-unit basis that typically have not exceeded our 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 our operating results. We advertise our products in various trade publications. We also occasionally advertise our products through various print and broadcast media. PRINTED BOOK PUBLISHING In 1997, we experienced extremely heavy returns from our book-publishing program, partly as a result of the industry-wide inventory adjustments and partly as a result of the high-risk nature of much of our publishing program. Since then, we have continued to reevaluate, and have substantially curtailed our book program. In 1999, we published "Meditations on Relationships" by Mary Sheldon and Christopher Stone, "The Libido Breakthrough: A Doctor's Guide to Restoring Sexual Vigor and Peak Health" by Stuart W. Fine and Brenda D. Adderly, a trade paper reprint of "On Communicating" by Mark McCormack and, under the Hallmark Entertainment Books imprint, "Alice In Wonderland." We are not presently developing any books for publication in 2000. Our current backlist includes over fifty titles. FILMED ENTERTAINMENT SEGMENT The filmed entertainment segment is comprised of production and distribution activities. PRODUCTION Prior to April 1996, we had from time to time developed and produced long form programming made for television and theatrical films. In April 1996, we expanded our 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. Our 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 8 with United States television networks, foreign distributors and other sources. Although we enter into such arrangements, there is no assurance that our 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 we may have to fund any short fall, which funding may not be available. NewStar Television's current projects in development include amongst others, "The New American Gladiators" a planned reality series to be produced under a joint venture with Tribune Entertainment and MGM, "Stealing Sinatra" a two-hour telefilm about the 1963 kidnapping of Frank Sinatra, Jr. for Showtime and "Keep Talking," an original game show. We are also developing "The Bulger Brothers" for Fox Studios. This is the story of two brothers who took opposite paths in life. Billy Bulger became President of the Massachusetts senate while Whitney Bulger made it to the FBI's Ten Most Wanted List. We also have other television programming in development but 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. Our television operations are dependent on a limited number of television projects. There is no assurance we will have any television projects or any significant revenues from television projects in any given quarterly or annual period. 7 DISTRIBUTION In conjunction with the formation of our distribution subsidiary, NewStar Worldwide, we 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 our film library, include films with stars such as F. Murray Abraham, Dyan Cannon, C. Thomas Howell, Peter Gallagher, Jason Alexander, John Savage, Kris Kristofferson, Sam Neill, Martin Sheen, Talisa Soto, George Takei and Bridget Fonda. The library includes films such as "A Boy Called Hate," "Hostage" and "Watch It." In 1999, we acquired two films through NewStar Worldwide for international distribution; "It Had To Be You" starring Natasha Henstridge and Michael Vartan and "Last Call" with Elizabeth Berkley and Peter Coyote. Also in 1999, NewStar Worldwide acquired the distribution rights to two reality programs currently in production entitled "World's Craziest Parties" and "Extreme Sports Gone Wrong." 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 we anticipate increased competition in the future and many of our competitors have substantially greater financial, personnel, technological, marketing and other resources than us. The cost of obtaining audio publishing rights from popular authors is escalating and, in certain cases, obtaining such rights is or may become difficult for independent publishers like us. We expect 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 major publishing houses enable such entities to expend considerably greater amounts to obtain the rights to such works than we are able to expend given our resources. Such ability may preclude us 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, could adversely affect our margins. There is no assurance that we 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. We compete 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. We seek to 9 build assets by retaining ownership of the television programs that we produce. The trend in the television industry is for networks and other distributors of our 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 we compete have substantially greater financial, distribution, technical and creative resources than us. There is no assurance that we will be able to successfully compete in the various businesses in which we operate. EMPLOYEES At April 10, 2000, we employed 35 people. On occasion, we employ temporary workers on a short-term basis to meet particular clerical and other needs. We believe employee relations are satisfactory. In accordance with industry practice, we meet a substantial part of our 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. 8 NATURE OF ACCOUNTING PRINCIPLES APPLICABLE TO THE PUBLISHING AND FILMED ENTERTAINMENT SEGMENTS We recognize 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 our licensing arrangements. To allow for returns, we establish a reserve against revenues from audio and printed book sales, the magnitude of which is based on our estimate of returns. Our future reported revenues would be negatively impacted if our actual return experience exceeds our established reserves. There is no assurance that our actual return experience will not exceed our 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 our reserves for excess inventory are not adequate at any time, we will be required, under generally accepted accounting principles, to write down audio and printed book inventory, which will increase cost of sales. Any such write-downs would have an adverse impact on our 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. We establish reserves against such write-downs based on past experience with similar products. There is no assurance that our 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. Management periodically reviews revenue forecasts for films, and our 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 we will not incur write-downs in the future in respect of our film and television operations; any such write-downs would have an adverse impact on operating results. NEED FOR ADDITIONAL FINANCING / RISK FACTORS. We have incurred substantial losses and may be unable to achieve profitability or continue operations in the future. Additionally, we have experienced significant negative cash flows from operations, including $7,018,000, $10,659,000 and $8,691,000 for the years ended December 31, 1999, 1998 and 1997, respectively. In November 1997, we entered into an agreement with The Chase Manhattan Bank "Chase Bank" providing us with an $8,000,000 loan facility ("Chase Loan") for working capital purposes, which was increased to $10,000,000 in May 1998, and we had borrowed $9,083,000 against the facility as of December 31, 1999. The Chase Loan runs for three years until November 4, 2000. We 10 were not in compliance with certain of the financial compliance tests at December 31, 1998, March 31, 1999 and June 30, 1999 and had requested waivers from Chase Bank. As of August 16, 1999, we had received such waivers and entered into amendments and waivers to the loan facility with Chase Bank. As a result of such amendments and waivers, we were in compliance with the aforementioned financial compliance tests. On January 28, 1999, Chase Bank and the Company were notified by one of the guarantors that there would be no approvals for guarantees of further extensions of credit under the Chase Loan. In connection with the drafting of certain amendments and waivers to the Chase Loan, we reached agreement with the guarantor for an extension and modification of the guarantee agreement to provide for a revised guarantee of $2,000,000. We were not in compliance with certain of the financial compliance tests at December 31, 1999 and have requested waivers from Chase Bank. As of April 11, 2000 we had not received such waivers and there is no assurance that we will receive them in the future. We are currently experiencing a severe shortage of working capital and accordingly are 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. In the event that additional funding is not obtained in the near future, we will not be able to continue operations. 9 To the extent we obtain financing through sales of equity securities, any such issuance of equity securities would result in dilution to the interests of our shareholders. Additionally, to the extent that we incur indebtedness or issue debt securities in connection with any acquisition or otherwise, we 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. If we receive funding through a sale of assets, those assets will no longer be available to the Company and its shareholders. Any proceeds from a sale of assets would be used to pay down the Chase Loan. There is no assurance that we would be able to reborrow such funds. >From time to time, we must fund our filmed entertainment activities and publishing activities in advance of receipt of revenues. Our television production activities can affect our capital needs in that the revenues from the initial licensing of television programming may be less than the associated production costs. Our ability 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, from time to time we are required to fund at least a portion of its production costs, pending receipt of revenues, out of working capital. Although our strategy generally is not to commence principal photography without first obtaining commitments that cover all or substantially all of the budgeted production costs, from time to time we may commence principal photography without having obtained commitments equal to or in excess of such costs. In these circumstances, we 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 are however, no assurances that such financing may be obtained or obtained on acceptable terms. If we were unable to obtain financing, we may be required to reduce or curtail certain operations. In order to obtain rights to certain properties for our publishing and television operations, we may be required to make advance cash payments to sources of such properties, including book authors and publishers. While we generally attempt to minimize the magnitude of such payments and to obtain advance commitments to offset such payments, we are not always able to do so and there is no assurance that we will be able to do so in the future. DELISTING FROM THE NASDAQ SMALLCAP MARKET Effective March 14, 2000, the common stock of the Company was delisted from the Nasdaq SmallCap Market ("Nasdaq"), and is listed on the OTC - Bulletin Board, trading under the symbol "NWST." Nasdaq informed us on April 19, 1999 that Nasdaq had determined that we were not in compliance with the net tangible assets/market capitalization/net income requirements pursuant to NASD Market Place Rule 4310(c)(2). Also on that date, Nasdaq sent separate correspondence to us in which Nasdaq noted that we had received a "going concern" opinion from our independent auditor, and expressed concern that, in light thereof, we may not be able to sustain compliance with Nasdaq's continued listing requirements. Nasdaq requested information from us by May 5, 1999 about our proposal for achieving compliance with Market Place Rule 4310(c)(2) 11 and a timeline for resolution of the items that led to the "going concern" opinion. On May 5, 1999, we submitted our response to Nasdaq. Nasdaq did not take any further action after May 5, 1999 with respect to its April 19, 1999 notification. Nasdaq informed us on September 23, 1999 that our common stock failed to maintain a minimum bid price greater than or equal to $1.00 over the last thirty consecutive trading days, as required under Market Place Rule 4310(c)(4). We were provided ninety calendar days, or until December 23, 1999, to regain compliance with the minimum bid price requirement of Rule 4310(c)(4). If at any time before December 23, 1999, the bid price of the Company's shares was equal to or greater than $1.00 for a minimum of ten consecutive trading days the staff of Nasdaq would determine if compliance with the requirement had been achieved. We were unable to demonstrate compliance with the requirement on or before December 23, 1999, but requested a hearing before the Nasdaq panel. Pending the hearing the delisting was stayed. Subsequently, we received another notification from Nasdaq that we were not in compliance with the net tangible assets/market capitalization/net income requirements pursuant to NASD Market Place Rule 4310(c)(2). 10 We appeared at a hearing on February 3, 2000 before a Nasdaq Listing Qualifications Panel. Subsequent to the hearing, we had further conversations with Nasdaq, and were requested to provide additional information requested by the panel. On March 13, 2000, we received the Nasdaq panel's decision not to grant us a further extension to seek to comply with the requirements of NASD Market Place Rule 4310(c)(4) and 4310(c)(2) and to delist the Company's securities from the Nasdaq Stock Market effective with the opening of business on March 14, 2000. As a result of the delisting, it will 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 could result in a decline in the trading market for our common stock that could depress our stock price, among other consequences. CHANGE IN PUBLISHING MANAGEMENT In the first quarter of 2000, we appointed John Hunt as President and Chief Executive Officer of NewStar Publishing and Internet Services. Lisa Hunt was named Executive Vice President of Marketing and Operations. The Hunts have been involved with us since June 1999, when we acquired Audio Literature, a company founded by the Hunts in 1987. The former NewStar Publishing CEO resigned to pursue other interests. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with The Securities and Exchange Commission ("SEC"). You may read and copy any document we file at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. You may also obtain SEC filings from the SEC's website at http://www.sec.gov. 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. We generally obtain a license to use (as opposed to a proprietary copyright interest in) the works underlying our audio books from the owner of the copyright. 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. We copyright substantially all of the audio works we produce. In those instances in which we acquire pre-recorded audio product (rather than the underlying work), our rights are limited to the terms of our agreement with respect to such product. ITEM 2. PROPERTIES During 1996 we purchased an office building and the underlying land (collectively, the "Property") in Los Angeles, California for $2,500,000. We moved our corporate headquarters to the new site in April 1996. In connection with the acquisition of the Property, we made improvements to the Property of approximately $220,000. In 1997, we made additional improvements of approximately $121,000 to relocate our video postproduction 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, we entered into a one-year lease with the purchaser of the Property, having monthly payments of approximately $35,000 and expiring in August 1999. We looked for space adequate for our needs but were not successful in finding such space on appropriate terms. As a result, we entered into an amended and restated lease for a major portion of space we had previously occupied. This amendment is for a term of two years from September 1, 1999. Either party has the right after August 31, 2000 to cancel the lease upon six months written notice. The amended lease provides for monthly payments of $29,000 for the first year of the term and $29,870 thereafter. 11 ITEM 3. LEGAL PROCEEDINGS PENDING LEGAL PROCEEDINGS We have been involved in numerous litigation and arbitration matters. These matters cost us substantial amounts in legal fees and divert the attention of management and employees from productive activities. In addition, if the outcome of litigation or arbitration proceedings is decided against us, we may incur significant monetary liability. Below is a brief explanation of significant litigation and arbitration proceedings. In addition to these proceedings, we are a party to various other legal proceedings and claims incidental to our business. 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" which was subsequently affirmed on appeal ("Stern Judgment"). In a related matter, we sought to restore certain alleged fraudulent conveyances that Mr. Stern had made. In August 1995, Mr. Stern filed for bankruptcy protection. The Chapter 7 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 we will be able to recover the amount of the original judgment. 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. We believe that we have good and meritorious defenses to the Canadian Stern Action. Nevertheless, we may not prevail in the action. In March 1996, the Company was served with a complaint in an action entitled Alexandra D. Datig v. Dove Audio, et al. (Los Angeles Superior Court Case No. BC145501) (the "Datig Action"). The Datig Action was brought by a contributor to, and relates to, the book "You'll Never Make Love In This Town Again." The Datig complaint sought in excess of a million dollars in monetary damages. In October 1996, we obtained a judgment of dismissal of the entire Datig Action, which judgment also awarded us our attorney fees and costs in defending the matter. Ms. Datig appealed the judgment. On July 15, 1999, the Court of Appeal of the State of California Second Appellate District Division 3 issued its opinion on plaintiff's appeal from judgment in the matter, which opinion was modified on August 13, 1999. The appeals court reversed the judgment and remanded the proceeding to the trial court. On March 30, 2000, the trial court struck plaintiff's complaint in its entirety with leave to amend. While we believe that we have good and meritorious defenses to the claims in the action at the trial court level, there can be no assurance that we will prevail in the action. LEGAL PROCEEDINGS SETTLED, DISMISSED OR ON APPEAL In June 1997, we were 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 discontinued in 1997 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 August 1997, Michael Viner and Deborah Raffin, former principals, commenced an arbitration against us seeking specific performance of, and alleging breach of, a termination agreement to which they and we are a party, and claimed damages in excess of $165,000 and additional reimbursements allegedly due for other items. We filed our own claims against the former principals. On July 17, 1998, the arbitrator ruled in our favor 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 12 principals from competing with us 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 judgment confirming the arbitrator's award and subsequently awarded us approximately $30,000 in costs and attorney's fees. On February 25, 1999 the former principals appealed the court's judgement. On March 23, 2000, the Court of Appeal of the State of California Second Appellate District Division 3 affirmed the judgment. Effective March 31, 2000, we settled this proceeding as part of the Overall Viner Settlement. On September 28, 1998, the former principals, commenced an arbitration against us, alleging breach of, and seeking specific performance of 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 us. 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. The arbitrator issued a subsequent decision dated November 19, 1999, which he thereafter corrected and amended and purported to later clarify, in which he determined that a portion of the termination agreement prohibiting the former principals from hiring, soliciting, encouraging the departure of, or engaging or seeking to employ authors under contract to us or included in our catalogs is void and unenforceable. The arbitrator also determined that the former principals had the discretion to elect to receive payments under the termination agreement in cash, rather than preferred stock. The former principals have sought to have the Los Angeles Superior Court confirm the clarified, corrected and amended award. Effective March 31, 2000, we settled this proceeding as part of the Overall Viner Settlement. On June 1, 1999, a complaint entitled Michael Viner and Deborah Raffin v. NewStar Media Inc. (BC 211240) was filed in Los Angeles Superior Court. The former principals alleged violation of the Lanham Act, statutory and common law unfair competition and common law unfair competition and false advertising with respect to executive producer credits on the covers of various audio books and with respect to credits for two television motion pictures.The complaint sought damages in an amount according to proof, punitive damages, and preliminary and permanent injunctive relief. On August 4, 1999, we removed the action to the United States District Court for the Central District of California Western Division (Case No. 99-07970 CBM (SHx)). Effective March 31, 2000, we settled this proceeding as part of the Overall Viner Settlement. On March 1, 2000, a complaint entitled Michael Viner and Deborah Raffin v. NewStar Media Inc. (BC 225685) was filed in Los Angeles Superior Court. The plaintiffs alleged that they were entitled to indemnity for the arbitration proceedings that MEI commenced against the former principals in the second quarter of 1999. Effective March 31, 2000, we settled this proceeding as part of the Overall Viner Settlement. Effective March 31, 2000, we entered into a settlement with the former principals (the "Overall Viner Settlement") ending all of the outstanding litigation and resolving various matters relating to the termination agreement. The Overall Viner Settlement provides for dismissals with prejudice of all pending arbitration and litigation proceedings with the former principals and terminates any obligation to pay the former principals the remaining $900,000 accrued under the termination agreement. In exchange, we transferred to the former principals (to the extent permissible) our interests in various books, audio books, and videos, and elements thereof, that were not producing a material portion of our revenues, including the Dove Kids books and audio books and most of our classic audio books, while retaining the rights to use our abridgements of the classics titles for future audio books. The Overall Viner Settlement also permits the former principals to engage in the audio book business approximately fourteen months earlier than provided by the termination agreement. In December of 1997, we were 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 our company and sought damages of approximately $287,000 for breach of contract and $60,000 for unpaid consulting fees. Mr. Leider also sought a declaration that we must comply with certain purported stock option agreements and for an order for inspection and copying of certain of our records 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 we substituted an undertaking for the amount of the attachment. On July 6, 1999, a first amended complaint in the action entitled Mattken Corp. and Gerald J. Leider v. NewStar Media Inc. was filed in the Los 13 Angeles County Superior Court (BC 191736). The plaintiffs alleged breach of contract arising out of a purported agreement between Mr. Leider and us in connection with executive producer services on the motion picture "Morning Glory", and a purported sales agency agreement between Mattken Corp. and us. Plaintiffs were seeking damages in excess of $350,000. We have settled these actions. The amount to be paid by the Company is less than the amount of the attachment and is payable over time 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 alleged 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 were seeking damages in excess of $1,000,000, plus punitive and exemplary damages. On August 30, 1999, the plaintiffs dismissed the action without prejudice for the purpose of settlement discussions, and we entered into a tolling agreement so that the plaintiffs could refile the action if the matter is not settled. We cannot assure you that we will be able to settle the matter, or if the matter is not settled, that we will prevail in the action.15 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 February 1999, we were 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 lawsuits. The complaint alleged fraud, negligent misrepresentation, violation of sections 25400 and 25401 of the California Corporations Code and breach of fiduciary duty, and sought recovery of in excess of $1,000,000 plus exemplary and punitive damages. We have settled this action which was covered by insurance. In March 1999, we 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, we made payments over time to Mr. Tourtelot totaling $60,000. In addition to the above claims, we are party to various other routine legal proceedings and claims incidental to its business. There can be no assurances that the ultimate outcome of these matters will be resolved in our favor. In addition, even if the ultimate outcome is resolved in our favor, involvement in any litigation or claims could entail considerable cost and the diversion of the attention of management, either of which could have a material adverse effect on our business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS In the fourth quarter of 1999, we solicited proxies from our shareholders for voting to take place on several proposals at a meeting to be held on December 8, 1999. However on December 2, 1999, we gave notice that the meeting would be adjourned until January 18, 2000. The results of the shareholder voting at this meeting will be disclosed in our 1st quarter 10QSB. 14 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Up until March 13, 2000, the Company's Common Stock was traded on the Nasdaq SmallCap Market under the symbol NWST and after that date on the Over The Counter Bulletin Board under the same symbol. See discussion in Item 1 of Part I under the caption "Delisting From The Nasdaq SmallCap Market". The following table sets forth, for the periods indicated, the range of low and high closing sale prices as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") and by the Over The Counter Bulletin Board for the periods after March 13, 2000. As of March 31, 2000, there were 84 holders of record of common stock of the Company and approximately 1330 beneficial owners of common stock of the Company. Low High --- ---- Year Ended December 31, 1998: First quarter (through March 31, 1998) $1.250 $2.750 Second quarter (through June 30, 1998) $1.125 $2.500 Third quarter (through September 30, 1998) $0.625 $2.500 Fourth quarter (through December 31, 1998) $0.500 $2.000 Year Ended December 31, 1999: First quarter (through March 31, 1999) $0.750 $1.375 Second quarter (through June 30, 1999) $0.938 $2.344 Third quarter (through September 30, 1999) $0.500 $1.625 Fourth quarter (through December 31, 1999) $0.219 $0.969 Year Ending December 31, 2000 First quarter (through March 31, 2000) $0.375 $1.250 Second quarter (through April 10, 2000) $0.500 $0.350 As previously reported, on April 21, 1999, we amended the Articles of Incorporation to increase our authorized common stock from 20,000,000 shares to 50,000,000 shares. Also as previously reported in the Company's public filings with the Securities and Exchange Commission, during the period January 1, 1999 to September 30, 1999, we issued the following shares of our common stock to the persons indicated: (i) 18,089 shares of common stock to Media Equities International, LLC ("MEI") for payment of preferred stock dividends in the amount of $10,200; (ii) 135 shares of our Series E Preferred Stock were released from escrow in lieu of payments to the former principals of the Company and 140,280 shares of common stock were issued upon conversion of 189 shares of Series E Preferred Stock; (iii) 30,000 shares of common stock to Ronald Lightstone pursuant to a Stock Purchase Agreement dated as of April 1, 1999 for $19,125; (iv) 416,667 shares of common stock to the Gorman Limited Partnership ("GLP") pursuant to a Stock Purchase Agreement Dated as of May 4, 1999 for $500,000; (v) 416,667 shares of common stock to the Elkes Limited Partnership ("ELP") pursuant to a Stock Purchase Agreement dated as of May 4, 1999 for $500,000; (vi) a total of 1,271,781 shares of common stock to GLP pursuant to a Stock Purchase Agreement dated as of April 1, 1999 for $1,587,417; (vii) a total of 1,300,000 shares of common stock to ELP pursuant to a Stock Purchase Agreement dated as of April 1, 1999 for $1,593,733; (viii) 250,000 shares of common stock to Peter Engel Pursuant to a Stock Purchase Agreement dated as of May 4, 1999 for $300,000; (ix) 83,833 shares of common stock in a private placement for $100,000; (x) 37,641 shares of common stock to Steinberg, Nutter & Brent in satisfaction of amounts we owed to that firm; (xi) 300,000 shares of common stock issued in connection with the acquisition of the assets of American Audio Literature (issued in reliance on Regulation D under the Securities Act of 1933) and (xii) 46,400 shares of common stock for fees in connection with the placement of our securities. The managing general partner of ELP is Terrence Elkes, the Chairman of the Board of Directors and Chief Executive Officer of the Company. The managing general partner of GLP is Kenneth Gorman, Vice-Chairman of the Board of Directors of the Company. Mr. Lightstone is a member of the Board of Directors of the Company. Peter Engel was Chief Executive Officer of NewStar Publishing. 15 Except as noted, all of the shares issued were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. DIVIDENDS We have not declared or paid any cash dividends on our Common Stock and do not intend to declare any cash dividends in the foreseeable future. Our credit facility prohibits the declaration or payment of any cash dividends. ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe 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 publishers (i.e., unaffiliated with any major book publishing company) of audio books in the United States. We produce and distribute approximately 100 to 120 new titles annually and have built a library of approximately 1,000 titles currently offered for sale. Through NewStar Television, we engage in the production and development of television programming. Other of our activities include a limited printed book publishing program and the distribution of feature films and television programming. These activities are carried out through two segments, publishing and filmed entertainment. 1999 proved to be a difficult year for the Company. Although we raised approximately $4.5 million in capital through a private placement of our common stock, we lacked sufficient capital to complete the execution of the business strategies that we put into effect earlier in the year in our audio book publishing program and in the launch of our Internet site, AudioUniverse.com. Television programming production also fell short of our expectations with many projects in development failing to proceed into production and delivery in 1999. We expanded our audio book publishing program in 1999 with an increased emphasis on acquiring audio rights to titles which will have longer life in our catalog and from well-known and best-selling authors. In 1999, we produced more than 150 audio book titles, including such key releases as "The Phantom of Manhattan" by Frederick Forsyth, "Family Honor" and "Hush Money" by Robert B. Parker, "Mother of Pearl" by Melinda Haynes, "Cuba" by Stephen Coonts, and "Warren Buffet Portfolio" by Robert G. Hagstrom. Additionally, we received three audio book industry Audie awards in 1999. Our 1999 strategies were developed and implemented to expand the audio book business by appealing to the large audience of people engaged in activities that permit the simultaneous enjoyment of audio books (such as auto commuters 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, we marketed 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 store chains, convenience stores, gas stations, military exchanges, etc. Secondly, we pursued an Internet strategy to position our website, AudioUniverse.com, as the premier 16 website for audio books. The development of the AudioUniverse.com website, which was launched in June 1999, included: 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, we embarked upon a plan to pursue possible acquisitions of several audio book and book 18 companies to expand our current audio book library, build a book publishing business, and provide additional channels of distribution for current and backlist product and as a result of this plan, we acquired the assets of American Audio Literature, Inc. which included a 300 title library of audio book rights. In 1998, Audio Literature's gross sales amounted to approximately $1.6 million. The purchase price of $1,550,000 for this acquisition consisted of $200,000 in cash paid June 1, 1999; $300,000 in cash payable June 1, 2000; and the balance in common stock of the Company. See Note 14 of Notes To Consolidated Financial Statements. We have reduced the number of new audio books planned for release in 2000 to approximately 100. Included among these new titles are "On Secret Service" by John Jakes, "Burnt Sienna" by David Morell, "Lying Stones of Marrakech" by Stephen Jay Gould, "Seagulls in My Soup" by Tristan Jones, and "What Color Is Your Parachute 2000" by Richard N. Bulles. The demand for audio books is seasonal, with the majority of shipments taking place in the third and fourth quarters of the year. We believe 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 our 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 our sales of audio and printed book products are and will continue to be subject to potential return by distributors and retailers. Although we estimate allowances for returned products, significant increases in actual return rates above these estimates could materially and adversely impact our results of operations or financial condition. In 1999, we produced "The Courage To Love" a two-hour television motion picture and delivered it to the Lifetime Television in January 2000. This movie aired on January 24th and was one of the highest rated cable movies ever broadcast. Additionally, we produced and delivered 65 half-hour episodes of "Random Acts Of Comedy" starring David Alan Greer to The Fox Family Channel. We are currently providing all production services for 130 half-hours of "National Enquirer" for MGM. This well-rated syndicated series has been renewed for the 2000/2001 broadcast season for an additional 195 half-hours. NewStar Television's current projects in development include "The Bulger Brothers", a television motion picture for Fox Television Studios, "Stealing Sinatra", a two-hour telefilm about the 1963 kidnapping of Frank Sinatra, Jr., and "The New American Gladiators" a planned one-hour reality series to be produced as a joint venture with MGM and Tribune Entertainment. From time to time, we may have several television projects in development and we generally seek to limit our 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. We have historically experienced significant negative cash flows from operations, including $7,018,000, $10,659,000 and $8,691,000 for the years ended December 31, 1999, 1998 and 1997, respectively. These 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 1999, we raised approximately $4.5 million in a private equity placement which took place in May and June. We are currently experiencing a severe shortage of working capital and accordingly are 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. In the event that additional funding is not obtained in the near future, we will not be able to continue operations. 17 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, --------------------------------- 1999 1998 1997 ---- ---- ---- REVENUES Publishing 67 % 44 % 41 % Television and Film 33 56 59 ---- ---- ---- Total 100 % 100 % 100 % ==== ==== ==== OPERATING EXPENSES Publishing 67 % 34 % 55 % Television and Film 30 45 72 Selling, general & administrative 98 59 59 Employee separation costs -- -- 10 ---- ---- ---- Total 195 % 138 % 196 % ==== ==== ==== YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 - --------------------------------------------------------------------- Publishing - ---------- REVENUES. Net publishing revenues for 1999 increased $304,000 to $7,184,000 compared with $6,880,000 for 1998. Of the 1999 net publishing revenues, net audio book revenue was approximately $6,675,000 and printed books net revenue was $509,000. In 1998, net audio book revenue was approximately $6,973,000 and printed books incurred net returns of approximately $93,000. The increase in total net publishing revenues was attributable primarily to the increase in printed book revenues as a result of several releases in 1999. In the third quarter, the Company sold 526,000 units of audio book inventory, which was recorded based upon the estimated fair market value of the inventory, in exchange, for $278,000 in cash and $443,000 allocated to barter credits to be used towards the future purchase of media advertising. The aforementioned barter credits were subsequently fully reserved against as we determined that a change in our business plan eliminated almost all of the previously planned media advertising. Net audio book revenue decreased from year to year as the sales volume from audio books released in 1999 was lower primarily due to our shift in strategy to produce fewer, higher quality titles and increased attention paid to non-traditional markets without a commensurate level of sale activity. Actual returns, as a percentage of gross sales, were 26.8% and 27.5% for the year ended December 31, 1999 and 1998, respectively. 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 our financial condition or results of operations. COST OF SALES. Cost of sales for 1999 increased $1,858,000 to $7,164,000 compared with $5,306,000 for 1998. The increase was mainly attributable to the adjustments in the fourth quarter of $1,221,000 to write down inventory and reserve against barter credits received in a sale of audio book inventory, as previously stated. Filmed Entertainment - -------------------- REVENUES. Film and television revenues for 1999 decreased $5,305,000 to $3,616,000, compared with $8,920,000 for 1998. 1999 revenues included approximately $2,947,000 relating to "Random Acts of Comedy." Consistent with 1998 and 1997, NewStar Television produced only one made for television motion picture in 1999 (entitled "The Courage to Love"). However, since delivery was not made until January 2000, we were unable to recognize revenue on it in 1999. This was the major reason for the reduction in revenues for 1999. COST OF SALES. Film and television amortization for 1999 decreased $3,806,000 to $3,271,000, compared with $7,077,000 for 1998. The decline in cost of sales is almost entirely related to the lower revenues stated previously. 18 General - ------- GROSS PROFIT / (LOSS). We experienced a gross profit of $365,000 for 1999 versus a gross profit of $3,417,000 for 1998, resulting from the matters discussed above 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 increased $1,561,000 to $10,846,000 for 1999 compared to $9,285,000 for 1998. The increase in SG&A was mostly attributable to the implementation of the publishing division's new website AudioUniverse.com as well as expanded selling and marketing costs in connection with new audio book product lines. GAIN ON SALE OF LAND AND BUILDING. In March of 1999, we sold our interest in a small unprofitable television production studio and realized a gain of $594,000 and in September 1998, we sold our principal office building and land for approximately $4,166,000, resulting in a gain of approximately $1,734,000. NET INTEREST EXPENSE. Net interest expense for 1999 was $918,000 compared with $798,000 for 1998. The increase in interest expense is primarily the result of increased utilization of the Company's loan facility for working capital purposes and a slight rise in interest rates. 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 our shift in strategy to produce fewer, higher quality titles. However, as a result of the Company's increased emphasis on acquiring higher quality titles, returns as a percentage of revenues decreased and offset the reduction in audio book titles released. Although we make allowances and reserves for returned product that it believes are adequate, significant increases in return rates can materially and adversely impact our 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 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. Filmed Entertainment - -------------------- REVENUES. Film and television revenues for 1998 decreased $952,000 to $8,920,000, compared with $9,872,000 for 1997. Consistent with 1997, we 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. 19 General - ------- GROSS PROFIT / (LOSS). We 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 our 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, we sold our principal office building and land for approximately $4,166,000, resulting in a gain of approximately $1,734,000. 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 Chase Loan for working capital purposes and a production loan obtained in connection with the production of a television motion picture. LIQUIDITY AND CAPITAL RESOURCES On November 12, 1997, we entered into an agreement with Chase Bank providing us 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 our 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 audio library, (2) 85% of our eligible receivables and (3) 30% of the finished goods audio and book inventory. At any time, we may borrow up to the Borrowing Base. In addition, the Chase Loan provides that we are 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 Media Equities International, LLC ("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 our option. In addition, unused commitment fees are payable at 1/2% per annum. The Chase Loan contains various covenants to which we 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. We were not in compliance with certain of the financial compliance tests at December 31, 1998, March 31, 1999, and June 30, 1999 and requested waivers from Chase Bank. As of August 16, 1999, we had received such waivers and entered into amendments and waivers to the loan facility with Chase Bank. As a result of such amendments and waivers, we were in compliance with the aforementioned financial compliance tests. On January 28, 1999, Chase Bank and we were notified by one of the guarantors that there would be no approvals for guarantees of further extensions of credit under the Chase Loan. In connection with the drafting of certain amendments and waivers to the Chase Loan, we reached agreement with the guarantor for an extension and modification of the guarantee agreement to provide for a revised guarantee of $2,000,000. At December 31, 1999, we were not in compliance with certain of the financial tests in the Chase Loan and have requested waivers from Chase Bank. As of April 11, 2000, we had not received such waivers and there is no assurance that we will receive them in the future. Also at December 31, 1999, we had borrowed $9,083,000 against the facility. In addition, Chase Bank has provided a letter of credit for $287,000 in respect of the settlement of certain litigation. In May and June of 1999, we raised $4,545,000 through private placements. 20 We have experienced significant negative cash flows from operations, including $7,018,000, $10,659,000 and $8,691,000 for the years ended December 31, 1999, 1998 and 1997, respectively. We believe that our current capital resources are not sufficient to cover our current working capital requirements and accordingly are presently 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 22 such financing will be obtained. Also see Note 15 of Notes To Consolidated Financial Statements. In the event that additional working capital is not obtained or not obtained in sufficient amounts, the Company will not be able to continue operations. Our television production activities can affect our capital needs in that the revenues from the initial licensing of television programming may be less than the associated production costs. Our ability 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, from time to time we are required to fund at least a portion of its production costs, pending receipt of programming revenues, out of its working capital. Although our 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 we may commence principal photography without having obtained commitments equal to or in excess of such costs. In such circumstances, we 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. In the event that additional funding is not obtained in the near future, the Company will not be able to continue operations. In order to obtain rights to certain properties for our publishing and television operations, we may be required to make advance cash payments to sources of such properties, including book authors and publishers. While we generally attempt to minimize the magnitude of such payments and to obtain advance commitments to offset such payments, we are not always able to do so and there is no assurance we will be able to do so in the future. As of April 10, 2000, our unused sources of funds consisted primarily of approximately $383,000 in cash and $176,000 in unused credit under the Chase Loan. In the event that additional funding is not obtained in the near future, the Company will not be able to continue operations. RECENT PRONOUNCEMENTS In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), effective for fiscal years beginning after June 15, 2000. The Company anticipates that the adoption of SFAS 133 will not have a material effect on its financial statements. In October 1998, the FASB released an exposure draft of the proposed statement on "Recission of FASB Statement No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films," ("SFAS 53"). An entity that previously was subject to the requirements of SFAS 53 would follow the guidance in a proposed Statement of Position, "Accounting by Producers and Distributors of Films." This proposed Statement of Position would be effective for financial statements for fiscal years beginning after December 15, 2000 and could have a significant impact on the Company's results of operations and financial position depending on its final outcome. INFLATION We do not believe our business and operations have been materially affected by inflation. YEAR 2000 We did not experience any difficulties in connection with the coming of the year 2000. ITEM 7. FINANCIAL STATEMENTS The financial statements, including notes thereto, required by Item 7 are set forth on the pages indicated in Item 3(a)(1). 21 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, 1999. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE There is hereby incorporated by reference the information appearing under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" 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, 1999. ITEM 10. EXECUTIVE COMPENSATIONThere 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, 1999. 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 Owners 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, 1999. 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, 1999. 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, 1999...........................................F-2 Statements of Operations for the Years Ended December 31, 1999 and 1998 .....F-3 Statements of Shareholders' Equity for the Years Ended December 31, 1999 and 1998..........................................F-4 Statements of Cash Flows for the Years Ended December 31, 1999 and 1998 .....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 3.8 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) 3.10 Certificate of Amendment of Articles of Incorporation of the Company filed with the Secretary of State of California on June 29, 1999 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) 24 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 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 (filed as Exhibit 10.34 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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 (filed as Exhibit 10.35 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.36 Residential Purchase Agreement, dated July 20, 1998, between Barry Beitler and Tony Dorn, as buyers, and NewStar Media Inc., as seller (filed as Exhibit 10.36 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.37 Standard Industrial Lease - Special Net, dated August 5, 1998, between NewStar Media Inc. and 8955 Beverly Partnership (filed as Exhibit 10.37 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.38 Stock Purchase Agreement, made as of November 12, 1998, among NewStar Media Inc., Apollo Partners, LLC and Ronald Lightstone (filed as Exhibit 10.38 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.39 Registration Rights Agreement, dated as of November 12, 1998, by and among NewStar Media Inc., Apollo Partners, LLC and Ronald Lightstone (filed as Exhibit 10.39 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.40 Agreement, dated as of July 30, 1998, between Media Equities International, LLC and NewStar Media Inc. (filed as Exhibit 10.40 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.41 Incentive Stock Option Agreement, entered into as of January 1, 1998, by and between NewStar Media Inc. and Neil Topham (filed as Exhibit 10.41 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 28 EXHIBIT NO. DESCRIPTION - ---------------- ------------------------------------------------------------ 10.42 Incentive Stock Option Agreement, entered into as of January 1, 1998, by and between NewStar Media Inc. and Robert Murray (filed as Exhibit 10.42 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.43 Trust Agreement, made December 30, 1998, by and between NewStar Media Inc. and Robert Murray, as trustee (filed as Exhibit 10.43 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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 (filed as Exhibit 10.44 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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. (filed as Exhibit 10.45 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.46 Consent, dated April 28, 1998, between The Chase Manhattan Bank and Dove Entertainment, Inc. (filed as Exhibit 10.46 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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. (filed as Exhibit 10.47 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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. (filed as Exhibit 10.48 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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 (filed as Exhibit 10.49 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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 (filed as Exhibit 10.50 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 29 EXHIBIT NO. DESCRIPTION - ---------------- ------------------------------------------------------------ 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 (filed as Exhibit 10.51 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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 (filed as Exhibit 10.52 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.53 Amendment No. 3 to the Credit Agreement dated as 10.53 of May 21, 1998, between the Company, Dove International Inc., Dove Four Point, Inc. and the Chase Manhattan Bank (filed as Exhibit 10.53 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.54 Agreement, dated as of December 31, 1998, between Media Equities International, LLC and NewStar Media Inc. (filed as Exhibit 10.54 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.55 Stock Purchase Agreement dated as of April 1, 1999 between NewStar Media Inc. and Ronald Lightstone (filed as Exhibit 10.1 to the Company's Report on Form 10QSB for the period ended June 30, 1999) 10.56 Stock Purchase Agreement dated as of April 1, 1999 between NewStar Media Inc. and Gorman Limited Partnership (filed as Exhibit 10.2 to the Company's Report on Form 10QSB for the period ended June 30, 1999) 10.57 Stock Purchase Agreement dated as of April 1, 1999 between NewStar Media Inc. and Elkes Limited Partnership (filed as Exhibit 10.3 to the Company's Report on Form 10QSB for the period ended June 30, 1999) 10.58 Stock Purchase Agreement dated as of May 4, 1999 between NewStar Media Inc. and Gorman Limited Partnership (filed as Exhibit 10.4 to the Company's Report on Form 10QSB for the period ended June 30, 1999) 10.59 Stock Purchase Agreement dated as of May 4, 1999 between NewStar Media Inc. and Elkes Limited Partnership (filed as Exhibit 10.5 to the Company's Report on Form 10QSB for the period ended June 30, 1999) 10.60 Stock Purchase Agreement dated as of May 19, 1999 between NewStar Media Inc. and Peter Engel (filed as Exhibit 10.6 to the Company's Report on Form 10QSB for the period ended June 30, 1999) 10.61 Registration Rights Agreement dated as of May 17, 1999 between NewStar Media Inc. and Peter Engel (filed as Exhibit 10.7 to the Company's Report on Form 10QSB for the period ended June 30, 1999) 30 EXHIBIT NO. DESCRIPTION - ---------------- ------------------------------------------------------------ 10.62 Agreement, dated as of November 15, 1999, between Media Equities International, LLC and NewStar Media Inc. 10.63 NewStar Media Inc. 1999 Stock Incentive Plan (filed as Exhibit A to the Company's Notice of Annual Meeting of Shareholders to be held December 8, 1999 issued on November 19,1999) 10.64 Key Executive Severance Agreement dated as of September 22, 1999 between NewStar Media Inc. and Robert C. Murray. 10.65 Key Executive Severance Agreement dated as of September 22, 1999 between NewStar Media Inc. and John T. Brady. 10.66 Amended and Restated Credit, Security, Guaranty and Pledge Agreement Dated as of November 4, 1997, as Amended and Restated as of August 16, 1999 21.1 Subsidiaries of NewStar Media Inc. (filed as Exhibit 21.1 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 23 Consent of KPMG LLP 27.1 Financial Data Schedule (b) REPORTS ON FORM 8-K. A report on Form 8-K (dated September 23, 1999) was filed on October 1, 1999, reporting under Item 5 the status of the listing of the Company's common stock on the Nasdaq Small Cap Market. 31 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, 1999, and the results of their operations and their cash flows for each of the years in the two year period ended December 31, 1999 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 15 to the financial statements, the Company has suffered recurring losses from operations, has generated net cash flow deficiencies from operations and is in violation of certain debt covenants 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 15. 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, 2000 F-1 NEWSTAR MEDIA INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1999
ASSETS CURRENT ASSETS Cash and cash equivalents $ 45,000 Accounts receivable, net of allowances of $ 1,485,000 3,728,000 Publishing inventory 1,762,000 Film costs 4,900,000 Prepaid expenses and other assets 1,067,000 -------------- Total current assets 11,502,000 NON-CURRENT ASSETS Production masters, net 2,531,000 Film costs, net 2,743,000 Property and equipment, net 518,000 Goodwill and other assets 5,472,000 -------------- Total non-current assets 11,264,000 -------------- Total assets $ 22,766,000 ============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 6,754,000 Advances and deferred income 4,134,000 Notes payable 9,101,000 Accrued dividends 106,000 -------------- Total current liabilities 20,095,000 NON-CURRENT LIABILITIES Accrued liabilities 385,000 ---------------- Total liabilities 20,480,000 COMMITMENTS AND CONTINGENCIES - note 10 LIQUIDITY - note 15 SHAREHOLDERS' EQUITY Convertible preferred stock $.01 par value; 2,000,000 shares authorized and 220,033 shares issued and outstanding, liquidation preference $ 6,878,000 2,000 Common stock $.01 par value; 50,000,000 shares authorized and 21,612,058 shares issued and outstanding 216,000 Additional paid-in capital 43,520,000 Accumulated deficit (41,452,000) ---------------- Total shareholders' equity 2,286,000 ---------------- Total liabilities and shareholders' equity $ 22,766,000 ================ See accompanying notes to consolidated financial statements F-2
NEWSTAR MEDIA INC.CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, ---------------------------------- 1999 1998 ---------------- ---------------- Revenues Publishing, net $ 7,184,000 $ 6,880,000 Filmed entertainment 3,616,000 8,920,000 ---------------- ---------------- 10,800,000 15,800,000 Cost of sales Publishing 7,164,000 5,306,000 Filmed entertainment 3,271,000 7,077,000 ---------------- ---------------- 10,435,000 12,383,000 ---------------- ---------------- Gross profit 365,000 3,417,000 Selling, general and administrative expenses 10,846,000 9,285,000 ---------------- ---------------- Loss from operations (10,481,000) (5,868,000) Gain on sale of long-term investment 594,000 -- Gain on sale of land and building -- 1,734,000 Interest expense, net (918,000) (798,000) ---------------- ---------------- Loss before income taxes (10,805,000) (4,932,000) Income tax expense 3,000 4,000 ---------------- ---------------- Net loss $ (10,808,000) $ (4,936,000) ================ ================ Dividends on preferred stock $ 116,000 $ 310,000 ================ ================ Loss attributable to common shareholders $ (10,924,000) $ (5,246,000) ================ ================ Basic and diluted loss per common share $ (.55) $ (.61) ================ ================ Weighted average number of common and common equivalent shares outstanding 19,950,000 8,563,000 ================ ================ See accompanying notes to consolidated financial statements F-3
NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
Preferred Stock Common Stock Additional ---------------------- ----------------------- Paid-in Unearned Accumulated Shares Amount Shares Amount Capital Compensation Deficit Total ---------- ----------- ------------ ---------- ------------ ------------- -------------- ------------- January 1,1998 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 to MEI -- -- -- -- -- -- (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 Net loss -- -- -- -- -- -- (10,808,000) (10,808,000) Issuance of common stock in payment of debt, vendors and legal settlements -- -- 37,641 -- 60,000 -- -- 60,000 Issuance of common stock as payment of preferred stock dividend -- -- 18,089 -- 10,000 -- -- 10,000 Stock option expense -- -- -- -- 26,000 -- -- 26,000 Amortization of unearned compensation -- -- -- -- -- 254,000 -- 254,000 Issuance of preferred stock in payment of expenses to former officers of the Company 135 -- -- -- 135,000 -- -- 135,000 Conversion of preferred stock to common stock (189) -- 140,280 2,000 (2,000) -- -- -- MEI capital contribution -- -- -- -- 225,000 225,000 Accrued preferred stock dividend to MEI -- -- -- -- -- -- (116,000) (116,000) Issuance of common stock in connection with a private placement -- -- 2,714,848 27,000 3,198,000 -- -- 3,225,000 Issuance of common stock to related parties in connection with a private placement -- -- 1,100,000 11,000 1,309,000 -- -- 1,320,000 Imputed value of warrant extension -- -- -- -- 669,000 669,000 Issuance of common stock in connection with the acquisition of the assets of American Audio Literature -- -- 300,000 3,000 1,047,000 -- -- 1,050,000 ---------- ----------- ------------ ---------- ------------ ------------- -------------- ------------- December 31, 1999 220,033 $ 2,000 21,612,058 $ 216,000 $43,520,000 $ -- $ (41,452,000) $ 2,286,000 ========== =========== ============ ========== ============ ============= ============== ============= See accompanying notes to consolidated financial statements F-4
NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, ---------------------------------- 1999 1998 ---------------- ---------------- OPERATING ACTIVITIES Net loss $ (10,808,000) $ (4,936,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 812,000 725,000 Amortization of goodwill 238,000 249,000 Amortization of production masters 1,258,000 1,809,000 Amortization of film costs 3,271,000 6,561,000 Provision for bad debts 229,000 516,000 Equity based compensation 280,000 -- MEI waived management fees 225,000 -- Gain on sale of building and land -- (1,734,000) Gain on sale of long term investment (594,000) Changes in operating assets and liabilities: Accounts receivable (1,475,000) (925,000) Inventory 1,325,000 277,000 Prepaid expenses and other assets 39,000 (241,000) Expenditures for production masters (1,420,000) (1,541,000) Film cost additions (6,270,000) (9,561,000) Accounts payable and accrued expenses 1,923,000 (1,620,000) Advances and deferred income 3,874,000 (264,000) Other 75,000 26,000 ---------------- ---------------- Net cash used in operating activities (7,018,000) (10,659,000) ---------------- ---------------- INVESTING ACTIVITIES Proceeds from sale of long-term investment 613,000 -- Purchase of Audio Literature (200,000) -- Proceeds from sale of property and equipment, net 113,000 4,166,000 Purchases of property and equipment (110,000) (86,000) ---------------- ---------------- Net cash provided by (used in) investing activities 416,000 4,080,000 ---------------- ---------------- FINANCING ACTIVITIES Proceeds from sale of common stock 4,545,000 6,340,000 Proceeds of bank borrowings and notes payable 6,923,000 11,130,000 Repayments of bank borrowings and notes payable (5,274,000) (10,740,000) ---------------- ---------------- Net cash provided by financing activities 6,194,000 6,730,000 ---------------- ---------------- Net increase (decrease) in cash and cash equivalents (408,000) 151,000 Cash and cash equivalents at beginning of year 453,000 302,000 ---------------- ---------------- Cash and cash equivalents at end of year $ 45,000 $ 453,000 ================ ================ 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, ---------------------------------- 1999 1998 ---------------- ---------------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 737,000 $ 650,000 NON-CASH INVESTING and FINANCING TRANSACTIONS: In June 1999, the Company acquired the assets of Audio Literature. In connection with the acquisition, the Company paid cash as follows: Assets Acquired: Inventory $ 327,000 Customer list 113,000 Production masters 1,110,000 Accrued payable (300,000) Common stock issued (1,050,000) ---------------- Cash paid in acquisition $ 200,000 Common stock issued as payment for debt, vendors, legal settlements and publishing rights $ 60,000 $ 715,000 Preferred stock issued as payment for expenses, loans and commissions payable to former officers of the Company $ 135,000 $ 189,000 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 $ 10,000 $ 686,000 Preferred stock dividend accrued to MEI $ 116,000 $ 310,000 Extension of warrants $ 669,000 $ -- 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, 1999 and 1998 was as follows:
Years Ended December 31, ---------------------------------- 1999 1998 ---------------- ---------------- Balance at beginning of year $ 923,000 $ 1,035,000 Provision for returns 2,691,000 2,456,000 Actual returns (2,729,000) (2,568,000) ---------------- ---------------- Balance at end of year $ 885,000 $ 923,000 ================ ================
The activity relating to the allowance for doubtful accounts during the years ended December 31, 1999 and December 31, 1998 was as follows:
Years Ended December 31, ---------------------------------- 1999 1998 ---------------- ---------------- Balance at beginning of year $ 389,000 $ 90,000 Provision for doubtful accounts 229,000 516,000 Write-offs (18,000) (217,000) ---------------- ---------------- Balance at end of year $ 600,000 $ 389,000 ================ ================
CASH EQUIVALENTS The Company consider all highly liquid investments with original maturities of three months or less to be cash equivalents. INVENTORY Inventory, consisting primarily of recorded audiocassettes and printed books, is valued at the lower of cost or market, determined using the first-in, first-out method. Periodically, the Company reviews inventory on a title-by-title basis. The Company expenses through cost of sales, inventory that it believes will not be sold. F-7 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. For the nine months ended September 30, 1998, 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 future 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 our 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. BARTER TRANSACTION During 1999, the Company sold certain audio inventory in exchange for cash and barter credits to be used for media advertising. The Company recorded the transaction based upon the estimated fair market value of the inventory. 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. 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 $5,472,000 net of accumulated amortization of $1,401,000 at December 31, 1999. The Company 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 thr Company'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. F-8 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 Company's earnings, similar to fully diluted EPS under APB No. 15. Potential dilutive securities of 9,773,926, consisting of convertible preferred stock and outstanding options and warrants (in the form of equivalent shares), have been omitted from the diluted calculation since they are antidilutive. In addition, contingent shares issuable in connection with the American Audio Literature acquisition up to a maximum of 1,800,000 additional 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 $310,000 and $116,000 during 1998 and 1999, respectively. USE OF ESTIMATES The Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and disclosures 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. 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 and 1999. 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. F-9 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, 1999 is as follows:
Furniture, fixtures and equipment $ 2,052,000 Leasehold improvements 6,000 --------------- Total 2,058,000 Less: Accumulated depreciation and amortization 1,540,000 =============== $ 518,000 ===============
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 $4,842,000 at December 31, 1999 consist of the following:
Released titles $ 2,141,000 Unreleased titles 390,000 --------------- Total $ 2,531,000 ===============
NOTE 6 - FILM COSTS Film costs, net of accumulated amortization of $25,476,000 at December 31, 1999 consist of the following:
Television and theatrical projects in development $ 176,000 Television and theatrical projects released less accumulated amortization 7,467,000 --------------- Total $ 7,643,000 ===============
As of December 31, 1999, approximately 72% of the unamortized balance of film costs will be amortized within the next three-year period based upon our revenue estimates at that date. NOTE 7 - INCOME TAXES The provision for income taxes is as follows:
Years Ended December 31, -------------------------------- 1999 1998 --------------- --------------- Current tax expense Federal $ -- $ -- State 3,000 4,000 --------------- --------------- Total current 3,000 4,000 Deferred tax expense Federal -- -- State -- -- --------------- --------------- Total deferred -- -- --------------- --------------- Total $ 3,000 $ 4,000 =============== ===============
F-10 Net deferred tax assets at December 31, 1999 comprises the following: Deferred tax assets: Net operating loss carryforward $ 11,896,000 Sales returns reserve 64,000 Inventory reserve 364,000 Film amortization reserve 561,000 Accrued expenses 116,000 Royalty payable 263,000 Deferred income 355,000 State taxes 695,000 Other 806,000 --------------- Total 15,120,000 Valuation allowance (15,120,000) --------------- Net deferred taxes $ -- =============== SFAS No. 109 requires that a valuation allowance be recorded against tax assets that 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. The tax effect of net operating loss carryforwards expire as follows: Year ending December 31, 2011 $ 1,989,000 2012 4,550,000 2018 2,517,000 2019 2,840,000 --------------- Total $ 11,896,000 =============== 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, 1999 and 1998, respectively, as a result of the following differences:
Years Ended December 31, 1999 1998 --------------- --------------- Federal income tax expense (benefit) based on federal statutory rates $ (3,675,000) $ (1,574,000) Increase (reduction) in taxes resulting from: State income taxes (553,000) (99,000) Non-deductible expenses 210,000 96,000 Increase in valuation allowance 4,021,000 1,581,000 --------------- --------------- $ 3,000 $ 4,000 =============== ===============
F-11 NOTE 8 - NOTES PAYABLE Notes payable at December 31, 1999 consist of the following: Chase Manhattan Bank revolving credit loan $ 9,083,000 Other 18,000 =============== Total notes payable $ 9,101,000 =============== On November 12, 1997, the Company entered into an agreement with Chase Bank providing it 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" 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 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 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 on May 21, 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 (8 1/2 % at December 31, 1999) plus 2% per annum or the bank's LIBOR rate (6.07% three-month rate at December 31, 1999) plus 3% per annum, at the Company's option. Both rates are applicable to the Company's drawdowns on the Chase Loan at December 31, 1999. 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, March 31, 1999, and June 30, 1999 and requested waivers from Chase Bank. As of August 16, 1999, the Company had received such waivers and entered into amendments and waivers to the loan facility with Chase Bank. As a result of such amendments and waivers, the Company was in compliance with the aforementioned financial compliance tests. On January 28, 1999, Chase Bank and we were notified by one of the guarantors that there would be no approvals for guarantee of further extensions of credit under the Chase Loan. In connection with the drafting of certain amendments and waivers to the Chase Loan, the Company reached agreement with the guarantor for an extension and modification of the guarantee agreement to provide for a revised guarantee of $2,000,000. At December 31, 1999, the Company was not in compliance with certain of the financial tests in the Chase Loan and had requested waivers from Chase Bank. As of April 11, 2000 the Company had not received such waivers and there is no assurance that it will receive them in the future. Also at December 31, 1999, the Company had borrowed $9,083,000 against the facility. In addition, Chase Bank has provided a letter of credit for $287,000 in respect of certain litigation. There were $630,000 of funds available for borrowing at December 31, 1999. NOTE 9 - RELATED PARTY TRANSACTIONS As of January 1, 1995, the Company entered into employment agreements with Michael Viner and Deborah Raffin, the former principals, which were to expire in December 1999. The agreements originally provided for aggregate compensation to the former principals of no less than a combined total of $345,000 per year, plus benefits such as health insurance and an automobile allowance and a combined non-accountable expenses of $75,000 per year. In addition, the former principals were entitled to an annual salary increase and bonus subject to certain limitations agreed upon with the underwriter of our initial public offering at the discretion of the Company's Board. The Board approved an F-12 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. Pursuant to the termination agreement, and in consideration for the settlement of their respective employment agreements, the former principals were entitled to each receive combined monthly termination payments of approximately $25,000, and medical insurance for 60 months. In addition, they were entitled to each receive a car allowance for 24 months and reimbursements for certain medical and business expenses. As an alternative to making the termination payments in cash, the Company 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 was held in escrow and was not to be released to the former principals unless the termination payments were not made in cash. If the termination payments were not made in cash, the Series E Preferred Stock was subject to release to the former principals, as the case may be, in an amount equal to the portion of the termination payments not paid in cash divided by the stated value of the Series E Preferred Stock. The former principals had 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, 1999, 324 shares of the Series E Preferred Stock had been released to the former principals in consideration of termination payments not made in cash. Certain payments under, and other provisions of, the termination agreement were subject to arbitration proceedings. The Company has settled all outstanding actions with the former principals. See Note 10 Commitments and Contingencies. Media Equities International, LLC ("MEI") is a limited liability company, the principals of which are Terrence A. Elkes, Kenneth F. Gorman, John T Healy, Ronald Lightstone and Bruce Maggin. Mr. Elkes is Chairman of the Board of the Company and Chief Executive Officer, and Mr. Gorman is Vice-Chairman and Messrs. Healy, Lightstone and Maggin are directors of the Company. During 1999, the Company reorganized its management whereby all operating officers report to the Office of the Chief Executive of which Mr. Elkes is Chairman and Chief Executive Officer and Mr. Gorman is Vice Chairman. As part of a certain agreement dated March 27, 1997, MEI and the Company 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. We 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. In 1999, MEI and the Company entered into amendments to the consulting agreement reducing the 1999 fees by $225,000. This was treated as a capital contribution. In addition, a 1999 amendment reduced the 1999 preferred dividend obligation to MEI by $318,000. This was treated as a reduction of dividends payable and adjustment to accumulated deficit. In July 1998, the Company entered into a loan agreement with Apollo Partners LLC ("Apollo") the principals of which are Terrence A. Elkes and Kenneth F. Gorman, whereby it borrowed $1,500,000 with a due date of the earlier of January 17, 1999 or the sale of its 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 principal office building and land. In September 1998, the Apollo Loan and accrued interest was fully paid. F-13 Pursuant to Guarantee Agreements each dated as of November 4, 1997, each of the principals of MEI (i.e. Messrs. Elkes, Gorman, Healy, Maggin and Lightstone) agreed to guarantee 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 agreed to pay MEI a fee of $25,000 for such guarantee 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 the Company's assets. Such security interest is junior to the security interest of Chase Bank that secures the Company's obligations under the Chase Loan. In July 1998, and in connection with the increase of the Chase Loan facility from $8,000,000 to $10,000,000, the principals of MEI agreed to increase the guarantee on the Company's obligations 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 remained substantially the same as those of the terms made under the initial agreement. As consideration for the increase in the guarantee, the Company has agreed to pay MEI an additional fee of $25,000 for such guarantee 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. In connection with the drafting of certain amendments and waivers to the Chase Loan, the Company reached agreement with MEI for an extension and modification of the guarantee agreement to provide for a revised guarantee of $2,000,000 which would not require prior approval by MEI for borrowings in excess of the borrowing base and which lowered the guarantee fee to $25,000 annually. Also in connection with the modification of the MEI guarantee, the Company agreed to extend the exercise date of the warrants held by MEI by one year. Based on a Black-Sholes valuation, the Company recorded a prepaid asset in the amount of $669,000 with a corresponding increase in Additional Paid-In Capital. The asset is being amortized to expense over the remaining life of the Chase Loan. Pursuant to an employment agreement dated as of February 4, 1998, Ronald Lightstone was employed by the Company as President and Chief Executive Officer. The term of Mr. Lightstone's employment agreement commenced on June 10, 1997 and ended on June 10, 1999. Pursuant to the agreement, Mr. Lightstone was 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, with ownership vesting over a three-year period (1/36 of such shares vesting each month), commencing July 10, 1997. Pursuant to SFAS No. 123, the Company has elected to apply the provisions of APB No. 25 in accounting for this 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 service period. Accordingly, it 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. During 1999, an additional amount of $254,000 of unearned compensation was amortized to expense. The Company has agreed to reimburse each Board member's travel expenses. For the fiscal years ending December 31, 1998 and 1999, the Company has granted to each director options to purchase 10,000 shares of Common Stock, which 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 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. 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 F-14 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. At the time, Mr. Lightstone was 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. In May and June 1999, as part of the private placement the Company sold 416,667 shares of Common Stock each to ELP and GLP and 250,000 shares to Peter Engel, who was at the time Chief Executive Officer of NewStar Publishing. In the second quarter of 1999, at the Company's request and to assist it in raising additional financing, each of GLP, ELP and Mr. Lightstone entered into Stock Purchase Agreements with the Company pursuant to which each of GLP, ELP and Mr. Lightstone agreed to sell registered shares of Common Stock to purchasers identified by the Company and in the amount and at prices identified by it, with a simultaneous purchase unregistered shares from the Company by GLP, ELP and Mr. Lightstone, as applicable, of the same number of shares of Common Stock at the same price. A total of 1,271,781; 1,300,000; and 30,000 shares were purchased and sold by GLP, ELP and Mr. Lightstone, respectively, in such transactions. NOTE 10 - COMMITMENTS AND CONTINGENCIES LITIGATION PENDING LEGAL PROCEEDINGS The Company has been involved in numerous litigation and arbitration matters. These matters cost the Company substantial amounts in legal fees and divert the attention of management and employees from productive activities. In addition, if the outcome of litigation or arbitration proceedings is decided against it, the Company may incur significant monetary liability. Below is a brief explanation of significant litigation and arbitration proceedings. In addition to these proceedings, the Company is a party to various other legal proceedings and claims incidental to its business. 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" which was subsequently affirmed on appeal ("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 Chapter 7 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 it will be able to recover the amount of the original judgment. 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, the Company may not prevail in the action. F-15 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 fees and costs in defending the matter. Ms. Datig appealed the judgment. On July 15, 1999, the Court of Appeal of the State of California Second Appellate District Division 3 issued its opinion on plaintiff's appeal from judgment in the matter, which opinion was modified on August 13, 1999. The appeals court reversed the judgment and remanded the proceeding to the trial court. On March 30, 2000, the trial court struck plaintiff's complaint in its entirety with leave to amend. While the Company believes that it has good and meritorious defenses to the claims in the action at the trial court level, there can be no assurance that it will prevail in the action. LEGAL PROCEEDINGS SETTLED, DISMISSED OR 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 discontinued in 1997 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 August 1997, Michael Viner and Deborah Raffin, former principals, commenced an arbitration against the Company seeking specific performance of, and alleging breach of, a termination agreement to which they and the Company are a party, 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 the Company's favor 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 judgement confirming the arbitrator's award and subsequently awarded the Company approximately $30,000 in costs and attorneys' fees. On February 25, 1999 the former principals appealed the court's judgment. On March 23, 2000, the Court of Appeal of the State of California Second Appellate District Division 3 affirmed the judgment. Effective March 31, 2000, the Company settled this proceeding as part of the Overall Viner Settlement. On September 28, 1998, the former principals, commenced an arbitration against the Company, alleging breach of, and seeking specific performance of 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. The arbitrator issued a subsequent decision dated November 19, 1999, which he thereafter corrected and amended and purported to later clarify, in which he determined that a portion of the termination agreement prohibiting the former principals from hiring, soliciting, encouraging the departure of, or engaging or seeking to employ authors under contract to us or included in our catalogs is void and unenforceable. The arbitrator also determined that the former principals had the discretion to elect to receive payments under the termination agreement in cash, rather than preferred stock. The former principals have sought to have the Los Angeles Superior Court confirm the clarified, corrected and amended award. Effective March 31, 2000, the Company settled this proceeding as part of the Overall Viner Settlement. F-16 On June 1, 1999, a complaint entitled Michael Viner and Deborah Raffin v. NewStar Media Inc. (BC 211240) was filed in Los Angeles Superior Court. The former principals alleged violation of the Lanham Act, statutory and common law unfair competition and common law unfair competition and false advertising with respect to executive producer credits on the covers of various audio books and with respect to credits for two television motion pictures. The complaint sought damages in an amount according to proof, punitive damages, and preliminary and permanent injunctive relief. On August 4, 1999, the Company removed the action to the United States District Court for the Central District of California Western Division (Case No. 99-07970 CBM (SHx)). On March 31, 2000, the Company settled this action as part of the Overall Viner Settlement.F-18 On March 1, 2000, a complaint entitled Michael Viner and Deborah Raffin v. NewStar Media Inc. (BC 225685) was filed in Los Angeles Superior Court. The plaintiffs alleged that they were entitled to indemnity for the arbitration proceedings that MEI commenced against the former principals in the second quarter of 1999. On March 31, 2000, the Company settled this action as part of the Overall Viner Settlement. Effective March 31, 2000, the Company entered into a settlement with the former principals (the "Overall Viner Settlement") ending all of the outstanding litigation and resolving various matters relating to the termination agreement. The Overall Viner Settlement provides for dismissals with prejudice of all pending arbitration and litigation proceedings with the former principals and terminates any obligation to pay the former principals the remaining $900,000 accrued under the termination agreement. In exchange, the Company transferred to the former principals (to the extent permissable) our interests in various books, audio books, and videos, and elements thereof, that were not producing a material portion of our revenues, including the Dove Kids books and audio books and most of our classic audio books, while retaining the rights to use our abridgements of the classics titles for future audio books. The Overall Viner Settlement also permits the former principals to engage in the audio book business fourteen months earlier than permitted by the termination agreement. The Company will record the benefit of approximately $800,000 from this settlement on March 31, 2000. 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 sought damages of approximately $287,000 for breach of contract and $60,000 for unpaid consulting fees. Mr. Leider also sought a declaration that the Company must comply with certain purported stock option agreements and for an order for inspection and copying of certain of its records 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 substituted an undertaking for the amount of the attachment. On July 6, 1999, a first amended complaint in the action entitled Mattken Corp. and Gerald J. Leider v. NewStar Media Inc. was filed in the Los Angeles County Superior Court (BC 191736). The plaintiffs alleged 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 it. Plaintiffs were seeking damages in excess of $350,000. The Company has settled these actions. The amount to be paid by the Company is less than the amount of the attachment and is payable over time. 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 alleged 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 were seeking damages in excess of $1,000,000, plus punitive and exemplary damages. On August 30, 1999, the plaintiffs dismissed the action without prejudice for the purpose of settlement discussions, and the Company entered into a tolling agreement so that the plaintiffs could refile the action if the matter is not settled. The Company cannot assure you that it will be able to settle the matter, or if the matter is not settled, that it will prevail in the action. 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. F-17 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 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 Company's class action lawsuits. 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 has settled this action which was covered by insurance. 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 made payments over time to Mr. Tourtelot totaling $60,000. In addition to the above claims, the Company is party to various other routine legal proceedings and claims incidental to its business. There can be no assurances that the ultimate outcome of these matters will be resolved in the Company's favor. In addition, even if the ultimate outcome is resolved in its favor, involvement in any litigation or claims could entail considerable cost and the diversion of the attention of management, either of which could have a material adverse effect on the Company's business. At December 31, 1999, $ 1,144,000 was reserved in respect of settlements and outstanding claims served against us. OFFICE LEASE Prior to 1997, the Company maintained its principal offices pursuant to non-cancelable operating leases that 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. 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 its principal office building and land, the Company entered into a one-year operating lease to provide office space and parking that expired August 31, 1999. Prior to the expiration of this lease, the Company entered into an amended and restated lease that reduced the amount of space we would be occupying and which extended the term by two years. Monthly rental under the amended and restated lease is $29,000 for the first year and $29,870 thereafter. Either party to the lease has the right after August 31, 2000 to cancel the lease upon six months written notice. Rent expense for the years ended December 31, 1999 and 1998, was $420,000 and $133,000, respectively. Minimum future non-cancelable lease payments as of December 31, 1999 amount to $351,000 in 2000 and $60,000 in 2001. 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. F-18 NOTE 11 - CAPITAL ACTIVITIES PREFERRED STOCK The Company has 2,000,000 shares designated as Preferred Stock. At December 31, 1999, 220,033 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). (4) No shares of Series E Preferred Stock are outstanding as of December 31, 1999. 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 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 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 us, 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 B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock. F-19 COMMON STOCK 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. o 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. o 320,000 shares to Elkes Limited Partnership for $250,000. o 320,000 shares to Gorman Limited Partnership for $250,000. During the year ended December 31, 1999, the Company issued the following shares of Common Stock o 37,641 shares in satisfaction of vendor payables amounting to $60,000. o 18,089 shares to MEI as payment of preferred dividends of $10,000. o 140,280 shares to the former principals pursuant to the termination agreement were converted from 189 shares of Series E Preferred Stock issued in the amount of $189,000. o 3,814,848 shares in connection with a private placement in May and June of 1999. o 300,000 shares in connection with the acquisition of the assets of Audio Literature STOCK OPTIONS AND WARRANTS On July 21, 1999, the Board approved the adoption of the NewStar Media Inc. 1999 Stock Incentive Plan (the "Plan") that was affirmatively approved on January 18, 2000 at the annual meeting of shareholders by holders of a majority of the shares of Common Stock or Equivalent Common Stock outstanding as of the record date for the meeting. The Company had previously maintained a stock incentive plan (the "1994 Plan") that had 750,000 shares available for grant thereunder, of which 724,000 had been granted. The Board adopted the Plan, instead of amending the 1994 Plan, in order to increase the number of shares available to be granted and to update the 1994 Plan to reflect recent changes in the law and executive compensation plans in general. No further awards will be granted pursuant to the 1994 Plan (although awards previously granted will remain outstanding). The Plan has 5,000,000 shares available for grant thereunder. The Plan authorizes the granting of stock incentive awards ("Awards") to employees, officers, directors, consultants, and the Company's advisors. The Plan is administered by a committee of the Board, or if no committee is designated by the Board, by the Board (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. Awards can be Stock Options, Stock Appreciation Rights, Restricted Stock, and Deferred Stock Awards. The number and kind of shares available under the Plan are subject to adjustment in certain events. F-20 F-21 Option activity under the Plans was as follows:
Weighted Average Number of Exercise Exercise Shares Price Price -------------- -------------- -------------- 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 Options issued 1,475,000 $.875 - $1.88 $1.18 Options canceled (143,500) $1.50 - $6.00 $1.75 -------------- Options outstanding at December 31, 1999 1,925,000 $.875 - $3.75 $1.31 ==============
At December 31, 1998 and 1999, respectively, options to acquire 238,000 and 1,415,000 shares of Common Stock under the Plan were exercisable. In addition to the above options issued under the Plan, at December 31, 1999, the following options to acquire shares of Common Stock were issued: (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, we 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 100,000 were fully vested and the balance to vest in 2000. (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 had 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, 1999 and none were exercised during 1999. At December 31, 1999, the weighted average remaining contractual life of all outstanding options was 8.71 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, -------------------------------- 1999 1998 --------------- --------------- Basic and diluted loss attributable to Common Shareholders As reported $ (10,924,000) $ (4,936,000) Pro forma (11,687,000) (5,350,000) Basic and diluted loss per share As reported (.55) (.61) Pro forma (.59) (.62)
The per share weighted-average fair value of stock options granted during the years ended December 31, 1999 and 1998 were $1.31 and $1.08, respectively, 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 ranging from 4.75% to 6.18%, expected volatility of 46%, and an expected life of 4 years. F-21 Warrant activity was as follows:
Number of Weighted Number of Equivalent Average Warrants Common Shares Exercise Price Exercise Price --------------- --------------- --------------- --------------- Warrants outstanding as of December 31, 1998 4,664,013 4,664,013 $2.00 - $12.00 $ 9.78 Warrants issued -- -- $ 2.00 - $4.50 $ 2.42 Warrants exercised -- -- --------------- --------------- Warrants outstanding as of December 31, 1998 4,664,013 4,664,013 $2.00 - $12.00 $ 5.06 Warrants issued -- -- Warrants cancelled 215,088 215,088 $ 2.50 - $2.75 $ 2.71 Warrants exercised -- -- --------------- --------------- Warrants outstanding as of December 31, 1999 4,448,925 4,448,925 $2.00 - $12.00 $ 5.17 =============== ===============
At December 31, 1999 all warrants were exercisable. On August 16, 1999 in connection with the modification of the MEI guaranree, the Company agreed to extend the 3,000,000 warrants held by MEI by one year. See Note 9 - Related Party Transactions. In October 1996 the Company entered into a financial advisory agreement with Morgan Fuller pursuant to which Morgan Fuller agreed to provide it with certain financial advisory services. 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. Such warrants expired in October 1999. The remaining warrants issued and outstanding were issued in conjunction with equity placements. 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 and the production and the distribution of filmed entertainment product. Revenues are generated from two reportable operating segments - publishing and filmed entertainment - based upon the nature of their products. Publishing produces and distributes audio book titles and publishes various printed books. Filmed entertainment develops, produces and distributes television programming and engages in the distribution of feature films. F-22 The information in the following tables is derived from the segments' internal financial reporting for corporate management purposes:
December 31, 1999 1998 --------------- --------------- Net revenues Publishing $ 7,184,000 $ 6,880,000 Filmed entertainment 3,616,000 8,920,000 --------------- --------------- Total $ 10,800,000 $ 15,800,000 Loss before gain on sale of long-term investment, interest and income taxes Publishing $ (5,114,000) $ (1,521,000) Filmed entertainment (1,780,000) (224,000) Unallocated corporate (3,587,000) (4,123,000) --------------- --------------- Total $ (10,481,000) $ (5,868,000) Depreciation and amortization Publishing $ 179,000 $ 26,000 Filmed entertainment 542,000 711,000 Unallocated corporate 329,000 237,000 --------------- --------------- Total $ 1,050,000 $ 974,000 Purchases of property and equipment Publishing $ 32,000 $ 86,000 Filmed entertainment -- -- Unallocated corporate 78,000 -- --------------- --------------- Total $ 110,000 $ 86,000 Total assets Publishing $ 7,410,000 $ 6,197,000 Filmed entertainment 13,965,000 11,636,000 Unallocated corporate 1,391,000 1,244,000 --------------- --------------- Total $ 22,766,000 $ 19,077,000
The Company earned net revenues in excess of 10% of the Company's total net revenues from various customers in the film and publishing operating segments. Net revenues and net revenues as a percentage of our total net revenues from these customers were as follows:
Year Ended December 31, 1999 1998 --------------- --------------- ABC -- $5,200,000 33% Fox Family Channel $2,947,000 27% -- The Lakeside Group $1,254,000 11% -- 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, it is not dependent on these manufacturers as our sole source of product. F-23 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 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. NOTE 14 - ACQUISITION OF AUDIO LITERATURE On June 1, 1999, the Company entered into an Asset Purchase Agreement with American Audio Literature, Inc. ("Audio Literature") whereby it purchased certain assets of Audio Literature including all of its inventory, production masters, prepaid expenses, sales and customer data, interests in various contracts, the Audio Literature corporate name and certain intangible and intellectual properties. The purchase price of these assets amounted to $1,550,000 and is comprised of 1) $200,000 in cash paid at closing on June 1, 1999, 2) $300,000 in cash subject to certain adjustments and payable on June 1, 2000, and 3) 300,000 shares of Common Stock ("Closing Shares") issued June 3, 1999 and valued by the Company and Audio Literature for purposes of the transaction at $3.50 per share. If the Common Stock does not reach $3.50 per share on at least one day during the period from June 1, 1999 through December 31, 2000, the Company will be required to issue additional shares of Common Stock to Audio Literature in a number equal to $3.50 minus the average of the closing prices of the Common Stock for the ninety consecutive trading days preceding and including December 31, 2000 ("Reissue Price") divided by the Reissue Price and multiplied by the number of Closing Shares still held by Audio Literature on December 31, 2000. In no event will the reissue Price be less than $ .50 per share resulting in a maximum of 1,800,000 additional shares. The Company has accounted for the assets purchased at fair market value and no goodwill was recorded in connection with the transaction. Included in the fair market value of the assets recorded are production masters of $1,110,000 which are being amortized over a five-year period, ranging from 10% to 30% per year, consistent with the estimated useful timing of future revenues to be earned. The Company's estimate of the fair market value of the production masters is subject to adjustment, following the completion of an independent library valuation. Additionally, inventory and prepaid assets of $327,000 were recorded, and $113,000 was capitalized in connection with the estimated value of Audio Literature's sales and customer database that is being amortized on a straight-line basis over five years. F-24 NOTE 15 - 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 $7,018,000, $10,659,000, and $8,691,000 for the years ended December 31, 1999, 1998 and 1997, respectively. In November 1997, the Company entered into an agreement with Chase Bank providing it 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 $9,083,000 against the facility as of December 31, 1999. As discussed in Note 8 of Notes To Consolidated Financial Statements, as of January 28, 1999, we 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, March 31, 1999 and June 30, 1999 and had requested waivers from Chase Bank. As of August 16, 1999, it had received such waivers and entered into amendments and waivers to the loan facility with Chase Bank. As a result of such amendments and waivers, the Company was in compliance with the aforementioned financial compliance tests. The Company was not in compliance with certain of the financial compliance tests at December 31, 1999 and has requested waivers from Chase Bank. As of April 11, 2000 the Company had not received such waivers and there is no assurance that it will receive them in the future. The Company is currently experiencing a severe shortage of working capital and accordingly is 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. However, there is no assurance that such financing will become available to the Company. In the event that additional funding is not obtained in the near future, the Company will not be able to continue operations. F-25 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 our shareholders. Additionally, to the extent that the Company incurs indebtedness or issues debt securities in connection with any acquisition or otherwise, it 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. If the Company receives funding through a sale of assets, those assets will no longer be available to the Company and its shareholders. Any proceeds from a sale of assets would be used to pay down the Chase Loan. There is no assurance that the Company would be able to reborrow such funds. From time to time, the Company must fund its television production activities and publishing and television activities in advance of receipt of revenues. 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 Company's ability 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, from time to time the Company is required to fund at least a portion of its production costs, pending receipt of revenues, out of working capital. Although the Company's strategy generally is not to commence principal photography without first obtaining commitments that cover all or substantially all of the budgeted production costs, from time to time it may commence principal photography without having obtained commitments equal to or in excess of such costs. In these circumstances, it 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 are however, no assurances that such financing may be obtained or obtained on acceptable terms. If we were unable to obtain financing, it will be required to reduce or curtail certain operations. In order to obtain rights to certain properties for our publishing and television operations, we may be required to make advance cash payments to sources of such properties, including book authors and publishers. While we generally attempt to minimize the magnitude of such payments and to obtain advance commitments to offset such payments, we are not always able to do so and there is no assurance that we will be able to do so in the future. NOTE 16 - FOURTH QUARTER ADJUSTMENTS In the fourth quarter of 1999, the Company recorded $1,221,000 in inventory write-downs and a reserve against certain barter credit receivables resulting from a remainder sale of inventory. During 1999, we devised a new method of packaging our audio books. The write-downs and reserve were to reflect the disposition of audio book inventory with the prior packaging. In addition, the Company will restate its results of operations for the three and nine months ended September 30, 1999 to reduce net publishing revenues and increase the net loss by $288,000 relating to the value of inventory sold in a transaction involving barter. F-26 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 14 day of April, 2000. NEWSTAR MEDIA INC. By: /s/ TERRENCE A. ELKES ------------------------------------ Terrence A. Elkes CHAIRMAN 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/ TERRENCE A. ELKES Chairman and Chief Executive Officer April 14, 2000 --------------------- Officer and Director Terrence A. Elkes /s/ JOHN T. BRADY Chief Financial Officer and April 14, 2000 --------------------- Chief Accounting Officer John T. Brady /s/ KENNETH F. GORMAN Vice-Chairman of the April 14, 2000 --------------------- Board of Directors Kenneth F. Gorman /s/ RONALD LIGHTSTONE Director April 14, 2000 --------------------- Ronald Lightstone /s/ JOHN T. HEALY Director April 14, 2000 --------------------- John T. Healy /s/ BRUCE MAGGIN Director April 14, 2000 --------------------- Bruce Maggin /s/JOHN R. SPRIESER Director April 14, 2000 --------------------- John R. Sprieser /s/ LEE MASTERS Director April 14, 2000 --------------------- Lee Masters
F-27 (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 3.8 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) 3.10 Certificate of Amendment of Articles of Incorporation of the Company filed with the Secretary of State of California on June 29, 1999 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) F-28 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) F-29 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) F-30 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). F-31 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) F-32 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 (filed as Exhibit 10.34 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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 (filed as Exhibit 10.35 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.36 Residential Purchase Agreement, dated July 20, 1998, between Barry Beitler and Tony Dorn, as buyers, and NewStar Media Inc., as seller (filed as Exhibit 10.36 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.37 Standard Industrial Lease - Special Net, dated August 5, 1998, between NewStar Media Inc. and 8955 Beverly Partnership (filed as Exhibit 10.37 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.38 Stock Purchase Agreement, made as of November 12, 1998, among NewStar Media Inc., Apollo Partners, LLC and Ronald Lightstone (filed as Exhibit 10.38 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.39 Registration Rights Agreement, dated as of November 12, 1998, by and among NewStar Media Inc., Apollo Partners, LLC and Ronald Lightstone (filed as Exhibit 10.39 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.40 Agreement, dated as of July 30, 1998, between Media Equities International, LLC and NewStar Media Inc. (filed as Exhibit 10.40 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.41 Incentive Stock Option Agreement, entered into as of January 1, 1998, by and between NewStar Media Inc. and Neil Topham (filed as Exhibit 10.41 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) F-33 EXHIBIT NO. DESCRIPTION - ---------------- ------------------------------------------------------------ 10.42 Incentive Stock Option Agreement, entered into as of January 1, 1998, by and between NewStar Media Inc. and Robert Murray (filed as Exhibit 10.42 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.43 Trust Agreement, made December 30, 1998, by and between NewStar Media Inc. and Robert Murray, as trustee (filed as Exhibit 10.43 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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 (filed as Exhibit 10.44 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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. (filed as Exhibit 10.45 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.46 Consent, dated April 28, 1998, between The Chase Manhattan Bank and Dove Entertainment, Inc. (filed as Exhibit 10.46 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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. (filed as Exhibit 10.47 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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. (filed as Exhibit 10.48 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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 (filed as Exhibit 10.49 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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 (filed as Exhibit 10.50 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) F-34 EXHIBIT NO. DESCRIPTION - ---------------- ------------------------------------------------------------ 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 (filed as Exhibit 10.51 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 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 (filed as Exhibit 10.52 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.53 Amendment No. 3 to the Credit Agreement dated as 10.53 of May 21, 1998, between the Company, Dove International Inc., Dove Four Point, Inc. and the Chase Manhattan Bank (filed as Exhibit 10.53 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.54 Agreement, dated as of December 31, 1998, between Media Equities International, LLC and NewStar Media Inc. (filed as Exhibit 10.54 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 10.55 Stock Purchase Agreement dated as of April 1, 1999 between NewStar Media Inc. and Ronald Lightstone (filed as Exhibit 10.1 to the Company's Report on Form 10QSB for the period ended June 30, 1999) 10.56 Stock Purchase Agreement dated as of April 1, 1999 between NewStar Media Inc. and Gorman Limited Partnership (filed as Exhibit 10.2 to the Company's Report on Form 10QSB for the period ended June 30, 1999) 10.57 Stock Purchase Agreement dated as of April 1, 1999 between NewStar Media Inc. and Elkes Limited Partnership (filed as Exhibit 10.3 to the Company's Report on Form 10QSB for the period ended June 30, 1999) 10.58 Stock Purchase Agreement dated as of May 4, 1999 between NewStar Media Inc. and Gorman Limited Partnership (filed as Exhibit 10.4 to the Company's Report on Form 10QSB for the period ended June 30, 1999) 10.59 Stock Purchase Agreement dated as of May 4, 1999 between NewStar Media Inc. and Elkes Limited Partnership (filed as Exhibit 10.5 to the Company's Report on Form 10QSB for the period ended June 30, 1999) 10.60 Stock Purchase Agreement dated as of May 19, 1999 between NewStar Media Inc. and Peter Engel (filed as Exhibit 10.6 to the Company's Report on Form 10QSB for the period ended June 30, 1999) 10.61 Registration Rights Agreement dated as of May 17, 1999 between NewStar Media Inc. and Peter Engel (filed as Exhibit 10.7 to the Company's Report on Form 10QSB for the period ended June 30, 1999) F-35 EXHIBIT NO. DESCRIPTION - ---------------- ------------------------------------------------------------ 10.62 Agreement, dated as of November 15, 1999, between Media Equities International, LLC and NewStar Media Inc. 10.63 NewStar Media Inc. 1999 Stock Incentive Plan (filed as Exhibit A to the Company's Notice of Annual Meeting of Shareholders to be held December 8, 1999 issued on November 19,1999) 10.64 Key Executive Severance Agreement dated as of September 22, 1999 between NewStar Media Inc. and Robert C. Murray. 10.65 Key Executive Severance Agreement dated as of September 22, 1999 between NewStar Media Inc. and John T. Brady. 10.66 Amended and Restated Credit, Security, Guaranty and Pledge Agreement Dated as of November 4, 1997, as Amended and Restated as of August 16, 1999 21.1 Subsidiaries of NewStar Media Inc. (filed as Exhibit 21.1 to the Company's Report on Form 10-KSB for the fiscal year ended 1998) 23 Consent of KPMG LLP 27.1 Financial Data Schedule F-36 EX-3.10 2 CERT. OF AMENDMENT OF ARTICLES OF INCORPORATION Exhibit 3.10 Certificate of Amendment of Articles of Incorporation of NewStar Media Inc. The undersigned certify that: 1. They are the Chairman and Chief Executive Officer, and the Secretary, respectively, of NewStar Media Inc., a California corporation (the "Corporation"). 2. Article IV of the Company's Articles of Incorporation is amended to read in its entirety as follows: IV. The Corporation is authorized to issue two classes of shares, one of which shall be designated Common Stock, par value $.01 per share, consisting of 50,000,000 shares, and the other of which shall be designated Preferred Stock, par value $.01 per share, consisting of 2,000,000 shares. Preferred Stock may be issued, from time to time, in one or more series, with such designations, preferences and relative, participating, optional or other rights, qualifications, limitations or restrictions thereof as shall be stated and expressed in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors from time to time, pursuant to the authority herein given, a copy of which resolution or resolutions shall have been set forth in a Certificate made, executed, acknowledged, filed and recorded in the manner required by the laws of the State of California in order to make the same effective. Each series shall consist of such number of shares as shall be stated and expressed in such resolution or resolutions providing for the issuance of the stock of such series. 3. The amendment herein set forth has been duly approved by the Board of Directors of the Corporation. The amendment herein set forth has been duly approved by the required vote of the shareholders of the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock in accordance with Sections 902 and 903 of the California Corporations Code. At the time of the vote of shareholders, the total number of outstanding shares of Series B Preferred Stock, Series C Preferred Stock, and Series D Preferred Stock was 4,000, 1,920, and 214,113, respectively. The number of shares of Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock voting in favor of the amendment (each series voting separately as a class and voting collectively, together with the Common Stock) equaled or exceeded the vote required. The percentage vote required in each such vote was more than 50% of the number of outstanding shares. 4. The amendment herein set forth has been duly approved by the required vote of the shareholders in accordance with Section 902 of the California Corporations Code. At the time of the vote of shareholders, the total number of outstanding shares of common stock of the Corporation was 17,319,289 and the number of voting shares was 20,537,289. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the number of outstanding shares and more than 50% of the number of common shares. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our knowledge. Dated: June 28, 1999 /S/ TERRENCE A. ELKES ------------------------------- Terrence A. Elkes, Chairman and Chief Executive Officer /S/ ROBERT MURRAY ------------------------------- Robert C. Murray, Secretary EX-10.62 3 AGREEMENT - MEDIA EQUITIES INTERNATIONAL LLC Exhibit 10.62 AGREEMENT, dated as of November 15, 1999, between NewStar Media ("NewStar") and Media Equities International LLC ("MEI"). WHEREAS, NewStar was formerly known as Dove Entertainment, Inc. WHEREAS, MEI and NewStar are parties to that certain Stock Purchase Agreement, dated as of March 27, 1997, pursuant to which NewStar is to pay MEI a consulting fee (the "Consulting Fee") of $300,000 per year, as more fully set forth in such agreement. WHEREAS, MEI and NewStar are parties to that certain Fee Agreement, dated as of November 4, 1997 (the "Guaranty Fee Agreement") pursuant to which NewStar is required to pay MEI a guarantee fee of $25,000 per year for the guaranty by the principals of MEI of up to $2,000,000. WHEREAS, upon the increase of the maximum guaranty amount from $2,000,000 to $4,000,000, NewStar and MEI agreed to increase the guaranty fee under the Guaranty Fee Agreement to $50,000 per year (the "Guaranty Fee"). WHEREAS, subsequent to the increase in the maximum guaranty amount to $4,000,000, it was reduced to $2,000,000. WHEREAS, MEI, Messrs. Elkes, Gorman, Lightstone, Healy and Maggin and NewStar are parties to that certain Agreement, dated as of July 13, 1999, which provided for certain amendments to NewStar warrants owned by MEI in connection with the reduction of the maximum guaranty amount from $4,000,000 to $2,000,000. WHEREAS, MEI is the owner of all of the Company's issued and outstanding Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock (collectively, the "Preferred Stock"). WHEREAS, from time to time, MEI had agreed to accept payments of the Consulting Fee, the Guaranty Fee and/or dividends on the Preferred Stock in the form of common stock of NewStar (in lieu of cash) and has waived payments of all or a portion of such fees and/or dividends. WHEREAS, certain NewStar employees have provided certain services to MEI. WHEREAS, in consideration of the foregoing, the parties hereto desire to resolve all payments of the Consulting Fee, the Guaranty Fee and dividends on the Preferred Stock as of the date hereof. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Except to the extent previously paid by NewStar (whether in cash, common stock or otherwise), MEI hereby waives payment of any and all Consulting Fees that are payable and/or accrued through September 30, 1999. 2. Except to the extent previously paid by NewStar (whether in cash, common stock or otherwise), MEI hereby waives payment of any and all dividends on the Preferred Stock that are payable and/or accrued through September 30, 1999 (together with any interest thereon). 3. Except to the extent previously paid by NewStar (whether in cash, common stock or otherwise), MEI hereby waives payment of any or all Guaranty Fees through September 30, 1999; provided, that each of NewStar and MEI agree that the annual Guaranty Fee shall be $25,000, and that NewStar shall pay the Guaranty Fee for 1999 in the amount of $25,000 on or before December 31, 1999. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date and year first written above. MEDIA EQUITIES INTERNATIONAL, LLC By: /s/ Terrence A. Elkes --------------------------------------------- Name:____________________________________________ Title:___________________________________________ NEWSTAR MEDIA INC. By: /s/ John T. Brady --------------------------------------------- Name: John T. Brady ------------------------------------------- Title: Vice President and Chief Financial Officer ------------------------------------------ EX-10.64 4 EXECUTIVE SEVERANCE AGREEMENT - ROBERT C. MURRAY Exhibit 10.64 KEY EXECUTIVE SEVERANCE AGREEMENT This Key Executive Severance Agreement (the "Agreement") is dated as of September 22, 1999, and is made by and between NewStar Media Inc., a California corporation (the "Company"), and Robert C. Murray who is presently Vice President, Secretary and General Counsel of the Company (the "Executive"). WITNESSETH: WHEREAS: A. The Executive is Vice President and General Counsel of the Company and an integral part of the Company's management. B. The Company wishes to assure both itself and the Executive of continuity of management generally, including continuity of management in the event of any actual change in control of the Company. NOW, THEREFORE, in consideration of the mutual covenants herein contained and in further consideration of services performed and to be performed by Executive for the Company, it is hereby agreed by and between the parties as follows: 1. COMPANY'S RIGHT TO TERMINATE. The Company may not terminate the Executive's employment unless, to the extent provided for herein, the Company provides the benefits hereinafter specified in accordance with the terms hereof. 2. EVENT. For Purposes of this Agreement, an "Event" shall mean any of the following: (1) Approval by the shareholders or the Board of Directors of the Company of the dissolution or liquidation of the Company; (2) Approval by the shareholders or the Board of Directors of the Company of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities, 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 Company; (3) Approval by the shareholders or the Board of Directors of the Company of the sale of 50% or more of the Company's business and/or assets or the Company's publishing business and/or assets to a person or entity which is not a Subsidiary; or (4) A Change in Control. A "Change in Control" shall be deemed to have occurred if (A) any "person" (as such term is used in Sections 13 (d) and 14 (d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under he Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities; or (B) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least a majority thereof. 3. CERTAIN BENEFITS UPON OCCURRENCE OF EVENT. Upon the occurrence of an Event, any and all options to purchase common stock that were granted to the Executive on or prior to the date of such Event (the "Options") shall become immediately exercisable to the full extent theretofore not exercisable. Notwithstanding anything to the contrary contained in any agreement pursuant to which any Options may have been granted (including, without limitation, any stock option or similar plan of the Company) (a "Stock Option Agreement") if an Event shall have occurred, any and all Options shall not terminate or expire and shall remain exercisable for the longer of (i) the one year period following the date of such Event (whether or not the Executive shall remain employed by the Company) and (ii) the period provided in the applicable Stock Option Agreement. 4. CERTAIN BENEFITS UPON TERMINATION OF EMPLOYMENT. (a) If an Event shall have occurred, and there is a Termination of the Employment of the Executive in anticipation of such Event or within one (1) year after the occurrence of such Event, the Executive shall be entitled to receive the benefits provided in Section 4(b) hereof. (b) If there is a Termination of the Employment of the Executive as provided in Section 4(a) hereof, the Executive shall be entitled to the following benefits: (i) The Company shall pay the Executive his full employment compensation through the Date of Termination at the rate in effect at the time Notice of Termination; and (ii) The Company shall pay the Executive, on the Date of Termination, a lump sum payment equal to his full employment compensation for a one-year period at the rate in effect at the time Notice of Termination is given. (c) The phrase "Termination of the Employment" of the Executive for purposes of this Agreement shall mean: (i) Termination by the Company of the employment of the Executive for any reason other than death, Disability or for Cause as defined below; or (ii) Termination by the Executive of his employment with the Company within six (6) months of the occurrence of any of the following events: 2 (A) The assignment to the Executive of any duties materially inconsistent with his positions, duties, responsibilities and status with the Company immediately prior thereto, or a material change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior thereto, or any removal of the Executive from or any failure to appoint the Executive to any of such positions, except in connection with the termination of the Executive's employment due to death, Disability or for Cause; (B) A reduction by the Company in the Executive's compensation as in effect on the date hereof or as the same may be increased from time to time; (C) Subsequent to an Event, the failure by the Company to continue in effect any benefit or compensation plan, stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health-and-accident plan or disability plan in which the Executive is participating at the time of an Event (or plans providing him with substantially similar benefits), or the taking of any action by the Company which would materially adversely affect the Executive's benefits under any of such plans or deprive the Executive of any fringe benefit enjoyed by him at the time of the Event; (D) Any purported termination of the Executive's employment which is to be effected pursuant to a Notice of Termination satisfying the requirements of Section 4(f) below; and for purposes of this Agreement, no such purported termination shall be effective. (d) The words "Disability" and "Cause" for purposes of this Agreement shall mean: (i) DISABILITY. Termination by the Company of the Executive's employment based on "Disability" shall mean termination because of the Executive's absence from his duties with the Company (or its subsidiaries) on a full-time basis for 130 consecutive business days, as a result of incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given following such absence the Executive shall have returned to the regular performance of his duties. 3 (ii) CAUSE. Termination by the Company of the Executive's employment for "Cause" shall mean termination upon (A) the willful and continued failure by Executive to substantially perform his duties with the Company (or its subsidiaries) other than any such failure resulting from his incapacity due to physical or mental illness, after a demand for substantial performance is delivered to the Executive by the Chief Executive Officer of the Company, which specifically identifies the manner in which the Executive has not substantially performed his duties, or (B) the willful engaging by the Executive in misconduct which is materially injurious to the Company (or its subsidiaries), monetarily or otherwise, and that constitutes on the part of the Executive common law fraud or a felony. (e) Any purported termination by the Company pursuant to Sections 4(c)(i) or 4(d) above, or by the Executive pursuant to Section 4(c)(ii) shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (f) "Date of Termination" shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a regular basis during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given. 5. MITIGATION OF DAMAGES. The Executive shall not be required to mitigate the amount of any payment provided for in Section 4 by seeking other employment or otherwise, nor shall the amount of any payment provided for in Section 4 be reduced by any compensation earned by the Executive as the result of employment by or consultancy to another employer after the Date of Termination, or otherwise. 6. SUCCESSORS: BINDING AGREEMENT. (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company or the publishing division of the Company, by agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 4 (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there be no such designee, to his estate. 7. NOTICE. For the purpose of this Agreement, notices and all other communication provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid. 8. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provision or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement; it being understood that this Agreement shall not provide or constitute any term of employment to the Executive, only certain severance provisions in the case of termination under certain circumstances. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. IN WITNESS WHEREOF, the parties hereto have agreed as set forth above. NEWSTAR MEDIA INC. /s/ Terrence A. Elkes - ------------------------------ EXECUTIVE: /s/ Robert Murray - ------------------------------ Robert C. Murray 5 EX-10.65 5 EXECUTIVE SEVERANCE AGREEMENT - JOHN T. BRADY Exhibit 10.65 KEY EXECUTIVE SEVERANCE AGREEMENT This Key Executive Severance Agreement (the "Agreement") is dated as of September 22, 1999, and is made by and between NewStar Media Inc., a California corporation (the "Company"), and John T. Brady who is presently Vice President and Chief Financial Officer of the Company (the "Executive"). WITNESSETH: WHEREAS: A. The Executive is Vice President and Chief Financial Officer of the Company and an integral part of the Company's management. B. The Company wishes to assure both itself and the Executive of continuity of management generally, including continuity of management in the event of any actual change in control of the Company. NOW, THEREFORE, in consideration of the mutual covenants herein contained and in further consideration of services performed and to be performed by Executive for the Company, it is hereby agreed by and between the parties as follows: 1. COMPANY'S RIGHT TO TERMINATE. The Company may not terminate the Executive's employment unless, to the extent provided for herein, the Company provides the benefits hereinafter specified in accordance with the terms hereof. 2. EVENT. For Purposes of this Agreement, an "Event" shall mean any of the following: (1) Approval by the shareholders or the Board of Directors of the Company of the dissolution or liquidation of the Company; (2) Approval by the shareholders or the Board of Directors of the Company of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities, 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 Company; (3) Approval by the shareholders or the Board of Directors of the Company of the sale of 50% or more of the Company's business and/or assets or the Company's publishing business and/or assets to a person or entity which is not a Subsidiary; or (4) A Change in Control. A "Change in Control" shall be deemed to have occurred if (A) any "person" (as such term is used in Sections 13 (d) and 14 (d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under he Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities; or (B) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors cease for any reason to constitute at least a majority thereof. 3. CERTAIN BENEFITS UPON OCCURRENCE OF EVENT. Upon the occurrence of an Event, any and all options to purchase common stock that were granted to the Executive on or prior to the date of such Event (the "Options") shall become immediately exercisable to the full extent theretofore not exercisable. Notwithstanding anything to the contrary contained in any agreement pursuant to which any Options may have been granted (including, without limitation, any stock option or similar plan of the Company) (a "Stock Option Agreement") if an Event shall have occurred, any and all Options shall not terminate or expire and shall remain exercisable for the longer of (i) the one year period following the date of such Event (whether or not the Executive shall remain employed by the Company) and (ii) the period provided in the applicable Stock Option Agreement. 4. CERTAIN BENEFITS UPON TERMINATION OF EMPLOYMENT. (a) If an Event shall have occurred, and there is a Termination of the Employment of the Executive in anticipation of such Event or within one (1) year after the occurrence of such Event, the Executive shall be entitled to receive the benefits provided in Section 4(b) hereof. (b) If there is a Termination of the Employment of the Executive as provided in Section 4(a) hereof, the Executive shall be entitled to the following benefits: (i) The Company shall pay the Executive his full employment compensation through the Date of Termination at the rate in effect at the time Notice of Termination; and (ii) The Company shall pay the Executive, on the Date of Termination, a lump sum payment equal to his full employment compensation for a one-year period at the rate in effect at the time Notice of Termination is given. (c) The phrase "Termination of the Employment" of the Executive for purposes of this Agreement shall mean: (i) Termination by the Company of the employment of the Executive for any reason other than death, Disability or for Cause as defined below; or (ii) Termination by the Executive of his employment with the Company within six (6) months of the occurrence of any of the following events: 2 (A) The assignment to the Executive of any duties materially inconsistent with his positions, duties, responsibilities and status with the Company immediately prior thereto, or a material change in the Executive's reporting responsibilities, titles or offices as in effect immediately prior thereto, or any removal of the Executive from or any failure to appoint the Executive to any of such positions, except in connection with the termination of the Executive's employment due to death, Disability or for Cause; (B) A reduction by the Company in the Executive's compensation as in effect on the date hereof or as the same may be increased from time to time; (C) Subsequent to an Event, the failure by the Company to continue in effect any benefit or compensation plan, stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health-and-accident plan or disability plan in which the Executive is participating at the time of an Event (or plans providing him with substantially similar benefits), or the taking of any action by the Company which would materially adversely affect the Executive's benefits under any of such plans or deprive the Executive of any fringe benefit enjoyed by him at the time of the Event; (D) Any purported termination of the Executive's employment which is to be effected pursuant to a Notice of Termination satisfying the requirements of Section 4(f) below; and for purposes of this Agreement, no such purported termination shall be effective. (d) The words "Disability" and "Cause" for purposes of this Agreement shall mean: (i) DISABILITY. Termination by the Company of the Executive's employment based on "Disability" shall mean termination because of the Executive's absence from his duties with the Company (or its subsidiaries) on a full-time basis for 130 consecutive business days, as a result of incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given following such absence the Executive shall have returned to the regular performance of his duties. 3 (ii) CAUSE. Termination by the Company of the Executive's employment for "Cause" shall mean termination upon (A) the willful and continued failure by Executive to substantially perform his duties with the Company (or its subsidiaries) other than any such failure resulting from his incapacity due to physical or mental illness, after a demand for substantial performance is delivered to the Executive by the Chief Executive Officer of the Company, which specifically identifies the manner in which the Executive has not substantially performed his duties, or (B) the willful engaging by the Executive in misconduct which is materially injurious to the Company (or its subsidiaries), monetarily or otherwise, and that constitutes on the part of the Executive common law fraud or a felony. (e) Any purported termination by the Company pursuant to Sections 4(c)(i) or 4(d) above, or by the Executive pursuant to Section 4(c)(ii) shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (f) "Date of Termination" shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a regular basis during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given. 5. MITIGATION OF DAMAGES. The Executive shall not be required to mitigate the amount of any payment provided for in Section 4 by seeking other employment or otherwise, nor shall the amount of any payment provided for in Section 4 be reduced by any compensation earned by the Executive as the result of employment by or consultancy to another employer after the Date of Termination, or otherwise. 6. SUCCESSORS: BINDING AGREEMENT. (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company or the publishing division of the Company, by agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 4 (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there be no such designee, to his estate. 7. NOTICE. For the purpose of this Agreement, notices and all other communication provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid. 8. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provision or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement; it being understood that this Agreement shall not provide or constitute any term of employment to the Executive, only certain severance provisions in the case of termination under certain circumstances. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. IN WITNESS WHEREOF, the parties hereto have agreed as set forth above. NEWSTAR MEDIA INC. /s/ Terrence A. Elkes - ---------------------------- EXECUTIVE: /s/ John T. Brady - ---------------------------- John T. Brady 5 EX-10.66 6 AMENDED CHASE MANHATTAN AGREEMENT COMPOSITE COPY ================================================================================ AMENDED AND RESTATED CREDIT, SECURITY, GUARANTY AND PLEDGE AGREEMENT DATED AS OF NOVEMBER 4, 1997, AS AMENDED AND RESTATED AS OF AUGUST 16, 1999 AMONG NEWSTAR MEDIA INC. AS BORROWER, THE GUARANTORS NAMED HEREIN AND THE CHASE MANHATTAN BANK, AS LENDER ================================================================================ TABLE OF CONTENTS
Page ---- 1. DEFINITIONS...................................................................................................2 2. THE LOANS....................................................................................................24 SECTION 2.1. Loans.........................................................................................24 SECTION 2.2. Making of Loans...............................................................................25 SECTION 2.3. Note..........................................................................................26 SECTION 2.4. Interest on Note..............................................................................26 SECTION 2.5. Commitment Fees and Other Fees................................................................27 SECTION 2.6. Optional and Mandatory Termination or Reduction of Commitment................................27 SECTION 2.7. Default Interest; Alternate Rate of Interest..................................................28 SECTION 2.8. Continuation and Conversion of Loans..........................................................28 SECTION 2.9. Prepayment of Loans; Reimbursement of Lender..................................................29 SECTION 2.10. Change in Circumstances......................................................................31 SECTION 2.11. Change in Legality...........................................................................34 SECTION 2.12. Manner of Payments...........................................................................34 SECTION 2.13. Interest Adjustments.........................................................................34 SECTION 2.14. Letters of Credit............................................................................35 3. REPRESENTATIONS AND WARRANTIES OF CREDIT PARTIES.............................................................38 SECTION 3.1. Corporate Existence and Power.................................................................39 SECTION 3.2. Corporate Authority and No Violation. ......................................................39 SECTION 3.3. Governmental Approval.........................................................................39 SECTION 3.4. Binding Agreements............................................................................40 SECTION 3.5. Financial Statements..........................................................................40 SECTION 3.6. No Material Adverse Change ...................................................................40 SECTION 3.7. Ownership of Pledged Securities, etc..........................................................41 SECTION 3.8. Copyrights and Other Rights...................................................................41 SECTION 3.9. Fictitious Names..............................................................................42 SECTION 3.10. Title to Properties..........................................................................42 SECTION 3.11. Places of Business...........................................................................42 SECTION 3.12. Litigation...................................................................................42 SECTION 3.13. Federal Reserve Regulations..................................................................43 SECTION 3.14. Investment Company Act.......................................................................43 SECTION 3.15. Taxes........................................................................................43 SECTION 3.16. Compliance with ERISA........................................................................43 SECTION 3.17. Agreements...................................................................................43 SECTION 3.18. Security Interest; Other Security............................................................44 SECTION 3.19. Disclosure...................................................................................44 SECTION 3.20. Distribution Rights..........................................................................45 i SECTION 3.21. Environmental Liabilities....................................................................45 SECTION 3.22. Pledged Securities...........................................................................46 SECTION 3.23. Compliance with Laws.........................................................................46 SECTION 3.24. Projected Financial Information..............................................................46 4. CONDITIONS OF LENDING........................................................................................46 SECTION 4.1. Conditions Precedent to Effectiveness of this Amendment and Restatement..........................................................................46 SECTION 4.2. Conditions Precedent to Each Loan and Letter of Credit........................................51 5. AFFIRMATIVE COVENANTS........................................................................................51 SECTION 5.1. Financial Statements and Reports..............................................................52 SECTION 5.2. Corporate Existence...........................................................................54 SECTION 5.3. Maintenance of Properties.....................................................................54 SECTION 5.4. Notice of Material Events.....................................................................55 SECTION 5.5. Insurance.....................................................................................55 SECTION 5.6. Production....................................................................................57 SECTION 5.7. Music.........................................................................................57 SECTION 5.8. Copyright.....................................................................................57 SECTION 5.9. Books and Records. ..........................................................................57 SECTION 5.10. Third Party Audit Rights.....................................................................58 SECTION 5.11. Observance of Agreements.....................................................................58 SECTION 5.12. Film Properties and Rights; Credit Parties to Act as Pledgeholder............................58 SECTION 5.13. Laboratories; No Removal.....................................................................58 SECTION 5.14. Taxes and Charges; Indebtedness in Ordinary Course of Business...............................59 SECTION 5.15. Liens........................................................................................60 SECTION 5.16. Further Assurances; Security Interests.......................................................60 SECTION 5.17. ERISA Compliance and Reports.................................................................60 SECTION 5.18. Environmental Laws...........................................................................61 SECTION 5.19. Use of Proceeds..............................................................................62 SECTION 5.20. Security Agreements with the Guilds..........................................................62 SECTION 5.21. Uncompleted Product..........................................................................62 6. NEGATIVE COVENANTS...........................................................................................63 SECTION 6.1. Limitations on Indebtedness...................................................................63 SECTION 6.2. Limitations on Liens..........................................................................64 SECTION 6.3. Limitation on Guarantees......................................................................66 SECTION 6.4. Limitations on Investments....................................................................66 SECTION 6.5. Restricted Payments...........................................................................66 SECTION 6.6. Limitations on Leases.........................................................................66 SECTION 6.7. Consolidation, Merger, Sale or Purchase of Assets, etc........................................66 SECTION 6.8. Receivables...................................................................................66 SECTION 6.9. Sale and Leaseback............................................................................66 ii SECTION 6.10. Places of Business; Change of Name...........................................................67 SECTION 6.11. Limitations on Capital Expenditures..........................................................67 SECTION 6.12. Transactions with Affiliates. ..............................................................67 SECTION 6.13. Prohibition of Amendments or Waivers.........................................................67 SECTION 6.14. Development Costs............................................................................67 SECTION 6.15. Overhead Expense.............................................................................67 SECTION 6.16. Consolidated Capital Base....................................................................68 SECTION 6.17. EBIT.........................................................................................68 SECTION 6.18. Liquidity Ratio.............................................................................68 SECTION 6.19. No Change in Business........................................................................68 SECTION 6.20. ERISA Compliance.............................................................................68 SECTION 6.21. Additional Limitations on Production and Acquisition of Product..............................69 SECTION 6.22. Subsidiaries.................................................................................69 SECTION 6.23. Bank Accounts................................................................................69 SECTION 6.24. Hazardous Materials..........................................................................69 SECTION 6.25. Use of Proceeds of Loans and Requests for Letters of Credit..................................70 SECTION 6.26. Interest Rate Protection Agreements, etc.....................................................70 SECTION 6.27. Amortization Method..........................................................................70 7. EVENTS OF DEFAULT............................................................................................70 8. GRANT OF SECURITY INTEREST; REMEDIES.........................................................................72 SECTION 8.1. Security Interests. .........................................................................72 SECTION 8.2. Use of Collateral.............................................................................73 SECTION 8.3. Collection Accounts...........................................................................73 SECTION 8.4. Credit Parties to Hold in Trust...............................................................75 SECTION 8.5. Collections, etc. ...........................................................................75 SECTION 8.6. Possession, Sale of Collateral, etc...........................................................75 SECTION 8.7. Application of Proceeds on Default............................................................76 SECTION 8.8. Power of Attorney.............................................................................77 SECTION 8.9. Financing Statements, Direct Payments.........................................................77 SECTION 8.10. Further Assurances...........................................................................78 SECTION 8.11. Termination..................................................................................78 SECTION 8.12. Remedies Not Exclusive.......................................................................78 SECTION 8.13. Quiet Enjoyment..............................................................................78 SECTION 8.14. Continuation and Reinstatement...............................................................78 9. GUARANTY.....................................................................................................79 SECTION 9.1. Guaranty......................................................................................79 SECTION 9.2. No Impairment of Guaranty, etc................................................................80 SECTION 9.3. Continuation and Reinstatement, etc...........................................................80 SECTION 9.4. Limitation on Guaranteed Amount etc...........................................................81 iii 10. PLEDGE......................................................................................................81 SECTION 10.1. Pledge........................................................................................81 SECTION 10.2. Covenant.....................................................................................81 SECTION 10.3. Registration in Nominee Name; Denominations..................................................82 SECTION 10.4. Voting Rights; Dividends; etc................................................................82 SECTION 10.5. Remedies Upon Default........................................................................82 SECTION 10.6. Application of Proceeds of Sale and Cash.....................................................84 SECTION 10.7. Securities Act, etc..........................................................................84 SECTION 10.8. Continuation and Reinstatement...............................................................85 SECTION 10.9. Termination..................................................................................85 11. MISCELLANEOUS...............................................................................................85 SECTION 11.1. Notices......................................................................................85 SECTION 11.2. Survival of Agreement, Representations and Warranties, etc...................................86 SECTION 11.3. Successors and Assigns; Loan Sales; Participations.........................................86 SECTION 11.4. Expenses; Documentary Taxes..................................................................88 SECTION 11.5. Indemnification of the Lender................................................................88 SECTION 11.6. CHOICE OF LAW................................................................................89 SECTION 11.7. WAIVER OF JURY TRIAL.........................................................................89 SECTION 11.8. No Waiver....................................................................................90 SECTION 11.9. Extension of Payment Date....................................................................90 SECTION 11.10. Amendments, etc.............................................................................90 SECTION 11.11. Severability................................................................................90 SECTION 11.12. SERVICE OF PROCESS..........................................................................91 SECTION 11.13. Headings....................................................................................92 SECTION 11.14. Execution in Counterparts...................................................................92 SECTION 11.15. Subordination of Intercompany Advances......................................................92 SECTION 11.16. Confidentiality.............................................................................92 SECTION 11.17. Entire Agreement............................................................................93 iv
Schedules 1 MEI Ownership Interest 3.7(a) Corporate Guarantors/Pledged Securities 3.7(b) Beneficial Interests 3.8 Items of Product; Copyrights 3.9 Fictitious Names 3.11 Principal Executive Office/Location of Collateral/Filing Offices 3.12 Litigation 3.17 Existing Indebtedness/Material Agreements 3.21 Environmental Liabilities 3.22 Outstanding Rights Re Pledged Securities 6.2 Existing Liens 6.3 Guarantees 6.4 Scheduled Investments 6.23 Bank Accounts Exhibits A Form of Note B-1 Form of Opinion of Hughes Hubbard & Reed, special counsel to the Credit Parties B-2 Form of Opinion of Robert C. Murray, general counsel of the Borrower C Form of Borrowing Base Certificate D-1 Form of Pledgeholder Agreement (Uncompleted Product) D-2 Form of Pledgeholder Agreement (Completed Product) E-1 Form of Copyright Security Agreement E-2 Form of Copyright Security Agreement Supplement F Form of Laboratory Access Letter G Form of Notice of Assignment and Irrevocable Instructions H Form of Borrowing Certificate I Form of Instrument of Assumption and Joinder J Form of Contribution Agreement K-1 Form of Amended and Restated Individual Guaranty Agreement by Terrence A. Elkes K-2 Form of Amended and Restated Individual Guaranty Agreement by Kenneth F. Gorman K-3 Form of Amended and Restated Individual Guaranty Agreement by Bruce Maggin K-4 Form of Amended and Restated Individual Guaranty Agreement by John T. Healy K-5 Form of Amended and Restated Individual Guaranty Agreement by Ronald Lightstone v
AMENDED AND RESTATED CREDIT, SECURITY, GUARANTY AND PLEDGE AGREEMENT, dated as of November 4, 1997, as amended and restated as of August 16, 1999 (as amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among NEWSTAR MEDIA INC. (formerly known as Dove Entertainment, Inc.), a California corporation (the "Borrower"), the Corporate Guarantors named herein and THE CHASE MANHATTAN BANK, a New York banking corporation, as Lender (together with any permitted assignees of all or part of the Commitment in accordance with the terms hereof, the "Lender"). INTRODUCTORY STATEMENT ---------------------- All terms not otherwise defined above or in this Introductory Statement are as defined in Article 1 hereof, or as defined elsewhere herein. On November 4, 1997, the Borrower, certain of the Corporate Guarantors and the Lender entered into a Credit, Security, Guaranty and Pledge Agreement (such agreement, as it has been amended through the date hereof, the "Existing Credit Agreement") providing for an $8,000,000 three-year secured revolving credit facility. Pursuant to Amendment No. 2 to the Existing Credit Agreement, the credit facility was increased to $10,000,000. The Borrower has requested that the Lender amend and restate the Existing Credit Agreement in order to, among other things, make available a $10,000,000 secured revolving credit facility which will be used (i) to finance the development, production, distribution or acquisition of audio books, books and television product and film product (other than the distribution of motion pictures in theaters) and related internet services and (ii) for other general corporate purposes. To provide assurance for the repayment of the Loans and other Obligations of the Borrower and the Corporate Guarantors hereunder, the Borrower and the Corporate Guarantors will provide or will cause to be provided to the Lender, the following (each as more fully described herein): (i) a security interest in the Collateral pursuant to Article 8 hereof; (ii) a guaranty of the Obligations pursuant to Article 9 hereof; and (iii) a pledge of the Pledged Securities pursuant to Article 10 hereof. A principal shareholder of the Borrower is Media Equities International, L.L.C. ("MEI") which is directly and indirectly owned by Terrence A. Elkes, Kenneth F. Gorman, Ronald Lightstone, John T. Healy and Bruce Maggin - 1 - (collectively referred to herein as the "Individual Guarantors"). To provide further assurance and in order to induce the Lender to enter into this Credit Agreement, as security for the repayment of the Loans and the other Obligations of the Borrower hereunder, the Individual Guarantors will provide to the Lender, pursuant to the Guaranty Agreements, an unconditional guaranty of payment of the Obligations in an amount equal to the lesser of (x) $2,000,000 and (y) the amount by which the aggregate of outstanding principal of and any interest on all Loans and the L/C Exposure (excluding that certain Letter of Credit described in Section 2.14(j) hereof) hereunder exceeds the Borrowing Base on the date demand for payment is made under such Guaranty Agreements (the "Maximum Guaranty Amount"); provided, that in the case of any Individual Guarantor, such guarantor's guaranty obligation shall not exceed the product of 110% of such Individual Guarantor's ownership interest in MEI as of the date hereof (as indicated in Schedule 1 hereto) multiplied by the Maximum Guaranty Amount. Subject to the terms and conditions set forth herein, the Lender is willing to make Loans to the Borrower and issue Letters of Credit in amounts in the aggregate at any one time outstanding not in excess of its Commitment hereunder. Accordingly, the parties hereto hereby agree as follows: 1. DEFINITIONS For the purposes hereof unless the context otherwise requires, all Section references herein shall be deemed to correspond with Sections herein, the following terms shall have the meanings indicated, all accounting terms not otherwise defined herein shall have the respective meanings accorded to them under GAAP and all terms defined in the UCC and not otherwise defined herein shall have the respective meanings accorded to them therein. Unless the context otherwise requires, any of the following terms may be used in the singular or the plural, depending on the reference: "ACCEPTABLE L/C" shall mean an irrevocable letter of credit which (i) is in form and on terms reasonably acceptable to the Lender, (ii) is payable in Dollars at an office of the issuing or confirming bank in New York City (or another city acceptable to the Lender in its sole discretion), (iii) is issued or confirmed by (a) the Lender; (b) any commercial bank that has (or which is the principal operating subsidiary of a holding company which has) as of the time such letter of credit is issued, public debt outstanding with a rating of at least "A" (or the equivalent of an "A") from one of the nationally recognized debt rating agencies; or (c) by any other bank which the Lender may in its sole discretion determine to be of acceptable credit quality and (iv) with respect to letters of credit delivered in connection with an uncompleted item of Product for which a Completion Guarantee is required pursuant to the terms hereof, has an expiration date no earlier than three (3) months after the "Outside Delivery Date" for an item of Product (as set forth in the Completion Guarantee for such item of Product) to which the letter of credit relates. - 2 - "AFFILIATE" shall mean any Person which, directly or indirectly, is in control of, is controlled by or is under common control with, another Person. For purposes of this definition, a Person shall be deemed to be "controlled by" another Person if such latter Person possesses, directly or indirectly, power either to (i) vote 20% or more of the securities having ordinary voting power for election of directors of such Person or (ii) direct or cause the direction of the management and policies of such controlled Person whether by contract or otherwise. "ALTERNATE BASE RATE" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect for such day plus 1/2 of 1%. For purposes hereof, "PRIME RATE" shall mean the rate of interest per annum publicly announced from time to time by the Lender as its prime rate in effect at its principal office in New York City. "BASE CD RATE" shall mean the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) Statutory Reserves and (b) the Assessment Rate. "THREE-MONTH SECONDARY CD RATE" shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day is not a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Lender from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. "STATUTORY RESERVES" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority to which the Lender is subject for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "FEDERAL FUNDS EFFECTIVE RATE" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Lender from three Federal funds brokers of recognized standing selected by it. If for any reason the Lender shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Effective Rate or both for any reason, including the inability or failure of the Lender to obtain sufficient quotations in accordance with the terms hereof, the Alternate Base Rate shall be determined without regard to clause (b) or (c), or both, of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the - 3 - Alternate Base Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "ALTERNATE BASE RATE LOAN" shall mean a Loan based on the Alternate Base Rate in accordance with the provisions of Article 2 hereof. "APPLICABLE LAW" shall mean all provisions of statutes, rules, regulations and orders of the United States or foreign governmental bodies or regulatory agencies applicable to the Person in question, and all orders and decrees of all U.S. federal or state courts and arbitrators in proceedings or actions in which the Person in question is a party. "APPLICABLE MARGIN" shall mean in the case of Alternate Base Rate Loans, 2% per annum, or in the case of Eurodollar Loans, 3% per annum. "APPROVED COMPLETION GUARANTOR" shall mean a financially sound and reputable completion guarantor approved by the Lender. The Lender hereby pre-approves as a completion guarantor (i) Fireman's Fund Insurance Company, acting through its agent, International Film Guarantors L.P. (the general partner of which is International Film Guarantors, Inc.), (ii) Cinema Completions International Inc./Continental Casualty Company, (iii) The Motion Picture Bond Company Inc. (to the extent a completion guarantee is accompanied by a London Guarantee Insurance Company "cut-through"), (iv) Film Finances, Inc. and its Affiliates that are insured under the same Lloyds of London insurance policies as Film Finances, Inc. (only to the extent the completion guarantee is accompanied by a Lloyd's of London "cut-through") and (v) Worldwide Film Completion Inc./Connecticut Surety Group/NAC Re Corporation; PROVIDED, HOWEVER, that any such pre-approval may be revoked by the Lender if deemed appropriate in its sole discretion at any time upon 5 days prior written notice to the Borrower; but FURTHER, PROVIDED, that such pre-approval may not be revoked with regard to an item of Product if a Completion Guarantee has already been issued for such item of Product. "ASSESSMENT RATE" shall mean, for any day, the net annual assessment rate (rounded upwards, if necessary, to the next higher 1/100 of 1%) as most recently estimated by the Lender for determining the then current annual assessment payable by the Lender to the Federal Deposit Insurance Corporation (or any successor) for insurance by such Corporation (or such successor) of time deposits made in Dollars at the Lender's domestic offices. "AUTHORIZED OFFICER" shall mean, with respect to any Credit Party, such Credit Party's Chief Executive Officer or Chief Financial Officer. "BANKRUPTCY CODE" shall mean the Bankruptcy Reform Act of 1978, as heretofore and hereafter amended, as codified at 11 U.S.C. ss. 101 et seq. - 4 - "BOARD" shall mean the Board of Governors of the Federal Reserve System of the United States of America. "BORROWING" shall mean a group of Loans of a single interest rate type and as to which a single Interest Period is in effect on a single day. "BORROWING BASE" shall mean, at any date for which the amount thereof is to be determined, an amount equal to the aggregate (without double counting) of the following: (i) one hundred percent (100%) of Eligible L/C Receivables; PLUS (ii) eighty-five percent (85%) of Eligible Receivables; PLUS (iii) thirty-five percent (35%) of Eligible Library Amount; PLUS (iv) thirty percent (30%) of the book value of physical audio cassettes and printed books; MINUS (v) to the extent not already deducted in computing the Borrowing Base, all amounts payable to third parties from or with regard to the amounts otherwise included in the Borrowing Base (not to exceed with respect to any item of Product, the amount included in the Borrowing Base attributable to such item of Product), including without limitation remaining acquisition payments, set offs, current profit participations, deferments, residuals, commissions and royalties not yet paid; minus (vi) to the extent not otherwise deducted in computing the Borrowing Base, the aggregate amount of all accrued but unpaid residuals (not to exceed with respect to any item of Product, the amount included in the Borrowing Base attributable to such item of Product) owed to any trade guild, to the extent that the obligation of any Credit Party to pay such residuals is secured by a security interest in any Eligible Receivable included in the Borrowing Base, which security interest is not subordinated to the security interests of the Lender; PROVIDED, HOWEVER, that credit in the Borrowing Base attributable to any Eligible Receivable may not exceed 20% of the total Borrowing Base, except as may be approved in writing by the Lender. "BORROWING BASE CERTIFICATE" shall have the meaning given such term in Section 5.1(e) hereof. - 5 - "BORROWING CERTIFICATE" shall mean a borrowing certificate, substantially in the form of Exhibit H hereto, to be delivered by the Borrower to the Lender in connection with each Borrowing. "BUDGETED NEGATIVE COST" shall mean, with respect to any item of Product, the amount of the cash budget (stated in Dollars) for such item of Product including all costs customarily included in connection with the acquisition of all underlying literary and musical rights with respect to such item of Product and in connection with the preparation, production and completion of such item of Product, including costs of materials, equipment, physical properties, personnel and services utilized in connection with such item of Product, both "above- the-line" and "below-the-line", any Completion Guarantee fee (if applicable), and all other items customarily included in negative costs, including finance charges and interest expense, but excluding production fees and overhead charges payable to a Credit Party. "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or other day on which banks are required or permitted to close in the States of California and New York; provided, however, that when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in Dollar deposits on the London Interbank Market. "CAPITAL EXPENDITURES" shall mean, with respect to any Person for any period, the sum of (i) the aggregate of all expenditures (whether paid in cash or accrued as a liability) by such Person during that period which, in accordance with GAAP, are or should be included in "additions to property, plant or equipment" or similar items included in cash flows (including Capital Leases) and (ii) to the extent not covered by clause (i) hereof, the aggregate of all expenditures properly capitalized in accordance with GAAP by such Person to acquire, by purchase or otherwise, in whole or in part, the business, property or fixed assets of, or stock or other evidence of beneficial ownership of any other Person (other than the portion of such expenditures allocable in accordance with GAAP to net current assets). "CAPITAL LEASE" shall mean any lease of any property (whether real, personal or mixed) by that Person as lessee which, in accordance with GAAP, is or should be accounted for as a capital lease on the balance sheet of that Person. "CASH EQUIVALENTS" shall mean (i) marketable securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (ii) time deposits, certificates of deposit, acceptances or prime commercial paper or repurchase obligations for underlying securities of the types described in clause (i) entered into with the Lender or any commercial bank having a short-term deposit rating of at least A-2 or the equivalent thereof by Standard & Poor's Rating Services or at least P-2 or the equivalent thereof by Moody's Investors Service, Inc. or (iii) commercial paper with a rating of A-1 or A-2 or the equivalent - 6 - thereof by Standard & Poor's Rating Services or P-1 or P-2 or the equivalent thereof by Moody's Investors Service, Inc. and in each case maturing within twelve months after the date of acquisition. "CHANGE IN CONTROL" shall mean either (i) any Person or group (such term being used as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) acquires ownership or control of voting stock of the Borrower having voting power greater than the voting power at the time controlled by MEI or (ii) if at any time, individuals who at the Closing Date constituted the Board of Directors of the Borrower (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Borrower was approved by a vote of the majority of the directors then still in office who were either directors at the Closing Date or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Borrower. "CHANGE IN MANAGEMENT" shall mean that any two of Terrence A. Elkes, Kenneth F. Gorman and Ronald Lightstone shall cease to perform executive functions for the Borrower; provided that a Change in Management shall not be deemed to have occurred if such Person has been replaced by a Person reasonably acceptable to the Lender within 180 days of such discontinuance. "CLOSING DATE" shall mean the earliest date on which all conditions precedent set forth in Section 4.1 have been satisfied or waived. The closing shall take place in New York, New York. "CODE" shall mean the Internal Revenue Code of 1986 and the rules and regulations issued thereunder, as heretofore amended, as codified at 26 U.S.C. ss.1 et seq or any successor provision thereto. "COLLATERAL" shall mean with respect to each Credit Party, all of such Credit Party's right, title and interest in personal property, tangible and intangible, wherever located or situated and whether now owned or hereafter acquired or created, including but not limited to goods, accounts, intercompany obligations, partnership and joint venture interests, contract rights, documents, chattel paper, general intangibles, goodwill, equipment, inventory, investment property, instruments, copyrights, trademarks, trade names, insurance proceeds, cash and deposit accounts and any proceeds thereon, products thereof or income therefrom, further including but not limited to all of such Credit Party's right, title and interest in and to each and every item and type of Product and Recorded Product, the scenario, screenplay or script upon which an item of Product is based, all of the properties thereof, tangible and intangible, and all domestic and foreign copyrights and all other rights therein and thereto, of every kind and character, whether now in existence or hereafter to be made or produced, and whether or not in possession of such Credit Party, - 7 - including with respect to each and every item of Product and/or Recorded Product and without limiting the foregoing language, each and all of the following particular rights and properties (to the extent they are owned or hereafter created or acquired by such Credit Party): (i) all scenarios, screenplays and/or scripts at every stage thereof; (ii) all common law and/or statutory copyright and other rights in all literary and other properties (hereinafter called "said literary properties") which form the basis of each item of Product and/or Recorded Product and/or which are and/or will be incorporated into each item of Product and/or Recorded Product, all component parts of each item of Product and/or Recorded Product consisting of said literary properties, all rights in and to the story, all treatments of said story and said literary properties, together with all preliminary and final screenplays used and to be used in connection with the item of Product and/or Recorded Product, and all other literary material upon which the item of Product and/or Recorded Product is based or from which it is adapted; (iii) all rights in and to all music and musical compositions used and to be used in each item of Product and/or Recorded Product, including, each without limitation, all rights to record, rerecord, produce, reproduce or synchronize all of said music and musical compositions in and in connection therewith; (iv) all tangible personal property relating to each item of Product and/or Recorded Product, including, without limitation, all exposed film, developed film, positives, negatives, prints, positive prints, answer prints, special effects, preparing materials (including interpositives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices, and all other forms of pre-print elements), sound tracks, cutouts, trims and any and all other physical properties of every kind and nature relating to such item of Product and/or Recorded Product, whether in completed form or in some state of completion, and all masters, duplicates, drafts, versions, variations and copies of each thereof, in all formats whether on film, videotape, disk or otherwise and all music sheets and promotional materials relating to such item of Product and/or Recorded Product (collectively, the "PHYSICAL MATERIALS"); (v) all collateral, allied, subsidiary and merchandising rights appurtenant or related to each item of Product and/or Recorded Product including, without limitation, the following rights: all rights to produce remakes or sequels or prequels to each item of Product and/or Recorded Product based upon each item of Product and/or Recorded Product, said literary properties or the theme of each item of - 8 - Product and/or Recorded Product and/or the text or any part of said literary properties; all rights throughout the world to broadcast, transmit and/or reproduce by means of television (including commercially sponsored, sustaining and subscription or "pay" television) or by any process analogous thereto, now known or hereafter devised, each item of Product and/or Recorded Product or any remake or sequel or prequel to the item of Product and/or Recorded Product; all rights to produce primarily for television or similar use a motion picture or series of motion pictures, by use of film or any other recording device or medium now known or hereafter devised, based upon each item of Product and/or Recorded Product, said literary properties or any part thereof, including, without limitation, based upon any script, scenario or the like used in each item of Product and/or Recorded Product; all merchandising rights including, without limitation, all rights to use, exploit and license others to use and exploit any and all commercial tie- ups of any kind arising out of or connected with said literary properties, each item of Product and/or Recorded Product, the title or titles of each item of Product and/or Recorded Product, the characters of each item of Product and/or Recorded Product or said literary properties and/or the names or characteristics of said characters and including further, without limitation, any and all commercial exploitation in connection with or related to each item of Product and/or Recorded Product, any remake or sequel thereof and/or said literary properties; (vi) all statutory copyrights, domestic and foreign, obtained or to be obtained on each item of Product and/or Recorded Product, together with any and all copyrights obtained or to be obtained in connection with each item of Product and/or Recorded Product or any underlying or component elements of each item of Product and/or Recorded Product, including, in each case without limitation, all copyrights on the property described in subparagraphs (i) through (v) inclusive, of this paragraph, together with the right to copyright (and all rights to renew or extend such copyrights) and the right to sue in the name of any of the Credit Parties for past, present and future infringements of copyright; (vii) all insurance policies and completion bonds connected with each item of Product and/or Recorded Product and all proceeds which may be derived therefrom; (viii) all rights to distribute, sell, rent, license the exhibition of and otherwise exploit and turn to account each item of Product and/or Recorded Product, the Physical Materials and rights in and to said story, other literary material upon which each item of Product and/or Recorded Product is based or from which it is adapted, and said music and musical compositions used or to be used in each item of Product and/or Recorded Product; - 9 - (ix) any and all sums, proceeds, money, products, profits or increases, including money profits or increases (as those terms are used in the UCC or otherwise) or other property obtained or to be obtained from the distribution, exhibition, sale or other uses or dispositions of each item of Product and/or Recorded Product or any part of each item of Product and/or Recorded Product, including, without limitation, all proceeds, profits, products and increases, whether in money or otherwise, from the sale, rental or licensing of each item of Product and/or Recorded Product and/or any of the elements of each item of Product and/or Recorded Product including from collateral, allied, subsidiary and merchandising rights; (x) the dramatic, nondramatic, stage, television, radio and publishing rights, title and interest in and to each item of Product and/or Recorded Product, and the right to obtain copyrights and renewals of copyrights therein; (xi) the name or title of each item of Product and/or Recorded Product and all rights of such Credit Party to the use thereof, including, without limitation, rights protected pursuant to trademark, service mark, unfair competition and/or the rules and principles of law and of any other applicable statutory, common law, or other applicable statutes, common law, or other rule or principle of law; (xii) any and all contract rights and/or chattel paper which may arise in connection with each item of Product and/or Recorded Product; (xiii) all accounts and/or other rights to payment which such Credit Party presently owns or which may arise in favor of such Credit Party in the future, including, without limitation, any refund under a completion guaranty, all accounts and/or rights to payment due from exhibitors in connection with the distribution of each item of Product and/or Recorded Product, and from exploitation of any and all of the collateral, allied, subsidiary, merchandising and other rights in connection with each item of Product and/or Recorded Product; - 10 - (xiv) any and all "general intangibles" (as that term is defined in the UCC) not elsewhere included in this definition, including, without limitation, any and all general intangibles consisting of any right to payment which may arise in the distribution or exploitation of any of the rights set out herein, and any and all general intangible rights in favor of such Credit Party for services or other performances by any third parties, including actors, writers, directors, individual producers and/or any and all other performing or nonperforming artists in any way connected with each item of Product and/or Recorded Product, any and all general intangible rights in favor of such Credit Party relating to licenses of sound or other equipment, licenses for any photograph or photographic process, and all general intangibles related to the distribution or exploitation of each item of Product and/or Recorded Product including general intangibles related to or which grow out of the exhibition of each item of Product and/or Recorded Product and the exploitation of any and all other rights in each item of Product and/or Recorded Product set out in this definition; (xv) any and all goods including inventory (as that term is defined in the UCC) which may arise in connection with the creation, production or delivery of each item of Product and/or Recorded Product and which goods pursuant to any production or distribution agreement or otherwise are owned by such Credit Party; (xvi) all and each of the rights, regardless of denomination, which arise in connection with the creation, production, completion of production, delivery, distribution, or other exploitation of each item of Product and/or Recorded Product, including, without limitation, any and all rights in favor of such Credit Party, the ownership or control of which are or may become necessary or desirable, in the opinion of the Lender, in order to complete production of each item of Product and/or Recorded Product in the event that the Lender exercises any rights it may have to take over and complete production of each item of Product and/or Recorded Product; (xvii) any and all documents issued by any pledgeholder or bailee with respect to the item of Product and/or Recorded Product or any Physical Materials (whether or not in completed form) with respect thereto; (xviii) any and all production accounts or other bank accounts established by such Credit Party with respect to such item of Product and/or Recorded Product; (xix) any and all rights of such Credit Party under contracts relating to the production or acquisition of such item of Product and/or Recorded Product; and (xx) any and all rights of such Credit Party under Distribution Agreements relating to each item of Product and/or Recorded Product; - 11 - provided, that, notwithstanding anything to the contrary contained above, "Collateral" shall not include the "Real Property" described in the Deed of Trust dated April 24, 1996 among the Borrower, Asahi Bank of California and North American Title Company, as trustee, and the "Rents" described in the Assignment of Rents dated April 24, 1996 between the Borrower and Asahi Bank of California. "COLLECTION ACCOUNT" shall have the meaning of given such term in Section 8.3 hereof. "COMMITMENT" shall mean the commitment of the Lender to make Loans to the Borrower and issue Letters of Credit from the Closing Date through the Commitment Termination Date up to an aggregate principal amount, at any one time, not in excess of $10,000,000, as such amount may be reduced from time to time in accordance with the terms of this Credit Agreement. "COMMITMENT FEE" shall have the meaning given such term in Section 2.5 hereof. "COMMITMENT TERMINATION DATE" shall mean the earlier to occur of (i) November 4, 2000 or (ii) such earlier date on which the Commitments shall terminate in accordance with Section 2.6 or Article 7 hereof. "COMPLETED" and "COMPLETION" shall mean with respect to any item of Product that (A) either (i) sufficient elements have been delivered by the Borrower to, and accepted by, a Person (other than the Borrower or Affiliate thereof) to permit such Person to exhibit the item of Product in the medium for which the item of Product is intended for initial exploitation in the United States or (ii) the Borrower has certified to the Lender that an independent laboratory has in its possession a complete final 35 mm or 70 mm (or other size which has become standard in the industry) composite positive print, video master or other equivalent master copy of the item of Product as finally cut, main and end titled, edited, scored and assembled with sound track printed thereon in perfect synchronization with the photographic action and fit and ready for exhibition and distribution in the medium for which the item of Product is intended for initial exploitation, provided that if such certification shall not be verified to the Lender by such independent laboratory within 20 business days thereafter, such item of Product shall revert to being uncompleted until the Lender receives such verification, and (B) if such item of Product was acquired from a third party, the entire acquisition price or minimum advance shall have been paid to the extent then due and there is no condition or event (other than the payment of money not yet due) the occurrence of which might result in the Borrower losing any of its rights in such item of Product. "COMPLETION GUARANTEE" shall mean a completion guarantee, in the customary form accepted by the Lender or otherwise in form and substance satisfactory to the Lender, issued by an Approved Completion Guarantor which names the Lender as a beneficiary thereof to the extent of the applicable Credit Party's financial interest in an item of Product. - 12 - "CONSOLIDATED CAPITAL BASE" shall mean the sum of the principal amount of Subordinated Debt outstanding (net of unamortized debt discount) plus the amount of Shareholders' Equity of the Borrower and its Consolidated Subsidiaries, all determined in accordance with GAAP. "CONSOLIDATED NET INCOME" shall mean, for any period for which such amount is being determined, the net income (or loss) of the Borrower and its Consolidated Subsidiaries during such period, determined on a consolidated basis for such period taken as a single accounting period in accordance with GAAP, provided that there shall be excluded (i) income (or loss) of any Person (other than a Consolidated Subsidiary) in which the Borrower or any of its Consolidated Subsidiaries has an equity investment or comparable interest, except to the extent of the amount of dividends or other distributions actually paid to the Borrower or any of its Consolidated Subsidiaries by such Person during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a Consolidated Subsidiary of the Borrower or is merged into or consolidated with the Borrower or any of its Consolidated Subsidiaries or the Person's assets are acquired by the Borrower or any of its Consolidated Subsidiaries and (iii) the income of any Consolidated Subsidiary to the extent that the declaration or payment of dividends or similar distributions by that Consolidated Subsidiary of its income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Consolidated Subsidiary. "CONSOLIDATED SUBSIDIARIES" shall mean all Subsidiaries of a Person which are required or permitted to be Consolidated with such Person for financial reporting purposes in accordance with GAAP. "CONTRIBUTION AGREEMENT" shall mean a Contribution Agreement executed by the Credit Parties substantially in the form of Exhibit J hereto, as the same may be amended, supplemented or otherwise modified from time to time. "CONTROLLED GROUP" shall mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with any Credit Party, are treated as a single employer under Section 414(b), (c), (m) or (o) of the Code. "COPYRIGHT SECURITY AGREEMENT" shall mean the Copyright Security Agreement, substantially in the form of Exhibit E-1 hereto as the same may be amended or supplemented from time to time by delivery of a Copyright Security Agreement Supplement or otherwise. "COPYRIGHT SECURITY AGREEMENT SUPPLEMENT" shall mean a Supplement to the Copyright Security Agreement substantially in the form of Exhibit E-2 hereto. "CORPORATE GUARANTORS" shall mean all of the direct and indirect Subsidiaries of the Borrower, now existing or hereafter acquired or created. - 13 - "CREDIT PARTY" shall mean the Borrower or any of the Corporate Guarantors. "CURRENCY AGREEMENT" shall mean any foreign exchange contract, currency swap agreement, futures contract, option contract or other similar agreement designed to protect any Credit Party against fluctuations in currency values. "DEFAULT" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "DISTRIBUTION AGREEMENTS" shall mean (i) any and all agreements entered into by a Credit Party pursuant to which such Credit Party has sold, leased, licensed or assigned distribution rights or other exploitation rights to any item of Product to an un-Affiliated Person and (ii) any agreement hereafter entered into by a Credit Party pursuant to which such Credit Party sells, leases, licenses or assigns distribution rights to an item of Product to an un-Affiliated Person. "DOLLARS" and "$" shall mean lawful money of the United States of America. "EBIT" shall mean, for any period, for the Borrower and its Subsidiaries on a Consolidated basis, the sum for such period of (i) Consolidated Net Income, (ii) Total Interest, and (iii) provision for income taxes during such period, all as determined for such period in conformity with GAAP. "ELIGIBLE L/C RECEIVABLE" shall have the same definition as an Eligible Receivable except that an Acceptable L/C shall have been delivered to the Lender for the full amount of the receivable. "ELIGIBLE LIBRARY AMOUNT" shall initially be equal to $13,300,000 and shall be redetermined no later than the Closing Date and on an annual basis thereafter by Richard L. Medress or an independent consultant selected by the Lender in its reasonable discretion exercised in good faith using methodology consistent with the initial valuation without double counting for items of Product that are receiving the credit in the Borrowing Base; provided, however, that there will be interim reductions to the Eligible Library Amount to reflect decreases, if any, in the remaining value of unsold library rights resulting from major library deals (e.g., any single agreement or series of related agreements pertaining to the licensing, distribution or sale of library product providing for aggregate payments (including reasonably estimated contingent payments) to a Credit Party in excess of $250,000) during such interim period. "ELIGIBLE RECEIVABLES" shall mean, at any date at which the amount thereof is to be determined, an amount equal to the sum of the present values (discounted, in the case of amounts which are not due and payable within 12 months following the date of determination, on a quarterly basis by a rate of - 14 - interest equal to the interest rate in effect on the Note on the date of computation) of (a) all net amounts which pursuant to a binding agreement are contractually obligated to be paid to any Credit Party either unconditionally or subject only to normal delivery requirements, and which are reasonably expected by the Borrower to be payable and collected from obligors (including, without limitation, amounts which a distributor has reported to a Credit Party in writing (and such report has been forwarded to the Lender) will be paid to such Credit Party following receipt by the distributor of sums contractually required to be paid to the distributor from third parties) minus (b) the sum, without double counting and computed on a receivable by receivable basis and never in excess of the amount of the corresponding receivable, of (i) in the case of audio and book receivables, a reserve in respect of estimated returns for items of Product sold on a returnable basis, allowances and doubtful payments of accounts for each such receivable, in an amount which shall not be less than 30% of the amount of the corresponding receivable, (ii) the following items (based on the Borrower's then best estimates): third party profit participations, residuals, collection/ distribution expenses, commissions, video fulfillment costs, foreign withholding, remittance and similar taxes chargeable in respect of such accounts receivable, and any other projected expenses of such Credit Party arising in connection with such amounts and (iii) the outstanding amount of unrecouped advances made by a distributor to the extent subject to repayment by a Credit Party or adjustment pursuant to approved Distribution Agreements, but Eligible Receivables shall not include amounts: (i) which in the reasonable discretion of the Lender (acting in good faith) are subject to material conditions precedent to payment (including a material performance obligation or a material executory aspect on the part of the Credit Parties or any other party or obligations contingent upon future events not within a Credit Party's direct control within the ordinary course of business); (ii) to the extent such receivables are more than 90 days past due; (iii) in excess of $50,000 that are to be paid in a currency other than Dollars unless hedged in a manner satisfactory to the Lender; (iv) to the extent included in the Borrower's estimated bad debts; (v) due from any obligor which has 20% or more of the total receivable amount from such obligor 120 or more days past due (exclusive of amounts that are being disputed or contested in good faith); (vi) for which there is a bona fide request for a material credit, adjustment, compromise, offset, counterclaim or dispute; provided, however, that only the amount in question shall be excluded from such receivable; (vii) which are attributable to an item of Product in which a Credit Party cannot warrant sufficient title to the underlying rights to justify such receivable; - 15 - (viii) in which the Lender does not have a first perfected security interest under the UCC and applicable copyright law; provided that, such receivable may be subject to permitted liens subordinate to the security interest of the Lender; (ix) which are determined by the Lender in its reasonable discretion, acting in good faith, upon written notice from the Lender to the Borrower and effective 10 days subsequent to the Borrower's receipt of such notice, to be unacceptable (it being understood that certain unacceptable receivables may be made acceptable and may be included in the Borrowing Base if secured by an Acceptable L/C); (x) which relate to items of Product as to which the Lender has not received a fully executed Laboratory Access Letter or Pledgeholder Agreement for each laboratory holding Physical Materials sufficient to fully exploit the rights held by the Borrower in such item of Product; (xi) which will be subject to reduction or repayment to the extent not earned by performance; (xii) which are attributable to items of Product as described in Section 5.21 unless the Borrower is in compliance with Section 5.21; (xiii) which are attributable to items of Product which have not been Completed (except that (1) if a Letter of Credit is issued in order to support the Borrower's minimum payment obligation to acquire distribution rights in such item of Product, amounts attributable to such rights may be treated as Eligible Receivables (even though the item of Product has not yet been Completed), PROVIDED THAT (A) proof of Completion of such item of Product must be presented in order to draw under the Letter of Credit, (B) the portion of the Borrowing Base attributable to such Eligible Receivables for such item of Product does not exceed the amount of such Letter of Credit for such item of Product, and (C) such amounts otherwise meet all of the applicable criteria for inclusion as Eligible Receivables except clause (x); or (2) if a Completion Guarantee has been issued for such item of Product or the Borrower is otherwise in compliance with Section 5.21, amounts attributable to such item of Product may be treated as Eligible Receivables (even though the item of Product has not yet been Completed), PROVIDED THAT (A) the portion of the Borrowing Base attributable to such Eligible Receivables for such - 16 - item of Product shall not exceed the amounts which would be paid to the Borrower or a Corporate Guarantor under such Completion Guarantee if such item of Product were abandoned as of the date of computation of the Borrowing Base and (B) such amounts otherwise meet all of the applicable criteria for inclusion as Eligible Receivables except clause (x); or (xiv) which will not become due and payable until one year or more after the scheduled final maturity of the Credit Agreement. The Lender from time to time by written notice to the Borrower (which notice shall be prospective only, i.e., to the extent that giving effect to such notice would otherwise result in a mandatory prepayment by the Borrower under Section 2.9, such notice shall not be given effect for purposes of such mandatory prepayment, but shall nevertheless be effective for all other purposes under this Credit Agreement immediately upon the Borrower's receipt of such notice) may determine that any amounts due under any Distribution Agreement are unacceptable and shall no longer constitute an Eligible Receivable as it may, acting in good faith, in its discretion deem appropriate. "ENVIRONMENTAL LAWS" shall mean any and all federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees or requirements of any Governmental Authority regulating, relating to or imposing liability or standards of conduct concerning any Hazardous Material or environmental protection or health and safety, as now or may at any time hereafter be in effect, including without limitation, the Clean Water Act also known as the Federal Water Pollution Control Act ("FWPCA"), 33 U.S.C.ss. 1251 et seq., the Clean Air Act ("CAA"), 42 U.S.C.ss.ss. 7401 et seq., the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"), 7 U.S.C.ss.ss. 136 et seq., the Surface Mining Control and Reclamation Act ("SMCRA"), 30 U.S.C.ss.ss. 1201 et seq., the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C.ss.9601 et seq., the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), Public Law 99-499, 100 Stat. 1613, the Emergency Planning and Community Right to Know Act ("ECPCRKA"), 42 U.S.C.ss.11001 et seq., the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. ss. 6901 et seq., the Occupational Safety and Health Act as amended ("OSHA"), 29 U.S.C.ss. 655 andss. 657, together, in each case, with any amendment thereto, and the regulations adopted pursuant thereto. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as heretofore and hereafter amended, as codified at 29 U.S.C.ss. 1001 et seq. and the regulations promulgated thereunder. "EURODOLLAR LOAN" shall mean a Loan based on the LIBO Rate in accordance with the provisions of Article 2 hereof. "EVENT OF DEFAULT" shall have the meaning given such term in Article 7 hereof. - 17 - "FUNDAMENTAL DOCUMENTS" shall mean this Credit Agreement, the Note, the Guaranty Agreements, the Pledgeholder Agreements, the Laboratory Access Letters, the Copyright Security Agreement, the Copyright Security Agreement Supplements, the Instruments of Assumption and Joinder, the Notices of Assignment and Irrevocable Instruction, UCC financing statements, and any other ancillary documentation which is required to be or is otherwise executed by any of the Credit Parties and delivered to the Lender in connection with this Credit Agreement or any other Fundamental Document. "GAAP" shall mean generally accepted accounting principles in the United States of America consistently applied (except for accounting changes in response to FASB releases, or other authoritative pronouncements). "GOVERNMENTAL AUTHORITY" shall mean any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, or any court, in each case whether of the United States or a foreign jurisdiction. "GUARANTY" shall mean, as to any Person, any direct or indirect obligation of such Person guaranteeing or intended to guaranty any Indebtedness, Capital Lease, dividend or other monetary obligation ("primary obligation") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (a) for the purchase or payment of any such primary obligation or (b) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, or (iii) to purchase property, securities or services, in each case, primarily for the purpose of assuring the performance of the obligor of any such primary obligation; provided, however, that the term Guaranty shall not include endorsements for collection or collections for deposit, in either case in the ordinary course of business. The amount of any Guaranty shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder). "GUARANTY AGREEMENTS" shall mean, collectively, the Amended and Restated Individual Guaranty Agreements dated the date hereof, each between an Individual Guarantor and the Lender substantially in the form of Exhibits K-1 through K-5 hereto, as the same may be amended, supplemented or otherwise modified from time to time. "HAZARDOUS MATERIALS" shall mean any flammable materials, explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances, or similar materials defined in any Environmental Law. - 18 - "INDEBTEDNESS" shall mean (without double counting), at any time and with respect to any Person, (i) indebtedness of such Person for borrowed money (whether by loan or the issuance and sale of debt securities) or for the deferred purchase price of property or services purchased (other than amounts constituting trade payables (payable within 90 days) arising in the ordinary course of business); (ii) obligations of such Person in respect of letters of credit, acceptance facilities, or drafts or similar instruments issued or accepted by banks and other financial institutions for the account of such Person; (iii) obligations of such Person under Capital Leases; (iv) deferred payment obligations of such Person resulting from the adjudication or settlement of any claim or litigation and (v) Indebtedness of others of the type described in clauses (i), (ii), (iii) and (iv) hereof which such Person has (a) directly or indirectly assumed or guaranteed in connection with a Guaranty or (b) secured by a Lien on the assets of such Person, whether or not such Person has assumed such indebtedness. Indebtedness shall not include non-refundable advances made by a third-party distributor to "cash-flow" the production of an item of Product. "INDIVIDUAL GUARANTORS" shall be as defined in the Introductory Statement hereof. "INSTRUMENTS OF ASSUMPTION AND JOINDER" shall mean the Instruments of Assumption and Joinder substantially in the form of Exhibit I pursuant to which Subsidiaries of the Borrower become parties to this Credit Agreement as contemplated by Section 6.22. "INTEREST PAYMENT DATE" shall mean (i) as to any Eurodollar Loan having an Interest Period of one, two or three months, the last day of such Interest Period, (ii) as to any Eurodollar Loan having an Interest Period of more than three months, the last day of such Interest Period and, in addition, each date during such Interest Period that would be the last day of an Interest Period commencing on the same day as the first day of such Interest Period but having a duration of three months or any integral multiple thereof and (iii) with respect to Alternate Base Rate Loans, the last Business Day of each March, June, September and December. "INTEREST PERIOD" shall mean as to any Eurodollar Loan, the period commencing on the date such Loan is made, continued or converted or the last day of the preceding Interest Period and ending on the numerically corresponding day (or if there is no corresponding day, the last day) in the calendar month that is one, two, three or six months thereafter as the Borrower may elect; provided, however, that (i) if any Interest Period would end on a day which shall not be a Business Day, such Interest Period shall be extended to the next succeeding Business Day, unless such next succeeding Business Day would fall in the next calendar month, in which case, such Interest Period shall end on the next preceding Business Day and (ii) no Interest Period may be selected which would end later than the Commitment Termination Date. "INTEREST RATE PROTECTION AGREEMENT" shall mean any interest rate swap agreement, interest rate cap agreement, synthetic caps, collars and floors or other financial agreement or arrangement designed to protect any Credit Party against fluctuations in interest rates. - 19 - "INVESTMENT" shall mean any stock, evidence of indebtedness or other securities of any Person, any loan, advance, contribution of capital, extension of credit or commitment therefor, including without limitation the guarantee of loans made to others (except for current trade and customer accounts receivable for goods or services provided or rendered in the ordinary course of business and payable in accordance with customary trading terms in the ordinary course of business), and any purchase of (i) any securities of another Person or (ii) any business or undertaking of any Person or any commitment or option to make any such purchase. "L/C EXPOSURE" shall mean, at any time, the amount expressed in Dollars of the aggregate face amount of all drafts which may then or thereafter be presented by beneficiaries under all Letters of Credit then outstanding plus (without duplication) the face amount of all drafts which have been presented or accepted under all Letters of Credit but have not yet been paid or have been paid but not reimbursed. "LABORATORY" shall mean any laboratory reasonably acceptable to the Lender which is located in the United States and is a party to a Pledgeholder Agreement or a Laboratory Access Letter. "LABORATORY ACCESS LETTER" shall mean a letter agreement among (i) a Laboratory holding any elements of any item of Product to which a Credit Party has the right of access, (ii) such Credit Party and (iii) the Lender, substantially in the form of Exhibit F hereto or a form otherwise acceptable to the Lender. "LENDER" shall be as defined in the Introductory Statement hereof. "LENDING OFFICE" shall mean, with respect to the Lender, the branch or branches (or affiliate or affiliates) from which the Lender's Eurodollar Loans or Alternate Base Rate Loans, as the case may be, are made or maintained and for the account of which all payments of principal of, and interest on, the Lender's Eurodollar Loans or Alternate Base Rate Loans are made. "LETTER OF CREDIT" shall mean a letter of credit issued by the Lender pursuant to Section 2.14. "LIBO RATE" shall mean, with respect to the Interest Period for a Eurodollar Loan, an interest rate per annum equal to the quotient (rounded upwards to the next 1/100 of 1%) of (A) the average of the rates at which Dollar deposits approximately equal in principal amount to such Eurodollar Loan and for a maturity equal to the applicable Interest Period are offered to the Lending Office of the Lender in immediately available funds in the London Interbank Market for Eurodollars at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period divided by (B) one minus - 20 - the applicable statutory reserve requirements of the Lender, expressed as a decimal (including without duplication or limitation, basic, supplemental, marginal and emergency reserves), from time to time in effect under Regulation D or similar regulations of the Board. It is agreed that for purposes of this definition, Eurodollar Loans made hereunder shall be deemed to constitute Eurocurrency Liabilities as defined in Regulation D and to be subject to the reserve requirements of Regulation D. "LIEN" shall mean any mortgage, copyright mortgage, pledge, security interest, encumbrance, lien or charge of any kind whatsoever (including any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction or the agreement to grant a security interest at a future date). "LOANS" shall mean the loans made hereunder in accordance with the provisions of Section 2.2, whether made as a Eurodollar Loan or an Alternate Base Rate Loan, as permitted hereby. "MARGIN STOCK" shall be as defined in Regulation U of the Board. "MATERIAL AGREEMENT" shall mean any agreement set forth on Schedule 3.17 hereto. "MAXIMUM GUARANTY AMOUNT" shall be as defined in the Introductory Statement hereof. "MULTIEMPLOYER PLAN" shall mean a plan described in Section 4001(a)(3) of ERISA. "NOTICE OF ASSIGNMENT AND IRREVOCABLE INSTRUCTIONS" shall mean the Notice of Assignment and Irrevocable Instructions substantially in the form of Exhibit G or in such other form as shall be acceptable to the Lender, including without limitation the inclusion of such notice and instructions in a Distribution Agreement. "OBLIGATIONS" shall mean the obligation of the Borrower to make due and punctual payment of principal of and interest on the Loans, the Commitment Fee, reimbursement obligations in respect of Letters of Credit and all other monetary obligations of the Borrower owed to the Lender under this Credit Agreement, the Note, the Commitment Letter or any other Fundamental Document and all amounts payable by the Borrower to the Lender under any Interest Rate Protection Agreement or Currency Agreement, provided that the Lender shall have received written notice within 10 days after execution of each such Interest Rate Protection Agreement or Currency Agreement. - 21 - "PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor thereto. "PERMITTED ENCUMBRANCES" shall mean Liens permitted under Section 6.2 hereof. "PERSON" shall mean any natural person, corporation, partnership, trust, joint venture, association, company, estate, unincorporated organization or government or any agency or political subdivision thereof. "PHYSICAL MATERIALS" shall have the meaning given such term in the definition of "Collateral" herein. "PLAN" shall mean an employee benefit plan within the meaning of Section 3(2) of ERISA, other than a Multiemployer Plan, maintained by the Borrower or any member of the Controlled Group, or to which the Borrower or any member of the Controlled Group contributes or is required to contribute or any other plan covered by Title IV of ERISA that cover any employees of the Borrower or any member of the Controlled Group. "PLEDGED SECURITIES" shall mean 100% of the issued and outstanding capital stock of each of the Corporate Guarantors. "PLEDGEHOLDER AGREEMENT" shall mean a Laboratory Pledgeholder Agreement among a Credit Party, the Lender, a third party completion guarantor (if there is one), and one or more Laboratories, substantially in the form of Exhibit D-1 or Exhibit D-2 hereto, or in such other form as shall be acceptable to the Lender. "PLEDGORS" shall mean those Credit Parties identified as such on Schedule 3.7(a). "PRODUCT" shall mean any motion picture, film or video tape produced for television release or for release in any other medium, in each case whether recorded on film, videotape, cassette, cartridge, disc or on or by any other means, method, process or device whether now known or hereafter developed, with respect to which a Credit Party (i) is the initial copyright owner or (ii) acquires an equity interest or distribution rights. The term "item of Product" shall include, without limitation, the scenario, screenplay or script upon which such Product is based, all of the properties thereof, tangible and intangible, and whether now in existence or hereafter to be made or produced, whether or not in possession of the Credit Parties, and all rights therein and thereto, of every kind and character. "PRODUCTION ACCOUNT(S)" shall mean individually or collectively, as the context so requires, each demand deposit account(s) established by a Credit Party at a commercial bank located in the United States or otherwise acceptable to the Lender, for the sole purpose of paying the production costs of a particular item of Product and, if a Completion Guaranty is required for such item of Product pursuant to the terms hereof, as to which the Approved Completion Guarantor for such item of Product has agreed in writing that amounts deposited in such account shall be deemed available for production of such item of Product for purposes of the Completion Guarantee for such item of Product. - 22 - "PRODUCTION EXPOSURE" for an item of Product shall mean the Budgeted Negative Cost or acquisition price paid or to be paid by a Credit Party (net of amounts being cash-flowed by a third party unrelated to a Credit Party pursuant to contractual arrangements reasonably acceptable to the Lender). "RECORDED PRODUCT" shall mean any audio embodiment or musical, spoken or other sound based upon literary or other works regardless of the nature of the material object, such as discs, tapes or other phonorecords, in which such sounds are embodied, including without limitation audio books. "REPORTABLE EVENT" shall mean any reportable event as defined in Section 4043(c) of ERISA, other than a reportable event as to which provision for 30-day notice to the PBGC would be waived under applicable regulations had the regulations in effect on the Closing Date been in effect on the date of occurrence of such reportable event. "RESTRICTED PAYMENT" shall mean (i) any distribution, dividend or other direct or indirect payment on account of shares of any class of stock of, partnership interest in, or any other equity interest of, a Credit Party, other than a dividend, distribution or other payment payable solely in shares of common stock, (ii) any redemption or other acquisition, re-acquisition or retirement by a Credit Party of any class of its own stock or other equity interest of a Credit Party or an Affiliate, now or hereafter outstanding, (iii) any payment made to retire, or obtain the surrender of any outstanding warrants, puts or options or other rights to purchase or acquire shares of any class of stock of, or any equity interest in, a Credit Party, now or hereafter outstanding and (iv) any payment by a Credit Party of principal of, premium, if any, or interest on, or any redemption, purchase, retirement, defeasance, sinking fund or similar payment with respect to, any Subordinated Debt now or hereafter outstanding. "SHAREHOLDERS' EQUITY" shall mean the consolidated capital, surplus and retained earnings and deficits of the Borrower and its Subsidiaries, subject to intercompany eliminations and reduced by the outstanding amount of any note held by the Borrower in payment for capital stock, all as determined in accordance with GAAP. "STRIKE PRICE" shall mean, with respect to any item of Product, the amount of funds required to be provided under the relevant Completion Guarantee, if applicable. "SUBORDINATED DEBT" shall mean all Indebtedness of any of the Credit Parties that is subordinated to the Obligations pursuant to written agreements, containing interest rates, payment terms, maturities, amortization schedules, covenants, defaults, remedies, subordination provisions and other material terms in form and substance satisfactory to the Lender. - 23 - "SUBSIDIARY" shall mean with respect to any Person, any corporation, association, joint venture, partnership or other business entity (whether now existing or hereafter organized) of which at least a majority of the Voting Stock or other ownership interests having ordinary voting power for the election of directors (or the equivalent) is, at the time as of which any determination is being made, owned or controlled by such Person or one or more subsidiaries of such Person or by such Person and one or more subsidiaries of such Person. "TOTAL INTEREST" shall mean the sum of (i) all cash interest expenses (net of interest income) calculated on an accrual basis of the Borrower and its Consolidated Subsidiaries computed in accordance with GAAP (whether indicated on the consolidated statement of earnings under the caption "Interest Expense" or netted out under the amount appearing under the caption "Interest and Investment Income") plus (ii) any cash interest expense calculated on an accrual basis that has been capitalized (other than as part of film costs) during the relevant period. "UCC" shall mean the Uniform Commercial Code as in effect in the State of New York on the date of execution of this Credit Agreement. "VOTING STOCK" shall mean the capital stock of an entity having ordinary voting power under ordinary circumstances to vote in the election of directors of such entity. 2. THE LOANS SECTION 2.1. LOANS. (a) The Lender agrees, upon the terms and subject to the conditions hereof, to make loans to the Borrower, on any Business Day and from time to time from the Closing Date to but excluding the Commitment Termination Date, each in an aggregate principal amount which when added to the aggregate principal amount of all Loans then outstanding to the Borrower from the Lender plus the then current L/C Exposure, does not exceed the Lender's Commitment (after giving effect to all Loans repaid and all reimbursements of Letters of Credit made concurrently with the making of any Loans). (b) Subject to Section 2.2, the Loans shall be made at such times as the Borrower shall request. (c) Subject to the terms and conditions of this Credit Agreement, the Borrower may borrow, repay and re-borrow amounts constituting the Commitment. (d) Notwithstanding anything to the contrary above, the Lender shall not be obligated to make Loans or to incur any incremental L/C Exposure if, as a result thereof, the aggregate principal amount of all Loans then outstanding plus the then current L/C Exposure exceeds the lesser of (x) the sum of (A) the Maximum Guaranty Amount plus (B) amounts currently held in the Collection Account plus (C) the Borrowing Base or (y) the Commitment. - 24 - SECTION 2.2. MAKING OF LOANS. (a) Each Loan shall be an Alternate Base Rate Loan or a Eurodollar Loan as the Borrower may request subject to and in accordance with this Section 2.2. (b) The Borrower shall give the Lender at least three Business Days' prior written, facsimile or telephonic (promptly confirmed in writing) notice of each Borrowing which is to consist of Eurodollar Loans, and at least one Business Day's prior written, facsimile or telephonic (promptly confirmed in writing) notice of each Borrowing which is to consist of Alternate Base Rate Loans. Each such notice in order to be effective must be received by the Lender not later than 2:00 p.m., New York City time, on the day required and shall specify the date (which shall be a Business Day) on which such Loan is to be made, the aggregate principal amount of the requested Loan. Each such notice shall be irrevocable and shall specify whether the Borrowing then being requested is to consist of Alternate Base Rate Loans or Eurodollar Loans and in the case of Eurodollar Loans, the Interest Period or Interest Periods with respect thereto; provided, that in the event the Lender shall have determined that Eurodollar Loans are not available pursuant to Section 2.7(b), the Borrower may rescind such Borrowing request by providing the Lender notice thereof no later than 5:00 p.m. (New York City time) on the day the Borrower received notice of such unavailability. If no election of an Interest Period is specified in such notice in the case of a Borrowing consisting of Eurodollar Loans, such notice shall be deemed to be a request for an Interest Period of one month. If no election is made as to the type of Loan, such notice shall be deemed a request for a Borrowing consisting of Alternate Base Rate Loans. No Borrowing shall consist of Eurodollar Loans if after giving effect thereto an aggregate of more than six (6) separate Eurodollar Loans would be outstanding hereunder (determined in accordance with Section 2.9(c) hereof). (c) Each Loan requested by the Borrower shall be as specified on the applicable Borrowing Certificate delivered to the Lender in connection with such Loan. The Lender shall disburse such funds by depositing the requested amounts into an account designated by the Borrower. (d) The Lender may at its option fulfill its obligation to make Eurodollar Loans by causing a foreign branch or affiliate to fund such Eurodollar Loans, provided that any exercise of such option shall not affect the obligation of the Borrower to repay Loans in accordance with the terms hereof. Subject to the other provisions of this Section 2.2, Loans of more than one interest rate type may be outstanding at the same time. (e) The amount of any Borrowing of new funds shall be in an aggregate principal amount of $125,000 (or such lesser amount as shall equal the available but unused portion of the Commitment) or such greater amount which is an integral multiple of $100,000; PROVIDED, HOWEVER that the amount of any Borrowing of new funds which shall be a Eurodollar Loan shall be in an aggregate principal amount of $500,000 or such greater amount which is an integral multiple of $100,000. - 25 - (f) Notwithstanding the provisions of clause (b) above and/or the absence of a request from the Borrower that the Lender make a Loan, the Lender may make Loans and apply the proceeds thereof as follows: (i) if the Approved Completion Guarantor for an item of Product being produced by the Borrower or for which receivables are included in the Borrowing Base shall take over production of such item of Product pursuant to the Completion Guarantee with respect to such item of Product, to make Loans up to the Strike Price with respect to the production of such item of Product and pay the proceeds thereof directly to the Approved Completion Guarantor to be used to finance the production and delivery of such item of Product pursuant to the terms of the Completion Guarantee; and (ii) if an Event of Default shall have occurred and be continuing, to make Loans with respect to any item of Product being produced by the Borrower or for which receivables are included in the Borrowing Base and pay the proceeds thereof directly to Persons providing services in connection with the production, delivery and distribution of such Product so as to ensure Completion of such item of Product and/or the collection of Eligible Receivables. SECTION 2.3. NOTE. (a) The Loans made by the Lender hereunder shall be evidenced by a single promissory note substantially in the form of Exhibit A hereto (the "Note") in the face amount of the Lender's Commitment, payable to the order of the Lender, duly executed by the Borrower and dated as of November 4, 1997. (b) The Note shall bear interest on the outstanding principal balance thereof as set forth in Section 2.4 hereof. The Lender is hereby authorized by the Borrower, but not obligated, to enter the amount of each Loan and the amount of each payment or prepayment of principal or interest thereon in the appropriate spaces on the reverse of or on an attachment to the Note; PROVIDED, HOWEVER, that the failure of the Lender to set forth such Loans, principal payments or other information shall not in any manner affect the obligations of the Borrower to repay such Loans. SECTION 2.4. INTEREST ON NOTE. (a) In the case of a Eurodollar Loan, interest shall be payable at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the LIBO Rate plus the Applicable Margin. Interest shall be payable on each Eurodollar Loan on each applicable Interest Payment Date, at maturity and on the date of a conversion of such Eurodollar Loan to an Alternate Base Rate Loan. The Lender shall determine the applicable LIBO Rate for each Interest Period as soon as practicable on the date when such determination is to be made in respect of such Interest Period and shall notify the Borrower of the applicable interest rate so determined. Such determination shall be conclusive absent manifest error. - 26 - (b) In the case of an Alternate Base Rate Loan, interest shall be payable at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 365/366 days, as the case may be, during such times as the Alternate Base Rate is based upon the Prime Rate, and over a year of 360 days at all other times) equal to the Alternate Base Rate plus the Applicable Margin. Interest shall be payable on each Alternate Base Rate Loan on each applicable Interest Payment Date and at maturity. (c) Anything in this Credit Agreement or the Note to the contrary notwithstanding, the interest rate on the Loans shall in no event be in excess of the maximum permitted by Applicable Law. SECTION 2.5. COMMITMENT FEES AND OTHER FEES. (a) The Borrower agrees to pay to the Lender on the last Business Day of each March, June, September and December in each year (commencing on the last Business Day of June 1999) prior to the Commitment Termination Date and on the Commitment Termination Date, an aggregate fee (the "COMMITMENT FEE") of 1/2 of 1% per annum, computed on the basis of the actual number of days elapsed during the preceding period or quarter over a year of 360 days, on the average daily amount by which the Lender's Commitment, as such Commitment may be reduced in accordance with the provisions of this Credit Agreement, exceeds the sum of the principal balance of the Lender's outstanding Loans plus its L/C Exposure during the preceding period or quarter. (b) The Commitment Fee shall commence to accrue from the Closing Date. SECTION 2.6. OPTIONAL AND MANDATORY TERMINATION OR REDUCTION OF COMMITMENT. (a) Upon at least three Business Days' prior written, facsimile or telephonic notice (provided that such telephonic notice is immediately followed by written confirmation) to the Lender, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitment. In the case of a partial reduction, each such reduction of the Commitment shall be in a minimum aggregate principal amount of $500,000 or an integral multiple thereof; PROVIDED, HOWEVER, that the Commitment may not be reduced by more than the amount of the then unused Commitment and may not be reduced to an amount less than the aggregate principal amount of the Loans outstanding, plus the then current L/C Exposure. (b) Simultaneously with each such termination or reduction of the Commitment, the Borrower shall pay to the Lender all accrued and unpaid Commitment Fees on the amount of the Commitment so terminated or reduced through the date of such termination or reduction. - 27 - SECTION 2.7. DEFAULT INTEREST; ALTERNATE RATE OF INTEREST. (a) If the Borrower shall default in the payment of the principal of, or interest on any Loan becoming due hereunder, whether at stated maturity, by acceleration or otherwise, or the payment of any other amount becoming due hereunder after written notification from the Lender to the Borrower of such amount, the Borrower shall on demand from time to time pay interest, to the extent permitted by law, on all Loans and overdue amounts outstanding up to the date of actual payment of such defaulted amount (after as well as before judgment) (i) for the remainder of the then current Interest Period for each Eurodollar Loan, at 2% in excess of the rate then in effect for each such Eurodollar Loan and (ii) for all periods subsequent to the then current Interest Period for each Eurodollar Loan, for all Alternate Base Rate Loans and for all other overdue amounts hereunder, at 2% in excess of the rate then in effect for Alternate Base Rate Loans. (b) In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Loan, (i) the Lender shall have determined (which determination, absent manifest error, shall be conclusive) that Dollar deposits in the amount of the principal amount of such Eurodollar Loan are not generally available in the London Interbank Market or that the rate at which such Dollar deposits are being offered will not adequately and fairly reflect the cost to the Lender of making or maintaining the principal amount of such Eurodollar Loan during such Interest Period or (ii) the Lender shall have determined that reasonable means do not exist for ascertaining the applicable LIBO Rate, the Lender shall, as soon as practicable thereafter, give written or facsimile notice of such determination to the Borrower, and any request by the Borrower for a Eurodollar Loan (or conversion to or continuation as a Eurodollar Loan pursuant to Section 2.8 hereof), made after receipt of such notice, shall be deemed a request for an Alternate Base Rate Loan (unless such borrowing request has been rescinded pursuant to Section 2.2 (b)). After such notice shall have been given and until the circumstances giving rise to such notice no longer exist, each request (or portion thereof, as the case may be) for a Eurodollar Loan shall be deemed to be a request for an Alternate Base Rate Loan. SECTION 2.8. CONTINUATION AND CONVERSION OF LOANS. The Borrower shall have the right, at any time, (i) to convert any Eurodollar Loan or portion thereof to an Alternate Base Rate Loan or to continue such Eurodollar Loan or a portion thereof for a successive Interest Period, or (ii) to convert any Alternate Base Rate Loan or a portion thereof to a Eurodollar Loan, subject to the following: (a) the Borrower shall give the Lender prior written, facsimile or telephonic (promptly confirmed in writing) notice of each continuation or conversion hereunder of at least three Business Days for continuation as or conversion to a Eurodollar Loan; such notice shall be irrevocable and to be effective, must be received by the Lender on the day required not later than 2:00 p.m., New York City time; - 28 - (b) no Event of Default or Default shall have occurred and be continuing at the time of any conversion to a Eurodollar Loan or continuation of any such Eurodollar Loan into a subsequent Interest Period; (c) no Alternate Base Rate Loan may be converted to a Eurodollar Loan and no Eurodollar Loan may be continued as a Eurodollar Loan if, after such conversion or continuance, and after giving effect to any concurrent prepayment of Loans, an aggregate of more than six separate Eurodollar Loans would be outstanding hereunder (for purposes of determining the number of such Loans outstanding, Loans with different Interest Periods shall be counted as different Loans even if made on the same date); (d) the aggregate principal amount of Loans continued as or converted to Eurodollar Loans as part of the same Borrowing shall be $500,000 or such greater amount which is an integral multiple of $100,000; (e) accrued interest on the Eurodollar Loans (or portion thereof) being continued shall be paid by the Borrower at the time of continuation; (f) the Interest Period with respect to a new Eurodollar Loan effected by a continuation or conversion shall commence on the date of such continuation or conversion; (g) if a Eurodollar Loan is converted to another type of Loan prior to the last day of the Interest Period with respect thereto, the amounts required by Section 2.9(b) shall be paid upon such conversion; and (h) each request for a continuation as or conversion to a Eurodollar Loan which fails to state an applicable Interest Period shall be deemed to be a request for an Interest Period of one month. In the event that the Borrower shall not give notice to continue or convert any Eurodollar Loan as provided above, such Loan (unless repaid) shall automatically be continued as a Eurodollar Loan having an Interest Period of one month at the expiration of the then current Interest Period. SECTION 2.9. Prepayment of Loans; Reimbursement of Lender. (a) Subject to the terms of paragraph (b) of this Section 2.9, the Borrower shall have the right at its option at any time and from time to time to prepay (i) any Alternate Base Rate Loan, in whole or in part, upon at least one Business Day's prior written, telephonic (promptly confirmed in writing) or facsimile notice to the Lender, in the principal amount of $125,000 or such greater amount which is an integral multiple of $100,000 or the remaining balance of such Loan if prepaid in full and (ii) any Eurodollar Loan, in whole or in part, upon at least three Business Days' prior written, telephonic (promptly confirmed in writing) or facsimile notice, in the principal amount of $500,000 or such greater amount which is an integral multiple of $100,000 if prepaid in part, or the remaining balance of such Loan if prepaid in full. Each notice of prepayment shall specify - 29 - the prepayment date, each Loan to be prepaid and the principal amount thereof, shall be irrevocable and shall commit the Borrower to prepay such Loan in the amount and on the date stated therein. All prepayments under this Section 2.9(a) shall be accompanied by accrued but unpaid interest on the principal amount being prepaid to (but not including) the date of prepayment. (b) The Borrower shall reimburse the Lender on demand for any loss incurred or to be incurred by the Lender in the reemployment of the funds released (i) by any prepayment (for any reason) of any Eurodollar Loan if such Loan is repaid other than on the last day of the Interest Period for such Loan or (ii) in the event that after the Borrower delivers a notice of borrowing under Section 2.2(b) or Section 2.8(a) in respect of Eurodollar Loans, such Loan is not made, converted to or continued as a Eurodollar Loan on the first day of the Interest Period specified in such notice of borrowing for any reason other than (A) a suspension or limitation under Section 2.7(b) of the right of the Borrower to select a Eurodollar Loan, (B) a breach by the Lender of its obligation to fund such borrowing when it is otherwise required to do so hereunder or (C) a repayment resulting from a conversion required by the Lender pursuant to Section 2.11(a). Such loss shall be the amount as reasonably determined by the Lender as the excess, if any, of (I) the amount of interest which would have accrued to the Lender on the amount so paid or not borrowed, continued or converted at a rate of interest equal to the interest rate applicable to such Loan pursuant to Section 2.4 hereof, for the period from the date of such payment or failure to borrow, continue or convert to the last day (x) in the case of a payment prior to the last day of the Interest Period for such Loan, of the then current Interest Period for such Loan or (y) in the case of such failure to borrow, continue or convert, of the Interest Period for such Loan which would have commenced on the date of such failure to borrow, continue or convert, over (II) the amount realized or to be realized by the Lender in reemploying the funds not advanced or the funds received in prepayment or realized from the Loan not so continued or converted during the period referred to above. The Lender shall deliver to the Borrower from time to time one or more certificates setting forth the amount of such loss (and in reasonable detail the manner of computation thereof) as determined by the Lender, which certificates shall be conclusive absent manifest error. The Borrower shall pay the Lender the amounts shown on such certificate within ten days of the Borrower's receipt of such certificate. (c) In the event the Borrower fails to prepay any Loan on the date specified in any prepayment notice delivered pursuant to Section 2.9(a), the Borrower shall pay to the Lender any amounts required to compensate the Lender for any actual loss incurred by the Lender as a result of such failure to prepay, including, without limitation, any loss, cost or expenses incurred by reason of the acquisition of deposits or other funds by the Lender to fulfill deposit obligations incurred in anticipation of such prepayment. The Lender shall deliver to the Borrower from time to time one or more certificates setting forth the amount of such loss (and in reasonable detail the manner of computation thereof) as determined by the Lender, which certificates shall be conclusive absent manifest error. The Borrower shall pay the Lender the amounts shown on such certificate within ten days of the Borrower's receipt of such certificate. - 30 - (d) If at any time the sum of the Loans outstanding plus the L/C Exposure exceeds the sum of (x) the Maximum Guaranty Amount, (y) the Borrowing Base and (z) the amounts currently held in the Collection Account, as set forth on the most recent Borrowing Base Certificate, the Borrower shall immediately pay down the Loans outstanding or otherwise eliminate such excess. (e) Simultaneously with each termination and/or mandatory or optional reduction of the Commitment pursuant to Section 2.6, the Borrower shall pay to the Lender an amount equal to the excess of the sum of aggregate outstanding principal amount of the Loans plus the L/C Exposure, over the reduced Commitment. (f) Unless otherwise designated in writing by the Borrower, all prepayments shall be applied to the applicable principal payment set forth in this Section 2.9, first to that amount of such applicable principal payment then maintained as Alternate Base Rate Loans by the Borrower, and then, to that amount of such applicable principal payment maintained as Eurodollar Loans by the Borrower in order of the scheduled expiry of Interest Periods with respect thereto. (g) All prepayments shall be accompanied by accrued but unpaid interest on the principal amount being prepaid to but not including the date of prepayment. SECTION 2.10. CHANGE IN CIRCUMSTANCES. (a) In the event that after the Closing Date any change in Applicable Law or in the official interpretation or administration thereof (including, without limitation, any request, guideline or policy not having the force of law) by any Governmental Authority charged with the administration or interpretation thereof or, with respect to clause (ii), (iii) or (iv) below any change in conditions, shall occur which shall: (i) subject the Lender to, or increase the net tax, levy, impost, duty, charge, fee, deduction or withholding with respect to any Eurodollar Loan (other than withholding tax imposed by the United States of America or any political subdivision or taxing authority thereof or any other tax, levy, impost, duty, charge, fee, deduction or withholding (A) that is measured with respect to the overall net income of the Lender or of a Lending Office of the Lender, and that is imposed by the United States of America, or by the jurisdiction in which the Lender or Lending Office is incorporated, in which the Lending Office is located, managed or controlled or in which the Lender has its principal office (or any political subdivision or taxing authority thereof or therein), or (B) that is imposed solely by reason of the Lender failing to make a declaration of, or otherwise to establish, non-residence, or to make any other claim for exemption, or otherwise to comply with any certification, identification, information, documentation or - 31 - reporting requirements prescribed under the laws of the relevant jurisdiction, in those cases where the Lender may properly make such declaration or claim or so establish non-residence or otherwise comply); or (ii) change the basis of taxation of any payment to the Lender of principal or any interest on any Eurodollar Loan or other fees and amounts payable to the Lender hereunder, or any combination of the foregoing; other than withholding tax imposed by the United States of America or any political subdivision or taxing authority thereof or any other tax, levy, impost, duty, charge, fee, deduction or withholding that is measured with respect to the overall net income of the Lender or of a Lending Office of the Lender, and that is imposed by the United States of America, or by the jurisdiction in which the Lender or Lending Office is incorporated, in which such Lending Office is located, managed or controlled or in which the Lender has its principal office (or any political subdivision or taxing authority thereof or therein); or (iii) impose, modify or deem applicable any reserve, deposit or similar requirement against any assets held by, deposits with or for the account of or loans or commitments by an office of the Lender with respect to any Eurodollar Loan; or (iv) impose upon the Lender or the London Interbank Market any other condition with respect to the Eurodollar Loans or this Credit Agreement; and the result of any of the foregoing shall be to increase the actual cost to the Lender of making or maintaining any Eurodollar Loan hereunder or to reduce the amount of any payment (whether of principal, interest or otherwise) received or receivable by the Lender in connection with any Eurodollar Loan hereunder, or to require the Lender to make any payment in connection with any Eurodollar Loan hereunder, in each case by or in an amount which the Lender in its sole judgment shall deem material, then and in each case the Borrower shall pay to the Lender, as provided in paragraph (c) below, such amounts as shall be necessary to compensate the Lender for such cost, reduction or payment. (b) If at any time and from time to time after the Closing Date the Lender shall have determined that the applicability of any law, rule, regulation or guideline adopted after the Closing Date regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender (or any Lending Office of the Lender) or the Lender's holding company with any request or directive regarding capital - 32 - adequacy (whether or not having the force of law) of the authority, central bank or comparable agency, would actually reduce the rate of return on the Lender's capital or on the capital of the Lender's holding company, if any, as a consequence of this Credit Agreement or the Loans made or Letters of Credit issued by the Lender pursuant hereto to a level below that which the Lender or the Lender's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration the Lender's policies and the policies of the Lender's holding company with respect to capital adequacy) by an amount deemed by the Lender to be material, then from time to time the Borrower shall pay to the Lender such additional amount or amounts as will compensate the Lender or the Lender's holding company for any such actual reduction suffered with respect to Loans made by the Lender hereunder. (c) The Lender shall deliver to the Borrower from time to time, one or more certificates setting forth the amounts due to the Lender under paragraphs (a) and (b) above within six months after incurring such additional costs or suffering such reductions, the changes as a result of which such amounts are due, the manner of computing such amounts and the manner of computing the amounts allocable to Loans hereunder pursuant to paragraphs (a) and (b) above. Each such certificate shall be conclusive in the absence of manifest error. The Borrower shall pay to the Lender the amounts shown as due on any such certificate within ten Business Days after its receipt of the same. No failure on the part of the Lender to demand compensation under paragraph (a) or (b) above on any one occasion shall constitute a waiver of its rights to demand compensation on any other occasion. The protection of this Section 2.10(c) shall be available to the Lender regardless of any possible contention of the invalidity or inapplicability of any law, regulation or other condition which shall give rise to any demand by the Lender for compensation thereunder. (d) The Lender agrees that after it becomes aware of the occurrence of an event or the existence of a condition that (i) would cause it to incur any increased cost hereunder or render it unable to perform its agreements hereunder for the reasons specifically set forth in Section 2.7(b), this Section 2.10 or Section 2.14(g) or (ii) would require the Borrower to pay an increased amount under Section 2.7(b), this Section 2.10 or Section 2.14(g), it will use reasonable efforts to notify the Borrower of such event or condition and, to the extent not inconsistent with the Lender's internal policies, will use its reasonable efforts to make, fund or maintain the affected Loans of the Lender, or, if applicable, to issue Letters of Credit as required under Section 2.14, through another Lending Office of the Lender if as a result thereof the additional monies which would otherwise be required to be paid or the reduction of amounts receivable by the Lender thereunder in respect of such Loans would be materially reduced, or such inability to perform would cease to exist, or the increased costs which would otherwise be required to be paid in respect of such Loans pursuant to Section 2.7(b), this Section 2.10 or Section 2.14(f) would be materially reduced or the taxes or other amounts otherwise payable under Section 2.7(b), this Section 2.10 or Section 2.14(f) would be materially reduced, and if, as determined by the Lender, in its discretion, the making, funding or maintaining of such Loans through such other Lending Office would not otherwise materially adversely affect such Loans or the Lender. - 33 - SECTION 2.11. CHANGE IN LEGALITY. (a) Notwithstanding anything to the contrary contained elsewhere in this Credit Agreement, if any change after the Closing Date in Applicable Law, guideline or order, or in the interpretation thereof by any Governmental Authority charged with the administration thereof, shall make it unlawful for the Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to a Eurodollar Loan, then, by written notice to the Borrower, the Lender may (i) declare that Eurodollar Loans will not thereafter be made by the Lender hereunder and/or (ii) require that, subject to Section 2.9(b), all outstanding Eurodollar Loans made by it be converted to Alternate Base Rate Loans, whereupon all of such Eurodollar Loans shall automatically be converted to Alternate Base Rate Loans, as of the effective date of such notice as provided in paragraph (b) below. Any subsequent Eurodollar Loan shall, instead, be an Alternate Base Rate Loan unless such declaration is subsequently withdrawn. (b) A notice to the Borrower by the Lender pursuant to paragraph (a) above shall be effective for purposes of clause (ii) thereof, if lawful, on the last day of the current Interest Period for each outstanding Eurodollar Loan; and in all other cases, on the date of receipt of such notice by the Borrower. SECTION 2.12. MANNER OF PAYMENTS. All payments by the Borrower hereunder and under the Note shall be made in Dollars in Federal or other immediately available funds at the office of The Chase Manhattan Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, 8th Floor, New York, NY 10081, Attention: Ganesh Persaud, for credit to the "NewStar Media Inc. Collection Account," Account No. 323-516-440, no later than 2:00 p.m., New York City time, on the date on which such payment shall be due. Interest in respect of any Loan hereunder shall accrue from and including the date of such Loan to but excluding the date on which such Loan is paid or converted to a Loan of a different type. SECTION 2.13. INTEREST ADJUSTMENTS. (a) If the provisions of this Credit Agreement or Note would at any time require payment by the Borrower to the Lender of any amount of interest in excess of the maximum amount then permitted by the law applicable to any Loan, the interest payments to the Lender shall be reduced to the extent necessary so that the Lender shall not receive interest in excess of such maximum amount. If, as a result of the foregoing, the Lender shall receive interest payments hereunder or under the Note in an amount less than the amount otherwise provided hereunder, such deficit (hereinafter called the "Interest Deficit") will, to the fullest extent permitted by Applicable Law, cumulate and will be carried forward (without interest) until the termination of this Credit Agreement. Interest otherwise payable to the Lender hereunder and under the Note for any subsequent period shall be increased by the maximum amount of the Interest Deficit that may be so added without causing the Lender to receive interest in excess of the maximum amount then permitted by the law applicable to the Loans. - 34 - (b) The amount of any Interest Deficit relating to a particular Loan and the Note shall be treated as a prepayment penalty and shall, to the fullest extent permitted by Applicable Law, be paid in full at the time of any optional prepayment by the Borrower to the Lender of all the Loans at that time outstanding pursuant to Section 2.9(a) hereof and upon termination or reduction of the Commitment pursuant to Section 2.6 hereof. The amount of any Interest Deficit relating to a particular Loan and the Note at the time of any complete payment of the Loans at that time outstanding (other than an optional prepayment thereof pursuant to Section 2.9(a) hereof) shall be canceled and not paid. SECTION 2.14. LETTERS OF CREDIT. (a) (i) Subject to the terms and conditions hereof and of Applicable Law, the Lender agrees to issue Letters of Credit payable in Dollars from time to time after the Closing Date and prior to the Commitment Termination Date upon the request of the Borrower, PROVIDED, HOWEVER, that (A) the Borrower shall not request that any Letter of Credit be issued if, after giving effect thereto, the sum of the then current L/C Exposure, plus the aggregate Loans then outstanding, would exceed the lesser of (x) the sum of (I) the Maximum Guaranty Amount, (II) the then current amount of the Borrowing Base and (III) the then current amount held in the Collection Account or (y) the Commitment and (B) in no event shall the Lender issue any Letter of Credit having an expiration date after the Commitment Termination Date or pursuant to which drafts drawn thereunder would be payable after the Commitment Termination Date. (ii) Each Letter of Credit may, at the option of the Lender, provide that the Lender may (but shall not be required to) pay all or any part of the maximum amount which may at any time be available for drawing thereunder to the beneficiary thereof upon the occurrence and continuation of an Event of Default and the acceleration of the maturity of the Loans, provided that, if payment is not then due to the beneficiary, the Lender may deposit the funds in question in a segregated account with the Lender to secure payment to the beneficiary and any funds so deposited shall be paid to the beneficiary of the Letter of Credit if conditions to such payment are satisfied or returned to the Lender (or, if all Obligations shall have been paid in full in cash, to the Borrower) if no payment to the beneficiary has been made and the final date available for drawings under the Letter of Credit has passed. Each payment or deposit of funds by the Lender as provided in this paragraph shall be treated for all purposes of this Credit Agreement as a drawing duly honored by the Lender under the related Letter of Credit. (b) Whenever the Borrower desires the issuance of a Letter of Credit, it shall deliver to the Lender a written notice no later than 2:00 p.m., New York City time, at least five Business Days prior to the proposed date of issuance. Such notice shall specify (i) the proposed date of issuance (which shall be a Business Day), (ii) the face amount of the Letter of Credit, (iii) the expiration date of the Letter of Credit and (iv) the name and address of the beneficiary. Such notice shall be accompanied by a brief description of the underlying transaction and upon request of the Lender, the Borrower shall provide additional details regarding the underlying transaction. Concurrently with the giving of written notice of a request for the issuance of a Letter of Credit, the Borrower shall specify a precise description of the documents and the verbatim text of any certificate to be presented by the beneficiary of such - 35 - Letter of Credit which, if presented by such beneficiary prior to the expiration date of the Letter of Credit, would require the Lender to make payment under the Letter of Credit; PROVIDED, HOWEVER, that the Lender, in its reasonable discretion, may require customary changes in any such documents and certificates. (c) The payment of drafts under any Letter of Credit shall be made in accordance with the terms of such Letter of Credit and the Uniform Customs and Practice for documentary Credits of the International Chamber of Commerce No. 500, as adopted or amended from time to time. The Lender shall be entitled to honor any drafts and accept any documents presented to it by the beneficiary of such Letter of Credit in accordance with the terms of such Letter of Credit and believed by the Lender in good faith to be genuine. The Lender shall not have any duty to inquire as to the accuracy or authenticity of any draft or other drawing documents which may be presented to it, but shall be responsible only to determine in accordance with customary commercial practices that the documents which are required to be presented before payment or acceptance of a draft under any Letter of Credit have been delivered and that they comply on their face with the requirements of that Letter of Credit. (d) Subject to provisions of Section 2.14(c), the Borrower is absolutely, unconditionally and irrevocably obligated to reimburse all amounts drawn under each Letter of Credit. If any draft is presented under a Letter of Credit, payment of which is required to be made after the Commitment Termination Date (it being understood that no Letter of Credit shall be issued which would expire after the Commitment Termination Date), then the Borrower will, upon demand by the Lender, pay to the Lender, in immediately available funds, the full amount of such draft. (e) (i) The Borrower agrees to pay to the Lender with respect to Letters of Credit issued by it hereunder in connection with the issuance, amendment, transfer or any other transaction related to each Letter of Credit and each drawing made thereunder, documentary and processing charges in accordance with the Lender's standard schedule for such charges in effect at the time of such issuance, amendment, transfer or drawing, as the case may be. (ii) The Borrower agrees to pay to the Lender a commission calculated at a rate per annum equal to the Applicable Margin for Eurodollar Loans (calculated in the same manner as interest) of the daily average L/C Exposure. Such commission shall be payable in arrears on and through the last Business Day of each fiscal quarter prior to the Commitment Termination Date and on the Commitment Termination Date. (f) If by reason of (i) any change in Applicable Law after the Closing Date, or in the interpretation or administration thereof (including, without limitation, any request, guideline or policy not having the force of law) by any Governmental Authority charged with the administration or interpretation thereof, or (ii) compliance by the Lender with any direction, request or requirement (whether or not having the force of law) issued after the Closing Date by any Governmental Authority or monetary authority (including any change whether or not proposed or published prior to the Closing Date), including, without limitation, any modifications to Regulation D occurring after the Closing Date: - 36 - (A) the Lender shall be subject to an increase in any tax, levy, impost, duty, charge, fee, deduction or withholding with respect to any Letter of Credit (other than withholding tax imposed by the United States of America or any political subdivision or taxing authority thereof or any other tax, levy, impost, duty, charge, fee, deduction or withholding (I) that is measured with respect to the overall net income of the Lender or of a Lending Office of the Lender, and that is imposed by the United States of America, or by the jurisdiction in which the Lender or Lending Office is incorporated, or in which such Lending Office is located, managed or controlled or in which the Lender has its principal office (or any political subdivision or taxing authority thereof or therein) or (II) that is imposed solely by reason of the Lender failing to make a declaration of, or otherwise to establish, non-residence or to make any other claim for exemption, or otherwise to comply with any certification, identification, information, documentation or reporting requirements prescribed under the laws of the relevant jurisdiction, in those cases where the Lender may properly make such declaration or claim or so establish non-residence or otherwise comply); (B) the basis of taxation of any fee or amount payable hereunder with respect to any Letter of Credit shall be changed (except as described in clause (A) above); (C) any reserve, deposit or similar requirement is or shall be applicable, imposed or modified in respect of any Letter of Credit issued by the Lender; or (D) there shall be imposed on the Lender any other condition regarding this Section 2.14 or any Letter of Credit; and the result of the foregoing is to increase from the conditions that exist on the Closing Date the actual cost to the Lender of issuing, making or maintaining any Letter of Credit or to reduce the amount receivable in respect thereof by the Lender, in each case by or in an amount which the Lender shall reasonably deem material, then and in any such case the Lender may, at any time, notify the Borrower, and the Borrower shall pay on demand such amounts as the Lender may specify to be necessary to compensate the Lender for such additional cost or reduced receipt. Section 2.10(b), (c), (d) and Section 2.11 shall in all instances apply to the Lender with respect to Letters of Credit issued hereunder. The determination by the Lender of any amount due pursuant to this Section 2.14 as set forth in a certificate setting forth the calculation thereof in reasonable detail shall, in the absence of manifest error, be final, conclusive and binding on all of the parties hereto. - 37 - (g) If at any time when an Event of Default shall have occurred and be continuing, any Letters of Credit shall remain outstanding, then the Lender may, at its option, require the Borrower to deliver to the Lender cash or Cash Equivalents in an amount equal to the full amount of the L/C Exposure or to furnish other security acceptable to the Lender. Any amounts so delivered pursuant to the preceding sentence shall be applied to reimburse the Lender for the amount of any drawings honored under Letters of Credit; provided, however, that if prior to the Commitment Termination Date, no Default or Event of Default is then continuing, the Lender shall return all of such collateral relating to such deposit to the Borrower upon request. (h) If at any time that any Letter of Credit is outstanding, the L/C Exposure, plus Loans outstanding, exceeds the sum of (i) the Maximum Guaranty Amount, plus (ii) the Borrowing Base, plus (iii) the amount of cash and Cash Equivalents currently held in the Collection Account, then the Lender may, at its option, require (x) a prepayment of the Loans in accordance with Section 2.9(d) or (y) the Borrower to deliver cash or Cash Equivalents to the Lender in an amount sufficient to eliminate such excess or to furnish other security for such excess acceptable to the Lender. Any amounts so delivered pursuant to the preceding sentence shall be applied to reimburse the Lender for the amount of any drawings honored under Letters of Credit; PROVIDED, HOWEVER, that if subsequent to any such deposit such excess is reduced to an amount less than the amount of such deposited amounts and no Default or Event of Default is then continuing, the Borrower shall be entitled to receive such excess collateral if requested by it. (i) Notwithstanding the termination of the Commitment and the payment of the Loans, the obligations of the Borrower under this Section 2.14 shall remain in full force and effect until the Lender shall have been irrevocably released from its obligations with regard to any and all Letters of Credit. (j) The parties hereto agree that the certain Irrevocable Letter of Credit, L/C No. 5-364581, issued by the Lender on May 6, 1998 at the request of the Borrower for the benefit of Amwest Surety Insurance Company in the face amount of $286,649, shall be deemed to have been issued under this Credit Agreement, and such Letter of Credit shall be subject to and governed by the terms and conditions set forth herein and that certain letter agreement dated as of July 1, 1998 among the Lender, the Credit Parties, the Individual Guarantors and MEI. For the avoidance of doubt, until such time that such Letter of Credit shall have expired the amount of such Letter of Credit shall be included in the calculation of L/C Exposure hereunder. 3. REPRESENTATIONS AND WARRANTIES OF CREDIT PARTIES In order to induce the Lender to enter into this Credit Agreement and to make the Loans and issue Letters of Credit provided for herein, the Credit Parties, jointly and severally, make the following representations and warranties to, and agreements with, the Lender, all of which shall survive the execution and delivery of this Credit Agreement, the issuance of the Note, the making of the Loans and the issuance of the Letters of Credit: - 38 - SECTION 3.1. CORPORATE EXISTENCE AND POWER. Each of the Credit Parties is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, is in good standing as a foreign corporation in all jurisdictions where the failure to be in good standing as a foreign corporation would render Eligible Receivables which are included in the Borrowing Base unenforceable or would give rise to a material liability of any Credit Party. Each of the Credit Parties has the corporate power and authority to own its respective properties and carry on its respective businesses as now being conducted, to execute, deliver and perform, as applicable, its obligations under this Credit Agreement, the Note and the other Fundamental Documents and other documents contemplated hereby to which it is or will be a party as provided herein and to grant to the Lender a security interest in the Collateral as contemplated by Article 8 hereof and in the Pledged Securities as contemplated by Article 10 hereof and in the case of each Corporate Guarantor to guaranty the Obligations as contemplated by Article 9 hereof. SECTION 3.2. Corporate Authority and No Violation. (a) The execution, delivery and performance of this Credit Agreement and the other Fundamental Documents to which it is a party, by each Credit Party and, in the case of the Borrower, the Borrowings hereunder and the execution and delivery of the Note and, in the case of each Credit Party, the grant to the Lender of the security interest in the Collateral and the Pledged Securities as contemplated herein and by the other Fundamental Documents and, in the case of each Corporate Guarantor, the guaranty of the Obligations as contemplated in Article 9 hereof (i) have been duly authorized by all necessary corporate action on the part of each such Credit Party, (ii) will not constitute a violation by such Credit Party in any material respect of any provision of Applicable Law or any order of any court or other agency of the United States or any state thereof applicable to such Credit Party or any of its properties or assets, (iii) will not violate any provision of the Certificate or Articles of Incorporation or By-Laws of such Credit Party, or any material provision of any Material Agreement or any other material indenture, agreement, bond, note or other similar instrument to which such Credit Party is a party or by which such Credit Party or its properties or assets are bound, (iv) will not be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under or create any right to terminate any Material Agreement, or any other material indenture, agreement, bond, note or other instrument, and (v) will not result in the creation or imposition of any Lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of any of the Credit Parties other than pursuant to this Credit Agreement or the other Fundamental Documents to which it is a party. (b) There are no restrictions on the transfer of any of the Pledged Securities other than as a result of this Credit Agreement or applicable securities laws and the regulations promulgated thereunder. SECTION 3.3. Governmental Approval. All authorizations, approvals, registrations or filings with any governmental or public regulatory body or authority of the United States or any state thereof (other than UCC financing statements and the Copyright Security Agreement which will be delivered to the Lender prior to the making of the initial Loan hereunder, in - 39 - form suitable for recording or filing with the appropriate filing office) required for the execution, delivery and performance by any Credit Party of this Credit Agreement and the other Fundamental Documents to which it is a party, and the execution and delivery by the Borrower of the Note, have been duly obtained or made, or duly applied for and are in full force and effect. SECTION 3.4. BINDING AGREEMENTS. This Credit Agreement and the other Fundamental Documents when executed will constitute the legal, valid and binding obligations of the respective Credit Parties, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights and general principles of equity. SECTION 3.5. FINANCIAL STATEMENTS. The audited consolidated balance sheets of the Borrower and its Consolidated Subsidiaries at December 31, 1998, together with the related statements of income, cash flows and Shareholders' Equity and the related notes and supplemental information for the reviewed statements, in the forms which have previously been provided to the Lender, have been prepared in accordance with GAAP, except as otherwise indicated in the notes to such financial statements. All of such financial statements fairly present the consolidated financial condition or the results of operations of the Borrower and its Consolidated Subsidiaries at the dates or for the periods indicated, subject (in the case of unaudited statements) to changes resulting from normal year-end and audit adjustments, and, in the case of balance sheets (including the notes thereto), reflect all known liabilities, contingent or otherwise, as of such dates required in accordance with GAAP to be shown or reserved against, or disclosed in the notes to the financial statements. SECTION 3.6. NO MATERIAL ADVERSE CHANGE (a) There has been no material adverse change with respect to the business, operations, performance, assets, properties, condition or prospects (financial or otherwise) of the Credit Parties taken as a whole from December 31, 1998, except for changes due to seasonality that are consistent with the corresponding periods in prior years. (b) No Credit Party has entered or is entering into the arrangements contemplated hereby and by the other Fundamental Documents, or intends to make any transfer or incur any obligations hereunder or thereunder, with actual intent to hinder, delay or defraud either present or future creditors. On and as of the Closing Date, on a pro forma basis after giving effect to all Indebtedness (including the Loans) (i) each Credit Party expects the cash available to such Credit Party, after taking into account all other anticipated uses of the cash of such Credit Party (including the payments on or in respect of debt referred to in clause (iii) of this Section 3.6(b)), will be sufficient to satisfy all final judgments for money damages which have been docketed against such Credit Party or which may be rendered against such Credit Party in any action in which such Credit Party is a defendant (taking into account the reasonably anticipated maximum amount of any such judgment and the earliest time at which such judgment might be entered); (ii) the sum of the present fair saleable value of the assets of each Credit Party will exceed the - 40 - probable liability of such Credit Party on its debts (including its Guaranties); (iii) no Credit Party will have incurred or intends to, or believes that it will, incur debts beyond its ability to pay such debts as such debts mature (taking into account the timing and amounts of cash to be received by such Credit Party from any source, and of amounts to be payable on or in respect of debts of such Credit Party and the amounts referred to in clause (ii)); and (iv) each Credit Party believes it will have sufficient capital with which to conduct its present and proposed business and the property of such Credit Party does not constitute unreasonably small capital with which to conduct its present or proposed business. For purposes of this Section 3.6, "debt" means any liability or a claim, and "claim" means (x) any right to payment whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, or (y) any right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured. SECTION 3.7. OWNERSHIP OF PLEDGED SECURITIES, ETC. (a) Annexed hereto as Schedule 3.7(a) is a correct and complete list as of the date hereof, of each corporate Subsidiary of the Borrower showing, as to each such Subsidiary, its name, the jurisdiction of incorporation, its authorized capitalization, the number of shares of its capital stock outstanding and the ownership of the capital stock of each such Credit Party; and (b) Except as noted on Schedule 3.7(b), no Credit Party owns any Voting Stock or beneficial interest, directly or indirectly, in any Person other than in the Subsidiaries of the Borrower. (c) All of the outstanding shares of capital stock of each Subsidiary of the Borrower have been validly issued and are fully paid and non-assessable and, with respect to shares which are owned by a Credit Party (set forth on Schedule 3.7(a)), are free and clear of all liens, charges or encumbrances except as contemplated herein. SECTION 3.8. COPYRIGHTS AND OTHER RIGHTS. On the date hereof, the items of Product listed on Schedule 3.8 comprise all of the Product in which any Credit Party has any right, title or interest (either directly or through a joint venture or partnership). The copyright registration number and the character of the interests held by the Credit Party for such items of Product for which filing in the United States Copyright Office is applicable are set forth across from the description of such item of Product and as to each item listed on Schedule 3.8 hereto and, to the extent applicable, the Credit Party holding such interests has duly recorded its interests in the United States Copyright Office and has delivered copies of all such recordation to the Lender. Schedule 3.8 shall identify the location of the best available Physical Materials related to each item of Product owned by the Credit Parties. To the best of each Credit Party's knowledge, all items of Product and all component parts thereof do not and will not violate or infringe upon any copyright, right of privacy, trademark, patent, trade name, performing right or any literary, dramatic, musical, artistic, personal, private, contract or copyright right or any other similar right of any Person or contain any libelous or slanderous - 41 - material other than to an extent which is either not material or for which coverage is provided in existing insurance policies. Except as set forth on Schedule 3.12, there is no claim, suit, action or, to the best of each Credit Party's knowledge, proceeding pending or threatened against any Credit Party that involves a claim of infringement of any copyright with respect to any item of Product listed on Schedule 3.8 and no Credit Party has knowledge of any existing infringement by any other Person of any copyright held by any Credit Party with respect to any item of Product listed on Schedule 3.8. SECTION 3.9. FICTITIOUS NAMES. Except as disclosed on Schedule 3.9, none of the Credit Parties are doing business or intend to do business other than under its full corporate name, including, without limitation, under any trade name or other doing business name. SECTION 3.10. TITLE TO PROPERTIES. As of the Closing Date, the Credit Parties have good title to each of the properties and assets reflected on the latest balance sheets referred to in Section 3.5 (other than such properties or assets disposed of in the ordinary course of business since the date of such balance sheets) and all such properties and assets are free and clear of Liens, except Permitted Encumbrances. SECTION 3.11. PLACES OF BUSINESS. The chief executive office of each Credit Party is, on the Closing Date, as set forth on Schedule 3.11 hereto, which offices in the United States are the places where each Credit Party is "located" for the purpose of the UCC and the Uniform Commercial Code in effect in any state in which any Credit Party is so located. All of the places where each Credit Party keeps the records concerning the Collateral on the date hereof or regularly keeps any goods included in the Collateral on the date hereof are also listed on Schedule 3.11 hereto. SECTION 3.12. LITIGATION. Except as set forth on Schedule 3.12 hereto, there are no actions, suits or other proceedings at law or in equity by or before any arbitrator or arbitration panel, or any Governmental Authority (including, but not limited to, matters relating to environmental liability) or, to the knowledge of any Credit Party, any investigation by any Governmental Authority of the affairs of, or threatened action, suit or other proceedings against or affecting, any Credit Party or of any of their respective properties or rights which either (A) would have a significant likelihood of materially and adversely affecting (i) the ability of any Credit Party to perform its obligations under the Fundamental Documents to which it is a party, (ii) the ability of any Credit Party to carry on its business, (iii) the security interests granted to the Lender under the Fundamental Documents, (iv) the financial condition or business of the Credit Parties taken as a whole or (v) the Collateral, or (B) involve this Credit Agreement or any of the transactions contemplated hereby. No Credit Party is in default with respect to any order, writ, injunction, decree, rule or regulation of any Governmental Authority binding upon such Person, which default would have a material adverse effect upon the financial condition or the business of the Credit Parties taken as a whole. - 43 - SECTION 3.13. FEDERAL RESERVE REGULATIONS. No Credit Party is engaged principally or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. No part of the proceeds of the Loans will be used, directly or indirectly, whether immediately, incidentally or ultimately (i) to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock, or (ii) for any other purpose, in each case, violative of or inconsistent with any of the provisions of any regulation of the Board, including, without limitation, Regulations T, U and X thereto. SECTION 3.14. INVESTMENT COMPANY ACT. No Credit Party is, or will during the term of this Credit Agreement be, (i) an "investment company", within the meaning of the Investment Company Act of 1940, as amended, or (ii) subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or, to the best of each Credit Party's knowledge, any foreign, federal or local statute or any other Applicable Law of the United States of America or, to the best of each Credit Party's knowledge, any other jurisdiction, in each case limiting its ability to incur indebtedness for money borrowed as contemplated hereby or by any other Fundamental Document. SECTION 3.15. TAXES. Each Credit Party has filed or caused to be filed all federal, state, local and foreign tax returns which are required to be filed with any Governmental Authority after giving effect to applicable extensions, and has paid or has caused to be paid all taxes as shown on said returns or on any assessment received by them in writing, to the extent that such taxes have become due, except as permitted by Section 5.14 hereof. No Credit Party knows of any material additional assessments or any basis therefor. The Credit Parties reasonably believe that the charges, accrual and reserves on its books in respect of taxes or other governmental charges are adequate. SECTION 3.16. COMPLIANCE WITH ERISA. Each Credit Party is in compliance in all material respects with the provisions of ERISA and the Code applicable to Plans, and the regulations and published interpretations thereunder, if any, which are applicable to it. As of the date hereof, no Credit Party has, with respect to any Plan established or maintained by it, engaged in a prohibited transaction which would subject it to a material tax or penalty on prohibited transactions imposed by ERISA or Section 4975 of the Code. No material liability to the PBGC has been or is expected to be incurred with respect to the Plans (other than for premiums not yet due) and there has been no Reportable Event and no other event or condition that presents a material risk of termination of a Plan by the PBGC. No Credit Party has engaged in a transaction which would result in the incurrence by such Credit Party of any liability under Section 4069 of ERISA. No Credit Party has taken any action and no event has occurred with respect to any Multiemployer Plan which would subject any Credit Party to material liability under either Section 4201 or 4204 of ERISA. - 43 - SECTION 3.17. AGREEMENTS. (a) No Credit Party is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Material Agreement or any other material indenture, agreement, bond, note or other instrument to which it is a party which would reasonably be expected to result in any material adverse change in the business, properties, assets, operations or condition (financial or otherwise) of the Credit Parties taken as a whole. (b) Schedule 3.17 is a true and complete listing as of the date on which this Credit Agreement is executed by the Borrower of (i) all credit agreements, indentures, and other agreements related to any Indebtedness for borrowed money of the Credit Parties, (ii) all material joint venture agreements to which the Credit Parties are a party (iii) all material Distribution Agreements and (iv) all other contractual arrangements which are material to any Credit Party, including but not limited to, guarantees and employment agreements. The Credit Parties have delivered or made available to the Lender a true and complete copy of each agreement described on Schedule 3.17, including all exhibits and schedules. For purposes of this Section 3.17, a Distribution Agreement or other contract or agreement shall be deemed "material" if the Credit Parties reasonably expect that any Credit Party would, pursuant to the terms thereof, (A) recognize future revenues in excess of $500,000, (B) incur liabilities or obligations in excess of $500,000 or (C) suffer damages or losses in excess of $250,000 by reason of the breach or termination thereof. SECTION 3.18. SECURITY INTEREST; OTHER SECURITY. This Credit Agreement and the other Fundamental Documents, when executed and delivered and, upon the making of the initial Loan hereunder and upon (i) the filing of the appropriate UCC-1 financing statements, with the Secretary of State of the States of California Florida and New York, and with the County Clerk of Kings County, New York, (ii) the filing of the Copyright Security Agreement with the U.S. Copyright Office and (iii) the delivery of the Pledged Securities, together with appropriate stock powers, to the Lender, will create and grant to the Lender a valid and first priority perfected security interests in the Collateral and the Pledged Securities in existence on the Closing Date as to which security interests may be perfected by such filings or delivery, subject only to Permitted Encumbrances. SECTION 3.19. DISCLOSURE. Neither this Credit Agreement nor any other Fundamental Document nor any agreement, document, certificate or statement furnished to the Lender by any Credit Party in connection with the transactions contemplated hereby, at the time it was furnished or delivered contained any untrue statement of a material fact regarding the Credit Parties or, when taken together with such other agreements, documents, certificates and statements omitted to state a material fact necessary under the circumstances under which it was made in order to make the statements contained herein or therein not misleading. There is no fact known to any Credit Party not constituting general industry conditions or not disclosed in such agreements, documents, certificates and statements which materially and adversely affects, or could reasonably be expected in the future to materially and adversely affect, the business, assets or condition, financial or otherwise of the Credit Parties taken as a whole. - 45 - SECTION 3.20. DISTRIBUTION RIGHTS. Each Credit Party has sufficient right, title and interest in each item of Product to enable it (i) to enter into and perform all of the material Distribution Agreements to which it is a party and other agreements generating Eligible Receivables and accounts receivable reflected on the most recent balance sheet and the most recent Borrowing Base Certificate delivered to the Lender pursuant hereto, and (ii) to charge, earn, realize and retain all fees and profits to which such Credit Party is entitled thereunder, and is not in breach of any of its obligations under such agreements, nor does any Credit Party have any knowledge of any breach or anticipated breach by any other parties thereto, which breach in either case either individually or when aggregated with all other such breaches would have a material adverse effect on the Credit Parties taken as a whole. SECTION 3.21. ENVIRONMENTAL LIABILITIES. (a) Except as set forth on Schedule 3.21 hereto, no Credit Party has used, stored, treated, transported, manufactured, refined, handled, produced or disposed of any Hazardous Materials on, under, at or from any of its properties or assets owned or leased by a Credit Party, in any manner which at the time of the action in question violated any Environmental Law governing the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials and which violation would have a material adverse effect on the business or financial condition of the Credit Parties taken as a whole and to the best of the Credit Parties' knowledge, no prior owner of such property or asset or any tenant, subtenant, prior tenant or prior subtenant thereof has used Hazardous Materials on or affecting such property or asset, or otherwise, in any manner which at the time of the action in question violated any Environmental Law governing the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials. (b) To the best of each Credit Party's knowledge (i) no Credit Party has any obligations or liabilities, known or unknown, matured or not matured, absolute or contingent, assessed or unassessed, which would reasonably be expected to have a materially adverse effect on the business or condition (financial or otherwise) of the Credit Parties taken as a whole and (ii) no claims have been made against any of the Credit Parties during the past five years and no presently outstanding citations or notices have been issued against any of the Credit Parties, which could reasonably be expected to have a materially adverse effect on the business or condition (financial or otherwise) of the Credit Parties taken as a whole which in either case have been or are imposed by reason of or based upon any provision of any Environmental Law, including, without limitation, any such obligations or liabilities relating to or arising out of or attributable, in whole or in part, to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation or handling of any Hazardous Materials by any Credit Party, or any of its employees or predecessors in interest in connection with or in any way arising from or relating to any of the Credit Parties or any of their respective owned or leased properties, or relating to or arising from or attributable, in whole or in part, to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation or handling of any such substance, by any other Person at or on - 45 - or under any of the real properties owned or used by any of the Credit Parties or any other location where such could have a materially adverse effect on the business or condition (financial or otherwise) of the Credit Parties taken as a whole. SECTION 3.22. PLEDGED SECURITIES. All of the Pledged Securities are duly authorized, validly issued, fully paid and non-assessable, and are owned and held by the Pledgors, free and clear of any liens, encumbrances, or security interests whatsoever other than those created pursuant to this Credit Agreement or Permitted Encumbrances and there are no restrictions on the transfer of the Pledged Securities other than as a result of this Credit Agreement or applicable securities laws. Except as set forth on Schedule 3.22, there are no outstanding rights, warrants, options, or agreements to purchase or otherwise acquire any shares of the stock or securities or obligations of any kind convertible into any shares of capital stock of the issuers of the Pledged Securities. The Pledged Securities are owned by the Persons specified on Schedule 3.7(a). SECTION 3.23. COMPLIANCE WITH LAWS. No Credit Party is in violation of any Applicable Law except for such violations in the aggregate which would not have a material adverse effect on the business condition (financial or otherwise) of the Credit Parties taken as a whole. The Borrowings hereunder, the intended use of the proceeds of the Loans as described in the preamble hereto and as contemplated by Section 5.19 and any other transactions contemplated hereby will not violate any Applicable Law. SECTION 3.24. PROJECTED FINANCIAL INFORMATION. The Borrower has delivered to the Lender certain projections relating to the Borrower and its Consolidated Subsidiaries consisting of statements of income, cash flows, balance sheets and an initial projected borrowing base. Such projected statements cover a period commencing on the Closing Date and ending at fiscal year end 2002 and prepared on a basis consistent with Borrower's past practices. All of the foregoing shall have been prepared in good faith and shall represent the good faith opinion of the senior management of the Borrower of the likely course of its business as of the date of delivery of such projections to the Lender, it being recognized by the Lender that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such other projections may differ from the projected results. 4. CONDITIONS OF LENDING SECTION 4.1. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AMENDMENT AND RESTATEMENT. The effectiveness of this amendment and restatement of the Existing Credit Agreement is subject to the following conditions precedent: (a) CORPORATE DOCUMENTS. On or prior to the Closing Date, the Lender shall have received: (i) a copy of the articles or certificate of incorporation of each Credit Party, certified as of a recent date by the Secretary of State of such Credit Party's jurisdiction of incorporation or organization, as the case may be; - 46 - (ii) a certificate of such Secretary of State and of the franchise tax entity of such jurisdiction of incorporation, if applicable, dated as of a recent date as to the good standing of and payment of taxes by each Credit Party which lists the charter documents on file in the office of such Secretary of State; (iii) a certificate dated as of a recent date as to the good standing of each Credit Party issued by the Secretary of State of each jurisdiction in which each Credit Party is qualified as a foreign corporation; and (iv) a certificate of the Secretary of each Credit Party dated the date of the initial Loan and certifying (A) that attached thereto is a true and complete copy of the By-Laws of such party as in effect on the date of such certification, (B) that attached thereto is a true and complete copy of resolutions adopted by the Board of Directors of such party authorizing (to the extent applicable) the Borrowings hereunder, the execution, delivery and performance in accordance with its respective terms of this Credit Agreement, the Note (if any) to be executed by it, and any other documents required or contemplated hereunder or thereunder and that such resolutions have not been amended, rescinded or supplemented and are currently in effect, (C) that the certificate of incorporation of such party has not been amended since the date of the last amendment thereto indicated on the certificate of the Secretary of State furnished pursuant to clause (i) above except to the extent specified in such Secretary's certificate and (D) as to the incumbency and specimen signature of each officer of such party executing (as applicable) this Credit Agreement, the Note or any other document delivered by it in connection herewith or therewith (such certificate to contain a certification by another officer of such party as to the incumbency and signature of the officer signing the certificate referred to in this clause (iv)); and (v) such additional supporting documents as the Lender or its counsel may reasonably request. (b) CREDIT AGREEMENT; NOTE. On or before the Closing Date, the Lender shall have received the Credit Agreement executed by the Credit Parties and the Note executed by the Borrower. - 47 - (c) OPINION OF COUNSEL. The Lender shall have received the written opinions of Hughes, Hubbard & Reed, special counsel to the Credit Parties, and Robert Murray, general counsel of the Borrower, each dated November 10, 1997 and addressed to the Lender substantially in the form attached hereto as Exhibits B-1 and B-2 respectively and in form and substance satisfactory to Morgan, Lewis & Bockius LLP. (d) NO MATERIAL ADVERSE CHANGE. No material adverse change shall have occurred with respect to the business, operations, performance, assets, properties, condition (financial or otherwise) or prospects of the Credit Parties taken as a whole from December 31, 1998 except as disclosed in any public filing after the date thereof. (e) INSURANCE. The Borrower shall have furnished the Lender with (i) a summary of all existing insurance coverage, (ii) evidence acceptable to the Lender that the insurance policies required by Section 5.5 have been obtained and are in full force and effect and (iii) Certificates of Insurance with respect to all existing insurance coverage which certificates shall name The Chase Manhattan Bank, as the Certificate holder and shall evidence the Borrower's compliance with Section 5.5(f) with respect to all insurance coverage existing as of the Closing Date. (f) BORROWING BASE CERTIFICATE. The Lender shall have received a Borrowing Base Certificate substantially in the form of Exhibit C hereto, signed by an Authorized Officer of the Borrower. (g) SECURITY AND OTHER DOCUMENTATION. On or prior to the Closing Date, the Lender shall have received fully executed copies of (i) a Pledgeholder Agreement for each item of Product for which a Credit Party has control over any physical elements thereof as listed on Schedule 3.8 hereto; (ii) a Copyright Security Agreement listing each item of Product in which any Credit Party has a copyrightable interest (as listed on Schedule 3.8 hereto) executed by such Credit Parties; (iii) a Laboratory Access Letter addressed to each Laboratory where a Credit Party has access rights to any physical elements of Product; (iv) appropriate UCC-1 financing statements relating to the Collateral; and (v) the Pledged Securities with appropriate undated stock powers executed in blank. (h) SECURITY INTERESTS IN COPYRIGHTS AND OTHER COLLATERAL. On or prior to the Closing Date, the Lender shall have received evidence satisfactory to it that each Credit Party has sufficient right, title and interest in and to the Collateral and other assets which it purports to own (including appropriate licenses under copyright), as set forth in its financial statements and in the other documents presented to the Lender to enable each such Credit Party to perform the Distribution Agreements to which each such Credit Party is a party and as to each Credit Party to grant to the Lender the security interests contemplated by the Fundamental Documents, and that all financing statements, copyright filings and other filings under Applicable Law necessary to provide the Lender with a first priority perfected security interest in the Pledged Securities and Collateral (subject, as to the Collateral, to Permitted Encumbrances) have been filed or delivered to the Lender in satisfactory form for filing. - 48 - (i) PAYMENT OF FEES. All fees and expenses then due and payable by any Credit Party in connection with the transactions contemplated hereby (including without limitation legal fees and expenses) shall have been paid. (j) CERTIFICATE FROM THE BORROWER. The Lender shall have received a certificate, signed by an Authorized Officer on behalf of Borrower, confirming that the Borrower has determined that the projected availability of the Loans as determined by the Borrowing Base, together with funds from internally generated sources and other available sources that are acceptable to the Lender, is sufficient to finance the Borrower in a manner compatible with the forecasted financial statements previously delivered to the Lender. (k) LITIGATION. Except as set forth on Schedule 3.12, no litigation, inquiry, injunction or restraining order shall be pending, entered or threatened which in the Lender's good faith judgment could reasonably be expected to materially and adversely affect (i) the assets, operations, business, condition or prospects (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower and its Subsidiaries to perform their respective Obligations hereunder or (iii) the rights and remedies of the Lender. (l) UCC SEARCHES. The Lender shall have received UCC searches satisfactory to it indicating that no other filings (other than in connection with Permitted Encumbrances) with regard to the Collateral are of record in any jurisdiction in which it shall be necessary or desirable for the Lender to make a UCC filing in order to provide the Lender with a perfected security interest in the Collateral. (m) FINANCIAL STATEMENTS. The Lender shall have received and be satisfied with the true and complete copies of all of the financial statements referred to in Section 3.5. (n) ERISA. The Lender shall have received copies of all Plans of the Credit Parties that are in existence on the Closing Date, and descriptions of those that are committed to on the Closing Date. (o) DELIVERY OF AGREEMENTS. The Lender shall have received and be satisfied with the terms and provisions of (i) the Borrower's standard form of Distribution Agreement and all significant existing Distribution Agreements listed on Schedule 3.17 which are not on such standard form, (ii) all joint venture or partnership agreements to which any Credit Party is a party and (iii) all other agreements listed on Schedule 3.17 to the extent requested by the Lender. (p) CONTRIBUTION AGREEMENT. The Lender shall have received a fully executed Contribution Agreement duly executed by all parties thereto. - 49 - (q) COMPLIANCE WITH LAWS. The Lender shall be satisfied that the transactions contemplated hereby will not violate any provision of Applicable Law. (r) REQUIRED CONSENTS AND APPROVALS. The Lender shall be satisfied that all required consents and approvals have been obtained with respect to the transactions contemplated hereby from all Governmental Authorities with jurisdiction over the business and activities of any Credit Party as of the date hereof, and from any other entity, foreign or domestic, whose consent or approval the Lender in its reasonable discretion deems necessary to effect the transactions contemplated hereby. (s) FEDERAL RESERVE REGULATIONS. The Lender shall be satisfied that the provisions of Regulations T, U and X of the Board will not be violated by the transactions contemplated hereby. (t) PRO-FORMA COMPLIANCE. The Lender shall have received a pro-forma compliance report dated the Closing Date or on the date on which the most recent data was available confirming that the Borrower and its Subsidiaries are in pro-forma compliance with all covenants set forth in Article 5 and Article 6 hereof and in the other Fundamental Documents. (u) SUBORDINATION AGREEMENTS. The Lender shall have received from each Affiliate who has made advances to a Credit Party which will not be required to be repaid on or before the Closing Date, a subordination agreement in form and substance acceptable to the Lender, pursuant to which the obligations of such Credit Party to such Affiliate is subordinated to the repayment in full of the Obligations. (v) GUARANTY AGREEMENTS. The Lender shall have received fully executed Amended and Restated Guaranty Agreements from each of the Individual Guarantors, duly executed by all parties thereto. (w) NOTICES OF ASSIGNMENT AND IRREVOCABLE INSTRUCTIONS. The Lender shall have received, with respect to each material Eligible Receivable included in the Borrowing Base Certificate dated May 19, 1999, copies of the Notice of Assignment and Irrevocable Instructions executed by the appropriate Credit Party and evidence that each such Notice of Assignment and Irrevocable Instructions has been sent to the applicable obligor for execution thereof. (x) EQUITY INVESTMENT. The Borrower shall have received an amount not less than $4,100,000 of additional equity investments in the Borrower, on terms and conditions satisfactory to the Lender. (y) LIBRARY VALUATION. The Lender shall have received a valuation of the Eligible Library Amount by Richard L. Medress. - 50 - (z) APPROVAL OF COUNSEL TO THE LENDER. All legal matters incident to this Credit Agreement and the transactions contemplated hereby shall be reasonably satisfactory to Morgan, Lewis & Bockius LLP, counsel to the Lender. (aa) OTHER DOCUMENTS. The Lender shall have received such other documentation as the Lender may reasonably request. SECTION 4.2. CONDITIONS PRECEDENT TO EACH LOAN AND LETTER OF CREDIT. The obligations of the Lender to issue each Letter of Credit and make each Loan are subject to the following conditions precedent: (a) NOTICE. The Lender shall have received a notice with respect to such Borrowing or with respect to such Letter of Credit as required by Article 2 hereof. (b) BORROWING CERTIFICATE. The Lender shall have received a Borrowing Certificate with respect to such Borrowing, duly executed by an Authorized Officer of the Borrower. (c) REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in Article 3 hereof and in the other Fundamental Documents shall be true and correct in all material respects on and as of the date of each Borrowing and issuance of a Letter of Credit hereunder (except to the extent that such representations and warranties expressly relate to an earlier date) with the same effect as if made on and as of such date. (d) NO EVENT OF DEFAULT. On the date of each Borrowing or the issuance of each Letter of Credit hereunder, each Credit Party shall be in compliance with all of the terms and provisions set forth herein to be observed or performed and no Event of Default or Default shall have occurred and be continuing. (e) ADDITIONAL DOCUMENTS. The Lender shall have received from the Borrower on the date of each Borrowing and issuance of each Letter of Credit such documents and information as they may reasonably request relating to the satisfaction of the conditions in this Section 4.2. Each request for a Borrowing or for issuance of a Letter of Credit shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing or issuance of such Letter of Credit as to the matters specified in paragraphs (c) and (d) of this Section. - 51 - 5. AFFIRMATIVE COVENANTS From the Closing Date and for so long as the Commitment shall be in effect or any amount remains outstanding under the Note or any Letter of Credit shall remain outstanding or any Obligations remain unpaid or unsatisfied, each Credit Party agrees that, unless the Lender shall otherwise consent in writing, each of them will: SECTION 5.1. FINANCIAL STATEMENTS AND REPORTS. Furnish or cause to be furnished to the Lender: (a) Within 120 days after the end of each fiscal year of the Borrower, the audited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as at the end of, and the related statements of income, Shareholders' Equity and cash flows (along with the related notes and supplemental information) for such year, and the corresponding figures as at the end of, and for, the preceding fiscal year, accompanied by an auditor's report and opinion of KPMG LLP or such other independent public accountants of nationally recognized standing as shall be retained by the Borrower and be reasonably satisfactory to the Lender, which report and opinion shall be prepared in accordance with generally accepted auditing standards relating to reporting and which report and opinion shall contain no material exceptions or qualifications except for qualifications relating to accounting changes (with which such independent public accountants concur) in response to FASB releases or other authoritative pronouncement, and with except for a going concern qualification solely with respect to the auditor's report for the fiscal year ended December 31, 1998; (b) Within 60 days after the end of each of the first three fiscal quarters of each of its fiscal years the unaudited consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as at the end of, and the related unaudited consolidated statements of income, cash flow and shareholders' equity for, such quarter, and the corresponding figures as at the end of, and for, the corresponding period in the preceding fiscal year, together with a certificate signed by an Authorized Officer of the Borrower, on behalf of the Borrower, to the effect that such financial statements, while not examined by independent public accountants, reflect, in the opinion of the Borrower, all adjustments necessary to present fairly the financial position of the Borrower and its Consolidated Subsidiaries as at the end of the fiscal quarter and the results of its operations for the quarter then ended are in conformity with GAAP, subject to normal year-end audit adjustments; (c) Simultaneously with the delivery of the statements referred to in paragraphs (a) and (b) of this Section 5.1, a certificate of an Authorized Officer of the Borrower, on behalf of the Borrower, in form and substance satisfactory to the Lender (i) stating whether or not such Authorized Officer has knowledge, after due inquiry, of any condition or event which would constitute an Event of Default or Default has occurred and, if so, specifying each such condition or event and the nature thereof, (ii) demonstrating in reasonable detail compliance with the provisions of Sections 6.14 through 6.18 and 6.21 hereof and (iii) certifying that all filings required under Section 5.8 hereof have been made and listing each such filing that has been made since the date of the last certificate delivered in accordance with this Section 5.1(c); - 52 - (d) Together with each set of audited financial statements required by paragraph (a) above, a report from the independent public accountants rendering the report thereon (i) stating that such Person has made such examination or investigation as is necessary to enable it to express an informed opinion as to the matters referred to in clause (ii) of this Section 5.1(d), it being understood that no special audit procedures are required hereby and (ii) stating whether, in connection with their audit examination, any condition or event, at any time during or at the end of the accounting period covered by such financial statements, which constitutes an Event of Default under covenants relating to accounting matters has come to their attention, and if such a condition or event has come to their attention, specifying the nature and period, if known, of existence thereof; (e) On or prior to the twentieth day of each month, a certificate ("Borrowing Base Certificate") in the form of Exhibit C hereto, setting forth the amount of each component included in the Borrowing Base as of the last Business Day of the preceding month, attached to which shall be detailed information including the calculation of each such component (the Borrower, at its option, may furnish additional Borrowing Base Certificates setting forth such information as of such other dates as it may deem appropriate), together with an aging report of the Eligible Receivables included in the Borrowing Base; (f) Promptly upon their becoming available, copies of (i) all management projections, studies or evaluations prepared by consultants for or presented to any Credit Party's Board of Directors and (ii) all audits, studies, reports or evaluations prepared for or submitted to any of the Credit Parties by any outside professional firm or service, including, without limitation, the final comment letter submitted by the Credit Parties' accountants to the Board of Directors or the audit committee of the Board of Directors of the Borrower in connection with their annual audit; (g) Within 10 days of the Borrower's receipt thereof, copies of all management letters issued to the Borrower by its auditors; (h) Promptly upon their becoming available, copies of (i) all registration statements, proxy statements, and all reports which the Borrower or any other Credit Party shall file with any securities exchange or with the Securities and Exchange Commission or any successor agency and (ii) all reports, financial statements, press releases and other information which the Borrower or any other Credit Party shall release, send or make available to its common stockholders generally; (i) Notice of (i) any substantive action taken by any Credit Party in connection with the proposed issuance of any additional debt or equity securities other than the issuance of securities to employees in connection with the exercise of options and (ii) the date on which such Credit Party expects to receive the net cash proceeds from the issuance of such additional debt or equity securities; - 53 - (j) No later than May 31 of each year (commencing with May 31, 2000), a valuation of the Eligible Library Amount by Richard L. Medress (or an independent consultant selected by the Lender in its reasonable discretion), together with a calculation of the Eligible Library Amount computed as of the last Business Day of the twelve-month period ending May 31 of such year, as contemplated by the definition of "Eligible Library Amount"; (k) Within 30 days of the Closing Date and on an annual basis thereafter (commencing with the fiscal year ending December 31, 1999, such annual reports to be delivered simultaneously with the statements referred to in paragraph (a) of this Section 5.1), a report from KPMG LLP (or such other independent public accountants of nationally recognized standing as shall be retained by the Borrower and reasonably satisfactory to the Lender), which report shall confirm the amounts of at least 50% of the Eligible Receivables included in the Borrowing Base calculated as of the last Business Day of the prior fiscal year (or in the case of the initial report, the Eligible Receivables included in the Borrowing Base Certificate dated May 19, 1999); (l) Simultaneously with the delivery of the statements referred to in paragraph (a) of this Section 5.1, a reconciliation, on a month-by-month basis, of the amount of Eligible Receivables included in the Borrowing Base as of the beginning of each month against the amount of Eligible Receivables included in the Borrowing Base as of the end of such month, including an accounting of new Eligible Receivables obtained, and any collections made in respect of existing Eligible Receivables, during such month; and (m) From time to time such additional information regarding the financial condition or business of the Credit Parties or otherwise regarding the Collateral, as the Lender may reasonably request for the purpose of assuring itself as to compliance by the Credit Parties with the terms hereof. SECTION 5.2. CORPORATE EXISTENCE. Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its corporate existence, rights, material licenses, material permits and material franchises, and comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, any Governmental Authority, except as otherwise permitted under Section 6.7 and except that any Subsidiary of the Borrower may be liquidated or dissolved if in the reasonable judgment of the Board of Directors of the Borrower such Subsidiary is no longer necessary for the proper conduct of the business of the Borrower. SECTION 5.3. MAINTENANCE OF PROPERTIES. Keep its tangible properties which are material to its business in good repair, working order and condition (ordinary wear and tear excepted) and, from time to time (i) make all necessary and proper repairs, renewals, replacements, additions and improvements thereto and (ii) comply at all times with the provisions of all material leases and other material agreements to which it is a party so as to prevent any loss or forfeiture thereof or thereunder unless compliance therewith is being currently contested in good faith by appropriate proceedings; provided, however, - 54 - that nothing in this Section 5.3 shall prevent any Credit Party from discontinuing the use, operation or maintenance of such properties or disposing of them if such discontinuance or disposal is, in the judgment of its Board of Directors, desirable in the conduct of the business. SECTION 5.4. NOTICE OF MATERIAL EVENTS. (a) Promptly upon any Authorized Officer of any Credit Party obtaining knowledge of (i) any Default or Event of Default, (ii) any material adverse change in the condition or operations of the Borrower and its Subsidiaries taken as a whole, financial or otherwise, (other than changes due to seasonality that are consistent with the corresponding periods in prior years), (iii) any action or event which could reasonably be expected to materially and adversely affect the performance of the Credit Parties' obligations under this Credit Agreement, the repayment of the Note, or the security interests granted to the Lender under this Credit Agreement or any other Fundamental Document, (iv) the opening of any office of any Credit Party or the change of the executive office or the principal place of business of any Credit Party or of the location of any Credit Party's books and records with respect to the Collateral, (v) any change in the name of any Credit Party, (vi) any other event which could reasonably be expected to materially and adversely impact upon the amount or collectibility of accounts receivable of the Credit Parties or otherwise materially decrease the value of the Collateral or (vii) any Person giving any notice to any Credit Party or taking any other action to enforce remedies with respect to a claimed default or event or condition of the type referred to in paragraph (d) of Article 7, such Credit Party shall promptly give written notice thereof to the Lender specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken and the nature of such claimed Event of Default or condition and what action such Credit Party has taken, is taking and proposes to take with respect thereto. (b) Promptly upon any Authorized Officer of any Credit Party obtaining knowledge of (i) the institution of, or threat of, any action, suit, proceeding, investigation or arbitration by any Governmental Authority or other Person against or affecting any Credit Party or any of its assets, or (ii) any material development in any such action, suit, proceeding, investigation or arbitration (whether or not previously disclosed to the Lender), which, in the case of (i) or (ii), could reasonably be expected to materially and adversely affect the Borrower and its Subsidiaries taken as a whole, such Credit Party shall promptly give notice thereof to the Lender and provide such other information as may be available to it to enable the Lender to evaluate such matters; and, in addition to the requirements set forth in clauses (i) and (ii) of this subsection (b), such Credit Party upon request shall promptly give notice of the status of any action, suit, proceeding, investigation or arbitration covered by a report delivered to the Lender pursuant to clause (i) and (ii) above to the Lender and provide such other information as may be reasonably available to it to enable the Lender to evaluate such matters. SECTION 5.5. INSURANCE. (a) Keep its assets which are of an insurable character insured (to the extent and for the time periods consistent with normal industry practices) by financially sound and reputable insurers against loss or damage by fire, explosion, theft or other hazards which are included under extended coverage in amounts not less than the insurable value of the property insured or such lesser amounts, and with such self-insured retention or deductible levels, as are consistent with normal industry practices. - 55 - (b) Maintain with financially sound and reputable insurers, insurance against other hazards and risks and liability to Persons and property to the extent and in the manner customary for companies in similar businesses. (c) Maintain, or cause to be maintained, in effect during the period from the commencement of principal photography of each item of Product produced by any Credit Party, through the third anniversary of the date on which such item of Product is Completed and/or as otherwise required by applicable contracts, a so-called "Errors and Omissions" policy with respect to all items of Product for which principal photography has commenced, and cause such Errors and Omissions policy to provide coverage to the extent and in such manner as is customary for items of Product of like type but, at minimum, to the extent and in such manner as is required under all applicable contracts relating thereto. (d) Maintain, or cause to be maintained, in effect during the period from the commencement of principal photography of each item of Product produced by any Credit Party, or from the date of acquisition of each item of Product acquired by any Credit Party (i) until such time as the Lender shall have been provided with satisfactory evidence of the existence of one negative or master tape in one location and an interpositive or internegative or duplicate master tape in another location of the final version of the Completed Product, insurance on the negatives and sound tracks or master tapes of such item of Product in an amount not less than the cost of re-shooting the principal photography of the item of Product, and (ii) until principal photography of such item of Product has been concluded, a cast insurance policy with respect to such item of Product, which provides coverage to the extent and in such manner as is customary for a like type of Product, but at minimum, to the extent required under all applicable contracts relating thereto. (e) Maintain, or cause to be maintained, in effect distributor's and/or publisher's "Errors and Omissions" insurance to the extent and in amounts customary for companies in similar businesses. (f) Cause all such above-described insurance (excluding worker's compensation insurance) to (i) provide for the benefit of the Lender that 30 days' prior written notice of suspension, cancellation, termination, modification, non-renewal or lapse or material change of coverage shall be given to the Lender; (ii) name the Lender as the loss payee as its interests may appear (except for "Errors and Omissions" insurance and other third party liability insurance), provided, however, that production insurance recoveries received prior to Completion or abandonment of an item of Product may be utilized to finance the production of such item of Product and property insurance proceeds may be used to repair damage in respect of which such proceeds were received; and (iii) to the extent that the Lender shall not be liable for premiums or calls, name the Lender as an additional insured including, without limitation, under any "Errors and Omissions" policy. - 56 - (g) Upon the request of the Lender, the Borrower will render to the Lender a statement in such detail as the Lender may request as to all such insurance coverage. SECTION 5.6. PRODUCTION. Cause each item of Product being produced by any Credit Party to be produced in all material respects in accordance with the standards set forth in, and within the time period established in, all agreements with respect to such item of Product to which such Credit Party is a party, subject to the terms and conditions of such agreements. SECTION 5.7. MUSIC. When an item of Product has been scored, if requested by the Lender, deliver to the Lender within a reasonable period of time after such request (a) written evidence of the music synchronization rights obtained from the composer or the licensor of the music and (b) copies of all music cue sheets with respect to such item of Product. SECTION 5.8. COPYRIGHT. (a) Within 90 days after the initial release or broadcast of each item of Product, to the extent any Credit Party is or becomes the copyright proprietor thereof or to the extent such interest is obtained by any Credit Party, or any Credit Party otherwise acquires a copyrightable interest, take any and all actions necessary to register the copyright for such item in the name of such Credit Party (subject to a Lien in favor of the Lender pursuant to the Copyright Security Agreement) in conformity with the laws of the United States and such other jurisdictions as the Lender may reasonably specify, and immediately deliver to the Lender (i) written evidence of the registration of any and all such copyrights for inclusion in the Collateral under this Credit Agreement and (ii) a Copyright Security Agreement Supplement relating to such item executed by such Credit Party. (b) Obtain instruments of transfer or other documents evidencing the interest of any Credit Party with respect to the copyright relating to items of Product in which such Credit Party is not entitled to be the initial copyright proprietor, and promptly record such instruments of transfer on the United States Copyright Register and such other jurisdictions as the Lender may specify. SECTION 5.9. BOOKS AND RECORDS. (a) Maintain or cause to be maintained at all times true and complete books and records of its financial operations and provide the Lender and its representatives access to such books and records and to any of its properties or assets upon reasonable notice and during regular business hours in order that the Lender may make such audits and examinations and make abstracts from such books, accounts, records and other papers pertaining to the Collateral (including, but not limited to, Eligible Receivables included in the Borrowing Base) and upon notification to the Borrower may discuss the affairs, finances and accounts with, and be advised as to the same by, officers and independent accountants, all as the Lender may deem appropriate for the purpose of verifying the accuracy of the Borrowing Base Certificate and the various other reports delivered by any Credit Party to the Lender pursuant to this Credit Agreement or for otherwise ascertaining compliance with this Credit Agreement or any other Fundamental Document. - 57 - (b) If, prior to an Event of Default, the Lender wishes to confirm with account debtors and other payors the amounts and terms of any or all Eligible Receivables included in the Borrowing Base, the Lender will so notify the Borrower; provided, that so long as an Event of Default has not occurred and is continuing, the Lender shall be entitled to exercise such right no more than once per year. Within 10 days after receipt of such notice from the Lender, the Borrower may, upon written notice to the Lender, elect to have such confirmation made through the Credit Parties' auditors. If the Borrower fails to timely make such election, the Lender may proceed to make such confirmations directly with account debtors and other payors. Each of the Credit Parties hereby agrees that, upon the occurrence and during the continuance of an Event of Default, the Lender shall be entitled to confirm directly with account debtors the amounts and terms of all accounts receivable. SECTION 5.10. THIRD PARTY AUDIT RIGHTS. Promptly notify the Lender of, and allow the Lender access to the results of, all audits conducted by any Credit Party of any third party licensee, partnership and joint venture under any agreement with respect to any item of Product included in the Collateral. The Credit Parties will exercise their audit rights with respect to any third party licensees, partnerships and joint ventures under any agreement with respect to an item of Product included in the Collateral upon the reasonable written request of the Lender, to the extent such rights are available to the Credit Parties; provided, that so long as an Event of Default has not occurred and is continuing, the Lender shall be entitled to cause the Credit Parties to exercise such audit rights no more than once per year. After an Event of Default has occurred and is continuing, the Lender shall have the right to exercise through any Credit Party such Credit Party's right to audit any obligor under an agreement with respect to any item of Product included in the Collateral. SECTION 5.11. OBSERVANCE OF AGREEMENTS. Duly observe and perform all material terms and conditions of all material agreements with respect to the exploitation of items of Product and diligently protect and enforce the rights of the Credit Parties under all such agreements in a manner consistent with prudent business judgment and subject to the terms and conditions of such agreements. SECTION 5.12. FILM PROPERTIES AND RIGHTS; CREDIT PARTIES TO ACT AS PLEDGEHOLDER. Act as pledgeholder for the Lender with the same effect as if the Lender were a pledgee in possession of all property relating to items of Product which are now or hereafter in the (actual or constructive) possession of any Credit Party, subject to such access as shall be necessary to distribute such items of Product. - 58 - SECTION 5.13. LABORATORIES; NO REMOVAL. (a) To the extent any Credit Party has control over or rights to receive any of the Physical Materials relating to any item of Product, deliver or cause to be delivered to a Laboratory or Laboratories all negative and preprint material, master tapes and all sound track materials with respect to each such item of Product and deliver to the Lender a fully executed Pledgeholder Agreement with respect to such materials. To the extent that any Credit Party has only rights of access to preprint material or master tapes then the Credit Parties will deliver to the Lender a fully executed Laboratory Access Letter covering such materials. Prior to requesting any such Laboratory to deliver such negative or other preprint or sound track material or master tapes to another laboratory, any such Credit Party shall provide the Lender with a Pledgeholder Agreement or Laboratory Access Letter, as appropriate, executed by such other laboratory and all other parties to such Pledgeholder Agreement (including the Lender). Each Credit Party hereby agrees not to remove or cause the removal of the original negative and film or sound materials with respect to any item of Product owned by such Credit Party or in which such Credit Party has an interest (i) to a location outside the United States or (ii) to any state or jurisdiction where UCC-1 financing statements (or in the case of jurisdictions outside the United States, documentation similar in purpose and effect satisfactory to the Lender) have not been filed against such Credit Party holding any rights to such item of Product. (b) During production of any item of Product produced by any Credit Party, such Credit Party shall promptly deliver the daily rushes for such item of Product to the appropriate Laboratory. (c) With respect to items of Product completed after the Closing Date, as soon as practicable after completion, deliver to the Lender and the Laboratories which are signatories to Pledgeholder Agreements a revised schedule of Product on deposit with such Laboratories. SECTION 5.14. TAXES AND CHARGES; INDEBTEDNESS IN ORDINARY COURSE OF BUSINESS. Duly pay and discharge, or cause to be paid and discharged, before the same shall become in arrears (after giving effect to applicable extensions), all taxes, assessments, levies and other governmental charges, imposed upon any Credit Party or its properties, sales and activities, or any part thereof, or upon the income or profits therefrom, as well as all claims for labor, materials, or supplies which if unpaid might by law become a Lien upon any property of any Credit Party; provided, however, that any such tax, assessment, charge, levy or claim need not be paid if the validity or amount thereof shall currently be contested in good faith by appropriate proceedings and if such Credit Party shall have set aside on its books reserves (the presentation of which is segregated to the extent required by GAAP) adequate with respect thereto if reserves shall be deemed necessary; and provided, further, that such Credit Party will pay all such taxes, assessments, levies or other governmental charges forthwith upon the commencement of proceedings to foreclose any Lien which may have attached as security therefor. The Credit Parties will promptly pay when due, or in conformance with customary trade terms, all other indebtedness incident to its operations in a manner consistent with such Credit Party's past business practices. - 59 - SECTION 5.15. LIENS. Defend the Collateral against any and all Liens howsoever arising, other than Permitted Encumbrances, and in any event defend against any attempted foreclosure. SECTION 5.16. FURTHER ASSURANCES; SECURITY INTERESTS. (a) Upon the request of the Lender, duly execute and deliver, or cause to be duly executed and delivered, at the cost and expense of the Credit Parties, such further instruments as may be appropriate in the reasonable judgment of the Lender to carry out the provisions and purposes of this Credit Agreement and the other Fundamental Documents. (b) Upon the request of the Lender, promptly execute and deliver or cause to be executed and delivered, at the cost and expense of the Credit Parties, such further instruments as may be appropriate in the reasonable judgment of the Lender, to provide the Lender a first perfected Lien in the Collateral and any and all documents (including, without limitation, the execution, amendment or supplementation of any financing statement and continuation statement or other statement) for filing under the provisions of the UCC and the rules and regulations thereunder, or any other statute, rule or regulation of any applicable foreign, federal, state or local jurisdiction, and perform or cause to be performed such other ministerial acts which are necessary or advisable, from time to time, in order to grant and maintain in favor of the Lender the security interest in the Collateral contemplated hereunder and under the other Fundamental Documents, subject only to Permitted Encumbrances. (c) Promptly undertake to deliver or cause to be delivered to the Lender from time to time such other documentation, consents, authorizations and approvals in form and substance reasonably satisfactory to the Lender, as the Lender shall deem reasonably necessary or advisable to perfect or maintain the Liens of the Lender. SECTION 5.17. ERISA COMPLIANCE AND REPORTS. Furnish to the Lender (a) as soon as possible, and in any event within 30 days after any Credit Party knows that (i) any Reportable Event with respect to any Plan has occurred, a statement of an executive officer of the Credit Party, setting forth on behalf of such Credit Party details as to such Reportable Event and the action which it proposes to take with respect thereto, together with a copy of the notice, if any, required to be filed by the applicable Credit Party of such Reportable Event given to the PBGC or (ii) an accumulated funding deficiency has been incurred or an application has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard or an extension of any amortization period under Section 412 of the Code with respect to a Plan, a Plan or Multiemployer Plan has been or is proposed to be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA, proceedings have been instituted to terminate a Plan, a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Multiemployer Plan, or the Borrower or such Credit Party will incur any liability (including any contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan or Multiemployer Plan under Sections 4062, 4063, 4201 or - 60 - 4204 of ERISA, if the occurrence of any of the foregoing events would result in a liability which is materially adverse to the financial condition of the Borrower and its Subsidiaries taken as a whole or would materially and adversely affect the ability of the Borrower to perform its obligations under this Credit Agreement or the Note, a statement of an executive officer of the Borrower, setting forth details as to such event and the action the applicable Credit Party proposes to take with respect thereto, (b) promptly upon reasonable request of the Lender, copies of each annual and other report with respect to each Plan and (c) promptly after receipt thereof, a copy of any notice any Credit Party may receive from the PBGC relating to the PBGC's intention to terminate any Plan or to appoint a trustee to administer any Plan. SECTION 5.18. ENVIRONMENTAL LAWS. (a) Promptly notify the Lender upon any Credit Party becoming aware of any violation or, to the best of each Credit Party's knowledge, potential violation, or non-compliance with, or liability or, to the best of each Credit Party's knowledge, potential liability, under any Environmental Laws which, when taken together with all other pending violations would reasonably be expected to have a materially adverse effect on the Borrower and its Subsidiaries taken as a whole, and promptly furnish to the Lender all notices of any nature which any Credit Party may receive from any Governmental Authority or other Person with respect to any violation, or potential violation or non-compliance with, or liability or potential liability under any Environmental Laws which, in any case or when taken together with all such other notices, could reasonably be expected to have a materially adverse effect on the Borrower and its Subsidiaries taken as a whole. (b) Comply with and use reasonable efforts to ensure compliance by all tenants and subtenants with all Environmental Laws, and obtain and comply in all material respects with and maintain and use reasonable efforts to ensure that all tenants and subtenants obtain and comply in all material respects with and maintain any and all licenses, approvals, registrations or permits required by Environmental Laws, except where failure to do so would not have a materially adverse effect on the Borrower and its Subsidiaries taken as a whole. (c) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under all Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities, except where failure to do so would not have a materially adverse effect on the Borrower and its Subsidiaries taken as a whole. Any order or directive whose lawfulness is being contested in good faith by appropriate proceedings shall be considered a lawful order or directive when such proceedings, including any judicial review of such proceedings, have been finally concluded by the issuance of a final non-appealable order; provided, however, that the appropriate Credit Party shall have set aside on its books reserves (the presentation of which is segregated to the extent required by GAAP) adequate with respect thereto if reserves shall be deemed necessary. (d) Defend, indemnify and hold harmless the Lender and its employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature, known or unknown, contingent or otherwise, arising out of, or in any way related to the violation of or noncompliance by any Credit - 61 - Party with any Environmental Laws, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, reasonable attorney and consultant fees, investigation and laboratory fees, court costs and litigation expenses, but excluding therefrom all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses arising out of or resulting from (i) the gross negligence or willful misconduct of any indemnified party or (ii) any acts or omissions of any indemnified party occurring after any indemnified party is in possession of, or controls the operation of, any property or asset. SECTION 5.19. USE OF PROCEEDS. Use the proceeds of the Loans solely for the Borrower (i) to finance the development, production, distribution or acquisition of audio books, books, television product and film product (other than the production and distribution of motion pictures in theaters) and related internet services and (ii) for other general corporate purposes. SECTION 5.20. SECURITY AGREEMENTS WITH THE GUILDS. Furnish to the Lender duly executed copies of (i) each security agreement relating to an item of Product entered into by a Credit Party with any guild and (ii) a subordination agreement (in form and substance satisfactory to the Lender) from the applicable guild with respect to the security interest and other rights granted to it pursuant to each such security agreement delivered to the Lender pursuant to clause (i) above. SECTION 5.21. UNCOMPLETED PRODUCT. With respect to all items of Product (other than audio books and books) for which any Credit Party is the producer (but not a producer-for-hire) or has a financial interest which is subject to a completion risk (i.e. payment by a Credit Party is not conditioned upon delivery), deliver to the Lender, not later than (A) five (5) days prior to the commencement of principal photography of such item of Product and (B) five (5) days prior to payment of the acquisition cost for a negative pick-up, each of the following to the extent applicable (it being understood that for purposes of clause B clauses (viii) and (ix) below shall not be applicable), (i) the budget for such item of Product, (ii) a schedule identifying all agreements executed by a Credit Party in connection with such item of Product which provide for deferments of compensation or a gross or net profit participation, (iii) copies of such of the foregoing agreements as the Lender may reasonably request, (iv) certificates or binders of insurance with respect to such item of Product (and policies of insurance if requested by the Lender), including all forms of insurance coverage required by Section 5.5 hereof, (v) copies of all instruments of transfer or other instruments (in recordable form) ("Chain of Title" documents) necessary to establish, to the reasonable satisfaction of the Lender, in the appropriate Credit Party ownership of sufficient copyright rights in the literary properties upon which such item of Product is to be based to enable such Credit Party to produce and/or distribute such item of Product and to grant the Lender the security interests therein which are contemplated by this Credit Agreement which documents shall evidence to the Lender's satisfaction the Credit Party's rights in, and with respect to, such item of Product, (vi) an executed Copyright Security Agreement Supplement with respect to such item of Product, (vii) executed Pledgeholder Agreements with respect to such item of Product, (viii) a schedule of sources and uses demonstrating in detail that all cash - 62 - necessary to complete and deliver such item of Product will be available as and when needed from sources acceptable to the Lender, and (ix) a Completion Guarantee with respect to such item of Product in form and substance satisfactory to the Lender naming the Lender as a beneficiary thereof; provided, however, that subclause (ix) shall not be applicable to items of Product for which a major television network has committed to provide financing in an amount equal to at least 70% of the Budgeted Negative Cost for such item of Product. SECTION 5.22. GOVERNMENTAL APPROVAL. If any further authorizations, approvals, registrations or filings with any governmental or public regulatory body or authority of the United States or any state thereof required for the execution, delivery and performance by any Credit Party of this Credit Agreement and the other Fundamental Documents to which it is a party should hereafter become necessary, the Credit Parties shall obtain or make all such authorizations, approvals, registrations or filings. 6. NEGATIVE COVENANTS From the date hereof and for so long as the Commitment shall be in effect or any amount remains outstanding under the Note or any Letter of Credit shall remain outstanding or any Obligations remain unpaid or unsatisfied, each Credit Party agrees that, unless the Lender shall otherwise consent in writing, it will not and will not allow any of its Subsidiaries to: SECTION 6.1. LIMITATIONS ON INDEBTEDNESS. Incur, create, assume or suffer to exist any preferred stock or Indebtedness or permit any partnership or joint venture in which any Credit Party is a general partner to incur create, assume or suffer to exist any Indebtedness other than: (a) the Indebtedness represented by the Note and the other Obligations; (b) Indebtedness in respect of secured purchase money financing, including Capital Leases, to the extent permitted by Section 6.2(b) and not to exceed $250,000 in the aggregate at any one time outstanding; (c) unsecured liabilities for acquisitions of rights or product incurred in the ordinary course of business and not otherwise prohibited hereunder; (d) liabilities relating to net or gross profit participations, deferments and guild residuals with respect to the production or acquisition of items of Product; (e) existing Indebtedness listed on Schedule 3.17 hereto but no increases, extensions or renewals thereof unless otherwise noted on Schedule 3.17; - 63 - (f) in the case of the Corporate Guarantors, the guarantees of the Obligations pursuant to Article 9 hereof; (g) Indebtedness incurred in connection with inter-company advances permitted under Section 6.4(v) hereof; (h) Subordinated Debt that does not require any cash payments at any time prior to six months after the Commitment Termination Date; (i) preferred stock without any mandatory redemption provisions; (j) 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; (k) Indebtedness incurred by a Credit Party in connection with the financing of insurance policies; (l) Indebtedness incurred in connection with the settlement of actions, suits or other proceedings brought against the Credit Parties in an aggregate amount not to exceed $500,000 at any one time outstanding; and (m) Indebtedness incurred in connection with the financing of television programming for which the Lender has previously provided written consent. SECTION 6.2. LIMITATIONS ON LIENS. Incur, create, assume or suffer to exist any Lien on its revenue stream, property or assets, whether now owned or hereafter acquired, except: (a) Liens pursuant to written security agreements (in form and substance reasonably acceptable to the Lender) in favor of guilds required pursuant to terms of collective bargaining agreements; provided, that such guilds have entered into an intercreditor agreement with the Lender reasonably satisfactory in all respects to the Lender; (b) Liens granted to the Person financing the acquisition of property, plant or equipment if (i) limited to the particular assets acquired; (ii) the debt secured by the Lien does not exceed the acquisition cost of a particular asset for which the Lien is granted; (iii) such transaction does not otherwise violate this Credit Agreement and (iv) the aggregate amount of all Indebtedness secured by Liens permitted under this paragraph does not exceed $250,000 at any one time outstanding; (c) Liens to secure distribution, exhibition and/or exploitation rights of licensees pursuant to Distribution Agreements on terms satisfactory to the Lender; - 64 - (d) deposits under worker's compensation, unemployment insurance, old-age pensions and other Social Security laws or to secure the performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases or to secure statutory obligations or surety or appeal bonds or performance or other similar bonds incurred in the ordinary course of business (other than Completion Guarantees); (e) Liens for taxes, assessments or other governmental charges or levies due and payable, the validity or amount of which is currently being contested in good faith by appropriate proceedings pursuant to the terms of Section 5.14 hereof; (f) Liens incurred in the ordinary course of business with regard to services rendered by laboratories and post-production houses, and suppliers of materials and equipment which secure trade payables in amounts not exceeding $500,000 in the aggregate; (g) Liens arising out of attachments, judgments or awards as to which an appeal or other appropriate proceedings for contest or review are promptly commenced (and as to which foreclosure and other enforcement proceedings shall not have been commenced (unless fully bonded or otherwise effectively stayed)) and as to which appropriate reserves have been established in accordance with GAAP; (h) the Liens of the Lender under this Credit Agreement, the other Fundamental Documents and other documents contemplated hereby; (i) existing Liens set forth on Schedule 6.2 hereto; (j) customary Liens in favor of Approved Completion Guarantors in connection with Completion Guarantees; (k) possessory Liens (other than those of Laboratories and production houses) which (i) occur in the ordinary course of business, (ii) secure normal trade debt which is not yet due and payable and (iii) do not secure Indebtedness for borrowed money; (l) Liens arising by virtue of any statutory or common law provision relating to banker's liens, rights of setoff or similar rights with respect to deposit accounts of the Credit Parties; (m) statutory Liens of landlords and other Liens imposed by law, such as carriers', warehouseman's or mechanic's Liens, incurred in good faith in the ordinary course of business and deposits made or bonds filed in the ordinary course of business to obtain the release of such Liens in amounts not exceeding $250,000 in the aggregate; and (n) Liens in favor of third-party lenders in respect of particular items of Product pursuant to production financing arrangements approved by the Lender; provided, that each such third-party lender shall have entered into an intercreditor agreement with the Lender in form and substance satisfactory to the Lender. - 65 - SECTION 6.3. LIMITATION ON GUARANTEES. Provide any Guaranty, either directly or indirectly, except (i) negative pickup agreements and minimum guarantees to acquire items of Product in the ordinary course of business to the extent otherwise permitted under Section 6.21 and the other provisions hereof, (ii) guarantees to the Lender in accordance with Article 9 hereof and (iii) existing Guarantees listed on Schedule 6.3 hereto. SECTION 6.4. LIMITATIONS ON INVESTMENTS. Create, make or incur any Investment other than (i) to acquire Product in the ordinary course of business to the extent otherwise permitted under Section 6.21 and the other provisions hereof, (ii) purchase of Cash Equivalents, (iii) inter-company advances among Credit Parties, (iv) Investments as of the Closing Date set forth on Schedule 6.4, (v) Guarantees permitted pursuant to Section 6.3, and (vi) the acquisition or creation of new Subsidiaries in accordance with Section 6.22 hereof. SECTION 6.5. RESTRICTED PAYMENTS. Declare, make or incur any liability to make any Restricted Payments. SECTION 6.6. LIMITATIONS ON LEASES. Create, incur or assume combined lease expense (but specifically excluding amounts included in the Budgeted Negative Cost of an item of Product) for any twelve consecutive calendar months in excess of $500,000 commencing with the fiscal year ended December 31, 1998. SECTION 6.7. CONSOLIDATION, MERGER, SALE OR PURCHASE OF ASSETS, ETC. Whether in one transaction or a series of transactions, (i) wind up, liquidate or dissolve its affairs, or enter into any transaction of merger or consolidation, (ii) sell or otherwise dispose of all or substantially all of its property, stock or assets, (iii) except to the extent permitted by Sections 6.4 and 6.22 hereof, acquire all or substantially all of the stock or assets of any other Person in amounts exceeding $500,000 in the aggregate, or (iv) agree to do or suffer any of the foregoing, except that any Subsidiary of the Borrower may merge with and into, or transfer assets to, another Subsidiary of the Borrower or with and into, or transfer assets to, the Borrower; provided that if any such transaction involves the Borrower, then the Borrower must be the surviving entity in each such transaction. SECTION 6.8. RECEIVABLES. Sell, discount or otherwise dispose of notes, accounts receivable or other obligations owing to any Credit Party except for the purpose of collection in the ordinary course of business. SECTION 6.9. SALE AND LEASEBACK. Enter into any arrangement with any Person or Persons, whereby in contemporaneous transactions any Credit Party sells essentially all of its right, title and interest in an item of Product and acquires or licenses the right to distribute or exploit such item of Product in media and markets accounting for substantially all the value of such item of Product, unless such arrangement does not impair the collateral position of the Lender and is evidenced by documentation acceptable to the Lender. - 66 - SECTION 6.10. PLACES OF BUSINESS; CHANGE OF NAME. Change the location of its chief executive office or principal place of business or any of the locations where it keeps any material portion of the Collateral or its books and records with respect to the Collateral or change its name without in each case (i) giving the Lender 30 days' prior written notice of such change and (ii) filing any additional Uniform Commercial Code financing statements, and such other documents requested by the Lender or which are otherwise necessary or desirable to maintain perfection of the security interest of the Lender in the Collateral. SECTION 6.11. LIMITATIONS ON CAPITAL EXPENDITURES. Make or incur on a consolidated basis any obligation to make Capital Expenditures (other than amounts included in the Budgeted Negative Cost of an item of Product) for any fiscal year in excess of $250,000. SECTION 6.12. TRANSACTIONS WITH AFFILIATES. Effect any transaction with an Affiliate other than a Credit Party on a basis less favorable to such Credit Party than would have been the case if such transaction had been effected on an arms-length basis (and if involving more than $100,000, without a resolution approving each such transaction from the Board of Directors of each Credit Party involved). SECTION 6.13. PROHIBITION OF AMENDMENTS OR WAIVERS. Amend, alter, modify, terminate or waive, or consent to any amendment, alteration, modification or waiver of (x) any material agreement to which any Credit Party is a party, including, without limitation, the Material Agreements, or the terms thereof in any manner which would change, alter or waive any material term thereof and which could reasonably be expected to (i) materially and adversely affect the collectibility of accounts receivable that form part of the Borrowing Base, (ii) materially and adversely affect the financial condition of any Credit Party, (iii) materially and adversely affect the rights of the Lender under this Credit Agreement, the other Fundamental Documents and any other agreements contemplated hereby, (iv) materially decrease the value of the Collateral, or (v) decrease the amount of the sum of (i) the Borrowing Base plus (ii) the Maximum Guaranty Amount plus (iii) amounts currently held in the Collection Account, to less than the sum of then outstanding principal amount of the Loans and the then current L/C Exposure, or (y) any indenture or note purchase agreement governing any Subordinated Debt in any manner whatsoever. SECTION 6.14. DEVELOPMENT COSTS. Permit unfunded development costs (which have not been sold, written off or allocated to an item of Product for which active preproduction has commenced) to exceed $100,000 for any item of Product. SECTION 6.15. OVERHEAD EXPENSE. Permit aggregate allocated and unallocated overhead expenses to exceed $9,500,000 in fiscal 1998 or to exceed in any subsequent fiscal year 110% of the maximum amount permitted for the immediately preceding fiscal year. - 67 - SECTION 6.16. CONSOLIDATED CAPITAL BASE. Permit Consolidated Capital Base at the end of the fiscal quarter ending June 30, 1999 to be less than $6,800,000 and for each fiscal quarter thereafter to be less than the sum of $6,800,000 plus 80% of all net new equity invested after June 30, 1999 plus 80% of accumulated net earnings, if any, for each fiscal quarter ending after June 30, 1999 and prior to the date at which compliance is being determined. SECTION 6.17. EBIT. Permit EBIT (i) as of the end of the 92-day period ending December 31, 1999 to be less than $300,000, and (ii) as of the end of each fiscal quarter thereafter, to be less than $1,500,000. SECTION 6.18. LIQUIDITY RATIO. Permit the ratio of (i) all projected known cash sources (including cash on hand, borrowing under the Credit Agreement (taking into account projected Borrowing Base availability plus the Maximum Guaranty Amount), cash receipts from operations, overhead reimbursements, and cash received from permitted Subordinated Debt and third party investors) to (ii) all projected known cash uses (including debt service, amounts to be spent to acquire film inventory, overhead, and all other cash expenditures), all as determined as of each quarter end and as projected in good faith by the Borrower for the ensuing 24 months, to be less than 1.0 to 1. SECTION 6.19. NO CHANGE IN BUSINESS. Engage in any business activities other than production, distribution and other exploitation of audio books, books, television product and film product (other than the distribution of motion pictures in theaters), in each case including ancillary rights (e.g., music publishing, soundtrack album, merchandising and publishing), and related internet services. SECTION 6.20. ERISA COMPLIANCE. Engage in a "prohibited transaction", as defined in Section 406 of ERISA or Section 4975 of the Code, with respect to any Plan or Multiemployer Plan or knowingly consent to any other "party in interest" or any "disqualified person", as such terms are defined in Section 3(14) or ERISA and Section 4975(e)(2) of the Code, respectively, engaging in any "prohibited transaction", with respect to any Plan or Multiemployer Plan maintained or contributed to by any Credit Party; or permit any Plan maintained by any Credit Party to incur any "accumulated funding deficiency", as defined in Section 302 of ERISA or Section 412 of the Code, unless such incurrence shall have been waived in advance by the Internal Revenue Service; or terminate any Plan in a manner which could result in the imposition of a Lien on any property of any Credit Party pursuant to Section 4068 of ERISA; or breach or knowingly permit any employee or officer or any trustee or administrator of any Plan maintained by any Credit Party to breach any fiduciary responsibility imposed under Title I of ERISA with respect to any Plan; engage in any transaction which would result in the incurrence of a liability under Section 4069 of ERISA; or fail to make contributions to a Plan or Multiemployer Plan which results in the imposition of a Lien on any property of any Credit Party pursuant to Section 302(f) of ERISA or Section 412(n) of the Code, if the occurrence of any of the foregoing events (alone or in the aggregate) would result in a liability which is materially adverse to the financial condition of the Credit Parties taken as a whole or would materially and adversely affect the ability of the Borrower to perform its obligations under this Credit Agreement or the Note. - 68 - SECTION 6.21. ADDITIONAL LIMITATIONS ON PRODUCTION AND ACQUISITION OF PRODUCT. (a) Permit production and acquisition deficits (net of pre-sale guarantees and completed pre-sales payable within 1 year after delivery) to exceed: $5,000,000 in the aggregate at any time outstanding for all (i) television series in production or acquired, which shall not exceed $300,000 for any single episode of any television series; and (ii) for all movies-of-the- week or mini-series, which shall not exceed $600,000 for any single movie-of-the-week and $1,200,000 for any mini-series. (b) Begin production on (i) any television series with a pattern budget in excess of $1,200,000 per episode; (ii) any movie-of-the-week having a budget in excess of $3,500,000; provided, however, that with respect to movies-of-the-week, no more than $10,500,000 in the aggregate shall be outstanding at any one time; or (iii) any television mini- series which would result in the aggregate amount outstanding at any one time in respect of all mini-series currently in production to exceed $7,000,000; in each case where a Credit Party is the producer or has a financial interest which is subject to a completion risk (i.e. payment by a Credit Party is not conditioned upon delivery). SECTION 6.22. SUBSIDIARIES. Acquire or create any new direct or indirect Subsidiary; provided however that a Credit Party may acquire or create additional Subsidiaries if (i) each such Subsidiary executes an Instrument of Assumption and Joinder in the form attached hereto as Exhibit I whereby such Subsidiary becomes a Credit Party hereunder and the certificates representing 100% of the shares of capital stock of such Subsidiary held by such Credit Party becomes part of the Pledged Securities hereunder and are delivered to the Lender together with stock powers for each such certificate executed in blank, and/or (ii) such Credit Party takes such other action in connection with the stock of such Subsidiary as is deemed appropriate by the Lender to protect the Lender's security interest therein. SECTION 6.23. BANK ACCOUNTS. After the date hereof, open or maintain any bank account other than (a) at the office of the Lender as contemplated by Section 8.3 hereof, (b) those accounts listed on Schedule 6.23 or as to which the Lender shall have received notice, or (c) one or more Production Accounts, as to which the Lender shall have received notice. SECTION 6.24. HAZARDOUS MATERIALS. Except as set forth on Schedule 3.21, cause or permit any of its properties or assets to be used to generate, manufacture, refine, transport, treat, store, handle, dispose, transfer, produce or process Hazardous Materials, except in compliance in all material respects with all applicable Environmental Laws, nor release, discharge, dispose or of permit or suffer any release or disposal as a result of any intentional act or omission on its part of Hazardous Materials onto any such property or asset in material violation of any Environmental Law. - 69 - SECTION 6.25. USE OF PROCEEDS OF LOANS AND REQUESTS FOR LETTERS OF CREDIT. Use the proceeds of Loans or request any Letter of Credit hereunder other than for the purposes set forth in, and as required by, Section 5.19 hereof. SECTION 6.26. INTEREST RATE PROTECTION AGREEMENTS, ETC. Enter into any Interest Rate Protection Agreement or Currency Agreement for other than bona fide hedging purposes. SECTION 6.27. AMORTIZATION METHOD. Change the method of amortization of film/television inventory used by any of the Credit Parties, unless required to do so under GAAP. 7. EVENTS OF DEFAULT In the case of the happening and during the continuance of any of the following events (herein called "Events of Default"): (a) any representation or warranty made by any Credit Party in this Credit Agreement or any other Fundamental Document or in connection with this Credit Agreement or with the execution and delivery of the Note or the Borrowings hereunder, or any statement or representation made in any report, financial statement, certificate or other document furnished by or on behalf of any Credit Party to the Lender under or in connection with this Credit Agreement or any Fundamental Document shall prove to have been false or misleading in any material respect when made, deemed to be made or delivered; (b) default shall be made in the payment of any principal of or interest on the Note or of any fees or other amounts payable by the Borrower hereunder, when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise and, in the case of payments of any amounts other than principal, such default shall continue unremedied for three (3) Business Days after receipt by the Borrower of an invoice therefor; (c) default shall be made by any Credit Party in the due observance or performance of any covenant, condition or agreement contained in Section 5.4 or Article 6 of this Credit Agreement; (d) default shall be made with respect to any payment of any Indebtedness of any Credit Party in excess of $250,000 when due or the performance of any other obligation incurred in connection with any such Indebtedness, if the effect of such default is to accelerate the maturity of such Indebtedness or to permit the holder thereof to cause such Indebtedness to become due prior to its stated maturity and such default shall not be remedied, cured, waived or consented to within the period of grace with respect thereto; - 70 - (e) any Credit Party shall generally not pay its debts as they become due or shall admit in writing its inability to pay its debts, or shall make a general assignment for the benefit of creditors; or any Credit Party shall commence any case, proceeding or other action seeking to have an order for relief entered on its behalf as debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property or shall file an answer or other pleading in any such case, proceeding or other action admitting the material allegations of any petition, complaint or similar pleading filed against it or consenting to the relief sought therein; or any Credit Party shall take any action to authorize any of the foregoing; (f) any involuntary case, proceeding or other action against any Credit Party shall be commenced seeking to have an order for relief entered against it as debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (i) results in the entry of any order for relief against it or (ii) shall remain undismissed for a period of thirty (30) days; (g) final judgment(s) for the payment of money in excess of $250,000 shall be rendered against any Credit Party which within thirty (30) days from the entry of such judgment shall not have been discharged or stayed pending appeal or which shall not have been discharged or bonded in full within thirty (30) days from the entry of a final order of affirmance on appeal; (h) failure to deliver a Borrowing Base Certificate to the Lender within 10 Business Days of the date such Certificate was due pursuant to Section 5.1(e) hereof, provided, however, that any failure to deliver a Borrowing Base Certificate shall not give rise to an Event of Default under this clause (h) in the event there are no outstanding Loans and Letters of Credit; (i) a Change in Control or a Change in Management shall occur; (j) the Guaranty Agreements shall for any reason, not be or shall cease to be in full force and effect, or shall be declared null and void, or become unenforceable, or it shall be terminated, or disaffirmed by any Individual Guarantor thereunder; (k) default shall be made by any Credit Party in the due observance or performance of any other covenant, condition or agreement to be observed or performed pursuant to the terms of this Credit Agreement, or any other Fundamental Document, and such default shall continue unremedied for thirty (30) consecutive days after any Credit Party obtains knowledge of such occurrence; (l) a Reportable Event relating to a failure to meet minimum funding standards or an inability to pay benefits when due shall have occurred with respect to any Plan -under the control of any Credit Party and shall not have been remedied within thirty (30) days after the occurrence of such Reportable Event; or a trustee shall be appointed by a United States District Court to administer such Plan, or the PBGC shall institute proceedings to terminate such Plan, and the Lender shall have notified the Borrower that the Lender has determined that on the basis of such Reportable Event, appointment of trustee or commencement of proceedings, there are reasonable grounds to believe that such occurrence would have a material adverse effect to the financial condition of the Credit Parties taken as a whole or would materially and adversely affect the ability of the Borrower to perform its obligations under this Credit Agreement or the Note; or - 71 - (m) any Fundamental Document shall, for any reason, not be or shall cease to be in full force and effect except as provided herein or therein or shall be declared null and void or any of the Fundamental Documents shall not give or shall cease to give the Lender the Liens, rights, powers and privileges purported to be created thereby in favor of the Lender superior to and prior to the rights of all third Persons (except to the extent expressly permitted herein or therein) and subject to no other Liens (except to the extent expressly permitted herein or therein) other than by actions of the Lender, provided that no such defect in the Fundamental Documents shall give rise to an Event of Default under this paragraph (m) unless such defect or such failure shall affect Collateral that is or should be subject to a Lien in favor of the Lender having an aggregate value in excess of $250,000; then, in every such event and at any time thereafter during the continuance of such event, the Lender may take either or both of the following actions, at the same or different times: terminate forthwith the Commitment and/or declare the principal of and the interest on the Loans and the Note and all other amounts payable hereunder or thereunder to be forthwith due and payable, whereupon the same shall become and be forthwith due and payable, without presentment, demand, protest, or other notice of any kind, all of which are hereby expressly waived, anything in this Credit Agreement or in the Note to the contrary notwithstanding. If an Event of Default specified in paragraphs (e) or (f) above shall have occurred, the Commitment shall automatically terminate and the Loans and the Note shall automatically become due and payable, both as to interest and principal, without presentment, demand, protest, or other notice of any kind, all of which are hereby expressly waived, anything in this Credit Agreement or the Note to the contrary notwithstanding. Such remedies shall be in addition to any other remedy available to the Lender pursuant to Applicable Law or otherwise. 8. GRANT OF SECURITY INTEREST; REMEDIES SECTION 8.1. SECURITY INTERESTS. The Borrower, as security for the due and punctual payment of the Obligations, and the Corporate Guarantors, as security for their obligations under Article 9 hereof, hereby mortgage, pledge, assign, transfer, set over, convey and deliver to the Lender and grant to the Lender a security interest in the Collateral. - 72 - SECTION 8.2. USE OF COLLATERAL. So long as no Event of Default shall have occurred and be continuing, and subject to the various provisions of this Credit Agreement and the other Fundamental Documents, a Credit Party may use the Collateral in any lawful manner permitted hereunder. SECTION 8.3. COLLECTION ACCOUNTS. (a) The Borrower will establish a lockbox arrangement and related collection bank accounts (each, a "Collection Account") and will direct all Persons who become licensees, buyers or account debtors under receivables with respect to any item included in the Collateral (other than de minimis amounts and proceeds of particular items of Product which are assigned by a Credit Party to third-party lenders as collateral for its obligations to make certain payments upon Completion and delivery of such items of Product pursuant to production financing arrangements permitted hereunder; provided that such third- party lender shall have entered into an intercreditor agreement with the Lender in form and in substance satisfactory to the Lender; and provided further that the Borrower may only assign proceeds of Distribution Agreements which relate solely to the particular item of Product whose production is being financed by such third-party lender) to make payments under or in connection with the license agreements, sales agreements or receivables directly to the appropriate lockbox or Collection Account. To the extent practicable, the Credit Parties, will amend existing agreements to direct all Persons who are licensees, buyers or account debtors under receivables with respect to any item included in the Collateral, to make payments under or in connection with the license agreements, sales agreements or receivables directly to the appropriate lockbox or Collection Account. (b) The Credit Parties will execute such documentation as may be reasonably required by the Lender in order to provide for the deposit into the Collection Accounts of all items received in the lockbox and to otherwise effectuate the provisions of this Section 8.3. (c) In the event a Credit Party receives payment from any Person or proceeds under an Acceptable L/C, which payment should have been remitted directly to a Collection Account, such Credit Party shall promptly remit such payment or proceeds to a Collection Account to be applied in accordance with the terms of this Credit Agreement. (d) All such lockboxes and Collection Accounts shall be maintained with the Lender or with such other financial institutions as may be approved by the Lender, subject to the right of the Lender to at any time withdraw such approval and transfer any such lockboxes and/or Collection Account(s) to the Lender or another approved financial institution. - 73 - (e) The Lender is hereby authorized and directed to invest and reinvest the funds from time to time deposited in the Collection Accounts, so long as no Event of Default has occurred and is continuing, on the instructions of the Borrower (provided that such notice may be given verbally to be confirmed promptly in writing) or, if the Borrower shall fail to give such instruction upon delivery of any such funds, in the sole discretion of the Lender, provided that in no event may the Borrower give instructions to the Lender to, or may the Lender in its discretion, invest or reinvest funds in the Collection Accounts in other than Cash Equivalents described in clause (i) of the definition of Cash Equivalents, or described in clauses (ii) and (iii) of the definition of Cash Equivalents to the extent issued by The Chase Manhattan Bank. (f) Any net income or gain on the investment of funds from time to time held in the Collection Accounts, shall be promptly reinvested by the Lender at the direction of the Borrower as a part of the Collection Accounts and any net loss on any such investment shall be charged against the Collection Accounts. (g) The Lender shall not be a trustee for the Credit Parties, or shall have any obligations or responsibilities, or shall be liable for anything done or not done, in connection with the Collection Accounts, except as expressly provided herein and except that the Lender shall have the obligations of a secured party under the UCC. The Lender shall not have any obligation or responsibilities and shall not be liable in any way for any investment decision made pursuant to this Section 8.3(g) or for any decrease in the value of the investments held in the Collection Accounts except for the gross negligence or wilful misconduct of Lender in carrying out the written instructions of Borrower. (h) For value received and to induce the Lender to issue Letters of Credit and to make Loans from time to time to the Borrower as provided for in this Credit Agreement, as security for the payment of all of the Obligations, the Credit Parties hereby assign to the Lender and grant to the Lender, a first and prior Lien upon all the Credit Parties' rights in and to the Collection Accounts, all cash, documents, instruments and securities from time to time held therein, and all rights pertaining to investments of funds in the Collection Accounts and all products and proceeds of any of the foregoing. All cash, documents, instruments and securities from time to time on deposit in the Collection Accounts, and all rights pertaining to investments of funds in the Collection Accounts shall immediately and without any need for any further action on the part of any of the Credit Parties or the Lender, become subject to the Lien set forth in this Section 8.3(h), be deemed Collateral for all purposes hereof and be subject to the provisions of this Credit Agreement. (i) At any time after the Loans have been accelerated in accordance with Article 7 hereof, the Lender may sell any documents, instruments and securities held in the Collection Accounts and may immediately apply the proceeds thereof and any other cash held in the Collection Accounts in accordance with Section 10.5 hereof. - 74 - SECTION 8.4. CREDIT PARTIES TO HOLD IN TRUST. Upon the occurrence and during the continuance of an Event of Default, the Credit Parties will, upon receipt by them of any revenue, income, profits or other sums in which a security interest is granted by this Article 8, payable pursuant to any agreement or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the sum in trust for the Lender, and forthwith, without any notice or demand whatsoever (all notices, demands, or other actions on the part of the Lender being expressly waived), endorse, transfer and deliver any such sums or instruments or both, to the Lender to be applied to the repayment of the Obligations in accordance with the provisions of Section 8.7 hereof. SECTION 8.5. COLLECTIONS, ETC. Upon the occurrence and during the continuance of an Event of Default, the Lender may, in its sole discretion, in its name or in the name of any Credit Party or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to, any of the Collateral, but shall be under no obligation so to do, or the Lender may extend the time of payment, arrange for payment in installments, or otherwise modify the terms of, or release, any of the Collateral, without thereby incurring responsibility to, or discharging or otherwise affecting any liability of, any Credit Party. The Lender will not be required to take any steps to preserve any rights against prior parties to the Collateral. If any Credit Party fails to make any payment or take any action required hereunder, the Lender may make such payments and take all such actions as the Lender reasonably deems necessary to protect the Lender's security interests in the Collateral and/or the value thereof, and the Lender is hereby authorized (without limiting the general nature of the authority herein above conferred) to pay, purchase, contest or compromise any Liens that in the judgment of the Lender appear to be equal to, prior to or superior to the security interests of the Lender in the Collateral and any Liens not expressly permitted by this Credit Agreement. SECTION 8.6. POSSESSION, SALE OF COLLATERAL, ETC. Upon the acceleration of the Loans in accordance with Article 7 hereof, the Lender may enter upon the premises of any Credit Party or wherever the Collateral may be, and take possession of the Collateral, and may demand and receive such possession from any Person who has possession thereof, and the Lender may take such measures as it may deem necessary or proper for the care or protection thereof, including the right to remove all or any portion of the Collateral, and with or without taking such possession may sell or cause to be sold, whenever the Lender shall decide, in one or more sales or parcels, at such prices as the Lender may deem best, and for cash or on credit or for future delivery, without assumption of any credit risk, all or any portion of the Collateral, at any broker's board or at public or private sale, without demand of performance or notice of intention to sell or of time or place of sale (except the Lender shall provide 15 days' written notice to the Credit Parties of the time and place of any such public sale or sales and such other notices as may be required by Applicable Law and cannot be waived), and the Lender or any other Person may be the purchaser of all or any portion of the Collateral so sold and thereafter hold the same absolutely, free (to the fullest extent permitted by Applicable Law) from any claim or right of whatever kind, including any equity of redemption, of any Credit Party, any such demand, notice, claim, right or equity - 75 - being hereby expressly waived and released. At any sale or sales made pursuant to this Article 8, the Lender may bid for or purchase, free (to the fullest extent permitted by Applicable Law) from any claim or right of whatever kind, including any equity of redemption, of any Credit Party, any such demand, notice, claim, right or equity being hereby expressly waived and released, any part of or all of the Collateral offered for sale, and may make any payment on account thereof by using any claim for moneys then due and payable to the Lender by any Credit Party hereunder as a credit against the purchase price. The Lender shall in any such sale make no representations or warranties with respect to the Collateral or any part thereof, and the Lender shall not be chargeable with any of the obligations or liabilities of any Credit Party. Each Credit Party hereby agrees (i) that it will indemnify and hold the Lender harmless from and against any and all claims with respect to the Collateral asserted before the taking of actual possession or control of the relevant Collateral by the Lender pursuant to this Article 8, or arising out of any act of, or omission to act on the part of, any party (other than the Lender) prior to such taking of actual possession or control by the Lender (whether asserted before or after such taking of possession or control), or arising out of any act on the part of any Credit Party, or its agents before or after the commencement of such actual possession or control by the Lender except for claims arising out of Lender's gross negligence or willful misconduct; and (ii) the Lender shall not have liability or obligation to any Credit Party arising out of any such claim except for acts of willful misconduct or gross negligence or not taken in good faith. Subject only to the lawful rights of third parties, any Laboratory which has possession of any of the Collateral is hereby constituted and appointed by the Credit Parties as pledgeholder for the Lender and, upon the acceleration of the Loans in accordance with Article 7 hereof, each such pledgeholder is hereby authorized (to the fullest extent permitted by Applicable Law) to sell all or any portion of the Collateral upon the order and direction of the Lender, and each Credit Party hereby waives any and all claims, for damages or otherwise, for any action taken by such pledgeholder in accordance with the terms of the UCC not otherwise waived hereunder. In any action hereunder, the Lender shall be entitled if permitted by Applicable Law to the appointment of a receiver without notice, to take possession of all or any portion of the Collateral and to exercise such powers as the court shall confer upon the receiver. Notwithstanding the foregoing, upon the occurrence of an Event of Default, and during the continuation of such Event of Default, the Lender shall be entitled to apply, without prior notice to the Credit Parties, any cash or cash items constituting Collateral in the possession of the Lender to payment of the Obligations. SECTION 8.7. APPLICATION OF PROCEEDS ON DEFAULT. During the continuance of an Event of Default, the balances in the Collection Account(s), or in any account of any Credit Party with the Lender, all other income on the Collateral, and all proceeds from any sale of the Collateral pursuant hereto shall be applied first toward payment of the reasonable out-of-pocket costs and expenses paid or incurred by the Lender in enforcing this Credit Agreement, in realizing on or protecting any Collateral and in enforcing or collecting any Obligations or any Guaranty thereof, including, without limitation, court costs and the reasonable attorney's fees and expenses incurred by the Lender, and then to the payment in full of the Obligations in such order as determined by the Lender, provided, however, that, the Lender may in its discretion apply funds - 76 - comprising the Collateral to pay the cost (i) of completing any item of Product owned in whole or in part by any Credit Party in any stage of production and (ii) of making delivery to the distributors of such item of Product. Any amounts remaining after such indefeasible payment in full shall be remitted to the appropriate Credit Party or as a court of competent jurisdiction may otherwise direct. SECTION 8.8. POWER OF ATTORNEY. Each Credit Party does hereby irrevocably make, constitute and appoint the Lender or any of its officers or designees its true and lawful attorney-in-fact with full power in the name of the Lender or any Credit Party, (a) after the acceleration of the Loans in accordance with Article 7 hereof, to receive, open and dispose of all mail addressed to any Credit Party, and to endorse any notes, checks, drafts, money orders or other evidences of payment relating to the Collateral that may come into the possession of the Lender with full power and right to cause the mail of such Persons to be transferred to the Lender's own offices or otherwise, and to do any and all other acts necessary or proper to carry out the intent of this Credit Agreement and the grant of the security interests hereunder and under the Fundamental Documents, and each Credit Party hereby ratifies and confirms all that the Lender or its substitutes shall properly do by virtue hereof; (b) upon the occurrence of an Event of Default which is not waived in writing by the Lender, (i) to enforce all of each Credit Party's rights under and pursuant to all agreements with respect to the Collateral, all for the sole benefit of the Lender and to enter into such other agreements as may be necessary or appropriate in the judgment of the Lender to complete the production, distribution or exploitation of any item of Product which is included in the Collateral, (ii) to enter into and perform such agreements as may be necessary in order to carry out the terms, covenants and conditions of the Fundamental Documents that are required to be observed or performed by any Credit Party, (iii) to execute such other and further mortgages, pledges and assignments of the Collateral, and related instruments or agreements, as the Lender may reasonably require for the purpose of perfecting, protecting, maintaining or enforcing the security interests granted to the Lender hereunder, and (iv) to do any and all other things necessary or proper to carry out the intention of this Credit Agreement and the grant of the security interests hereunder and under the other Fundamental Documents. The Credit Parties hereby ratify and confirm in advance all that the Lender as such attorney-in-fact or its substitutes shall properly do by virtue of this power of attorney. In the event the Lender exercises the power of attorney granted herein, the Lender shall, concurrently with such exercise, provide written notice to the Borrower and the Lender in accordance with Section 11.1. SECTION 8.9. FINANCING STATEMENTS, DIRECT PAYMENTS. Each Credit Party hereby authorizes the Lender to file UCC financing statements and any amendments thereto or continuations thereof, any Copyright Security Agreement, any Copyright Security Agreement Supplement, and any other appropriate security documents or instruments and to give any notices necessary or desirable to perfect the Lien of the Lender on the Collateral, in all cases without the signatures of any Credit Party or to execute such items as attorney-in-fact for any Credit Party. Each Credit Party further authorizes the Lender upon the occurrence of an Event of Default, and during the continuation of such Event of Default, to notify any account debtors that all sums payable to any Credit Party relating to the Collateral shall be paid directly to the Lender. - 77 - SECTION 8.10. FURTHER ASSURANCES. Upon the reasonable request of the Lender, each Credit Party hereby agrees to duly and promptly execute and deliver, or cause to be duly executed and delivered, at the cost and expense of the Credit Parties, such further instruments as may be necessary or proper, in the judgment of the Lender, to carry out the provisions and purposes of this Article 8, necessary, in the judgment of the Lender, to perfect and preserve the Liens of the Lender hereunder and under the Fundamental Documents, and in the Collateral or any portion thereof. SECTION 8.11. TERMINATION. The security interests granted under this Article 8 shall terminate when all the Obligations have been paid in full and performed and the Commitment shall have terminated and all Letters of Credit shall have expired or been terminated or canceled. Upon request by the Credit Parties (and at the sole expense of the Credit Parties) after such termination, the Lender will take all reasonable action and do all things reasonably necessary, including executing UCC terminations, Pledgeholder Agreement terminations, termination letters to account debtors and copyright reassignments, to release the security interest granted to it hereunder. SECTION 8.12. REMEDIES NOT EXCLUSIVE. The remedies conferred upon or reserved to the Lender in this Article 8 are intended to be in addition to, and not in limitation of, any other remedy or remedies available to the Lender. Without limiting the generality of the foregoing, the Lender shall have all rights and remedies of a secured creditor under Article 9 of the UCC. SECTION 8.13. QUIET ENJOYMENT. The Lender acknowledges that its security interest hereunder is subject to the rights of Quiet Enjoyment of parties to Distribution Agreements, license agreements and other similar agreements, whether existing on the date hereof or hereafter executed. For the purpose hereof, "Quiet Enjoyment" shall mean in connection with the rights of licensees under license agreements and distributors under Distribution Agreements, the Lender's agreement that its rights under this Credit Agreement and the Fundamental Documents and in the Collateral are subject to the rights of such parties to distribute, exhibit and/or to exploit the item of Product licensed to them, and to receive prints or tapes or have access to preprint material or master tapes in connection therewith and that even if the Lender shall become the owner of the Collateral in case of an Event of Default, the Lender's ownership rights shall be subject to the rights of said parties under such agreements, provided, however, that such licensee or such distributor shall not be in default under the relevant license agreement or Distribution Agreement and, provided, further that the Lender shall not be responsible for any liability or obligation of any Credit Party under any license agreement. - 78 - SECTION 8.14. CONTINUATION AND REINSTATEMENT. Each Credit Party further agrees that the security interest granted hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment or any part thereof, of principal or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or reorganization of any Credit Party or otherwise. 9. GUARANTY SECTION 9.1. GUARANTY. (a) Each Corporate Guarantor unconditionally and irrevocably guarantees to the Lender the due and punctual payment by, and performance of, the Obligations (including interest accruing on and after the filing of any petition in bankruptcy or of reorganization of the obligor whether or not post filing interest is allowed in such proceeding). Each Corporate Guarantor further agrees that the Obligations may be extended or renewed, in whole or in part, without notice or further assent from it (except as may be otherwise required herein), and it will remain bound upon this guaranty notwithstanding any extension or renewal of any Obligation. (b) Each Corporate Guarantor waives presentation to, demand for payment from and protest to, as the case may be, the Credit Parties or any other Corporate Guarantor of any of the Obligations, and also waives notice of protest for nonpayment. The obligations of each Corporate Guarantor hereunder shall not be affected by (i) the failure of the Lender to assert any claim or demand or to enforce any right or remedy against the Borrower, Corporate Guarantor, any Individual Guarantor or any other guarantor under the provisions of this Credit Agreement or any other agreement or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) the failure of the Lender to obtain the consent of the Corporate Guarantor with respect to any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of this Credit Agreement, the Note or of any other agreement; (iv) the release, exchange, waiver or foreclosure of any security held by the Lender for the Obligations or any of them; (v) the failure of the Lender to exercise any right or remedy against any other Corporate Guarantor, any Individual Guarantor or any other guarantor of the Obligations; or (vi) the release or substitution of any Corporate Guarantor, any Individual Guarantor or other guarantor of the Obligations. Without limiting the generality of the foregoing or any other provision hereof, to the extent permitted by applicable law, each Corporate Guarantor hereby expressly waives any and all benefits which might otherwise be available to it under California Civil Code Sections 2799, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2838, 2839, 2845, 2848, 2849, 2850, 2899 and 3433. (c) Each Corporate Guarantor further agrees that this Guaranty constitutes a guaranty of performance and of payment when due and not just of collection, and waives any right to require that any resort be had by the Lender to any security held for payment of the Obligations or to any balance of any deposit, account or credit on the books of the Lender in favor of the Borrower, any other Corporate Guarantor, any Individual Guarantor or to any other Person. - 79 - (d) Each Corporate Guarantor hereby expressly assumes all responsibilities to remain informed of the financial condition of the Borrower, the Corporate Guarantors, the Individual Guarantors and any other guarantors and any circumstances affecting the ability of the Borrower to perform under this Credit Agreement. (e) Each Corporate Guarantor's obligations under the guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Obligations, the Note or any other instrument evidencing any Obligations, or by the existence, validity, enforceability, perfection, or extent of any collateral therefor or by any other circumstance relating to the Obligations which might otherwise constitute a defense to this Guaranty. The Lender makes no representation or warranty with respect to any such circumstances and has no duty or responsibility whatsoever to each Corporate Guarantor in respect to the management and maintenance of the Obligations or any collateral security for the Obligations. SECTION 9.2. NO IMPAIRMENT OF GUARANTY, ETC. The obligations of each Corporate Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason (except payment of the Obligations), including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Obligations. Without limiting the generality of the foregoing, the obligations of each Corporate Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lender to assert any claim or demand or to enforce any remedy under this Credit Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure or delay, willful or otherwise, in the performance of the Obligations, or by any other act or thing or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of such Corporate Guarantor or would otherwise operate as a discharge of such Corporate Guarantor as a matter of law, unless and until the Obligations are paid in full, the Commitments have terminated and each outstanding Letter of Credit has expired or otherwise been terminated. SECTION 9.3. CONTINUATION AND REINSTATEMENT, ETC. (a) Each Corporate Guarantor further agrees that its guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or reorganization of Borrower or a Corporate Guarantor, or otherwise. In furtherance of the provisions of this Article 9, and not in limitation of any other right which the Lender may have at law or in equity against the Borrower or a Corporate Guarantor by virtue hereof, upon failure of the Borrower to pay any Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, each Corporate Guarantor hereby promises to and will, upon receipt of written demand by the Lender, forthwith pay or cause to be paid to the Lender in cash an amount equal to the unpaid amount of all the Obligations with interest thereon at a rate of interest equal to the rate specified in Section 2.7(a) hereof, and thereupon the Lender shall assign such Obligation, together with all security interests, if any, then held by the Lender in respect of such Obligation, to the - 80 - Corporate Guarantors making such payment; such assignment to be subordinate and junior to the rights of the Lender with regard to amounts payable by the Borrower in connection with the remaining unpaid Obligations and to be pro tanto to the extent to which the Obligation in question was discharged by the Corporate Guarantor or Corporate Guarantors making such payments. (b) All rights of the Corporate Guarantors against the Borrower, arising as a result of the payment by any Corporate Guarantor of any sums to the Lender or directly to the Lender hereunder by way of right of subrogation or otherwise shall in all respects be subordinated and junior in right of payment to, and shall not be exercised by such Corporate Guarantor until and unless, the prior final and indefeasible payment in full of all the Obligations. If any amount shall be paid to such Corporate Guarantor for the account of the Borrower, such amount shall be held in trust for the benefit of the Lender, segregated from such Corporate Guarantor's own assets, and shall forthwith be paid to the Lender to be credited and applied to the Obligations, whether matured or unmatured. SECTION 9.4. LIMITATION ON GUARANTEED AMOUNT ETC. Notwithstanding any other provision of this Article 9, the amount guaranteed by each Corporate Guarantor hereunder shall be limited to the extent, if any, required so that its obligations under this Article 9 shall not be subject to avoidance under Section 548 of the Bankruptcy Code or to being set aside or annulled under any applicable state law relating to fraud on creditors. In determining the limitations, if any, on the amount of any Corporate Guarantor's obligations hereunder pursuant to the preceding sentence, it is the intention of the parties hereto that any rights of subrogation or contribution which such Corporate Guarantor may have under this Article 9 (or as a result of the operation of Article 8 with regard to assets of other Credit Parties) or any other agreement or under Applicable Law shall be taken into account. 10. PLEDGE SECTION 10.1. PLEDGE. As security for the Obligations, each Pledgor hereby pledges, hypothecates, assigns, transfers, sets over and delivers unto the Lender, a security interest in all Pledged Securities now owned or hereafter acquired by it. On or prior to the Closing Date, the Pledgors shall deliver to the Lender the definitive instruments representing all Pledged Securities, accompanied by executed undated stock powers, duly endorsed or executed in blank by the appropriate Pledgor, and such other instruments or documents as the Lender or its counsel shall reasonably request. SECTION 10.2. COVENANT. Each Pledgor covenants that as stockholder of each of its respective Subsidiaries it will not take any action to allow any additional shares of common stock, preferred stock or other equity securities of any of its respective Subsidiaries or any securities convertible or exchangeable into common or preferred stock of such Subsidiaries to be issued, or grant any options or warrants, unless such securities are pledged to the Lender as security for the Obligations. - 81 - SECTION 10.3. REGISTRATION IN NOMINEE NAME; DENOMINATIONS. Upon the occurrence and during the continuation of an Event of Default, the Lender shall have the right (in its sole and absolute discretion) to hold the certificates representing any Pledged Securities (a) in its own name or in the name of its nominee or (b) in the name of the appropriate Pledgor, endorsed or assigned in blank or in favor of the Lender. The Lender shall have the right to exchange the certificates representing Pledged Securities for certificates of smaller or larger denominations for any purpose consistent with this Credit Agreement. SECTION 10.4. VOTING RIGHTS; DIVIDENDS; ETC. (a) The appropriate Pledgor shall be entitled to exercise any and all voting and/or consensual rights and powers accruing to owners of the Pledged Securities or any part thereof for any purpose not inconsistent with the terms hereof, at all times, except as expressly provided in (c) below. (b) Any dividends or distributions of any kind whatsoever (other, so long as an Event of Default is not continuing, than cash) received by a Pledgor, whether resulting from a subdivision, combination, or reclassification of the outstanding capital stock of the issuer or received in exchange for Pledged Securities or any part thereof or as a result of any merger, consolidation, acquisition, or other exchange of assets to which the issuer may be a party, or otherwise, shall be and become part of the Pledged Securities pledged hereunder and shall immediately be delivered to the Lender to be held subject to the terms hereof. (c) Upon the occurrence and during the continuance of an Event of Default and notice from the Lender of the transfer of such rights to the Lender, all rights of the Pledgors to exercise the voting and/or consensual rights and powers and to receive dividends or distributions which it is entitled to pursuant to this Section 10.4 shall cease, and all such rights shall thereupon become vested in the Lender, which shall have the sole and exclusive right and authority to exercise such voting and/or consensual rights and/or receive such dividends or distributions until such time as such Event of Default has been cured. All dividends and distributions which are received contrary to the provisions of this subsection (c) shall be received in trust for the benefit of the Lender and shall be delivered. (d) If the Lender shall receive any cash pursuant to Section 10.4(c) which but for the occurrence of an Event of Default the relevant Pledgor would be entitled to retain for its own account under Section 10.4(b), then after and so long as all Events of Default have been cured and only if the Obligations have not been accelerated, the Lender shall pay over to such Pledgor any such cash retained by it during the continuance of such Event of Default which has not been applied to the Obligations pursuant to the terms hereof. SECTION 10.5. REMEDIES UPON DEFAULT. If the Loans shall have been accelerated in accordance with Article 7 hereof, the Lender may sell the Pledged Securities, or any part thereof, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery as the Lender shall deem appropriate subject to the terms hereof or as otherwise provided in the UCC. The Lender shall be authorized at any such - 82 - sale (if it deems it advisable to do so) to restrict to the full extent permitted by Applicable Law the prospective bidders or purchasers to Persons who will represent and agree that they are purchasing the Pledged Securities for their own account for investment and not with a view to the distribution or sale thereof, and upon consummation of any such sale the Lender shall have the right to assign, transfer, and deliver to the purchaser or purchasers thereof the Pledged Securities so sold. Each such purchaser at any such sale shall hold the property sold absolutely, free from any claim or right on the part of the Pledgors. The Lender shall give ten (10) days' written notice of its intention to make any such public or private sale, or sale at any broker's board or on any such securities exchange, or of any other disposition of the Pledged Securities. Such notice, in the case of public sale, shall state the time and place for such sale and, in the case of sale at a broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Pledged Securities, or portion thereof, will first be offered for sale at such board or exchange. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Lender may fix and shall state in the notice of such sale. At any such sale, the Pledged Securities, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Lender may (in its sole and absolute discretion) determine. The Lender shall not be obligated to make any sale of the Pledged Securities if it shall determine not to do so, regardless of the fact that notice of sale of the Pledged Securities may have been given. The Lender may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case the sale of all or any part of the Pledged Securities is made on credit or for future delivery, the Pledged Securities so sold shall be retained by the Lender until the sale price is paid by the purchaser or purchasers thereof, but the Lender shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Pledged Securities so sold and, in case of any such failure, such Pledged Securities may be sold again upon like notice. At any sale or sales made pursuant to this Section 10.5, the Lender may bid for or purchase, free from any claim or right of whatever kind, including any equity of redemption, of the Pledgors, any such demand, notice, claim, right or equity being hereby expressly waived and released, any or all of the Pledged Securities offered for sale, and may make any payment on the account thereof by using any claim for moneys then due and payable to the Lender by any Credit Party as a credit against the purchase price; and the Lender, upon compliance with the terms of sale, may hold, retain and dispose of the Pledged Securities without further accountability therefor to the Pledgors or any third party (other than the Lender). The Lender shall in any such sale make no representations or warranties with respect to the Pledged Securities or any part thereof, and shall not be chargeable with any of the obligations or liabilities of the Pledgors with respect thereto. Each Pledgor hereby agrees (i) it will indemnify and hold the Lender harmless from and against any and all claims with respect to the Pledged Securities asserted before the taking of actual possession or control of the Pledged Securities by the Lender pursuant to this Credit Agreement or arising out of any act of, or omission to act on the part of, any party prior to such taking of actual possession or control by the Lender (whether asserted before or after such taking of possession or control), or arising out of any act on the part of any Pledgor or Affiliates before or after the commencement of such actual possession - 83 - or control by the Lender unless due to Lender's gross negligence or wilful misconduct and (ii) the Lender shall have no liability or obligation arising out of any such claim unless due to Lender's gross negligence or wilful misconduct. As an alternative to exercising the power of sale herein conferred upon it, the Lender may proceed by a suit or suits at law or in equity to foreclose upon the Collateral and Pledged Securities under this Credit Agreement and to sell the Pledged Securities, or any portion thereof, pursuant to a judgment or decree of a court or courts having competent jurisdiction. SECTION 10.6. APPLICATION OF PROCEEDS OF SALE AND CASH. The proceeds of sale of the Pledged Securities sold pursuant to Section 10.5 hereof shall be applied by the Lender as follows: (i) to the payment of all reasonable out-of-pocket costs and expenses paid or incurred by the Lender in connection with such sale, including, without limitation, all court costs and the reasonable fees and expenses of counsel for the Lender in connection therewith, and the payment of all reasonable out-of-pocket costs and expenses paid or incurred by the Lender in enforcing this Credit Agreement, in realizing or protecting any Collateral and in enforcing or collecting any Obligations or any Guaranty thereof, including, without limitation, court costs and the reasonable attorney's fees and expenses incurred by the Lender in connection therewith; and (ii) to the payment in full of the Obligations in such order as determined by the Lender; provided, however, that the Lender may in its discretion apply funds comprising the Collateral to pay the cost (i) of completing any item of Product owned in whole or in part by any Credit Party in any stage of production and (ii) of making delivery to the distributors of such item of Product. Any amounts remaining after such indefeasible payment in full shall be remitted to the appropriate Pledgor, or as a court of competent jurisdiction may otherwise direct. SECTION 10.7. SECURITIES ACT, ETC. In view of the position of each Pledgor in relation to the Pledged Securities pledged by it, or because of other present or future circumstances, a question may arise under the Securities Act of 1933, as amended, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being hereinafter called the "Federal Securities Laws"), with respect to any disposition of the Pledged Securities permitted hereunder, each Pledgor understands that compliance with the Federal Securities Laws may very strictly limit the course of conduct of the Lender if the Lender were to attempt to dispose of all or any part of the Pledged Securities, and may also limit the extent to which or the manner in which any subsequent transferee of any Pledged Securities may dispose of the same. Similarly, there may be other legal restrictions or limitations affecting the Lender in any attempt to dispose of all or any part of the Pledged Securities under applicable Blue Sky or other state securities laws, or similar laws analogous in purpose or effect. Under Applicable Law, in the absence of an - 84 - Agreement to the contrary, the Lender may perhaps be held to have certain general duties and obligations to the Pledgors to make some effort towards obtaining a fair price even though the Obligations may be discharged or reduced by the proceeds of a sale at a lesser price. Each Pledgor waives to the fullest extent permitted by Applicable Law any such general duty or obligation to it, and the Pledgors and/or the Credit Parties will not attempt to hold the Lender responsible for selling all or any part of the Pledged Securities at an inadequate price; provided that the Lender, in good faith, shall have obtained three bids for the purchase of all or part of the Pledged Securities and the Lender shall have accepted the highest offer of such three bids. SECTION 10.8. CONTINUATION AND REINSTATEMENT. Each Pledgor further agrees that its pledge hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or reorganization of any Pledgor or otherwise. SECTION 10.9. TERMINATION. The pledge referenced herein shall terminate when all of the Obligations shall have been paid in full and the Commitment shall have terminated, and all Letters of Credit shall have expired or been terminated or canceled, at which time the Lender shall assign and deliver to the appropriate Pledgor, or to such Person or Persons as such Pledgor shall designate, against receipt, such of the Pledged Securities (if any) as shall not have been sold or otherwise applied by the Lender pursuant to the terms hereof and shall still be held by it hereunder, together with appropriate instruments of reassignment and release. Any such reassignment shall be free and clear of all Liens, arising by, under or through the Lender but shall otherwise be without recourse upon or warranty by the Lender and at the expense of the Pledgors. 11. MISCELLANEOUS SECTION 11.1. NOTICES. Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or in the case of facsimile communication, if by telegram, delivered to the telegraph company and, if by telex, graphic scanning or other telegraphic or facsimile communications equipment of the sending party hereto, delivered by such equipment) addressed, if to the Lender to it at 270 Park Avenue, 37th Floor, New York, New York 10017, Attn: John J. Huber III, Facsimile No.: (212) 270-4584, with a copy to Chase Securities Inc., 1800 Century Park East, Suite 400, Los Angeles, California 90067, Attn: Kenneth R. Wilson, Facsimile No.: (310) 788-5628 or if to any Credit Party at 8955 Beverly Boulevard, Los Angeles, California 90048, Attn: Robert Murray, Esq. and Ronald Lightstone, Facsimile No.: (310) 724-7146 or such other address as such party may from time to time designate by giving written notice to the other parties hereunder. Any failure of the Lender giving notice pursuant to this Section 11.1, to provide a courtesy copy to a party as provided herein, shall not affect the validity of such notice. All notices and other communications given to any party hereto in accordance with the provisions of this Credit Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid, return receipt requested, if by mail, or when - 85- delivered to the telegraph company, charges prepaid, if by telegram, or upon receipt by such party, if by any telegraphic or facsimile communications equipment, in each case addressed to such party as provided in this Section 11.1 or in accordance with the latest unrevoked written direction from such party. SECTION 11.2. SURVIVAL OF AGREEMENT, REPRESENTATIONS AND WARRANTIES, ETC. All warranties, representations and covenants made by any of the Credit Parties herein or in any certificate or other instrument delivered by it or on its behalf in connection with this Credit Agreement shall be considered to have been relied upon by the Lender and, except for any terminations, amendments, modifications or waivers thereof in accordance with the terms hereof, shall survive the making of the Loans and issuance of the Letters of Credit herein contemplated and the execution and delivery to the Lender of the Note regardless of any investigation made by the Lender and shall continue in full force and effect so long as any amount due or to become due hereunder is outstanding and unpaid and so long as any Letter of Credit remains outstanding and so long as the Commitment has not been terminated. All statements in any such certificate or other instrument shall constitute representations and warranties by the Credit Parties hereunder. SECTION 11.3. SUCCESSORS AND ASSIGNS; LOAN SALES; PARTICIPATIONS. (a) Whenever in this Credit Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; provided, however, that the Borrower may not assign its rights hereunder without the prior written consent of the Lender, and all covenants, promises and agreements by or on behalf of the Borrower which are contained in this Credit Agreement shall bind and inure to the benefit of the successors and assigns of all such parties. (b) The Lender may, with the consent of the Borrower (such consent not to be unreasonably withheld), assign to one or more banks or other entities, all or a portion of its interests, rights and obligations under this Credit Agreement (including, without limitation, all or a portion of its Commitment and the same portion of the Loans at the time owing to it and the Note held by it). The Lender and such assignee shall execute appropriate documentation (i) evidencing such assignment, which documentation shall set forth the respective rights and obligations of the Lender and such assignee and (ii) to the extent The Chase Manhattan Bank shall retain a portion of the Commitment, appointing The Chase Manhattan Bank as agent for the Lender and such assignee(s). Upon the effectiveness of such assignment, the assignee thereunder shall become a party to this Credit Agreement. (c) Once there has been an assignment by the Lender pursuant to this Section 11.3, the Lender shall maintain at its address at which notices are to be given to it pursuant to Section 11.1 hereof, a register for the recordation of the names and addresses of the assignees of the Lender hereunder and the commitments of, and principal amount of the Loans owing to, each such assignee from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower and any such assignee may treat each Person whose name is recorded in the Register as an assignee of the Lender hereunder for all purposes of the Fundamental Documents. The Register shall be available for inspection by the Borrower or any such assignee at any reasonable time and from time to time upon reasonable prior notice. - 86 - (d) The Lender shall give prompt written notice to the Borrower of each assignment made hereunder. Within five (5) Business Days after receipt of any such notice, the Borrower, at its own expense, shall execute and deliver to the Lender in exchange for the Note surrendered by the Lender to the Borrower, new Notes to the order of the assignee of the Lender and the Lender in amounts equal to the respective Commitments held by each of them after giving effect to the applicable assignment. Such new Notes shall be in an aggregate principal amount equal to the aggregate principal amount of the surrendered Notes, shall be dated the date of the surrendered Notes and shall otherwise be in substantially the form of Exhibit A hereto. In addition the Borrower will promptly, at its own expense, execute such amendments to the Fundamental Documents to which it is a party and such additional documents, and take such other actions as the Lender or the assignee of the Lender may reasonably request in order to give such assignee of the Lender the full benefit of the Liens contemplated by the Fundamental Documents. (e) The Lender may, without the consent of the Borrower, sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Credit Agreement (including, without limitation, all or a portion of its Commitment, the Loans owing to it and the Note held by it); provided, however, that (i) the Lender's obligations under this Credit Agreement shall remain unchanged, (ii) such participant shall not be granted any voting rights under this Credit Agreement, except with respect to proposed changes to interest rates, amounts of Commitments, maturity of any Loans, release of all or substantially all the Collateral and fees (as applicable to such participant), (iii) the Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) the participating banks or other entities shall be entitled to the cost protection provisions contained in Sections 2.9(b), 2.10 and 2.14 hereof; provided, that the aggregate amount that the Borrower shall be obligated to pay to the Lender (for the benefit of itself and any participants) pursuant to such provisions shall be limited to the amount to which the Lender shall be entitled to receive pursuant to such provisions and (v) the Borrower shall continue to deal solely and directly with the Lender in connection with the Lender's rights and obligations under this Credit Agreement. (f) The Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 11.3, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to the Lender by or on behalf of the Borrower; provided that prior to any such disclosure, each such assignee or participant or proposed assignee or participant shall agree (by executing a confidentiality letter) to preserve the confidentiality of any confidential information relating to the Borrower received from the Lender to the same extent as the Lender as set forth in Section 11.16 hereof. - 87 - (g) The Borrower consents that the Lender may at any time and from time to time pledge or otherwise grant a security interest in any Loan or in any Note evidencing any Loan (or any part thereof) to any Federal Reserve Bank. SECTION 11.4. EXPENSES; DOCUMENTARY TAXES. Whether or not the transactions hereby contemplated shall be consummated, the Borrower agrees to pay all reasonable out-of-pocket expenses incurred by the Lender in connection with performance of due diligence by the Lender in connection with the transactions hereby contemplated and the preparation, execution, delivery, waiver or modification and administration of this Credit Agreement and any other documentation contemplated hereby, the Note and the making of the Loans and the Letters of Credit, including but not limited to any internally allocated audit costs, the reasonable fees and disbursements of Morgan, Lewis & Bockius LLP, counsel for the Lender and any other counsel that the Lender shall retain, reasonable fees and expenses of technical or other consultants engaged by the Lender. Such payments shall be made on the date of execution of this Credit Agreement and thereafter on demand. In addition, the Borrower agrees to pay all reasonable out-of-pocket expenses incurred by the Lender in the enforcement or protection of the rights of the Lender in connection with this Credit Agreement, the Note or the Letters of Credit, and with respect to any action which may be instituted by any Person other than the Credit Parties against the Lender in respect of the foregoing, or as a result of any transaction, action or non-action arising from the foregoing, including but not limited to the reasonable fees and disbursements of any counsel for the Lender (but excluding any such expenses to the extent incurred by reason of the gross negligence or wilful misconduct of the Lender). Such payments shall be made on demand after the date of execution of this Credit Agreement. The Borrower agrees that it shall indemnify the Lender from and hold it harmless against any documentary taxes, assessments or charges made by any Governmental Authority by reason of the execution and delivery of this Credit Agreement, the Note or the issuance of Letters of Credit. The obligations of the Borrower under this Section 11.4 shall survive the termination of this Credit Agreement and/or the payment of the Loans and/or the expiration of the Letters of Credit. SECTION 11.5. INDEMNIFICATION OF THE LENDER. The Borrower agrees (a) to indemnify and hold harmless the Lender and its directors, officers, employees, trustees and agents (to the full extent permitted by law) from and against any and all claims, demands, losses, judgments and liabilities (including liabilities for penalties) of whatsoever nature, and (b) to pay to the Lender an amount equal to the amount of all costs and expenses, including reasonable legal fees and disbursements, in each case arising out of or resulting from any litigation, investigation or other proceedings relating to the Collateral, this Credit Agreement, the Copyright Security Agreement, the Pledgeholder Agreements and the Letters of Credit, the making of the Loans, any attempt to audit, inspect, protect or sell the Collateral, or the administration and enforcement or exercise of any right or remedy granted to the Lender hereunder or thereunder but excluding therefrom all claims, demands, losses, judgments, liabilities, costs and expenses arising out of or resulting from (i) the gross negligence or willful misconduct of the Lender and (ii) litigation between the Borrower and the Lender in connection with the Fundamental Documents or in any way relating to the transactions contemplated hereby if, after final non-appealable judgment, the Lender is not the prevailing party in such - 88 - litigation. The foregoing indemnity agreement includes any reasonable costs incurred by the Lender in connection with any action or proceeding which may be instituted in respect of the foregoing by the Lender or by any other Person either against the Lender or in connection with which any officer, director, agent or employee of the Lender is called as a witness or deponent, including, but not limited to, the reasonable fees and disbursements of Morgan, Lewis & Bockius LLP, counsel to the Lender and any out-of-pocket costs incurred by the Lender in appearing as a witness or in otherwise complying with legal process served upon them. In no event shall the Lender be liable to the Borrower for any matter or thing in connection with this Credit Agreement other than to make Loans and account for moneys actually received by them in accordance with the terms hereof. Whenever the provisions of this Credit Agreement or any other Fundamental Document provide that, if any Credit Party shall fail to do any act or thing which it has covenanted to do hereunder or any representation or warranty of any of the Credit Parties shall be breached, the Lender may (but shall not be obligated to) do the same or cause it to be done or remedy any such breach and if the Lender does the same or causes it to be done, there shall be added to the Obligations hereunder the cost or expense incurred by the Lender in so doing, and any and all amounts expended by the Lender in taking any such action shall be repayable to it upon its demand therefor and shall bear interest at 2% in excess of the Alternate Base Rate from time to time in effect from the date advanced to the date of repayment. All indemnities contained in this Section 11.5 shall survive the expiration or earlier termination of this Credit Agreement and shall inure to the benefit of any Person who was a Lender notwithstanding such Person's assignment of all its Loans and Commitment. SECTION 11.6. CHOICE OF LAW. THIS CREDIT AGREEMENT AND THE NOTES SHALL IN ALL RESPECTS BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK WHICH ARE APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE AND, IN THE CASE OF PROVISIONS RELATING TO INTEREST RATES, ANY APPLICABLE LAW OF THE UNITED STATES OF AMERICA. EACH LETTER OF CREDIT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OR RULES DESIGNATED IN SUCH LETTER OF CREDIT, OR IF NO SUCH LAWS OR RULES ARE DESIGNATED, THE UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500 (THE "UNIFORM CUSTOMS") AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM CUSTOMS, THE LAWS OF THE STATE OF NEW YORK. - 89 - SECTION 11.7. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH CREDIT PARTY HEREBY WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS CREDIT AGREEMENT OR THE SUBJECT MATTER HEREOF OR ANY FUNDAMENTAL DOCUMENT, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. EACH CREDIT PARTY ACKNOWLEDGES THAT IT HAS BEEN INFORMED BY THE LENDER THAT THE PROVISIONS OF THIS SECTION CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDER HAS RELIED, IS RELYING AND WILL RELY IN ENTERING INTO THIS CREDIT AGREEMENT AND ANY OTHER FUNDAMENTAL DOCUMENT. THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 11.7 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE CREDIT PARTIES TO THE WAIVER OF THEIR RIGHTS TO TRIAL BY JURY. SECTION 11.8. NO WAIVER. No failure on the part of the Lender to exercise, and no delay in exercising, any right, power or remedy hereunder, under the Note or any other Fundamental Document or with regards to Letters of Credit shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law. SECTION 11.9. EXTENSION OF PAYMENT DATE. Should any payment of principal of or interest on the Note or any other amount due hereunder become due and payable on a day other than a Business Day, the due date of such payment thereof shall be extended to the next succeeding Business Day and, in the case of principal, interest shall be payable thereon at the rate herein specified during such extension. SECTION 11.10. AMENDMENTS, ETC. No modification, amendment or waiver of any provision of this Credit Agreement, and no consent to any departure by the Credit Parties herefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any of the Credit Parties shall entitle such Credit Party to any other or further notice or demand in the same, similar or other circumstances. Each holder of a Note shall be bound by any amendment, modification, waiver or consent authorized as provided herein, whether or not a Note shall have been marked to indicate such amendment, modification, waiver or consent and any consent by any holder of a Note shall bind any Person subsequently acquiring a Note, whether or not a Note is so marked. SECTION 11.11. SEVERABILITY. Any provision of this Credit Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. - 90 - SECTION 11.12. SERVICE OF PROCESS. EACH CREDIT PARTY (EACH A "SUBMITTING PARTY") HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK AND TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS CREDIT AGREEMENT (INCLUDING, BUT NOT LIMITED TO THE LETTERS OF CREDIT) OR THE SUBJECT MATTER HEREOF BROUGHT BY THE LENDER OR ANY OF ITS SUCCESSORS OR ASSIGNS IN EITHER OF THE ABOVE- REFERENCED FORUMS AT THE SOLE OPTION OF THE LENDER. EACH SUBMITTING PARTY TO THE EXTENT PERMITTED BY APPLICABLE LAW (A) HEREBY WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH COURTS, ANY CLAIM THAT IT IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER OR THAT THIS CREDIT AGREEMENT OR THE SUBJECT MATTER HEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, (B) HEREBY WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION, SUIT OR PROCEEDING INSTITUTED BY THE LENDER IN STATE COURT TO FEDERAL COURT AND (C) HEREBY WAIVES THE RIGHT TO ASSERT IN ANY SUCH ACTION, SUIT OR PROCEEDING ANY OFFSETS OR COUNTERCLAIMS EXCEPT COUNTERCLAIMS THAT ARE COMPULSORY OR OTHERWISE ARISE FROM THE SAME SUBJECT MATTER. THE SUBMITTING PARTY HEREBY CONSENTS TO SERVICE OF PROCESS BY MAIL AT ITS ADDRESS TO WHICH NOTICES ARE TO BE GIVEN PURSUANT TO SECTION 11.1 HEREOF. THE SUBMITTING PARTY AGREES THAT ITS SUBMISSION TO JURISDICTION AND CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE LENDER. FINAL JUDGMENT AGAINST THE SUBMITTING PARTY IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN ANY OTHER JURISDICTION (A) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND THE AMOUNT OF INDEBTEDNESS OR LIABILITY OF THE SUBMITTING PARTY THEREIN DESCRIBED OR (B) IN ANY OTHER MANNER PROVIDED BY OR PURSUANT TO THE LAWS OF SUCH OTHER JURISDICTION, PROVIDED, HOWEVER, THAT THE LENDER MAY AT ITS OPTION BRING SUIT, OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE SUBMITTING PARTY OR ANY OF ITS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE SUBMITTING PARTY OR SUCH ASSETS MAY BE FOUND. - 91 - SECTION 11.13. HEADINGS. Section headings used herein and the Table of Contents are for convenience only and are not to affect the construction of or be taken into consideration in interpreting this Credit Agreement. SECTION 11.14. EXECUTION IN COUNTERPARTS. This Credit Agreement may be executed in any number of counterparts, each of which shall constitute an original, but all of which taken together shall constitute one and the same instrument. SECTION 11.15. SUBORDINATION OF INTERCOMPANY ADVANCES. (a) Each Credit Party hereby agrees that any Indebtedness or other intercompany receivables or advances of any other Credit Party, directly or indirectly, in favor of such Credit Party of whatever nature at any time outstanding shall be completely subordinate in right of payment to the prior payment in full of the Obligations, and that no payment on any such Indebtedness shall be made (i) except intercompany receivables and advances permitted pursuant to the terms hereof may be repaid in the ordinary course of business so long as no Default or Event of Default, shall have occurred and be continuing and (ii) except as specifically consented to by the Lender in writing, until the prior payment in full all Obligations and termination of the Commitment. (b) In the event that any payment on any such Indebtedness shall be received by such Credit Party other than as permitted by Section 11.15(a) before payment in full of all Obligations and termination of the Commitment, such Credit Party shall receive such payments and hold the same in trust for, segregate the same from its own assets and shall immediately pay over to, the Lender all such sums to the extent necessary so that the Lender shall have been paid all Obligations owed or which may become owing. SECTION 11.16. CONFIDENTIALITY. The Lender understands that certain information furnished to it pursuant to this Agreement will be received by it prior to the time that such information shall have been made public, and the Lender hereby agrees that it will keep, and will direct its officers and employees to keep, all the information provided to it pursuant to this Credit Agreement confidential prior to its becoming public except that the Lender shall be permitted to disclose such information (i) to officers, directors, employees, representatives, agents, auditors, accountants, consultants, advisors, lawyers and affiliates of the Lender necessary for the administration of this Credit Agreement, in the ordinary course of business who have been made aware of the confidential nature of the information; (ii) to prospective assignees or participants and their respective officers, directors, employees, agents and representatives in accordance with Section 11.3(h) herein; (iii) as required by Applicable Law, or pursuant to subpoenas or other legal process, or as requested by governmental agencies and examiners; (iv) in proceedings to enforce the Lender's rights and remedies hereunder or under any other Fundamental Document or in any proceeding against the Lender in connection with this Credit Agreement or under any other Fundamental Document or the transactions contemplated - 92 - hereunder; (v) to the extent such information (A) becomes publicly available other than as a result of a breach of this Credit Agreement or (B) becomes available to the Lender or a participant on a non-confidential basis, not in breach of any agreement or other obligation to Borrower, from a source other than Borrower; or (vi) to the extent Borrower shall have consented to such disclosure in writing. SECTION 11.17. ENTIRE AGREEMENT. This Credit Agreement, together with the letter agreement described in Section 2.14(j) hereof, represents the entire agreement of the parties with regard to the subject matter hereof, and the terms of any letters and other documentation entered into between any of the parties hereto (other than the Commitment Letter) prior to the execution of this Credit Agreement which relate to Loans to be made hereunder shall be replaced by the terms of this Credit Agreement and such letter agreement, as applicable. - 93 - IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be duly executed as of the day and the year first written. BORROWER: NEWSTAR MEDIA INC. (FORMERLY KNOWN AS DOVE ENTERTAINMENT, INC.) By /s/ John T. Brady ----------------------------- Name: John T. Brady Title: Vice President and Chief Financial Officer CORPORATE GUARANTORS: NEWSTAR WORLDWIDE INC. (FORMERLY KNOWN AS DOVE INTERNATIONAL, INC.) NEWSTAR TELEVISION INC. DOVE FOUR POINT, INC. DOVE ENTERTAINMENT, INC. DOVE AUDIO, INC. By /s/ John T. Brady ------------------------------ Name: John T. Brady Title: Vice President and Chief Financial Officer LENDER: THE CHASE MANHATTAN BANK By /s/ Edmond DeForest ------------------------------ Name: Edmond DeForest Title: Vice President - 94 - Schedule 1 MEI OWNERSHIP INTEREST Individual Guarantor Interest - -------------------- -------- Terrence Elkes 33.57% Kenneth Gorman 33.57% Bruce Maggin 14.11% John Healy 7.05% Ronald Lightstone 11.70% Schedule 3.7(a) CORPORATE GUARANTORS / PLEDGED INTERESTS
Number of Shares Corporate Guarantor Jurisdiction of Authorized of Outstanding Ownership of - ------------------- Incorporation Capitalization Capital Stock Capital Stock ------------- -------------- ------------- ------------- NewStar Worldwide California 1,000 shares 100 shares common NewStar Media Inc. Inc. (formerly known as common stock stock (formerly, Dove Dove International, Entertainment, Inc.) Inc.) - ---------------------------------------------------------------------------------------------------------------------- NewStar Television California 1,000 shares 1,000 shares NewStar Media Inc. Inc. common stock common stock - ---------------------------------------------------------------------------------------------------------------------- Dove Four Point, Inc. Florida 10,000 shares 100 shares common NewStar Television common stock stock Inc. 10,000 shares preferred stock - ---------------------------------------------------------------------------------------------------------------------- Dove Entertainment, California 1,000 shares 1,000 shares NewStar Media Inc. Inc. common stock common stock - ---------------------------------------------------------------------------------------------------------------------- Dove Audio, Inc. California 1,000 shares 1,000 shares NewStar Media Inc. common stock common stock - ----------------------------------------------------------------------------------------------------------------------
Schedule 3.7(b) BENEFICIAL INTERESTS None. Schedule 3.9 FICTITIOUS NAMES NewStar* NewStar Media* NewStar Worldwide* NewStar Television* AudioUniverse* AudioUniverse.com* Audio Literature* Dove Dove Entertainment Dove Four Point* Dove International Four Point Dove Books Dove Audio* Dove Television Dove Frontlist Audio Select Dove Books on Tape Dove Kids Olive Branch Dove Pictures, Inc. Note: Names with an asterisk (*) are names currently used by the Credit Parties. Schedule 3.11 PRINCIPAL EXECUTIVE OFFICE; LOCATION OF COLLATERAL Chief Executive Office and office where 8955 Beverly Blvd. "located" for purposes of UCC: Los Angeles, CA 90048 Dove Four Point, Inc. 8955 Beverly Blvd. Los Angeles, CA 90048 Dove International, Inc. 8955 Beverly Blvd. Los Angeles, CA 90048 NewStar Worldwide Inc. 8955 Beverly Blvd. Los Angeles, CA 90048 NewStar Television Inc. 8955 Beverly Blvd. Los Angeles, CA 90048 Dove Entertainment, Inc. 8955 Beverly Blvd. Los Angeles, CA 90048 Dove Audio, Inc. 8955 Beverly Blvd. Los Angeles, CA 90048 Dove Retail, Inc. 8955 Beverly Blvd. Los Angeles, CA 90048 Case Closed, Inc. 8955 Beverly Blvd. Los Angeles, CA 90048 Family Blessings Productions Inc. 8955 Beverly Blvd. Los Angeles, CA 90048 Places where goods included in the Collateral 8955 Beverly Blvd. are regularly kept: Los Angeles, CA 90048 International Cine Service, Inc. 920 Allen Avenue Glendale, CA 91201 Schedule 3.11 Bonded Services 3205 Burton Avenue Burbank, CA 91504 Laser Pacific Media Corp. 809 N. Cahuenga Blvd. Hollywood, CA 90038 GES Exposition Services 13861 Rosencras Avenue Santa Fe Springs, CA 90670 Keep It Self Storage 6827 Woodley Avenue Van Nuys, CA 91406 Select Storage 135 West Avenue 34 Los Angeles, CA 90031 Iron Mountain 5430 E. Slauson Avenue Commerce, CA 90040 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. Schedule 3.12 LITIGATION See the description of litigation in NewStar Media Inc.'s Form 10-K-SB for the year ended December 31, 1998 and Form 10-Q-SB for the quarter ended March 31, 1998, filed with the Securities and Exchange Commission. The Credit Parties are also parties to various other routine legal proceedings and claims incidental to their businesses. The Credit Parties believe that the ultimate resolution of these matters, individually and in the aggregate, will not have a material adverse effect on the financial position of the Credit Parties. Schedule 3.17 MATERIAL AGREEMENTS (i) Existing Indebtedness --------------------- None. (ii) Material Joint Venture Agreements --------------------------------- None. (iii) Material Distribution Agreements -------------------------------- 1. Letter Agreement, dated as of February 15, 19995, between Buena Vista Television and Four Point Entertainment re: "Make Me Laugh." 2. Letter Agreement, dated October 21, 1996, between Discovery Communications, Inc. and Dove Four Point Entertainment re: "Unnatural History." (iv) Material Contractual Arrangements --------------------------------- 1. Stock Purchase Agreement, dated as of March 27, 1997, among Dove Entertainment, Inc., and the Purchasers named therein and the following related agreements: (a) Warrant to Purchase Shares of Common Stock of Dove Entertainment, in favor of Media Equities International, LLC (1,500,000 shares). (b) Warrant to Purchase Shares of Common Stock of Dove Entertainment, in favor of Media Equities International, LLC (500,000 shares). (c) Warrant to Purchase Shares of Common Stock of Dove Entertainment, in favor of Media Equities International, LLC (500,000 shares). (d) Warrant to Purchase Shares of Common Stock of Dove Entertainment, in favor of Media Equities International, LLC (500,000 shares). (e) Registration Rights Agreement, dated as of March 27, 1997, by and among Dove Entertainment, Inc., Media Equities International, LLC, Michael Viner and Deborah Raffin. (f) Pledge Agreement, dated as of March 27, 1997, among Michael Viner, Deborah Raffin, Media Equities International, LLC and Dove Entertainment, Inc. (g) Shareholders Voting Agreement, dated as of March 27, 1997, by and between Michael Viner and Deborah Raffin, on the one hand, and Media Equities International, LLC, on the other hand. (h) Escrow Agreement, dated as of June 10, 1997, by and between Dove Entertainment, Inc., Michael Viner and Deborah Raffin. 2. Employment Termination Agreement, dated June 10, 1997, among Dove Entertainment, Inc., Michael Viner and Deborah Raffin. 3. Key Executive Severance Agreement between Dove Entertainment, Inc. and Gerald Leider, dated September 4, 1996. 4. Employment Agreement between Dove Entertainment, Inc. and Ron Ziskin, dated April 29, 1996. 5. Employment Agreement between Dove Entertainment, Inc. and Steven Soloway, dated September 4, 1996. 6. Dove Four Point, Inc. is a signatory with the Directors Guild of America. 7. Registration Rights Agreements, between the various purchasers in the private placement conducted through Whale Securities Co., L.P. and Dove Audio, Inc. The agreements provide for piggyback registration rights beginning January 1, 1996 and an automatic registration on or prior to June 14, 1996. 8. Registration provisions in the Warrant Agreement between Dove Audio, Inc. and Whale Securities Co., L.P. 9. Registration Rights Agreement, dated as of April ___, 1996, between Shukri Ghalayini and Dove Audio, Inc. 10. Registration Rights Agreement, dated as of April ___, 1996, between Ron Ziskin and Dove Audio, Inc. 11. Warrant Certificates of Dove Audio, Inc. to Morgan Fuller Capital Group, LLC and others, each dated October 1, 1996. 12. Employment Agreement with Ronald Lightstone. 13. Employment Agreement with Neil Topham. 14. Insurance Policies. 15. Agreement and Plan of Merger, made and entered into as of April 12, 1996, by and among Dove Audio, Inc., Dove Four Point, Inc. and Four Point Entertainment Inc. 16. Stock Option Award Agreement, dated April 1996, by and between Dove Audio, Inc. and Ron Ziskin, as amended. 17. See listing of additional material agreements in NewStar Media Inc.'s Form 10-K- SB for the year ended December 31, 1998 and Form 10-Q-SB for the quarter ended March 31, 1998, filed with the Securities and Exchange Commission. Schedule 3.21 ENVIRONMENTAL LIABILITIES None. Schedule 3.22 OUTSTANDING RIGHTS RE: PLEDGED SECURITIES None. Schedule 6.2 EXISTING LIENS 1. Operating Leases (a) Miller Infinity -- Infinity QX4 Truck (b) Various operating leases for Apple Computers, photocopiers and telephone systems. 2. Liens in favor of Individual Guarantors securing amounts paid pursuant to the Guaranty. Such Liens will be subordinate to the Liens of the Lender. 3. UCC-1 financing statement named Dove International, as Debtor, and BWE Distribution, Inc., as Secured Party, covering a security interest in Debtor's rights under the motion picture "Unwed Father." 4. Liens evidenced by the following UCC-1 financing statements: (a) Where Filed: California Secretary of State Debtor: Dove International, Inc. Secured Party: Paramount Pictures Corporation File No.: 9617660715 (b) Where Filed: California Secretary of State Debtor: Dove International, Inc. Secured Party: Paramount Pictures Corporation File No.: 9617660730 (c) Where Filed: California Secretary of State Debtor: Dove International, Inc. Secured Party: Paramount Pictures Corporation File No.: 9625060583 (d) Where Filed: California Secretary of State Debtor: Dove International, Inc. Secured Party: Michael Viner File No.: 9631061125 (e) Where Filed: California Secretary of State Debtor: Dove International, Inc. Secured Party: Paramount Pictures Corporation File No.: 9635360269 (f) Where Filed: California Secretary of State Debtor: Dove International, Inc. Secured Party: Guiness Mahon & Co. Limited File No.: 9635360521 5. Liens granted to Columbia TriStar Home Video in connection with worldwide video distribution rights with respect to "Futuresport." Schedule 6.3 GUARANTIES None. Schedule 6.4 INVESTMENTS None. EXHIBIT A FORM OF AMENDED AND RESTATED NOTE $10,000,000 New York, New York as of November 4, 1997 FOR VALUE RECEIVED, NEWSTAR MEDIA INC. (formerly known as Dove Entertainment, Inc.), a California corporation (the "Obligor"), DOES HEREBY PROMISE TO PAY to the order of THE CHASE MANHATTAN BANK (the "Lender") at the office of The Chase Manhattan Bank at 270 Park Avenue, New York, New York 10017-2070, in lawful money of the United States of America in immediately available funds, the principal amount of TEN MILLION DOLLARS ($10,000,000), or the aggregate unpaid principal amount of all Loans (as defined in the Credit Agreement referred to below) made by the Lender to the Obligor pursuant to said Credit Agreement, whichever is less, on such date or dates as is required by said Credit Agreement, and to pay interest on the unpaid principal amount from time to time outstanding hereunder, in like money, at such office and at such times as set forth in said Credit Agreement. The Obligor and any and all sureties, guarantors and endorsers of this Note and all other parties now or hereafter liable hereon severally waive grace, demand, presentment for payment, protest, notice of any kind (including, but not limited to, notice of dishonor, notice of protest, notice of intention to accelerate or notice of acceleration) and diligence in collecting and bringing suit against any party hereto and agree to the extent permitted by applicable law (i) to all extensions and partial payments, with or without notice, before or after maturity, (ii) to any substitution, exchange or release of any security now or hereafter given for this Note, (iii) to the release of any party primarily or secondarily liable hereon, and (iv) that it will not be necessary for any holder of this Note, in order to enforce payment of this Note, to first institute or exhaust such holder's remedies against the Obligor or any other party liable hereon or against any security for this Note. The nonexercise by the holder of any of its rights hereunder in any particular instance shall not constitute a waiver thereof in that or any subsequent instance. This Note is the Note referred to in that certain Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among the Obligor, the Corporate Guarantors referred to therein and The Chase Manhattan Bank, and is entitled to the benefits of, and is secured by the security interests granted in the Credit Agreement and the other security documents and guarantees referred to and described therein, which among other things, contains provisions for optional and mandatory prepayment and for acceleration of the maturity hereof upon the occurrence of certain events, all as provided in the Credit Agreement. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK. NEWSTAR MEDIA INC. (formerly known as Dove Entertainment, Inc.) By: /s/ Neil Topham --------------------------------- Name: Neil Topham Title: Vice President and Chief Financial Officer EXHIBIT A [LAST PAGE OF NOTE] Unpaid Name of Principal Person Payments Balance Making Date Amount of Loan Principal Interest of Note Notation - ---- -------------- --------- -------- ------- -------- EXHIBIT B-1 November 10, 1997 The Chase Manhattan Bank, as Lender under the Credit Agreement referred to below 270 Park Avenue New York, New York 10017 Re: Credit, Security, Guaranty and Pledge Agreement, dated as of November 4, 1997 (the "Credit Agreement") among DOVE ENTERTAINMENT, INC., a California corporation ("Borrower"), the Corporate Guarantors named therein and THE CHASE MANHATTAN BANK, a New York banking corporation, as Lender ("Lender) Ladies and Gentlemen: We have acted as special counsel to (i) Borrower and (ii) Dove International, Inc., a California corporation ("DII"), and Dove Foup Point, Inc. a Florida corporation ("DFP" and, together with DII, the "Corporate Guarantors"), in connection with the Credit Agreement and the transactions contemplated thereby (the "Transactions"). This opinion letter is given at the request of Borrower and the Corporate Guarantors pursuant to Section 4.1(c) of the Credit Agreement. Capitalized terms not otherwise defined in this opinion letter shall have the meanings ascribed to them in the Credit Agreement. The term "Collateral", as used herein shall include the "Pledged Stock", the "copyrights" and the "collateral", as each such term is hereinafter defined. We have delivered this opinion letter as counsel admitted to practice in the States of California, Florida and New York, and we shall not be understood to have expressed any opinion herein under or with respect to the laws of any jurisdiction other than the State of New York, the State of California (with respect to paragraphs 2 (other than the first sentence thereof), 5 and 6 of this opinion letter), the State of Florida (with respect to paragraph 6 of this opinion letter) and the Federal laws of the United States of America (with respect to paragraph 5 of this opinion letter). In addition, except as specifically set forth in this opinion letter, we are not rendering any opinion herein as to any legal issue that would be excluded by Section 19 of the Legal Opinion Accord of the ABA Section of Business Law (1991) were it to govern this opinion letter. In connection with this opinion letter, we have reviewed executed copies of the following documents: (i) the Credit Agreement; (ii) the Note; (iii) the agreement dated as November 4, 1997 made by Borrower and the Corporate Guarantors in favor of Lender (the "Copyright Security Agreement"); (iv) the Uniform Commercial Code Form UCC-1 Financing Statement to be filed with the Secretary of State of California, naming Borrower as debtor and Lender as secured party ("Borrower Financing Statement"); (v) the Uniform Commercial Code Form UCC-1 Financing Statement to be filed with the Secretary of State of California, naming DII as debtor and Lender as secured party (the "DII Financing Statement"); (vi) the Uniform Commercial Code Form UCC-1 Financing Statement to be filed with the Secretary of State of California, naming DFP as debtor and Lender as secured party (the "DFP Financing Statement" and, together with the Borrower Financing Statement and the DII Financing Statement, the "Financing Statements"); (vii) the Articles of Incorporation and Bylaws of DFP; (viii) a good standing certificate issued on October 31, 1997 by the Office of the Secretary of State of the State of Florida with respect to DFP (the "DFP Florida Good Standing Certificate); and (ix) a good standing certificate issued on October 31, 1997 by the Office of the Secretary of State of the State of California with respect to DFP (the "DFP California Good Standing Certificate and, together with the DFP Florida Good Standing Certificate, the "DFP Good Standing Certificates"). The documents listed in subparagraphs (i) through (iii) above are hereinafter sometimes referred to collectively as the "Documents." We have not participated in the negotiations relating to the Documents or the Transactions and have undertaken no review or investigation in connection with the opinions expressed herein other than to read each of the Documents. As to factual matters relevant to such opinions, we have relied with your permission solely upon the representations and warranties contained in the Documents and have not made any 2 independent verification thereof. We have made such examinations of law as we have deemed appropriate in order to render such opinions. In rendering the opinions set forth herein, we have assumed (a) the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to authentic originals of all documents submitted to us as copies; (b) that the Financing Statements have been properly filed with the California Secretary of State, and that the Copyright Security Agreement has been properly filed in the United States copyright office within thirty days after its execution; (c) the legal capacity of each natural person; (d) that each of Lender and each Credit Party (other than DFP) is a corporation duly organized and validly existing in good standing under applicable law; (e) that each Person has all requisite power and authority to execute, deliver and perform each document executed and delivered by such Person and to do each other act done or to be done by such Person; (f) the due execution and delivery by each Person of each document executed and delivered or to be executed and delivered by such Person; (g) except as specifically set forth in paragraph 1 of this opinion letter with respect to the Credit Parties, the legality, validity, binding effect and enforceability against each party thereto of each document executed and delivered or to be executed and delivered in connection with the Transactions; (h) that the execution and delivery of each such document do not breach the certificate or articles of incorporation, by-laws and other constituent documents of each such party and, except as specifically set forth in paragraph 3 of this opinion letter, do not violate any law, rule or regulation applicable to such party or breach any instrument or agreement to which such party is a party; (i) that all conditions precedent set forth in Article 4 of the Credit Agreement required as of the Closing Date have been fully complied with or waived; (j) that Lender has given value, has acted in good faith without notice of adverse claims or defenses against enforcement of any rights created by the Documents, has complied with all laws applicable to it that affect the Transactions or the Documents and has paid all taxes and fees required to be paid by it in connection therewith; (k) that all statutes, judicial and administrative decisions and rules and regulations of governmental agencies constituting the law with respect to which we are rendering opinions herein are published or otherwise generally accessible; (l) that, with respect to the Documents or the Transactions, there has been no mutual mistake of fact, fraud or duress; (m) the constitutionality and validity of all relevant laws, regulations and governmental actions; (n) that routine procedural matters such as service of process will be satisfied by the parties seeking to enforce any right created by the Documents; (o) that the Credit Parties own, free and clear of any liens or options, the Collateral that they purport to own; and (p) that the DFP Good Standing Certificates have remained accurate through and including the date of this opinion letter. Various issues are addressed in the opinion letter of Robert Murray, Esq., general counsel of Borrower, a copy of which is attached hereto as Exhibit A, and we express no opinion with respect to the matters which are addressed in such opinion letter. To the 3 extent any of the opinions expressed therein are relevant to this opinion letter, we have, with your permission, relied thereon together with and subject to any and all assumptions, qualifications and limitations expressed therein and herein which are relevant to those opinions upon which we have relied. Based upon the foregoing and subject to the exceptions, qualifications, limitations and other statements contained herein, it is our opinion that: 1. Under New York law, each of the Documents to which a Credit Party is a party constitutes the legal, valid and binding obligation of such Credit Party and is enforceable against such Credit Party in accordance with its terms. 2. The Credit Agreement creates in favor of Lender a valid security interest in that portion of the collateral in which the creation and attachment of security interests or liens are governed by Article 9 of the New York Uniform Commercial Code (the "NYUCC"), as security for the obligations of the Credit Parties under the Credit Agreement. Upon the filing of the Financing Statements with the California Secretary of State (the "Filing Office"), Lender will have a perfected security interest (to the extent that perfection may be accomplished by filing the Financing Statement in the Filing Office) in that portion of the collateral described in the Financing Statement other than fixtures (the "UCC Property") in which the perfection of security interests is governed by Division 9 of the California Uniform Commercial Code ("CAUCC"). Whenever used in this opinion letter, the term "collateral" shall be limited to "accounts", "general intangibles", "inventory", "equipment" and "goods" as each of such terms is defined in Article 9 of the NYUCC and Division 9 of the CAUCC. The Financing Statements are in appropriate form for filing in the Filing Office. 3. The execution and delivery of the Documents by each Credit Party that is a party thereto and the performance by such Credit Party of its obligations thereunder, the grant to Lender of the security interests as provided in the Credit Agreement and the pledge to Lender of the Pledged Stock (as hereinafter defined) as provided in the Credit Agreement do not violate any New York law, statute, rule or regulation applicable to such Credit Party, and no governmental authorizations, consents, approvals, registrations or filings by or in the State of New York are required in connection with the execution, delivery and performance of the Documents by such Credit Party. 4. The delivery in the State of New York to Lender of the certificates evidencing the shares of stock described in Exhibit B hereto (the "Pledged Stock"), duly endorsed in the name of Lender or in blank (or accompanied by stock powers or separate documents of assignment duly executed in favor of Lender or in blank), together with the execution and delivery by the Credit Parties of the Credit Agreement, creates in favor of Lender a valid and perfected security interest in such Pledged Stock 4 as security for the obligations of the Credit Parties under the Credit Agreement, which security interest will remain perfected for as long as possession of the Pledged Stock is continuously maintained by Lender in the State of New York. 5. The Copyright Security Agreement creates in favor of Lender a valid and enforceable security interest in that portion of the collateral (the "copyrights") in which the creation and attachment of security interests or liens are governed by 17 U.S.C. Section 205 and Article 9 of the NYUCC, and such security interest will become effective against third parties at the later of the execution and delivery of the Copyright Security Agreement and the filing of the Financing Statements in the Filing Office. 6. DFP is a corporation duly organized, validly existing and, based solely on the DFP Good Standing Certificates, in good standing under the laws of the State of Florida and as a foreign corporation under the laws of the State of California. The opinions set forth above in this opinion letter are subject, in all respects, to the following exceptions, qualifications and limitations: (a) Our opinion concerning the legality, validity, binding effect and enforceability of the Documents in accordance with their terms does not mean that (1) any particular remedy is available upon a material default or (2) every provision of the Documents will be upheld or enforced in any or each circumstance by a court. Certain provisions of the Documents may be or are unenforceable in whole or in part, but in each case the inclusion of such provisions does not affect the validity of each such Documents taken as whole, and each such Document taken as a whole contains adequate provisions for the practical realization of the benefits purported to be created thereby (subject to the consequences of any judicial, administrative or other delay which may be imposed by, be related to or arise from applicable laws or equitable principles). Furthermore, the validity, binding effect and enforceability of the Documents may be limited or otherwise affected by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws, rules or regulations affecting the enforcement of creditors' rights and remedies generally and the unavailability of, or limitation of the availability of, a particular right or remedy (whether in a proceeding in equity or at law) because of an equitable principle or a requirement as to commercial reasonableness, conscionability or good faith. The provisions of any Document which permit any Person to take action or make determinations (and/or to have such determinations be binding on other parties to any degree), or to benefit from indemnities, contributions or similar undertakings, or waivers, exculpatory provisions or similar provisions, may be subject to limitations imposed by law or by public policy considerations, including, without limitation, a requirement that such action be taken or such determination be made, or that any action or inaction by any Person in respect of which such an indemnity, right of contribution or similar undertaking, or such a 5 waiver, exculpatory provision or similar provision, be called upon or raised, or be taken or not taken, as the case may be, on a reasonable and lawful basis and in good faith. (b) The use of the term "enforceable" shall not imply any opinion as to the availability of equitable remedies, including, without limitation, the remedies of specific performance or injunctive relief, nor is any opinion regarding the same intended to be expressed herein, and no opinion is expressed that any particular provision of any of the Documents may not be limited by defenses such as estoppel, waiver and other equitable considerations. (c) Under certain circumstances the requirement that the provision of a Document may be modified or waived only in writing or only in a specific instance and the provision that failure or delay in exercising any power, right, privilege or remedy will not impair or waive such power, right, privilege or remedy may be unenforceable to the extent that an oral agreement has been effected or a course of dealing has occurred modifying such provisions. (d) With respect to any Document creating a security interest in UCC Property, we express no opinion as to the enforceability of the rights and remedies under such Documents against property located in the State of California unless the procedural requirements under the CAUCC are followed. (e) We express no opinion with respect to any security interest in any Collateral described in the Financing Statements to which the provisions of Article 9 of the NYUCC or Division 9 of the CAUCC do not apply. (f) The continuation and perfection of security interests in proceeds is limited to the extent set forth in Sections 9-306 through 9-309 of the NYUCC and Sections 9306 through 9309 of the CAUCC. (g) We express no opinion with respect to the creation, attachment, validity, perfection or priority of any security interest, except as specifically set forth in paragraphs 2, 4 and 5 of this opinion letter. (h) We express no opinion as to (1) the impact of any laws regulating the type of investments that can be made by, or the legal lending limits of, Lender or (2) the effect of the laws of any jurisdiction in which Lender or any Credit Party is located (other than the State of New York) that limit the interest, fees or other charges Lender may impose. 6 (i) We express no opinion with respect to the enforceability of any provision of the Documents which provides for (1) acceleration of future amounts due (other than principal) without appropriate discount to present value, (2) late charges or (3) increased interest rates upon default, to the extent that any such provision is determined to be penalty, or which purports to bind a Person not a party or signatory thereto. (j) We expressed no opinion as to any Credit Party's rights in, or title to, any Collateral, the value thereof or the interest of Lender in any after-acquired property. We call to your attention the fact that Section 552 of the Federal Bankruptcy Code limits the extent to which property acquired by a debtor after the commencement of a case under the Federal Bankruptcy Code may be subject to a security interest arising from a security agreement entered into by such debtor before the commencement of such case. Our opinions are subject to the provisions of Sections 9-203 and 9-204 of the NYUCC relating to the time of attachment of a security interest in an item of Collateral in which the Person granting the security interest does not presently have rights. (k) We express no opinion with respect to any provisions in the Documents (1) authorizing the unilateral appointment of a receiver or (2) which provide that Lender is appointed as any Credit Party's attorney-in-fact or that Lender may otherwise act on behalf of in the name of a Credit Party. (l) We express no opinion as to any Document provision contrary to Section 9-311 or Part V of Article 9 of the NYUCC or Section 9311 or Chapter 5 of Division 9 of the CAUCC. (m) We express no opinion as to the enforceability or perfection of any interest of any Person other than Lender in any property included in the UCC Property. Our opinion as to the enforceability of an governing law provision contained in any Document is qualified by the effects of subsection (2) of Section 1-105 of the NYUCC. (n) We express no opinion regarding any items of Collateral which are (1) accessioned to, or commingled or processed with, other goods to the extent the security interest of Lender is limited by Section 9-314 or 9-315 of the NYUCC or Section 9314 or 9315 of the CAUCC or (2) subject to or represented by a certificate of title or a document of title. (o) Except as specifically set forth in paragraph 5 of this opinion letter, we express no opinion regarding any items of Collateral which are subject to a statute, regulation or treaty of the United States which provides for a national or international registration or a national or international certificate of title for the perfection of a security interest therein or which specifies a place of filing different from the place specified in the CAUCC. 7 (p) We express no opinion regarding any Collateral consisting of claims against any government or governmental agency (including, without limitation, the United States or any state thereof or any agency or department of the United States or any state thereof). (q) In the case of any chattel paper, account or general intangible which is itself secured by other property, we express no opinion with respect to Lender's rights in and to such other property. (r) We express no opinion with respect to Collateral consisting of mobile goods, goods in possession of a third party, equipment used in farming operations, farm products, consumer goods, crops growing or to be grown, timber to be cut or minerals or the like (including oil and gas), accounts subject to Section 9-103(5) of the NYUCC of Section 9103(5) of the CAUCC, goods which are or are to become fixtures, an ownership interest in a corporation or partnership formed for the purpose of cooperative ownership of real estate, policies of insurance, beneficial interests in a trust or decedent's estate, letters of credit, instruments, money, cash, deposit accounts (and any items of property in such accounts), collection accounts (and any items of property in such accounts), lockboxes, intellectual property (except as specifically set forth in paragraph 5 of this opinion letter) or securities (except as specifically set forth in paragraph 4 of this opinion letter). (s) We have assumed that the collateral, other than accounts and general intangibles, is located in the State of California and that any part of such collateral that was brought into the State of California within the last four months is not subject to a security interest perfected under the law of the jurisdiction from which such part of the collateral was removed. (t) We call to your attention that the security interest of Lender in the collateral and the copyrights may be subject to the rights of lessees, licensees, assignees or other account debtors, the claims and defenses of such lessees, licensees, assignees and account debtors and the terms of any leases or other agreements with such lessees, licensees, assignees and account debtors. (u) We call to your attention that the perfection and the effect of perfection and non-perfection of the security interest of Lender may be governed by laws other than those of the State of California to the extent either the collateral or a Credit Party is or becomes located in a jurisdiction other than the State of California. (v) We call to your attention that the perfection of the security interest in any UCC Property may be terminated as to any UCC Property acquired more than four months subsequent to a change in the nature, corporate structure or identity of a Credit 8 Party and that a continuation statement is required to be filed under the CAUCC within six months prior to the expiration of five-years from the date of filing of a financing statement and within six months prior to each fifth anniversary of the expiration of such five-year period in order to maintain the continuous perfection of the security interests referred to therein. (w) We call to your attention that provisions of the Documents which provide that a guaranty by a party thereto or the grant of a lien or security interest by a party thereto to secure the obligations of a third party shall not be affected by changes in or amendments to the Documents or other relevant documents might be enforceable only to the extent such changes or amendments are not so material as to constitute a new agreement among the parties to such documents. (x) We call to your attention that a court may modify or limit contractual awards of attorneys' fees. (y) We express no opinion with respect to any provision contained in the Documents concerning waiver of inconvenient forum, venue, forum non conveniens or subject matter jurisdiction, in each case with respect to Federal courts. (z) We express no opinion as to the enforceability of any provision of any Document that purports to establish (or may be construed to establish) evidentiary standards. (aa) We express no opinion as to the last sentence of Section 9.1(b) of the Credit Agreement, the last sentence of the first paragraph of Section 12.5 of the Credit Agreement, the last sentence of Section 12.6 of the Credit Agreement, Sections 12.7 and 12.11 of the Credit Agreement, the third sentence of Section 12.12 of the Credit Agreement (unless a reasonable time for appearance is allowed in connection with any such service of process) or the fifth sentence of Section 12.12 of the Credit Agreement. (bb) We express no opinion herein as to the legality, validity or enforceability of any provisions of the Documents precluding oral waivers or modifications of provisions of the Documents, precluding waivers of equitable rights and defenses by the Credit Parties or precluding the Credit Parties from asserting certain claims or defenses or from obtaining certain rights and remedies. The opinions set forth herein are based upon those statutes, rules and regulations that, in our experience, are normally applicable to transactions of the type provided for in the Documents, but without our having made any independent investigation of any other statute, rule or regulation. 9 This opinion is issued as of the date hereof, and we disclaim any obligation to advise you of changes of law or fact that occur after the date hereof. This opinion is solely for your benefit in connection with the Transactions and may not be relied upon for any other purpose or furnished, circulated or quoted to, or used or referred to by, any other Person without our prior written consent in each instance. Very truly yours, /s/ Hughes Hubbard & Reed LLP EXHIBIT B-2 November 10, 1997 The Chase Manhattan Bank 270 Park Avenue New York, NY 10017 Hughes Hubbard & Reed One Battery Park Plaza New York, New York 10004-1482 Ladies and Gentlemen: I am Vice President and General Counsel of Dove Entertainment, Inc. (the "Company"), a California corporation. I am providing this opinion to you pursuant to Section 4.1(c) of the Credit, Security, Guaranty and Pledge Agreement (the "Credit Agreement"), dated as of November 4, 1997, among the Company, the Corporate Guarantors named therein and The Chase Manhattan Bank (the "Lender"). Except as otherwise indicated, capitalized terms used in this opinion and defined in the Credit Agreement will have the meanings given in the Credit Agreement. In my capacity as General Counsel, I have examined originals or copies of those corporate and other records and documents I considered appropriate. I have obtained and relied upon those certificates of public officials I considered appropriate. I have assumed the genuineness of all signatures (other than with respect to the Credit Parties), the authenticity of all documents submitted as originals and the conformity with originals of all documents submitted as copies. To the extent any Credit Parties' obligations depend on the due authorization, execution and delivery of any Fundamental Document by any other person, I have assumed that such Fundamental Document has been so authorized, executed and delivered by such other person. The "Individual Guaranty Agreements" are the guaranty agreements, each dated as of November 4, 1997, between Terrence Elkes, Bruce Maggin, Kenneth Gorman, John Healy and Ronald Lightstone and the Lender. On the basis of such examination, my reliance upon the assumptions in this opinion and my consideration of those questions of law I considered relevant, and subject to the limitations and qualifications in this opinion, I am of the opinion that: -1- 1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of California. 2. Dove International, Inc. ("Dove International") is a corporation duly organized, validly existing and in good standing under the laws of the State of California. 3. The Borrower has the power and authority (i) to own and operate its assets and properties and to carry on its business as now being conducted, (ii) to execute, deliver and perform its obligations under the Credit Agreement and other Fundamental Documents to which it is a party and any other documents contemplated thereby to which it is a party, (iii) to borrow under the Credit Agreement, (iv) to grant to the Lender the security interests contemplated by the Fundamental Documents and (v) to pledge to the Lender the Pledged Securities as contemplated by the Credit Agreement. 4. Each of Dove International and Dove Four Point, Inc. ("Dove Four Point") has the corporate power and authority (i) to own and operate its assets and properties and to carry on its business as now being conducted, (ii) to execute, deliver and perform its obligations under the Fundamental Documents to which it is a party, (iii) to guarantee the obligations of the Borrower and (iv) to grant to the Lender the security interests contemplated by the Fundamental Documents. 5. The execution, delivery and performance of the Fundamental Documents to which it is a party by each Credit Party, the grant to the Lender of the security interest as contemplated by the Credit Agreement and the pledge to the Lender of the Pledged Securities as contemplated by the Credit Agreement: (a) have been duly authorized by all requisite corporate action on the part of each Credit Party, (b) will not violate any provision of any State of California or United States federal law, statute, governmental rule or regulation, or treaty that I, in the exercise of customary professional diligence, recognized as applicable to the Credit Parties or to transactions of the type contemplated in the Fundamental Documents, (c) will not violate any provision of the Articles of Incorporation or By-laws of any Credit Party, (d) will not violate any provision of any material indenture, agreement, bond, note or other instrument to which any Credit Party or by which any Credit Party or any of their respective properties or assets are bound, or be in conflict with, result in a breach or termination of, or constitute (with due notice or lapse of time or both) a default under, or accelerate any performance required by, any such indenture, agreement, bond, note or other instrument and (e) will not result in the creation or imposition of (or the obligation to create or impose) any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of any of any Credit Party, other than pursuant to of the Fundamental Documents to which such Credit Party is a party. -2- 6. Each Credit Party has duly executed and delivered to the Lender all of the Fundamental Documents to which it is a party. 7. No authorizations, consents, approvals, registrations or filings from or with any California or United States federal governmental authority that I have, in the exercise of customary professional diligence, recognized as applicable to the Credit Parties or to transactions of the type contemplated by the Fundamental Documents, is required in connection with the execution, delivery and performance by any Credit Party of the Fundamental Documents to which it is a party. 8. There is no judgment, order, action, suit or other proceeding at law or in equity, or before any arbitrator or arbitration panel, of any California state or United States federal governmental authority (and, to my knowledge, any other Governmental Authority), or, to my knowledge, any investigation of the affairs of, any Credit Party, or any of their respective properties or rights which (i) if adversely determined, could reasonably be expected to materially affect (a) the ability of any Credit Party to carry on its business, (b) the ability of any Credit Party to perform its respective obligations under the Fundamental Documents to which it is a party or any other material contract to which it is a party, (c) the validity or enforceability or priority of the security interests, rights, remedies or benefits available to the Lender under any of the Fundamental Documents, or (d) the Collateral or the Pledged Securities; or (ii) involves any of the transactions contemplated by the Fundamental Documents. 9. The authorized, issued and outstanding capital stock of Dove Four Point and Dove International is as set forth on Schedule 3.7(a) to the Credit Agreement (the "Pledged Securities") and such issued and outstanding capital stock has been duly authorized, validly issued, is fully paid and nonassessable and is owned of record by the Borrower. 10. There are no restrictions on the transfer of any Pledged Securities other than under the Credit Agreement. There are no outstanding rights, warrants, options or agreements to purchase or otherwise acquire any shares of stock or securities or obligations of any kind convertible into any shares of capital stock of Dove International or Dove Four Point. 11. None of the Credit Parties is (a) and "investment company", within the meaning of the Investment Company Act of 1940, as amended or (b) subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or any federal statute or regulation limiting such corporation's ability to incur indebtedness for money borrowed as contemplated by the Credit Agreement or by any other Fundamental Document. The making of the Loans and the application of the proceeds thereof as contemplated by the Fundamental Documents do not violate any of -3- Regulations G, T, U or X of the Board of Governors of the Federal Reserve System, as amended. 12. Assuming that New York law is identical to California law, each Individual Guaranty Agreement constitutes the legal, valid and binding obligation of the Individual Guarantor party thereto and is enforceable against such Individual Guarantor in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors rights generally (including, without limitation, fraudulent conveyance laws) and by general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. 13. You have received an opinion letter of Hughes, Hubbard & Reed (a copy of which is attached hereto) (the "HHR Opinion") with respect to the creation and perfection of a security interest in the Pledged Stock (as defined therein). Assuming that New York law is identical with California law, and in reliance on the HHR Opinion and subject to any and all assumptions, qualifications and limitations expressed therein, the perfected security interest of the Lender in the Pledged Stock will be prior to any other security interest in such Pledged Stock that may be created by the Company under the Uniform Commercial Code. I express no opinion as to the effect of non-compliance by the Lender with any state or federal laws or regulations applicable to the transactions contemplated by any of the Fundamental Documents because of the nature of its business. The law covered by this opinion is limited to the present federal law of the United States and the present law of the State of California. I express no opinion as to the laws of any other jurisdiction and no opinion regarding the statutes, administrative decisions, rules, regulations or requirements of any county, municipality, subdivision or local authority of any jurisdiction. This opinion is issued as of the date hereof, and I disclaim any obligation to advise you of changes in law or fact that occur after the date hereof. This opinion may be relied upon by you only in connection with the execution and delivery of the Credit Agreement and the other Fundamental Documents. It may not be used or relied upon by you for any other purpose or by any other person, nor may copies be delivered to any other person, without in each instance my prior written consent. You may, however, deliver a copy of this opinion to your accountants, attorneys, and other professional advisors, to governmental regulatory agencies having jurisdiction over you and to successors and permitted transferees under the Credit -4- Agreement, and such successors and transferees may rely on this opinion as if it were addressed and had been delivered to them on the date of this opinion. Very truly yours, /s/ ROBERT C. MURRAY - ------------------------ Robert C. Murray RCM:kms -5- EXHIBIT C FORM OF BORROWING BASE CERTIFICATE as of ___________ The undersigned (the "Borrower") HEREBY CERTIFIES the following information as of __________, pursuant to the Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended and restated as of August 16, 1999, among NewStar Media Inc. (formerly known as Dove Entertainment, Inc.) as Borrower, the Corporate Guarantors named therein and The Chase Manhattan Bank, as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time (herein called the "Credit Agreement"), the defined terms therein being herein used with the same meanings:
(from detailed schedules Amount Advance Borrowing attached) $000's Rate Base ------- ------ ----- a. Eligible L/C Receivables ______x 100% = ________ b. Eligible Receivables ______x 85% = ________ c. Eligible Library Amount ______x 35%= ________ d. Inventory of physical audio cassettes and printed books ______x 30%= ________ e. Less Amounts Payable to Third Parties not Already Deducted 1 (______) f. Less Amounts of accrued but unpaid residuals owed to any trade guilds with respect to each item of Product included in the Borrowing Base (______)
TOTAL BORROWING BASE - -------------------- 1 To the extent not already deducted in computing the Total Borrowing Base, the sum of all amounts payable to third parties from or with regard to the amounts otherwise included in the Borrowing Base pursuant to items (a) through (d), including without limitation remaining acquisition payments, set offs, current profit participations, deferments, commissions and royalties must be subtracted from the Total Borrowing Base. - 1 - COMMITMENT AVAILABILITY - ----------------------- a. Outstanding Loans _________ b. L/C Exposure _________ Total outstanding _________ Availability _________ The Borrower has no reason to believe that the aggregate principal amount of all Loans to the Borrower outstanding as of the date of this certificate would exceed the Borrowing Base if such Borrowing Base was computed as of the date of this certificate. IN WITNESS WHEREOF, the undersigned has caused this certificate to be executed this ____ day of _____________. NEWSTAR MEDIA INC. By: ---------------------------- Name: Title: - 2 - EXHIBIT D-1 FORM OF PLEDGEHOLDER AGREEMENT (ONLY APPLICABLE WITH RESPECT TO UNCOMPLETED PRODUCT FOR WHICH A COMPLETION GUARANTEE IS REQUIRED) AGREEMENT dated as of [INSERT DATE] (the "Agreement") among (i) [INSERT NAME OF LABORATORY] (the "Laboratory"), (ii) [INSERT NAME OF EACH CREDIT PARTY WHO HAS CONTROL OVER THE PHYSICAL ELEMENTS OF THE COLLATERAL] (collectively referred to herein as the "Company"), (iii) [INSERT NAME OF COMPLETION GUARANTOR] (the "Completion Guarantor") and (iv) The Chase Manhattan Bank (the "Lender"). Pursuant to the Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended and restated as of August 16, 1999 (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement"), among NewStar Media Inc. (formerly known as Dove Entertainment, Inc.), (the "Borrower"), the Corporate Guarantors named therein and the Lender, the Lender has agreed, subject to the terms and conditions set forth in the Credit Agreement, to make loans to the Borrower in connection with, among other things, the acquisition, production and distribution of the Product (as hereinafter defined). The Company has granted to the Lender a security interest in, among other things, all of its right, title and interest in and to the [DESCRIBE NATURE OF PRODUCT, I.E. MOVIE-OF- THE-WEEK, TELEVISION PROGRAMS, AUDIOBOOKS, ETC.] listed on Schedule 1 hereto (hereinafter called the "Product") as security for various obligations of the Company to the Lender. Such security interest covers, among other things, all physical properties of every kind or nature of, or relating to, the Product and all versions thereof, including, without limitation, exposed film, developed film, positives, negatives, prints, positive prints, answer prints, special effects, preparing materials (including interpositives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices, and all other forms of pre-print elements), sound tracks, cutouts, trims and any and all other physical properties of every kind and nature of, or relating to, the Product, whether in completed form or in some state of completion, and all audio and video masters, duplicates, drafts, versions, variations and copies of each thereof, in all formats whether on film, videotape, disk, cassette, phonorecord or otherwise - 1 - and all music sheets and promotional materials relating to the Product all of the foregoing items being hereinafter collectively called the "Collateral". Pursuant to the Completion Guaranty dated as of [INSERT DATE], among the Completion Guarantor, the Company and the Lender (the "Completion Guaranty"), the Completion Guarantor has agreed to guaranty the completion and delivery of the Product. In connection therewith, the Company has granted to the Completion Guarantor, a security interest in certain assets that are included in the Collateral, all as specified in, and subject to the terms and conditions of, the Company's Completion Agreement dated as of [INSERT DATE], between the Company and the Completion Guarantor (the "Company's Agreement"). From time to time, the Laboratory will have in its possession certain items of the Collateral. Accordingly, the parties hereto hereby agree as follows: 1. Each of the Company, the Completion Guarantor, and the Lender hereby appoints the Laboratory as the pledgeholder of all items of Collateral that may from time to time come into the possession or control of the Laboratory. The Laboratory agrees to hold all such items of Collateral as pledgeholder for the Lender subject to the following terms and conditions: a. Except as permitted by Section 1(b) below, the Laboratory will keep all items of Collateral at the laboratories or storage facilities listed on Schedule 2 hereto, and will not deliver such property to anyone. b. Subject to the provisions of Sections 1(c) and 1(d) below, the Laboratory will permit the Company and/or Completion Guarantor (and their respective designated affiliates, sublicensees or designees): i) to have access to the negatives and other pre-print material of the Product (but not remove them from the possession of the Laboratory) for purposes of inspecting, cutting, scoring or similar purposes; ii) to obtain a reasonable number of positive prints including without limitation, dailies, for the purposes of editing and previewing the Product; iii) to direct the making of pre-print material, positive prints and video masters of the Product and trailers thereof and the delivery thereof to the Company or distributors, licensees or other parties as the Company may direct; - 2 - iv) to remove reasonable amounts of material for processing by optical and/or sound houses which agree in writing to be bound by the terms hereof or enter into a separate laboratory pledgeholder agreement substantially in the form hereof, and to return such materials when processed to the Laboratory; v) with the prior written consent of the Lender, to forward any item of Collateral to another laboratory. The Lender's consent contained in this clause (v) may be revoked at any time by written notice to the Laboratory, the Completion Guarantor and the Company from the Lender. In addition, such consent shall be deemed to be revoked at any time upon receipt by the Laboratory of written notice from the Lender, that an Event of Default has occurred under the Credit Agreement; and vi) to forward any of the above-mentioned property to another laboratory, approved by the Lender, if the Lender has previously received a Pledgeholder Agreement executed by such laboratory. c. If and when the Laboratory shall receive written notice from the Lender that an Event of Default shall have occurred and is continuing under the Credit Agreement, the Laboratory shall take no further orders from the Company and will hold all items of Collateral within its possession or under its control as pledgeholder hereunder, subject only (i) to the order and instruction of the Lender; and (ii) to the rights of the Lender and/or the Completion Guarantor to have access to and/or delivery of items referred to in Section 6 below. d. If and when the Laboratory shall receive written notice from the Completion Guarantor that the Completion Guarantor has exercised its right to take over the production of the Product under the Company's Agreement and, unless and until the Laboratory shall have received written notice from the Lender to the contrary, the Laboratory shall allow the Completion Guarantor to exercise the rights set forth in clauses (i), (ii), (iii) and (iv) of Section 1(b) hereof. Following such notice from the Completion Guarantor, the Laboratory will not permit the Company to have any further access to, or direct any further actions to be taken with respect to, the Collateral in the Laboratory's possession or under its control or to obtain any prints thereof. e. If the Completion Guarantor takes over the production of the Product and requests that the Collateral be moved to a different laboratory, the Lender agrees to consent to such move so long as a laboratory pledgeholder agreement is executed by the various parties hereto (other than the Laboratory) - 3 - and by the replacement laboratory, substantially in the form hereof and so as long as the replacement laboratory is reasonably satisfactory to the Lender. 2. The Company agrees with the Lender that during production of the Product it will deliver the daily rushes for the Product to the Laboratory as soon as practicable and will use their best efforts to deliver the daily rushes on a weekly basis. 3. The Laboratory shall keep the original negatives of the Product in film vaults separate from and at a reasonable distance from protective duplicating materials (whether protective masters, fine grains, duplicate negatives or otherwise) to afford protection against any loss or damage, whether by fire or other disaster or otherwise. The Laboratory shall keep the Lender and the Completion Guarantor advised in writing of the actual location of the film vaults where all items of the Collateral are kept, including information as to the separate film vaults utilized for the original negatives and protective materials as aforesaid. 4. Subject to the rights of the Completion Guarantor, the Laboratory agrees that in its capacity as pledgeholder it is holding and has possession of the Collateral and the physical properties thereof constructively for the Lender and, until such time that the Lender notifies the Laboratory that the Lender no longer has any rights in the Collateral, upon written notice to the Laboratory indicating that an Event of Default has occurred and is continuing under the Credit Agreement (a copy of which will be sent to the Completion Guarantor unless its rights hereunder have terminated as contemplated by Section 8 hereof), will hold a sale or sales of the Collateral or any part thereof in accordance with the direction and instruction of the Lender, at the expense of the Lender, or in the alternative will cause to be delivered or made available to the Lender or its nominee (in all cases, pursuant to written instructions from the Lender) the Collateral and all physical properties thereof in the possession of the Laboratory or under its control for the purpose of enabling the Lender to deal with the same pursuant to the Credit Agreement. Nothing herein contained shall be construed to waive any rights of the Laboratory as specified under Section 9 hereof. 5. Each of the Completion Guarantor and the Company hereby waives any claim for damages or otherwise which it may have against the Laboratory for any acts which the Laboratory may take as pledgeholder, pursuant to the written direction of the Lender made in accordance with the terms of this Agreement. 6. Subject to Section 9 hereof, the Laboratory agrees that, despite the existence of any other claim which the Laboratory may have against the Company and/or the Completion Guarantor and/or any third-party distributor of the Product, the Laboratory shall accept and fulfill orders for laboratory work and any other material which may be required by the Lender or any other third-party distributor of the Product, subject to satisfactory credit arrangements being made with the Laboratory with respect to any charges incurred on behalf of the Lender or any such third-party distributor, and the Laboratory will not assert any claim or - 4 - lien, statutory or otherwise, against the Lender or against the Product (except as set forth in Section 9 hereof) with respect to any charges for laboratory services or materials ordered by the Company, the designees of the Company, any third-party distributor of the Product or the Completion Guarantor. 7. The parties hereto agree that the Lender and its respective designees, successors and assigns shall each be entitled to unilaterally remove from the Laboratory materials made pursuant to an order contemplated by Section 6 hereof, which materials shall not be subject to this Agreement. 8. The rights granted hereunder to the Completion Guarantor shall (i) at all times be junior and subordinate to the rights hereunder of the Lender and (ii) terminate upon the completion and delivery of the Product, unless prior to such completion and delivery of the Product, the Completion Guarantor has notified the Lender and the Laboratory in writing that it has or anticipates that it will have to advance its own funds to complete the Product. Notwithstanding anything to the contrary in this Agreement, the Completion Guarantor shall have no rights under this Agreement if the Lender gives written notice to the Laboratory and the Completion Guarantor that the Product has been completed and delivered without the requirement that the Completion Guarantor advance any of its own funds pursuant to the Completion Guaranty. The Completion Guarantor hereby agrees that in the event that the Completion Guarantor shall have been released in writing from all of its obligations under the Completion Guaranty for the Product, any amendment or termination of this Agreement thereafter shall not require the Completion Guarantor's consent. 9. The Laboratory shall hold and/or process the Collateral under its standard terms of business as set forth in Schedule 3 hereto, except that any liens arising in favor of the Laboratory shall be limited to an aggregate amount of $50,000 at any one time outstanding for processing and/or storing the Collateral and/or materials delivered therefrom for the Company, any of their designees and/or the Completion Guarantor. Except as provided in the prior sentence, the rights of the Laboratory in the Collateral shall be subordinate and junior to the rights of the Lender and the Completion Guarantor in respect of the Collateral. 10. The Lender shall promptly give written notice to the Laboratory when the Lender's security interests in the Collateral has terminated. Upon receipt of such written notice, the Laboratory's obligations hereunder as pledgeholder for the Lender shall terminate. 11. This Agreement shall be binding on and inure to the benefit of the parties hereto and the successors and assigns of each of the parties. 12. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK - 5 - APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK. 13. No amendment to this Agreement shall be effective unless in writing and signed by the Company, the Lender and the Laboratory and if the Laboratory has not received the notice from the Lender contemplated by Section 8 hereof, then also the Completion Guarantor. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together, shall constitute but one instrument, and shall become effective on the date on which each of the Completion Guarantor and the Lender shall have received a fully-executed copy of this Agreement. Promptly thereafter, the Company shall deliver or mail counterparts of this Agreement bearing the signature of each of the parties hereto to each party hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first written above. [LABORATORY] By ----------------------------------- Name: Title: Address: Attn: [LIST APPLICABLE CREDIT PARTY(IES)] By ---------------------------------- Name: Title: Address: - 6 - [COMPLETION GUARANTOR] By ---------------------------------- Name: Title: Address: Attn: THE CHASE MANHATTAN BANK By ---------------------------------- Name: Title: Address: 270 Park Avenue, 37th floor New York, NY 10017-2070 Attn: John J. Huber, III - 7 - Schedule 1 List of items of Product Schedule 2 List of Laboratory and Storage Facilities Schedule 3 [Attach Laboratory's Standard Terms of Business] EXHIBIT D-2 FORM OF PLEDGEHOLDER AGREEMENT (COMPLETED PRODUCT) AGREEMENT dated as of [INSERT DATE] (the "Agreement") among (i) [INSERT NAME OF LABORATORY] (the "Laboratory"), (ii) [INSERT NAME OF EACH CREDIT PARTY WHO HAS CONTROL OVER THE PHYSICAL ELEMENTS OF THE COLLATERAL] (collectively referred to herein as the "Company") and (iii) The Chase Manhattan Bank (the "Lender"). Pursuant to the Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended and restated as of August 16, 1999 (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement"), among NewStar Media Inc. (formerly known as Dove Entertainment, Inc.) (the "Borrower"), the Corporate Guarantors named therein and the Lender, the Lender has agreed, subject to the terms and conditions set forth in the Credit Agreement, to make loans to the Borrower in connection with, among other things, the acquisition, production and distribution of the Product (as hereinafter defined). The Company has granted to the Lender a security interest in, among other things, all of its right, title and interest in and to the [DESCRIBE NATURE OF PRODUCT, I.E. MOVIE-OF- THE-WEEK, TELEVISION PROGRAMS, AUDIOBOOKS, ETC.] listed on Schedule 1 hereto (hereinafter called the "Product") as security for various obligations of the Company to the Lender. Such security interest covers, among other things, all physical properties of every kind or nature of, or relating to, the Product and all versions thereof, including, without limitation, exposed film, developed film, positives, negatives, prints, positive prints, answer prints, special effects, preparing materials (including interpositives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices, and all other forms of pre-print elements), sound tracks, cutouts, trims and any and all other physical properties of every kind and nature of, or relating to, the Product, whether in completed form or in some state of completion, and all audio and video masters, duplicates, drafts, versions, variations and copies of each thereof, in all formats whether on film, videotape, disk, cassette, phonorecord or otherwise and all music sheets and promotional materials relating to the Product all of the foregoing items being hereinafter collectively called the "Collateral". From time to time, the Laboratory will have in its possession certain items of the Collateral. - 1 - Accordingly, the parties hereto hereby agree as follows: 1. Each of the Company and the Lender hereby appoints the Laboratory as the pledgeholder of all items of Collateral that may from time to time come into the possession or control of the Laboratory. The Laboratory agrees to hold all such items of Collateral as pledgeholder for the Lender subject to the following terms and conditions: a. Except as permitted by Section 1(b) below, the Laboratory will keep all items of Collateral at the laboratories or storage facilities listed on Schedule 2 hereto, and will not deliver such property to anyone. b. Subject to the provisions of Sections 1(c) below, the Laboratory will permit the Company and its designated affiliates, sublicensees and designees: i) to have access to the negatives and other pre-print material of the Product (but not remove them from the possession of the Laboratory) for purposes of inspecting, cutting, scoring or similar purposes; ii) to obtain a reasonable number of positive prints including without limitation, dailies, for the purposes of editing and previewing the Product; iii) to direct the making of pre-print material, positive prints and video masters of the Product and trailers thereof and the delivery thereof to the Company or distributors, licensees or other parties as the Company may direct; iv) to remove reasonable amounts of material for processing by optical and/or sound houses which agree in writing to be bound by the terms hereof or enter into a separate laboratory pledgeholder agreement substantially in the form hereof, and to return such materials when processed to the Laboratory; v) with the prior written consent of the Lender, to forward any item of Collateral to another laboratory. The Lender hereby consents to the Laboratory's forwarding original material or elements constituting Collateral, if requested to do so by the Company, to any of the laboratories listed on Schedule 4 hereto. The Lender's consent contained in this clause (v) may be revoked at any time by written notice to the Laboratory and the Company from the Lender. In addition, such consent shall be deemed to be revoked at any time upon receipt by the Laboratory of written notice - 2 - from the Lender, that an Event of Default has occurred under the Credit Agreement; and vi) to forward any of the above-mentioned property to another laboratory, approved by the Lender, if the Lender has previously received a Pledgeholder Agreement executed by such laboratory. c. If and when the Laboratory shall receive written notice from the Lender that an Event of Default shall have occurred and is continuing under the Credit Agreement, the Laboratory shall take no further orders from the Company and will hold all items of Collateral within its possession or under its control as pledgeholder hereunder, subject only (i) to the order and instruction of the Lender; and (ii) to the rights of the Lender to have access to and/or delivery of items referred to in Section 5 below. 2. The Laboratory shall keep the original negatives of the Product in film vaults separate from and at a reasonable distance from protective duplicating materials (whether protective masters, fine grains, duplicate negatives or otherwise) to afford protection against any loss or damage, whether by fire or other disaster or otherwise. The Laboratory shall keep the Lender advised in writing of the actual location of the film vaults where all items of the Collateral are kept, including information as to the separate film vaults utilized for the original negatives and protective materials as aforesaid. 3. The Laboratory agrees that in its capacity as pledgeholder it is holding and has possession of the Collateral and the physical properties thereof constructively for the Lender and, until such time that the Lender notifies the Laboratory that the Lender no longer has any rights in the Collateral, upon written notice to the Laboratory indicating that an Event of Default has occurred and is continuing under the Credit Agreement, will hold a sale or sales of the Collateral or any part thereof in accordance with the direction and instruction of the Lender, at the expense of the Lender, or in the alternative will cause to be delivered or made available to the Lender or its nominee (in all cases, pursuant to written instructions from the Lender) the Collateral and all physical properties thereof in the possession of the Laboratory or under its control for the purpose of enabling the Lender to deal with the same pursuant to the Credit Agreement. Nothing herein contained shall be construed to waive any rights of the Laboratory as specified under Section 7 hereof. 4. The Company hereby waives any claim for damages or otherwise which it may have against the Laboratory for any acts which the Laboratory may take as pledgeholder, pursuant to the written direction of the Lender made in accordance with the terms of this Agreement. - 3 - 5. Subject to Section 7 hereof, the Laboratory agrees that, despite the existence of any other claim which the Laboratory may have against the Company and/or any third-party distributor of the Product, the Laboratory shall accept and fulfill orders for laboratory work and any other material which may be required by the Lender or any other third-party distributor of the Product, subject to satisfactory credit arrangements being made with the Laboratory with respect to any charges incurred on behalf of the Lender or any such third-party distributor, and the Laboratory will not assert any claim or lien, statutory or otherwise, against the Lender or against the Product (except as set forth in Section 7 hereof) with respect to any charges for laboratory services or materials ordered by the Company, the designees of the Company or any third-party distributor of the Product. 6. The parties hereto agree that the Lender and its respective designees, successors and assigns shall each be entitled to unilaterally remove from the Laboratory materials made pursuant to an order contemplated by Section 5 hereof, which materials shall not be subject to this Agreement. 7. The Laboratory shall hold and/or process the Collateral under its standard terms of business as set forth in Schedule 3 hereto, except that any liens arising in favor of the Laboratory shall be limited to an aggregate amount of $50,000 at any one time outstanding for processing and/or storing the Collateral and/or materials delivered therefrom for the Company and/or any of their designees. Except as provided in the prior sentence, the rights of the Laboratory in the Collateral shall be subordinate and junior to the rights of the Lender in respect of the Collateral. 8. The Lender shall promptly give written notice to the Laboratory when the Lender's security interests in the Collateral has terminated. Upon receipt of such written notice, the Laboratory's obligations hereunder as pledgeholder for the Lender shall terminate. 9. This Agreement shall be binding on and inure to the benefit of the parties hereto and the successors and assigns of each of the parties. 10. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK. 11. No amendment to this Agreement shall be effective unless in writing and signed by the Company, the Lender and the Laboratory. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together, shall constitute but one instrument, and shall become effective on the date on which the Lender shall have received a fully-executed copy of this Agreement. Promptly thereafter, the - 4 - Company shall deliver or mail counterparts of this Agreement bearing the signature of each of the parties hereto to each party hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first written above. [LABORATORY] By ------------------------------------ Name: Title: Address: Attn: [LIST APPLICABLE CREDIT PARTY(IES)] By ------------------------------------ Name: Title: Address: Attn: THE CHASE MANHATTAN BANK By ------------------------------------ Name: Title: Address: 270 Park Avenue, 37th floor New York, NY 10017-2070 Attn: John J. Huber, III - 5 - Schedule 1 List of Items of Product Schedule 2 List of Laboratory and Storage Facilities Schedule 3 [Attach Laboratory's Standard Terms of Business] Schedule 4 Other Laboratories EXHIBIT E-1 FORM OF COPYRIGHT SECURITY AGREEMENT WHEREAS, Dove Entertainment, Inc., a California corporation ("Borrower"), and each Subsidiary of Borrower whose name appears at the foot hereof (collectively the "Grantors") now own or hold and may hereafter acquire or hold certain copyrights and rights under copyright with respect to certain movies-of-the-week, television programs, films, videotapes or other programs produced for television release or for release in any other medium, shown on network, free and cable, pay and/or other television medium (including, without limitation, first-run syndication), certain written works, books and other published material, and sound recordings and audiobooks, in each case whether recorded on film, videotape, cassette, cartridge, disc, audio cassette or on or by any other means, method, process or device whether now owned or hereafter developed, including, without limitation, those United States copyright registrations listed on Schedule 1 hereto (the "Product") as such Schedule may be amended from time to time by the addition of copyrights subsequently arising or acquired; WHEREAS, pursuant to that certain Credit, Security, Guaranty and Pledge Agreement, dated as of November 4, 1997, (as the same may be amended, modified or otherwise supplemented from time to time, the "Credit Agreement"), among the Borrower, the Corporate Guarantors named therein and The Chase Manhattan Bank (the "Lender"), the Lender has agreed to make loans to the Borrower; WHEREAS, pursuant to the terms of the Credit Agreement, the Grantors granted to the Lender a security interest in all of the personal property of the Grantors including all right, title and interest of the Grantors in, to and under any copyright or copyright license whether now existing or hereafter arising or acquired, and all proceeds thereof to secure the payment of the Obligations (as such term is defined in the Credit Agreement); NOW THEREFORE, for good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, Grantors do, as security for the Obligations, hereby grant to the Lender a continuing security interest in all the Grantors' right, title and interest in and to each and every item of Product, the scenario, screenplay or script upon which an item of Product is based, all of the properties thereof, tangible and intangible, and all domestic and foreign copyrights and all other rights therein and thereto, of every kind and character, whether now in existence or hereafter to be made or produced, and whether or not in possession of such Grantors, including with respect to each and every item of Product and without limiting the foregoing language, each and all of the following particular rights and properties (to the extent they are owned or hereafter created or acquired by Grantors): -1- (i) all scenarios, screenplays and/or scripts at every stage thereof; (ii) all common law and/or statutory copyright and other rights in all literary and other properties (hereinafter called "said literary properties") which form the basis of each item of Product and/or which are and/or will be incorporated into each item of Product, all component parts of each item of Product consisting of said literary properties, all rights in and to the story, all treatments of said story and said literary properties, together with all preliminary and final screenplays used and to be used in connection with the item of Product, and all other literary material upon which the item of Product is based or from which it is adapted; (iii) all rights in and to all music and musical compositions used and to be used in each item of Product, including, each without limitation, all rights to record, rerecord, produce, reproduce or synchronize all of said music and musical compositions in and in connection therewith; (iv) without limitation, all exposed film, developed film, positives, negatives, prints, positive prints, answer prints, special effects, preparing materials (including interpositives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices, and all other forms of pre-print elements), sound tracks, cutouts, trims and any and all other physical properties of every kind and nature relating to such item of Product, whether in completed form or in some state of completion, and all masters, duplicates, drafts, versions, variations and copies of each thereof, in all formats whether on film, videotape, disk or otherwise and all music sheets and promotional materials relating to such item of Product (collectively, the "PHYSICAL MATERIALS"); (v) all collateral, allied, subsidiary and merchandising rights appurtenant or related to each item of Product including, without limitation, the following rights: all rights to produce remakes or sequels or prequels to each item of Product based upon each item of Product, said literary properties or the theme of each item of Product and/or the text or any part of said literary properties; all rights throughout the world to broadcast, transmit and/or reproduce by means of television (including commercially sponsored, sustaining and subscription or "pay" television) or by any process analogous thereto, now known or hereafter devised, each item of Product or any remake or sequel or prequel to the item of Product; all rights to produce primarily for television or similar use a motion picture or series of motion pictures, by use of film or any other recording device or medium now known or hereafter devised, based upon each item of Product, said literary properties or any part thereof, including, without limitation, based upon any script, scenario or the like used in each item of Product; all merchandising rights including, without limitation, all rights to use, exploit and license others to use and exploit any and all commercial tieups of any kind arising out of or connected with said literary properties, each item of Product, the title or titles of each item of Product, the characters of each item -2- of Product or said literary properties and/or the names or characteristics of said characters and including further, without limitation, any and all commercial exploitation in connection with or related to each item of Product, any remake or sequel thereof and/or said literary properties; (vi) all statutory copyrights, domestic and foreign, obtained or to be obtained on items of Product, together with any and all copyrights obtained or to be obtained in connection with each item of Product or any underlying or component elements of each item of Product, including, in each case without limitation, all copyrights on the property described in subparagraphs (i) through (v) inclusive, of this paragraph, together with the right to copyright (and all rights to renew or extend such copyrights) and the right to sue in the name of any of the Grantors' names for past, present and future infringements of copyright; (vii) all insurance policies and completion bonds connected with each item of Product and all proceeds which may be derived therefrom; (viii) all rights to distribute, sell, rent, license the exhibition of and otherwise exploit and turn to account each item of Product, the Physical Materials and rights in and to said story, other literary material upon which each item of Product is based or from which it is adapted, and said music and musical compositions used or to be used in each item of Product; (ix) any and all sums, proceeds, money, products, profits or increases, including money profits or increases (as those terms are used in the New York Uniform Commercial Code (the "UCC") or otherwise) or other property obtained or to be obtained from the distribution, exhibition, sale or other uses or dispositions of each item of Product or any part of each item of Product, including, without limitation, all proceeds, profits, products and increases, whether in money or otherwise, from the sale, rental or licensing of each item of Product and/or any of the elements of each item of Product including from collateral, allied, subsidiary and merchandising rights; (x) the dramatic, nondramatic, stage, television, radio and publishing rights, title and interest in and to each item of Product, and the right to obtain copyrights and renewals of copyrights therein; (xi) the name or title of each item of Product and all rights of such Grantor to the use thereof, including, without limitation, rights protected pursuant to trademark, service mark, unfair competition and/or the rules and principles of any other applicable statutes, common law, or other rule or principle of law; (xii) any and all contract rights and/or chattel paper which may arise in connection with each item of Product; -3- (xiii) all accounts and/or other rights to payment which such Grantor presently owns or which may arise in favor of such Grantor in the future, including, without limitation, any refund under a completion guaranty, all accounts and/or rights to payment due from exhibitors in connection with the distribution of each item of Product, and from exploitation of any and all of the collateral, allied, subsidiary, merchandising and other rights in connection with each item of Product; (xiv) any and all "general intangibles" (as that term is defined in the UCC) not elsewhere included in this definition, including, without limitation, any and all general intangibles consisting of any right to payment which may arise in the distribution or exploitation of any of the rights set out herein, and any and all general intangible rights in favor of such Grantor for services or other performances by any third parties, including actors, writers, directors, individual producers and/or any and all other performing or nonperforming artists in any way connected with each item of Product, any and all general intangible rights in favor of such Grantor relating to licenses of sound or other equipment, licenses for any photograph or photographic process, and all general intangibles related to the distribution or exploitation of each item of Product including general intangibles related to or which grow out of the exhibition of each item of Product and the exploitation of any and all other rights in each item of Product set out in this definition; (xv) any and all goods, including inventory (as that term is defined in the UCC), which may arise in connection with the creation, production or delivery of each item of Product and which goods pursuant to any production or distribution agreement or otherwise are owned by such Grantor; (xvi) all and each of the rights, regardless of denomination, which arise in connection with the creation, production, completion of production, delivery, distribution, or other exploitation of each item of Product, including, without limitation, any and all rights in favor of such Grantor, the ownership or control of which are or may become necessary or desirable, in the opinion of the Lender, in order to complete production of each item of Product in the event that the Agent exercises any rights it may have to take over and complete production of each item of Product; (xvii) any and all documents issued by any pledgeholder or bailee with respect to the item of Product, or any Physical Materials (whether or not in completed form) with respect thereto; (xviii) any and all production accounts or other bank accounts established by such Grantor with respect to such item of Product; (xix) any and all rights of such Grantor under contracts relating to the production or acquisition of each item of Product; and -4- (xx) any and all rights of such Grantor under any agreement entered into by such Grantor pursuant to which such Grantor has sold, leased, licensed or assigned distribution rights or other exploitation rights to any item of Product to an unaffiliated person; (all of the foregoing items or types of property, whether presently existing or hereafter arising or acquired, shall be referred to herein collectively as the "Collateral"). Each of the Grantors agrees that if any person, firm, corporation or other entity shall do or perform any acts which the Lender believes constitute a copyright infringement of the photoplay or of any of the literary, dramatic or musical material contained in the Product, or constitute a plagiarism, or violate or infringe any right of any Grantor or the Lender therein or if any person, firm, corporation or other entity shall do or perform any acts which the Lender believes constitute an unauthorized or unlawful distribution, exhibition, or use thereof, then and in any such event, upon 30 days' prior written notice to such Grantor, while an Event of Default under the Credit Agreement is continuing, the Lender may and shall have the right to take such steps and institute such suits or proceedings as the Lender may deem advisable or necessary to prevent such acts and conduct and to secure damages and other relief by reason thereof, and to generally take such steps as may be advisable or necessary or proper for the full protection of the rights of the parties. The Lender may take such steps or institute such suits or proceedings in its own name or in the name of such Grantor or in the names of the parties jointly. The Lender hereby agrees to give the applicable Grantor notice of any steps taken, or any suits or proceedings instituted, by the Lender pursuant to this paragraph. This security interest is granted in conjunction with the security interests granted to the Lender pursuant to the Credit Agreement. Each Grantor does hereby further acknowledge and affirm that the rights and remedies of the Lender with respect to the security interest in the Collateral made and granted hereby are subject to, and more fully set forth in, the Credit Agreement, the terms and provisions of which are incorporated by reference herein as if fully set forth herein. This Copyright Security Agreement is made for collateral purposes only. At such time as all of the Loans under the Credit Agreement shall have been repaid in full, the Commitments (including any commitment to issue any Letter of Credit) shall have terminated and all Letters of Credit shall have expired or been terminated or cancelled, the Lender shall execute and deliver to such Grantors, at the Borrower's or the applicable Grantor's expense, without representation, warranty or recourse, all releases and reassignments, termination statements and other instruments as may be necessary or proper to terminate the security interest of the Lender in the Collateral, subject to any disposition thereof which may have been made by the Lender pursuant to the terms hereof or of the Credit Agreement. The Lender agrees that there will be no assignment of the Collateral, other than the security interest described herein, unless and until there shall occur an Event of Default under -5- the Credit Agreement and the Lender gives written notice to the applicable Grantor of its intention to enforce its rights against any of the Collateral. So long as no Event of Default under the Credit Agreement shall have occurred and be continuing, and subject to the various provisions of the Credit Agreement and the other Fundamental Documents to which it is a party, each Grantor may use, license and exploit the Collateral in any lawful manner. THIS COPYRIGHT SECURITY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Credit Agreement. IN WITNESS WHEREOF, the Grantors have caused this Copyright Security Agreement to be duly executed by its officer thereunto duly authorized as of November 4, 1997. DOVE ENTERTAINMENT, INC. By /s/ Neil Topham ----------------------------- Name: Title: -6- DOVE INTERNATIONAL, INC. By /s/ Neil Topham ----------------------------- Name: Title: DOVE FOUR POINT, INC. By /s/ Neil Topham ----------------------------- Name: Title: Accepted: THE CHASE MANHATTAN BANK By /s/ Mitchell J. Gervis -------------------------------- Name: Title: -7- STATE OF CALIFORNIA ) : ss.: COUNTY OF LOS ANGELES ) On the 4th day of November, in the year 1997, before me personally came Neil Topham, to me known, who, being by me sworn, did say that he is the CFO and Treasurer of Dove Entertainment, Inc. which corporation is described in, and which corporation executed the above instrument, and that s/he signed his/her name by order of the Board of Directors of said corporation. /s/ Victoria Kaye ---------------------------- Notary Public STATE OF ) : ss.: COUNTY OF ) On the 4th day of November, in the year 1997, before me personally came Neil Topham, to me known, who, being by me sworn, did say that he is the CFO and Treasurer of Dove International, Inc. , which corporation is described in, and which corporation executed the above instrument, and that s/he signed his/her name by order of the Board of Directors of said corporation. /s/ Victoria Kaye ---------------------------- Notary Public STATE OF ) : ss.: COUNTY OF ) On the 4th day of November, in the year 1997, before me personally came Neil Topham, to me known, who, being by me sworn, did say that he is the CFO and Treasurer of Dove Four Point, Inc. , which corporation is described in, and which corporation executed the above instrument, and that s/he signed his/her name by order of the Board of Directors of said corporation. /s/ Victoria Kaye --------------------------- Notary Public SCHEDULE 1 to Copyright Security Agreement See Schedule 3.8 to the Credit Agreement EXHIBIT E-2 FORM OF SUPPLEMENT NO. __ TO THE COPYRIGHT SECURITY AGREEMENT DATED AS OF NOVEMBER 4, 1997 -------------------------------------- WHEREAS, [INSERT NAME OF GRANTOR], a __________ corporation (the "Grantor") is party to that certain Credit, Security, Guaranty and Pledge Agreement, dated as of November 4, 1997, (as the same has been amended and restated as of August 16, 1999 and as the same may be further amended, modified or otherwise supplemented from time to time, the "Credit Agreement"), among NewStar Media Inc. (formerly known as Dove Entertainment, Inc.) (the "Borrower"), the Corporate Guarantors named therein (the "Guarantors") and The Chase Manhattan Bank, as Lender (the "Lender"); WHEREAS, pursuant to the terms of the Credit Agreement, the Grantor has granted to the Lender a security interest in all right, title and interest of the Grantor in and to all personal property, whether now owned, presently existing or hereafter acquired or created, including, without limitation, all right, title and interest of the Grantor in, to and under any item of Product (such term being used herein as defined in the Copyright Security Agreement referred to below) and any copyright or copyright license, whether now existing or hereafter arising, acquired or created, and all proceeds thereof or income therefrom, to secure the payment and performance of the Obligations (such term being used herein as defined in the Credit Agreement) pursuant to the Credit Agreement; WHEREAS, the Grantor is a party to a Copyright Security Agreement, dated as of November 4, 1997 (as the same has been, or may hereafter be, amended or supplemented from time to time, the "Copyright Security Agreement"), pursuant to which the Grantor has granted to the Lender, as security for the Obligations, a continuing security interest in all of the Grantor's right, title and interest in and to each and every item of Product, the scenario, screenplay or script upon which an item of Product is based, all of the properties thereof, tangible and intangible, and all domestic and foreign copyrights and all other rights therein and thereto, of every kind and character, whether now in existence or hereafter to be made or produced, and whether or not in possession of the Grantor, all as more fully set forth in the Copyright Security Agreement; WHEREAS, the Grantor has acquired or created additional items of Product since the date of execution of the Copyright Security Agreement and the most recent Supplement thereto and holds certain additional copyrights and rights under copyright with respect to items of Product; -1- WHEREAS, Schedule 1 to the Copyright Security Agreement does not reflect (i) item(s) of Product acquired or created by the Grantor since the date of execution of the Copyright Security Agreement and the most recent Supplement thereto or (ii) all the copyrights and rights under copyright held by the Grantor; THEREFORE, A. The Grantor does hereby grant to the Lender, as security, a continuing security interest in and to all of the Grantor's right, title and interest in and to each and every item of Product being added to Schedule 1 to the Copyright Security Agreement pursuant to paragraph (b) below, the scenario, screenplay or script upon which such item of Product is based, all of the properties thereof, tangible and intangible, and all domestic and foreign copyrights and all other rights therein and thereto, of every kind and character, whether now in existence or hereafter to be made or produced, and whether or not in possession of the Grantor, all as contemplated by, and as more fully set forth in, the Copyright Security Agreement. B. Schedule 1 to the Copyright Security Agreement is hereby supplemented, effective as of the date hereof, so as to reflect all of the copyrights and rights under copyright with respect to the item(s) of Product in and to which the Grantor has granted a continuing security interest to the Lender pursuant to the terms of the Copyright Security Agreement and the Credit Agreement. The following item(s) of Product and copyright information are hereby added to Schedule 1 to the Copyright Security Agreement: Date of Title Registration No. Registration ----- ---------------- ------------ Except as expressly supplemented hereby, the Copyright Security Agreement shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in the Copyright Security Agreement, the terms "Agreement", "this Agreement", "this Copyright Security Agreement", "herein", "hereafter", "hereto", "hereof" and words of similar import, shall, unless the context otherwise requires, mean the Copyright Security Agreement as supplemented by this Supplement. Except as expressly supplemented hereby, the Copyright Security Agreement, all documents contemplated thereby and any previously executed Supplements thereto, are each hereby confirmed and ratified by the Grantor. The execution and filing of this Supplement, and the addition of the item(s) of Product set forth herein to Schedule 1 to the Copyright Security Agreement are not intended by -2- the parties to derogate from, or extinguish, any of the Lender's rights or remedies under (i) the Copyright Security Agreement and/or any agreement, amendment or supplement thereto or any other instrument executed by the Grantor and heretofore recorded or submitted for recording in the U.S. Copyright Office or (ii) any financing statement, continuation statement, deed or charge or other instrument executed by the Grantor and heretofore filed in any state or country in the United States of America or elsewhere. IN WITNESS WHEREOF, the Grantor has caused this Supplement No. ___ to the Copyright Security Agreement to be duly executed by its duly authorized officer as of [INSERT DATE OF EXECUTION]. [NAME OF GRANTOR] By: --------------------------- Name: Title: -3- STATE OF ______________ ) : ss.: COUNTY OF _____________ ) On this the ___ day of __________, ____, before me, ______________________, the undersigned Notary Public, personally appeared [ ] personally known to me, [ ] proved to me on the basis of satisfactory evidence, to be the _________________________ of the corporation known as ______________________ who executed the foregoing instrument on behalf of the corporation, and acknowledged that such corporation executed it pursuant to a resolution of its Board of Directors. WITNESS my hand and official seal. ------------------------------ Notary Public EXHIBIT F FORM OF LABORATORY ACCESS LETTER [DATE] [ADDRESS TO LABORATORY] Dear Sir or Madam: This letter will confirm the terms of an agreement among you (the "Laboratory"), [LIST APPLICABLE CREDIT PARTY(IES) WITH ACCESS RIGHTS](collectively, the "Company") and The Chase Manhattan Bank (the "Lender") relating to the items of Product (the "Product") listed on Schedule 1 hereto. Reference is hereby made to that certain Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended and restated as of August 16, 1999 (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among the NewStar Media Inc. (formerly known as Dove Entertainment Inc.), the Corporate Guarantors named therein and the Lender; The Laboratory now has or may have in its possession or under its control certain of the exposed film, developed film, positives, negatives, prints, positive prints, answer prints, special effects, preparing material (including interpositives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices, and all other forms of pre-print elements), sound tracks, cutouts, trims and any and all other physical properties of every kind and nature, of or relating to, the Product, whether in completed form or in some state of completion, and all audio and video masters, duplicates, drafts, versions, variations and copies of each thereof, in all formats whether on film, videotape, disk, cassette, phonorecord or otherwise and all materials relating to the Product (all of the foregoing physical properties now or hereafter in the Laboratory's possession or control are herein collectively referred to as the "Physical Materials"). The Company now possesses certain rights in connection with the Product and the Physical Materials, including, without limitation, non- exclusive rights of access with respect to the Physical Materials (the "Access Rights"). For good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. The Laboratory hereby agrees and confirms to the Lender that the Company is entitled to exercise the Access Rights with respect to the Physical Materials. The Company and - 1 - the Lender hereby confirm to the Laboratory, and the Laboratory hereby acknowledges, that in order to secure certain obligations under the Credit Agreement, the Company has pursuant to the Credit Agreement, inter alia, granted to the Lender a security interest in and to the Company's right, title and interest in and to the Access Rights. 2. The parties hereby agree that, upon written notice from the Lender to the Laboratory that an Event of Default (as such term is defined in the Credit Agreement) has occurred and is continuing, and the Lender has exercised its security interest with respect to Access Rights, the Laboratory shall accord to the Lender (or the Lender's successors or assigns) instead of the Company, the non-exclusive right to exercise the Access Rights including, without limitation, the non-exclusive right to have access to the Physical Materials and to order and receive from the Laboratory on the Laboratory's normal and customary terms all materials and services customarily rendered or furnished by the Laboratory in connection with the Physical Materials. 3. The Laboratory and the other parties hereto hereby agree that the rights of any party hereunder (including, without limitation, the Lender's non-exclusive right to exercise the Access Rights) shall not be affected, diminished, impeded or interfered with by reason of any failure of any other person or entity to pay for any charges which have heretofore been incurred or which may hereinafter be incurred in connection with the Product or the Physical Materials, that the Laboratory will not look to any party hereunder for payment of any charges incurred by any other person or entity with respect to the Product or the Physical Materials (it being understood and agreed that all services or materials ordered by any party shall be at the sole cost and expense of the party ordering the same) and that any claim or lien which the Laboratory may assert against any party hereto with respect to services or materials furnished or rendered by the Laboratory at the request of such party with respect to the Product or the Physical Materials will not interfere with any other party's rights of access with respect to the Physical Materials or other rights referred to hereunder. 4. The parties hereto hereby agree that the Access Rights may not be terminated without the prior written consent of the Lender or unless the Laboratory shall have received notice that the Lender's security interest in and to the Company's right, title and interest in and to the Access Rights has terminated, and that the Physical Materials may not be released to any other entity (including another laboratory) without the Lender's prior written consent (which consent shall not be unreasonably withheld), except that unless and until the Laboratory shall have received written notice to the contrary, the Laboratory will permit the Company to remove Physical Materials from its premises in the ordinary course of business and in a manner consistent with the Access Rights. - 2 - Kindly confirm your agreement to and acceptance of the foregoing by signing in the space provided below. Very truly yours, [LIST APPLICABLE CREDIT PARTY(IES)] By -------------------------------- Name: Title: THE CHASE MANHATTAN BANK By: ------------------------------- Name: Title: AGREED AND ACCEPTED BY: [LABORATORY] By: ----------------------------- Name: Title: Schedule 1 THE PRODUCT [LIST TITLES OF PRODUCT] EXHIBIT G FORM OF NOTICE OF ASSIGNMENT AND IRREVOCABLE INSTRUCTIONS [INSERT NAME AND ADDRESS OF APPLICABLE CREDIT PARTY] As of __________ [INSERT NAME AND ADDRESS OF ACCOUNT DEBTOR] Re: [DESCRIBE AGREEMENT BETWEEN THE APPLICABLE CREDIT PARTY (THE "COMPANY") AND ACCOUNT DEBTOR (THE "AGREEMENT")] Dear Sir or Madam: The undersigned has created a security interest in its benefits and rights to receive payments under the Agreement referred to above, for the benefit of The Chase Manhattan Bank (the "Lender") pursuant to that certain Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended and restated as of August 16, 1999 (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among NewStar Media Inc. (formerly known as Dove Entertainment, Inc.), the Corporate Guarantors named therein and the Lender. The Company hereby irrevocably instructs and authorizes you to pay all monies from time to time owing or to become due from you to us pursuant to the Agreement (the "Assigned Payments") as follows: -1- If by wire transfer, to: The Chase Manhattan Bank for credit to NewStar Media Inc. Collection Account Account No. 323-516-440 ABA No. 021000021 If by mail or hand delivery, to: The Chase Manhattan Bank P.O. Box 29176 New York, NY 10087-9176 for credit to NewStar Media Inc. Collection Account This authority and instruction is coupled with an interest and may not be modified, terminated or revoked without the prior written consent of the Lender. Upon the occurrence of an Event of Default (as such term is defined in the Credit Agreement), the Lender shall have the right to modify this authority and instruction by written notice to the parties hereto. This Notice of Assignment and Irrevocable Instruction rescinds, supersedes and replaces in its entirety any prior or previous notice and/or directions to pay that you may have received with regard to the payment of all or any portion of the Assigned Payments. Please signify your acknowledgment hereof by signing and returning to the Lender at the address below the acknowledgment and confirmation as set out below. Very truly yours, [INSERT NAME OF APPLICABLE CREDIT PARTY] By: ------------------------------------ Name: Title: -2- To: The Chase Manhattan Bank c/o Morgan, Lewis & Bockius LLP 101 Park Avenue New York, New York 10178-0060 Attention: Michael A. Chapnick, Esq. WE ACKNOWLEDGE RECEIPT, of the foregoing notice of irrevocable authority and instruction and undertake to comply with it. We hereby confirm and agree that all monies owing under the Agreement shall be paid immediately when they are due subject only to the Agreement between us and the Company. Dated this ______ day of ______ [NAME OF ACCOUNT DEBTOR] By: ------------------------------ Name: Title: [THE UNDERSIGNED ACKNOWLEDGES THAT THE NOTICE OF ASSIGNMENT, DATED AS OF ______, IN FAVOR OF THE UNDERSIGNED HAS BEEN TERMINATED. [NAME OF OLD LENDER] BY: --------------------------------- NAME: TITLE:](1) - -------- (1) /Applicable only to receivables previously assigned to another lender. -3- EXHIBIT H FORM OF BORROWING CERTIFICATE The undersigned HEREBY CERTIFIES with respect to the Borrowing to be made on the date indicated below pursuant to the Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended and restated as of August 16, 1999, among NewStar Media Inc. (formerly known as Dove Entertainment, Inc.) (the "Borrower"), the Corporate Guarantors named therein and The Chase Manhattan Bank (the "Lender") (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement"; capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement) that: (a) the representations and warranties contained in the Credit Agreement are true and correct in all material respects on and as of the date hereof as if such representations and warranties had been made on and as of the date hereof except to the extent that such representations and warranties expressly relate to an earlier date and except to the extent that changes have occurred without breach or default under any of the terms or conditions of the Credit Agreement; (b) no Default or Event of Default has occurred or is continuing, nor shall any such event occur by reason of the making of the Loan(s) requested herein; (c) the Borrower requests [A] Loan(s) on the terms and conditions as stated in the Credit Agreement and the Note: (i) the requested Business Day of the Loan is [INSERT DATE]; (ii) the type of [INSERT WHETHER AN ALTERNATE BASE RATE OR EURODOLLAR LOAN] requested, the amounts thereof and the Interest Period(s) [IF A EURODOLLAR LOAN IS REQUESTED] are as follows: Type Interest Period Amount ---- --------------- ------ (iii) $_______ of the Loan requested above shall be subject to the guaranty obligations of the Individual Guarantors pursuant to the Guaranty Agreements1/; - - --------------- (1) / Applicable for Loans subject to the guaranty obligations of the Individual Guarantors under the Guaranty Agreements. -1- (d) the Borrowing Base on [INSERT DATE] was $__________ as indicated on the most recent Borrowing Base Certificate delivered to the Lender pursuant to the Credit Agreement and the undersigned has no reason to believe that the sum of (x) the Borrowing Base, (y) Maximum Guaranty Amount and (z) amounts currently held in the Collection Account, if currently computed would be less than the outstanding principal amount of all Loans under the Credit Agreement (after giving effect to the Loan requested hereby). IN WITNESS WHEREOF, the undersigned has caused this certificate to be executed this ___ day of ___________. NEWSTAR MEDIA INC. By --------------------------- Name: Title: -2- EXHIBIT I FORM OF INSTRUMENT OF ASSUMPTION AND JOINDER Instrument of ASSUMPTION AND JOINDER AGREEMENT dated as of ___________ (the "Assumption Agreement") made by [INSERT NAME OF NEW CREDIT PARTY], a [INSERT STATE OF INCORPORATION] corporation (the "Company") in favor of The Chase Manhattan Bank, as Lender (the "Lender"), under that certain Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended and restated as of August 16, 1999 (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among NewStar Media Inc. (formerly known as Dove Entertainment, Inc.), a California corporation, the Corporate Guarantors referred to therein and the Lender. W I T N E S S E T H - - - - - - - - - - The Company is a [INSERT STATE OF INCORPORATION] corporation and is a Subsidiary of [INSERT NAME OF CREDIT PARTY]. Pursuant to Section 6.22 of the Credit Agreement, the Company is required to execute this document (as a newly [FORMED OR ACQUIRED] Subsidiary of [INSERT NAME OF CREDIT PARTY]). NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt of which is hereby acknowledged, the Company hereby agrees as follows: 1. ASSUMPTION AND JOINDER. (a) The Company hereby expressly confirms that it has assumed, and hereby agrees to perform and observe, each and every one of the covenants, rights, promises, agreements, terms, conditions, obligations, appointments, duties and liabilities of (i) a Corporate Guarantor under the Credit Agreement and all the other Fundamental Documents applicable to it as a Corporate Guarantor, (ii) a Contributor (as such term is defined in the Contribution Agreement) under the Contribution Agreement and (iii) a Grantor (as such term is defined in the Copyright Security agreement) under the Copyright Security Agreement. By virtue of the foregoing, the Company hereby accepts and assumes any liability of (x) a Corporate Guarantor and/or a Credit Party related to each representation or warranty, covenant or obligation made by a Corporate Guarantor and/or a Credit Party in the Credit Agreement or any other document and hereby expressly affirms, on the date hereof, for the benefit of the Lender, each of such representations, warranties, covenants and obligations, (y) a Contributor related to each covenant - 1 - 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. (b) All references to the term "Corporate Guarantor" or "Credit Party" in the Credit Agreement or any other Fundamental Document, or in any document or instrument executed and delivered or furnished, or to be executed and delivered or furnished, in connection therewith shall be deemed to be references to, and shall include, the Company. (c) All references to the term "Contributor" in the Contribution Agreement, or in any document or instrument executed and delivered or furnished, or to be executed and delivered or furnished, in connection therewith shall be deemed to be references to, and shall include, the Company. (d) All references to the term "Grantor" in the Copyright Security Agreement, or in any document or instrument executed and delivered or furnished, or to be executed and delivered or furnished, in connection therewith shall be deemed to be references to, and shall include, the Company. 2. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants to the Lender as follows: (a) The Company has the requisite corporate power and authority to enter into this Assumption Agreement and to perform its obligations hereunder and under the Credit Agreement, the Contribution Agreement, the Copyright Security Agreement and the other Fundamental Documents to which it is a party. The execution, delivery and performance of this Assumption Agreement by the Company and the performance of its obligations under the Credit Agreement and the other Fundamental Documents have been duly authorized by the Board of Directors of the Company and no other corporate proceedings on the part of the Company are necessary to authorize the execution, delivery or performance of this Assumption Agreement, the transactions contemplated hereby or the performance of its obligations under the Credit Agreement or any other Fundamental Document. This Assumption Agreement has been duly executed and delivered by the Company. This Assumption Agreement and the Credit Agreement each constitutes a legal, valid and binding obligation of the Company enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors rights generally and to general principles of equity. (b) The representations and warranties set forth in Article 3 of the Credit Agreement are true and correct on and as of the date hereof (except to the extent that such representations and warranties expressly relate to an earlier date) with the same effect as if made on and as of the date hereof. - 2 - (c) The authorized capitalization of the Company, the number of shares of its capital stock outstanding on the date hereof, and the ownership of the outstanding shares of its capital stock is set forth on Schedule 1 hereto. (d) On the date hereof the Company has not done business, is not doing business and does not intend to do business other than under its full corporate name, including, without limitation, under any trade name or other doing business name except as set forth on Schedule 1 hereto, and is in good standing in all jurisdictions where the failure to be in good standing as a foreign jurisdiction would give rise to a material liability of the Company. (e) The chief executive office of the Company is located at ________________________. Such office is the place where the Company keeps the records concerning the Collateral attributable to it on the date hereof. The only places at which the Company regularly keeps any goods included in the Collateral attributable to it on the date hereof are the places listed on Schedule 2 hereto. 3. FURTHER ASSURANCES. At any time and from time to time, upon the Lender's request and at the sole expense of the Company, the Company will promptly and duly execute and deliver any and all further instruments and documents and take such further action as the Lender reasonably deems necessary to effect the purposes of this Assumption Agreement. 4. BINDING EFFECT; ASSIGNMENT. This Assumption Agreement shall be binding upon the Company and shall inure to the benefit of the Lender and its successors and assigns. 5. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK. IN WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be duly executed and delivered by its duly authorized officer as of the date first above written. [NAME OF COMPANY] By: ----------------------------- Name: Title: - 3 - SCHEDULE 1 Capital Stock of [NAME OF COMPANY] ---------------------------------- Authorized capitalization: Number of shares of capital stock outstanding: Ownership of the outstanding capital stock: SCHEDULE 2 Location of Collateral ---------------------- EXHIBIT J FORM OF CONTRIBUTION AGREEMENT This CONTRIBUTION AGREEMENT ("Agreement") is entered into as of November 4, 1997 by and among Dove Entertainment, Inc., a California corporation (the "Company" or the "Borrower") and each Subsidiary of the Borrower whose name appears at the foot hereof (collectively, the "Contributors", individually each a "Contributor"), for the purpose of establishing the respective rights and obligations of contribution among the Contributors and the Borrower in connection with the Credit Agreement (as hereinafter defined). Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. WHEREAS, the Borrower and the Contributors are parties to a Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 among the Borrower, the Contributors and The Chase Manhattan Bank (the "Lender") (said agreement, as it may hereafter be amended, supplemented or otherwise modified, renewed or replaced from time to time in accordance with its terms being the "Credit Agreement"), pursuant to which the Lender has made certain commitments, subject to the terms and conditions set forth therein, to extend a credit facility to the Borrower; WHEREAS, pursuant to the Credit Agreement, the Contributors have guaranteed the Obligations (such term being used herein as defined in the Credit Agreement) of the Borrower; WHEREAS, pursuant to the terms of the Credit Agreement, each of the Borrower and Contributors has granted to the Lender a security interest in the Collateral (as defined in the Credit Agreement) for their respective obligations thereunder; WHEREAS, as a result of the transactions contemplated by the Credit Agreement, the Borrower and the Contributors will benefit, directly and indirectly, from the Obligations and in consideration thereof desire to enter into this Agreement to allocate such benefits among themselves and to provide a fair and equitable arrangement to make contributions in the event any payments are made by the Contributors under the Credit Agreement or the Lender exercises recourse against any of the Collateral owned by the Contributors (such payment or recourse being referred to herein as a "Contribution"); NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Contributors and the Borrower hereby agree as follows: - 1 - SECTION 1. CONTRIBUTION. In order to provide for just and equitable contribution among the Contributors and the Borrower in the event any Contribution is made by a Contributor (a "FUNDING CONTRIBUTOR") under the Credit Agreement, that Funding Contributor shall be entitled to a contribution from certain other Contributors and from the Borrower for all payments, damages and expenses incurred by that Funding Contributor in discharging any of the Obligations, in the manner and to the extent set forth in this Agreement. The amount of any Contribution under this Agreement shall be equal to the payment made pursuant to the Credit Agreement or the fair saleable value of the Funding Contributor's portion of the Collateral against which recourse is exercised, and shall be determined as of the date on which such payment is made or recourse is exercised, as the case may be. SECTION 2. BENEFIT AMOUNT DEFINED. For purposes of this Agreement, the "BENEFIT AMOUNT" of any Contributor as of any date of determination shall be the net value of the benefits to such Contributor from extensions of credit made by the Lender to the Borrower under the Credit Agreement. Such benefits shall include benefits of funds constituting proceeds of Loans which are deposited into the account of the Borrower by the Lender which are in turn advanced or contributed by the Borrower to such Contributor (collectively, the "BENEFITS"). In the case of any proceeds of Loans or Benefits advanced or contributed to a Person (an "OWNED ENTITY") any of the equity interests of which are owned directly or indirectly by a Contributor, the Benefit Amount of a Contributor with respect thereto shall be that portion of the net value of the benefits attributable to Loans or Benefits advanced or contributed to the Owned Entity equal to the direct or indirect percentage ownership of such Contributor in its Owned Entity. SECTION 3. CONTRIBUTION OBLIGATION. Each Contributor and the Borrower shall be liable to a Funding Contributor in an amount equal to the greater of (A) the product of (i) a fraction the numerator of which is (x) the Benefit Amount of such Contributor or Borrower, and the denominator of which is (y) the total amount of Obligations and (ii) the amount of Obligations paid by such Funding Contributor and (B) 95% of the excess of the fair saleable value of the property of such Contributor over the total liabilities of such Contributor (including the maximum amount reasonably expected to become due in respect of contingent liabilities), as the case may be, determined as of the date on which the payment made by a Funding Contributor is deemed made for purposes of this Agreement or any recourse is exercised against any Contributor's portion of the Collateral, as the case may be (giving effect to all payments made by other Funding Contributors and to the exercise of recourse against any other Funding Contributor's portion of the Collateral as of such date in a manner to maximize the amount of such contributions). SECTION 4. ALLOCATION. In the event that at any time there exists more than one Funding Contributor with respect to any Contribution (in any such case, the "APPLICABLE CONTRIBUTION"), then payment from other Contributors and from the Borrower pursuant to this Agreement shall be allocated among such Funding Contributors in proportion to the total amount of the Contribution made for or on account of the Borrower by each such Funding Contributor pursuant to the Applicable Contribution. In the event that at any time any Contributor pays an - 2 - amount under this Agreement in excess of the amount calculated pursuant to clause (A) of Section 3, that Contributor shall be deemed to be a Funding Contributor to the extent of such excess and shall be entitled to contribution from the other Contributors and from the Borrower in accordance with the provisions of this Agreement. SECTION 5. SUBROGATION. Any payments made hereunder by the Borrower shall be credited against amounts payable by the Borrower pursuant to any subrogation rights of the Contributors which received the payments under this Agreement. SECTION 6. PRESERVATION OF RIGHTS. This Agreement shall not limit any right which any Contributor may have against any other Person which is not a party hereto. SECTION 7. SUBSIDIARY PAYMENT. The amount of contribution payable under this Agreement by any Contributor shall be reduced by the amount of any contribution paid hereunder by a Subsidiary of such Contributor. SECTION 8. EQUITABLE ALLOCATION. If as a result of any reorganization, recapitalization, or other corporate change in the Company or any Affiliates or Subsidiaries thereof, or as a result of any amendment, waiver or modification of the terms and conditions governing the Credit Agreement or the Obligations, or for any other reason, the Contributions under this Agreement become inequitable, the parties hereto shall promptly modify and amend this Agreement to provide for an equitable allocation of the Contributions. Any of the foregoing modifications and amendments to this Agreement shall be in writing and signed by all parties hereto. SECTION 9. ASSET OF PARTY TO WHICH CONTRIBUTION IS OWING. The parties hereto acknowledge that the right to contribution hereunder shall constitute an asset in favor of the party to which such contribution is owing. SECTION 10. SUBORDINATION. No payments payable by a Contributor or by the Borrower pursuant to the terms hereof shall be paid until all amounts then due and payable by the Borrower to the Lender, pursuant to the terms of the Fundamental Documents, are paid in full in cash. Nothing contained in this Agreement shall affect the obligations of any party hereto to the Lender under the Credit Agreement or any other Fundamental Documents. SECTION 11. SUCCESSORS AND ASSIGNS; AMENDMENTS. This Agreement shall be binding upon each party hereto and its respective successors and assigns and shall inure to the benefit of the parties hereto and their respective successors and assigns, and in the event of any transfer or assignment of rights by a Contributor or by the Borrower, the rights and privileges herein conferred upon that Contributor shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and condition hereof. Except as specifically required under Section 8, this Agreement shall not be amended without the prior written consent of the Lender. - 3 - SECTION 12. TERMINATION. This Agreement, as it may be modified or amended from time to time, shall remain in effect, and shall not be terminated until the Credit Agreement has been discharged or otherwise satisfied in accordance with its terms. SECTION 13. CHOICE OF LAW. This Agreement, and any instrument or agreement required hereunder, shall be deemed to be made under, shall be governed by, and shall be construed and enforced in accordance with, the laws of the State of New York without regard to principles of conflict of laws. SECTION 14. COUNTERPARTS. This Agreement, and any modifications or amendments hereto may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original for all purposes, but all such counterparts shall constitute but one and the same instrument. SECTION 15. EFFECTIVENESS. This Agreement shall become effective on the date on which all of the parties hereto shall have executed this Agreement. The Company shall deliver counterparts hereof bearing the signatures of each of the parties hereto to the Lender. IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be duly executed as of the day and year first written above. DOVE ENTERTAINMENT, INC. By /s/ Neil Topham ----------------------------------------------- Name: Neil Topham Title: Vice President & Chief Financial Officer DOVE INTERNATIONAL, INC. By /s/ Neil Topham ----------------------------------------------- Name: Neil Topham Title: Vice President & Treasurer DOVE FOUR POINT, INC. By /s/ Neil Topham ----------------------------------------------- Name: Neil Topham Title: Vice President - 4 - EXHIBIT J FORM OF CONTRIBUTION AGREEMENT This CONTRIBUTION AGREEMENT ("Agreement") is entered into as of November 4, 1997 by and among Dove Entertainment, Inc., a California corporation (the "Company" or the "Borrower") and each Subsidiary of the Borrower whose name appears at the foot hereof (collectively, the "Contributors", individually each a "Contributor"), for the purpose of establishing the respective rights and obligations of contribution among the Contributors and the Borrower in connection with the Credit Agreement (as hereinafter defined). Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. WHEREAS, the Borrower and the Contributors are parties to a Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997 among the Borrower, the Contributors and The Chase Manhattan Bank (the "Lender") (said agreement, as it may hereafter be amended, supplemented or otherwise modified, renewed or replaced from time to time in accordance with its terms being the "Credit Agreement"), pursuant to which the Lender has made certain commitments, subject to the terms and conditions set forth therein, to extend a credit facility to the Borrower; WHEREAS, pursuant to the Credit Agreement, the Contributors have guaranteed the Obligations (such term being used herein as defined in the Credit Agreement) of the Borrower; WHEREAS, pursuant to the terms of the Credit Agreement, each of the Borrower and Contributors has granted to the Lender a security interest in the Collateral (as defined in the Credit Agreement) for their respective obligations thereunder; WHEREAS, as a result of the transactions contemplated by the Credit Agreement, the Borrower and the Contributors will benefit, directly and indirectly, from the Obligations and in consideration thereof desire to enter into this Agreement to allocate such benefits among themselves and to provide a fair and equitable arrangement to make contributions in the event any payments are made by the Contributors under the Credit Agreement or the Lender exercises recourse against any of the Collateral owned by the Contributors (such payment or recourse being referred to herein as a "Contribution"); NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Contributors and the Borrower hereby agree as follows: - 1 - SECTION 1. CONTRIBUTION. In order to provide for just and equitable contribution among the Contributors and the Borrower in the event any Contribution is made by a Contributor (a "FUNDING CONTRIBUTOR") under the Credit Agreement, that Funding Contributor shall be entitled to a contribution from certain other Contributors and from the Borrower for all payments, damages and expenses incurred by that Funding Contributor in discharging any of the Obligations, in the manner and to the extent set forth in this Agreement. The amount of any Contribution under this Agreement shall be equal to the payment made pursuant to the Credit Agreement or the fair saleable value of the Funding Contributor's portion of the Collateral against which recourse is exercised, and shall be determined as of the date on which such payment is made or recourse is exercised, as the case may be. SECTION 2. BENEFIT AMOUNT DEFINED. For purposes of this Agreement, the "BENEFIT AMOUNT" of any Contributor as of any date of determination shall be the net value of the benefits to such Contributor from extensions of credit made by the Lender to the Borrower under the Credit Agreement. Such benefits shall include benefits of funds constituting proceeds of Loans which are deposited into the account of the Borrower by the Lender which are in turn advanced or contributed by the Borrower to such Contributor (collectively, the "BENEFITS"). In the case of any proceeds of Loans or Benefits advanced or contributed to a Person (an "OWNED ENTITY") any of the equity interests of which are owned directly or indirectly by a Contributor, the Benefit Amount of a Contributor with respect thereto shall be that portion of the net value of the benefits attributable to Loans or Benefits advanced or contributed to the Owned Entity equal to the direct or indirect percentage ownership of such Contributor in its Owned Entity. SECTION 3. CONTRIBUTION OBLIGATION. Each Contributor and the Borrower shall be liable to a Funding Contributor in an amount equal to the greater of (A) the product of (i) a fraction the numerator of which is (x) the Benefit Amount of such Contributor or Borrower, and the denominator of which is (y) the total amount of Obligations and (ii) the amount of Obligations paid by such Funding Contributor and (B) 95% of the excess of the fair saleable value of the property of such Contributor over the total liabilities of such Contributor (including the maximum amount reasonably expected to become due in respect of contingent liabilities), as the case may be, determined as of the date on which the payment made by a Funding Contributor is deemed made for purposes of this Agreement or any recourse is exercised against any Contributor's portion of the Collateral, as the case may be (giving effect to all payments made by other Funding Contributors and to the exercise of recourse against any other Funding Contributor's portion of the Collateral as of such date in a manner to maximize the amount of such contributions). SECTION 4. ALLOCATION. In the event that at any time there exists more than one Funding Contributor with respect to any Contribution (in any such case, the "APPLICABLE CONTRIBUTION"), then payment from other Contributors and from the Borrower pursuant to this Agreement shall be allocated among such Funding Contributors in proportion to the total amount of the Contribution made for or on account of the Borrower by each such Funding Contributor pursuant to the Applicable Contribution. In the event that at any time any Contributor pays an - 2 - amount under this Agreement in excess of the amount calculated pursuant to clause (A) of Section 3, that Contributor shall be deemed to be a Funding Contributor to the extent of such excess and shall be entitled to contribution from the other Contributors and from the Borrower in accordance with the provisions of this Agreement. SECTION 5. SUBROGATION. Any payments made hereunder by the Borrower shall be credited against amounts payable by the Borrower pursuant to any subrogation rights of the Contributors which received the payments under this Agreement. SECTION 6. PRESERVATION OF RIGHTS. This Agreement shall not limit any right which any Contributor may have against any other Person which is not a party hereto. SECTION 7. SUBSIDIARY PAYMENT. The amount of contribution payable under this Agreement by any Contributor shall be reduced by the amount of any contribution paid hereunder by a Subsidiary of such Contributor. SECTION 8. EQUITABLE ALLOCATION. If as a result of any reorganization, recapitalization, or other corporate change in the Company or any Affiliates or Subsidiaries thereof, or as a result of any amendment, waiver or modification of the terms and conditions governing the Credit Agreement or the Obligations, or for any other reason, the Contributions under this Agreement become inequitable, the parties hereto shall promptly modify and amend this Agreement to provide for an equitable allocation of the Contributions. Any of the foregoing modifications and amendments to this Agreement shall be in writing and signed by all parties hereto. SECTION 9. ASSET OF PARTY TO WHICH CONTRIBUTION IS OWING. The parties hereto acknowledge that the right to contribution hereunder shall constitute an asset in favor of the party to which such contribution is owing. SECTION 10. SUBORDINATION. No payments payable by a Contributor or by the Borrower pursuant to the terms hereof shall be paid until all amounts then due and payable by the Borrower to the Lender, pursuant to the terms of the Fundamental Documents, are paid in full in cash. Nothing contained in this Agreement shall affect the obligations of any party hereto to the Lender under the Credit Agreement or any other Fundamental Documents. SECTION 11. SUCCESSORS AND ASSIGNS; AMENDMENTS. This Agreement shall be binding upon each party hereto and its respective successors and assigns and shall inure to the benefit of the parties hereto and their respective successors and assigns, and in the event of any transfer or assignment of rights by a Contributor or by the Borrower, the rights and privileges herein conferred upon that Contributor shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and condition hereof. Except as specifically required under Section 8, this Agreement shall not be amended without the prior written consent of the Lender. - 3 - SECTION 12. TERMINATION. This Agreement, as it may be modified or amended from time to time, shall remain in effect, and shall not be terminated until the Credit Agreement has been discharged or otherwise satisfied in accordance with its terms. SECTION 13. CHOICE OF LAW. This Agreement, and any instrument or agreement required hereunder, shall be deemed to be made under, shall be governed by, and shall be construed and enforced in accordance with, the laws of the State of New York without regard to principles of conflict of laws. SECTION 14. COUNTERPARTS. This Agreement, and any modifications or amendments hereto may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original for all purposes, but all such counterparts shall constitute but one and the same instrument. SECTION 15. EFFECTIVENESS. This Agreement shall become effective on the date on which all of the parties hereto shall have executed this Agreement. The Company shall deliver counterparts hereof bearing the signatures of each of the parties hereto to the Lender. IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be duly executed as of the day and year first written above. DOVE ENTERTAINMENT, INC. By /s/ Neil Topham -------------------------------------------------- Name: Neil Topham Title: Vice President & Chief Financial Officer DOVE INTERNATIONAL, INC. By /s/ Neil Topham -------------------------------------------------- Name: Neil Topham Title: Vice President & Treasurer DOVE FOUR POINT, INC. By /s/ Neil Topham -------------------------------------------------- Name: Neil Topham Title: Vice President - 4 - EXHIBIT K-1 FORM OF GUARANTY AGREEMENT GUARANTY AGREEMENT, dated as of August 16, 1999 (as the same may be further supplemented, amended or otherwise modified, renewed or replaced from time to time, the "Guaranty Agreement") between (i) TERRENCE A. ELKES, an individual residing in Westchester County, New York (the "Individual Guarantor") and (ii) THE CHASE MANHATTAN BANK, a New York banking corporation (the "Lender"). Pursuant to the Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended and restated as of August 16, 1999 (as the same may be further amended, supplemented, or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among NewStar Media Inc. (formerly known as Dove Entertainment, Inc.), a California corporation (the "Borrower"), the Corporate Guarantors referred to therein and the Lender, the Lender has agreed to make Loans to the Borrower and issue Letters of Credit in an amount outstanding at any one time not in excess of $10,000,000. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. The Individual Guarantor, Kenneth F. Gorman, Ronald Lightstone, John T. Healy and Bruce Maggin (collectively, the "Guarantors") are the direct and indirect owners of Media Equities International, L.L.C. As an inducement to the Lender to make the Loans and issue Letters of Credit to the Borrower, each of the Guarantors has agreed to guaranty such obligations of the Borrower in an amount not to exceed the lesser of (x) $2,000,000 and (y) the amount by which the aggregate of outstanding principal of and any interest on all Loans and L/C Exposure exceeds the Borrowing Base (as defined in the Credit Agreement) on the date demand for payment hereunder is made (the "Maximum Guaranty Amount"). The Individual Guarantor individually has agreed to guaranty such obligations of the Borrower to the extent and in accordance with the terms hereof. -1- Therefore, for good and valuable consideration, the receipt of which is hereby acknowledged by the Individual Guarantor, the parties hereto agree as follows: 1. GUARANTY SECTION 1.1 GUARANTY. (a) The Individual Guarantor unconditionally and irrevocably guarantees the due and punctual payment by the Borrower in an amount not to exceed the product of 110% of the Individual Guarantor's ownership interest in MEI as of the date hereof (as set forth on Schedule 1 hereto) multiplied by the Maximum Guaranty Amount (the "Guaranteed Obligations"), as and when such amounts shall become due and payable whether by scheduled maturity, acceleration or otherwise and any extensions or renewals thereof, reimbursement obligations in respect of Letters of Credit, related costs and attorney's fees, and all other monetary obligations of the Borrower to the Lender under the Credit Agreement. (b) In furtherance of the provisions of this Guaranty Agreement, and not in limitation of any other right which the Lender may have at law or in equity against the Borrower or any other guarantor of the Guaranteed Obligations, upon failure of the Borrower to pay any of the Guaranteed Obligations when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, the Individual Guarantor hereby promises to and will, upon receipt of written demand by the Lender, forthwith pay or cause to be paid to the Lender in cash an amount equal to the unpaid balance of the Guaranteed Obligations then due and payable. (c) The Individual Guarantor, to the extent permitted by applicable law, waives presentation to, demand for payment from and protest to the Borrower and also waives notice of protest for nonpayment, notice of acceleration and notice of intent to accelerate. The obligations of the Individual Guarantor hereunder shall not be affected by (i) the failure of the Lender to assert any claim or demand or to enforce any right or remedy against the Borrower or any other guarantor of the Guaranteed Obligations under the provisions of the Credit Agreement or any other agreement or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of the Credit Agreement, the Note or any other agreement; (iv) the release, exchange, waiver or foreclosure of any security held by the Lender for the Guaranteed Obligations or any of them or (v) the failure of the Lender to exercise any right or remedy against any other guarantor of the Guaranteed Obligations. (d) The Individual Guarantor further agrees that this guaranty is a continuing guaranty and constitutes a guaranty of performance and of payment when due and not just of collection, and waives, to the extent permitted by applicable law, any right to require that any resort be had by the Lender to any security held for payment of the Guaranteed Obligations or to any balance of any deposit, account or credit on the books of the Lender in favor of the Borrower or any other guarantor or to any other person. -2- (e) The Individual Guarantor hereby expressly assumes all responsibilities to remain informed of the financial condition of the Borrower and each other guarantor of the Guaranteed Obligations and any circumstances affecting the Collateral or the ability of the Borrower to perform under the Credit Agreement. (f) This guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed Obligations, the Note or any other instrument evidencing any of the Guaranteed Obligations, or by the existence, validity, enforceability, perfection or extent of any collateral therefor or by any other circumstance relating to the Guaranteed Obligations which might otherwise constitute a defense to the guaranty under this Guaranty Agreement. The Lender makes no representation or warranty in respect to any such circumstances nor has any duty or responsibility whatsoever to the Individual Guarantor in respect to the management and maintenance of the Guaranteed Obligations or the Collateral. (g) The Individual Guarantor hereby acknowledges that, subject to $2,000,000 limit set forth in the definition of "Maximum Guaranty Amount" above, the Maximum Guaranty Amount may increase or decrease as the amount of the Borrowing Base (as defined in the Credit Agreement) decreases or increases in accordance with the terms of the Credit Agreement. In addition, the Individual Guarantor acknowledges and agrees that neither he nor MEI shall have any approval rights over extensions of credit by the Lender in excess of the Borrowing Base, and further acknowledges that such extensions of credit shall be included within the scope of this Guaranty. SECTION 1.2 NO IMPAIRMENT OF GUARANTY. The obligations of the Individual Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense (other than payment of the Guaranteed Obligations) or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Individual Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lender to assert any claim or demand or to enforce any remedy hereunder or under the Credit Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure, or delay, willful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or thing, or omission or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of the Individual Guarantor or would otherwise operate as a discharge of the Individual Guarantor as a matter of law, unless and until the Guaranteed Obligations are paid in full. SECTION 1.3 CONTINUATION AND REINSTATEMENT, ETC. The Individual Guarantor further agrees that his guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or other -3- reorganization of the Borrower or any other guarantor of the Guaranteed Obligations or otherwise. SECTION 1.4 SUBROGATION. Subject to the prior final and indefeasible payment in full of all Obligations and to the extent of payments received by the Lender from the Individual Guarantor on the Guaranteed Obligations, the Individual Guarantor (and the other Guarantors) shall be subrogated to the rights of the Lender to receive payments or distributions of cash, property or securities of the Borrower applicable to the Obligations; provided, that all such rights of subrogation shall be subordinated and junior in right of payment to the prior payment in full of the Obligations to the Lender. SECTION 1.5 APPLICATION OF GUARANTEED AMOUNTS. In the event the Lender receives an amount in excess of the Maximum Guaranty Amount then due and payable from the Individual Guarantor and the other Guarantors pursuant to the terms of this Guaranty Agreement and the respective guaranty agreements of other Guarantors, the Lender shall remit such excess to MEI for disbursement to the Guarantors in such amounts as the Guarantors shall determine. SECTION 1.6 PRIOR GUARANTY. This Guaranty Agreement amends and restates in its entirety the Guaranty Agreement dated as of November 4, 1997 previously executed by the Individual Guarantor. 2. REPRESENTATIONS AND WARRANTIES The Individual Guarantor makes the following representations and warranties to the Lender, all of which shall survive the execution and delivery of the Note and this Guaranty Agreement and the making of the loans evidenced and to be evidenced by the Note: (i) The execution, delivery and performance of this Guaranty Agreement (a) will not violate, or involve the Lender in a violation of, any provision of applicable law or any order of any governmental authority or any judgment of any court applicable to the Individual Guarantor or his property, (b) will not violate any indenture, any agreement for borrowed money, any bond, note or other similar instrument or any other material agreement to which the Individual Guarantor is a party or by which the Individual Guarantor or any of his property is bound, (c) will not be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, bond, note, instrument or other material agreement to which the Individual Guarantor is a party and (d) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or assets of the Individual Guarantor other than pursuant to this Guaranty Agreement. (ii) This Guaranty Agreement constitutes the legal, valid and binding obligation of the Individual Guarantor, enforceable in accordance with its terms, subject (a) as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency and other -4- laws affecting creditors' rights generally and to moratorium laws from time to time in effect, (b) to general equitable principles which may limit the right to obtain the remedy of specific performance and (c) to the qualification that the enforceability of indemnification provisions may be limited by applicable federal and state securities laws, rules and regulations. (iii) The Individual Guarantor will realize a direct economic benefit as a result of the Loans being made to the Borrower pursuant to the Credit Agreement. 3. MISCELLANEOUS SECTION 3.1 NOTICES. Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or if by telecopier, delivered by such equipment) addressed (i) if to the Lender, to it at 270 Park Avenue, 37th floor, New York, New York 10017, Attn: John J. Huber, III, Facsimile No.: (212) 270-4584, with a copy to Chase Securities Inc., 1800 Century Park East, Suite 400, Los Angeles, California 90067, Attn: Kenneth R. Wilson, Facsimile No.: (310) 788-5628, (ii) if to the Individual Guarantor, to him at c/o Apollo Partners, LLC, 500 Fifth Avenue, Suite 3520, New York, New York, 10110, or such other address as such party may from time to time designate by giving written notice to the other party hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Guaranty Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid return receipt requested, if by mail, or when receipt is acknowledged, if by telecopier, in each case addressed to such party as provided in this Section 3.1 or in accordance with the latest unrevoked written direction from such party. SECTION 3.2 SUCCESSORS. Each reference herein to a party hereto shall be deemed to include its respective successors, assigns, heirs, executors, administrators and legal representatives including but not by way of limitation, any party in whose favor the provisions of the Note shall inure, all of whom shall be bound by the provisions of this Guaranty Agreement. SECTION 3.3 SERVICE OF PROCESS. THE INDIVIDUAL GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK IN NEW YORK COUNTY AND TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT, OR THE SUBJECT MATTER HEREOF BROUGHT BY THE LENDER OR ITS SUCCESSORS OR ASSIGNS. THE INDIVIDUAL GUARANTOR TO THE EXTENT PERMITTED BY APPLICABLE LAW (A) HEREBY WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT HE IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE -5- ABOVE-NAMED COURTS, THAT HIS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, (B) HEREBY WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION, SUIT OR PROCEEDING INSTITUTED BY THE LENDER IN STATE COURT TO FEDERAL COURT, AND (C) HEREBY AGREES NOT TO ASSERT ANY OFFSETS OR COUNTERCLAIMS (OTHER THAN COMPULSORY COUNTERCLAIMS) IN ANY SUCH ACTION, SUIT OR PROCEEDING. THE INDIVIDUAL GUARANTOR HEREBY CONSENTS TO SERVICE OF PROCESS BY CERTIFIED MAIL AT THE ADDRESS TO WHICH NOTICES ARE TO BE GIVEN, AND AGREES THAT THE SUBMISSION TO JURISDICTION AND THE CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE LENDER. FINAL JUDGMENT AGAINST THE INDIVIDUAL GUARANTOR IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER JURISDICTIONS (X) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ANY INDEBTEDNESS OR LIABILITY OF THE INDIVIDUAL GUARANTOR THEREIN DESCRIBED OR (Y) IN ANY OTHER MANNER PROVIDED BY, OR PURSUANT TO, THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED, HOWEVER, THAT THE LENDER MAY AT ITS OPTION BRING SUIT OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE INDIVIDUAL GUARANTOR OR ANY OF HIS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE INDIVIDUAL GUARANTOR OR SUCH ASSETS MAY BE FOUND. SECTION 3.4 GOVERNING LAW. THIS GUARANTY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 3.5 NO WAIVER, ETC. Neither a failure nor a delay on the part of the Lender in exercising any right, power or privilege under this Guaranty Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Lender herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which it may have under this Guaranty Agreement, at law, in equity, by statute, or otherwise. SECTION 3.6 MODIFICATION, ETC. No modification, amendment or waiver of any provision of this Guaranty Agreement, nor the consent to any departure by the Individual Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific -6- instance and for the purpose for which given. No notice to or demand on the Individual Guarantor in any case shall entitle the Individual Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 3.7 SEVERABILITY. If any one or more of the provisions contained in this Guaranty Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall in no way be affected or impaired thereby. SECTION 3.8 HEADINGS. Section headings used herein are for convenience of reference only and are not to affect the construction of, or be taken into consideration in interpreting, this Guaranty Agreement. SECTION 3.9 WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, THE INDIVIDUAL GUARANTOR HEREBY WAIVES, AND COVENANTS THAT HE WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. THE INDIVIDUAL GUARANTOR ACKNOWLEDGES THAT HE HAS BEEN INFORMED BY THE LENDER THAT THE PROVISIONS OF THIS SECTION 3.9 CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDER HAS RELIED, IS RELYING AND WILL RELY IN MAKING THE LOANS EVIDENCED BY THE NOTE AND ENTERING INTO THIS GUARANTY AGREEMENT. THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 3.9 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE INDIVIDUAL GUARANTOR TO THE WAIVER OF HIS RIGHTS TO TRIAL BY JURY. IN WITNESS WHEREOF, the Individual Guarantor and the Lender have caused this Guaranty Agreement to be executed by its duly authorized officer, all as of the date first written above. /s/ Terrence A. Elkes ------------------------- TERRENCE A. ELKES -7- Executed by the Lender THE CHASE MANHATTAN BANK in New York, New York By: /s/ Edmond DeForest --------------------------------- Name: Edmond DeForest Title: Vice President -8- Schedule 1 Equity Interests in Media Equities International, L.L.C. Guarantor Equity Interest - --------- --------------- Terrence A. Elkes 33.57% (through Elkes' 50% interest in Apollo Partners, LLC, which holds 67.14% of MEI) -9- EXHIBIT K-2 FORM OF GUARANTY AGREEMENT GUARANTY AGREEMENT, dated as of August 16, 1999 (as the same may be further supplemented, amended or otherwise modified, renewed or replaced from time to time, the "Guaranty Agreement") between (i) KENNETH F. GORMAN, an individual residing in Nassau County, New York (the "Individual Guarantor") and (ii) THE CHASE MANHATTAN BANK, a New York banking corporation (the "Lender"). Pursuant to the Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended and restated as of August 16, 1999 (as the same may be further amended, supplemented, or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among NewStar Media Inc. (formerly known as Dove Entertainment, Inc.), a California corporation (the "Borrower"), the Corporate Guarantors referred to therein and the Lender, the Lender has agreed to make Loans to the Borrower and issue Letters of Credit in an amount outstanding at any one time not in excess of $10,000,000. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. The Individual Guarantor, Terrence A. Elkes, Ronald Lightstone, John T. Healy and Bruce Maggin (collectively, the "Guarantors") are the direct and indirect owners of Media Equities International, L.L.C. As an inducement to the Lender to make the Loans and issue Letters of Credit to the Borrower, each of the Guarantors has agreed to guaranty such obligations of the Borrower in an amount not to exceed the lesser of (x) $2,000,000 and (y) the amount by which the aggregate of outstanding principal of and any interest on all Loans and L/C Exposure exceeds the Borrowing Base (as defined in the Credit Agreement) on the date demand for payment hereunder is made (the "Maximum Guaranty Amount"). The Individual Guarantor individually has agreed to guaranty such obligations of the Borrower to the extent and in accordance with the terms hereof. -1- Therefore, for good and valuable consideration, the receipt of which is hereby acknowledged by the Individual Guarantor, the parties hereto agree as follows: 1. GUARANTY SECTION 1.1 GUARANTY. (a) The Individual Guarantor unconditionally and irrevocably guarantees the due and punctual payment by the Borrower in an amount not to exceed the product of 110% of the Individual Guarantor's ownership interest in MEI as of the date hereof (as set forth on Schedule 1 hereto) multiplied by the Maximum Guaranty Amount (the "Guaranteed Obligations"), as and when such amounts shall become due and payable whether by scheduled maturity, acceleration or otherwise and any extensions or renewals thereof, reimbursement obligations in respect of Letters of Credit, related costs and attorney's fees, and all other monetary obligations of the Borrower to the Lender under the Credit Agreement. (b) In furtherance of the provisions of this Guaranty Agreement, and not in limitation of any other right which the Lender may have at law or in equity against the Borrower or any other guarantor of the Guaranteed Obligations, upon failure of the Borrower to pay any of the Guaranteed Obligations when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, the Individual Guarantor hereby promises to and will, upon receipt of written demand by the Lender, forthwith pay or cause to be paid to the Lender in cash an amount equal to the unpaid balance of the Guaranteed Obligations then due and payable. (c) The Individual Guarantor, to the extent permitted by applicable law, waives presentation to, demand for payment from and protest to the Borrower and also waives notice of protest for nonpayment, notice of acceleration and notice of intent to accelerate. The obligations of the Individual Guarantor hereunder shall not be affected by (i) the failure of the Lender to assert any claim or demand or to enforce any right or remedy against the Borrower or any other guarantor of the Guaranteed Obligations under the provisions of the Credit Agreement or any other agreement or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of the Credit Agreement, the Note or any other agreement; (iv) the release, exchange, waiver or foreclosure of any security held by the Lender for the Guaranteed Obligations or any of them or (v) the failure of the Lender to exercise any right or remedy against any other guarantor of the Guaranteed Obligations. (d) The Individual Guarantor further agrees that this guaranty is a continuing guaranty and constitutes a guaranty of performance and of payment when due and not just of collection, and waives, to the extent permitted by applicable law, any right to require that any resort be had by the Lender to any security held for payment of the Guaranteed Obligations or to any balance of any deposit, account or credit on the books of the Lender in favor of the Borrower or any other guarantor or to any other person. -2- (e) The Individual Guarantor hereby expressly assumes all responsibilities to remain informed of the financial condition of the Borrower and each other guarantor of the Guaranteed Obligations and any circumstances affecting the Collateral or the ability of the Borrower to perform under the Credit Agreement. (f) This guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed Obligations, the Note or any other instrument evidencing any of the Guaranteed Obligations, or by the existence, validity, enforceability, perfection or extent of any collateral therefor or by any other circumstance relating to the Guaranteed Obligations which might otherwise constitute a defense to the guaranty under this Guaranty Agreement. The Lender makes no representation or warranty in respect to any such circumstances nor has any duty or responsibility whatsoever to the Individual Guarantor in respect to the management and maintenance of the Guaranteed Obligations or the Collateral. (g) The Individual Guarantor hereby acknowledges that, subject to $2,000,000 limit set forth in the definition of "Maximum Guaranty Amount" above, the Maximum Guaranty Amount may increase or decrease as the amount of the Borrowing Base (as defined in the Credit Agreement) decreases or increases in accordance with the terms of the Credit Agreement. In addition, the Individual Guarantor acknowledges and agrees that neither he nor MEI shall have any approval rights over extensions of credit by the Lender in excess of the Borrowing Base, and further acknowledges that such extensions of credit shall be included within the scope of this Guaranty. SECTION 1.2 NO IMPAIRMENT OF GUARANTY. The obligations of the Individual Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense (other than payment of the Guaranteed Obligations) or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Individual Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lender to assert any claim or demand or to enforce any remedy hereunder or under the Credit Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure, or delay, willful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or thing, or omission or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of the Individual Guarantor or would otherwise operate as a discharge of the Individual Guarantor as a matter of law, unless and until the Guaranteed Obligations are paid in full. SECTION 1.3 CONTINUATION AND REINSTATEMENT, ETC. The Individual Guarantor further agrees that his guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or other -3- reorganization of the Borrower or any other guarantor of the Guaranteed Obligations or otherwise. SECTION 1.4 SUBROGATION. Subject to the prior final and indefeasible payment in full of all Obligations and to the extent of payments received by the Lender from the Individual Guarantor on the Guaranteed Obligations, the Individual Guarantor (and the other Guarantors) shall be subrogated to the rights of the Lender to receive payments or distributions of cash, property or securities of the Borrower applicable to the Obligations; provided, that all such rights of subrogation shall be subordinated and junior in right of payment to the prior payment in full of the Obligations to the Lender. SECTION 1.5 APPLICATION OF GUARANTEED AMOUNTS. In the event the Lender receives an amount in excess of the Maximum Guaranty Amount then due and payable from the Individual Guarantor and the other Guarantors pursuant to the terms of this Guaranty Agreement and the respective guaranty agreements of other Guarantors, the Lender shall remit such excess to MEI for disbursement to the Guarantors in such amounts as the Guarantors shall determine. SECTION 1.6 PRIOR GUARANTY. This Guaranty Agreement amends and restates in its entirety the Guaranty Agreement dated as of November 4, 1997 previously executed by the Individual Guarantor. 2. REPRESENTATIONS AND WARRANTIES The Individual Guarantor makes the following representations and warranties to the Lender, all of which shall survive the execution and delivery of the Note and this Guaranty Agreement and the making of the loans evidenced and to be evidenced by the Note: (i) The execution, delivery and performance of this Guaranty Agreement (a) will not violate, or involve the Lender in a violation of, any provision of applicable law or any order of any governmental authority or any judgment of any court applicable to the Individual Guarantor or his property, (b) will not violate any indenture, any agreement for borrowed money, any bond, note or other similar instrument or any other material agreement to which the Individual Guarantor is a party or by which the Individual Guarantor or any of his property is bound, (c) will not be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, bond, note, instrument or other material agreement to which the Individual Guarantor is a party and (d) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or assets of the Individual Guarantor other than pursuant to this Guaranty Agreement. (ii) This Guaranty Agreement constitutes the legal, valid and binding obligation of the Individual Guarantor, enforceable in accordance with its terms, subject (a) as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency and other -4- laws affecting creditors' rights generally and to moratorium laws from time to time in effect, (b) to general equitable principles which may limit the right to obtain the remedy of specific performance and (c) to the qualification that the enforceability of indemnification provisions may be limited by applicable federal and state securities laws, rules and regulations. (iii) The Individual Guarantor will realize a direct economic benefit as a result of the Loans being made to the Borrower pursuant to the Credit Agreement. 3. MISCELLANEOUS SECTION 3.1 NOTICES. Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or if by telecopier, delivered by such equipment) addressed (i) if to the Lender, to it at 270 Park Avenue, 37th floor, New York, New York 10017, Attn: John J. Huber, III, Facsimile No.: (212) 270-4584, with a copy to Chase Securities Inc., 1800 Century Park East, Suite 400, Los Angeles, California 90067, Attn: Kenneth R. Wilson, Facsimile No.: (310) 788-5628, (ii) if to the Individual Guarantor, to him at c/o Apollo Partners, LLC, 500 Fifth Avenue, Suite 3520, New York, New York, 10110, or such other address as such party may from time to time designate by giving written notice to the other party hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Guaranty Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid return receipt requested, if by mail, or when receipt is acknowledged, if by telecopier, in each case addressed to such party as provided in this Section 3.1 or in accordance with the latest unrevoked written direction from such party. SECTION 3.2 SUCCESSORS. Each reference herein to a party hereto shall be deemed to include its respective successors, assigns, heirs, executors, administrators and legal representatives including but not by way of limitation, any party in whose favor the provisions of the Note shall inure, all of whom shall be bound by the provisions of this Guaranty Agreement. SECTION 3.3 SERVICE OF PROCESS. THE INDIVIDUAL GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK IN NEW YORK COUNTY AND TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT, OR THE SUBJECT MATTER HEREOF BROUGHT BY THE LENDER OR ITS SUCCESSORS OR ASSIGNS. THE INDIVIDUAL GUARANTOR TO THE EXTENT PERMITTED BY APPLICABLE LAW (A) HEREBY WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT HE IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE -5- ABOVE-NAMED COURTS, THAT HIS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, (B) HEREBY WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION, SUIT OR PROCEEDING INSTITUTED BY THE LENDER IN STATE COURT TO FEDERAL COURT, AND (C) HEREBY AGREES NOT TO ASSERT ANY OFFSETS OR COUNTERCLAIMS (OTHER THAN COMPULSORY COUNTERCLAIMS) IN ANY SUCH ACTION, SUIT OR PROCEEDING. THE INDIVIDUAL GUARANTOR HEREBY CONSENTS TO SERVICE OF PROCESS BY CERTIFIED MAIL AT THE ADDRESS TO WHICH NOTICES ARE TO BE GIVEN, AND AGREES THAT THE SUBMISSION TO JURISDICTION AND THE CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE LENDER. FINAL JUDGMENT AGAINST THE INDIVIDUAL GUARANTOR IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER JURISDICTIONS (X) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ANY INDEBTEDNESS OR LIABILITY OF THE INDIVIDUAL GUARANTOR THEREIN DESCRIBED OR (Y) IN ANY OTHER MANNER PROVIDED BY, OR PURSUANT TO, THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED, HOWEVER, THAT THE LENDER MAY AT ITS OPTION BRING SUIT OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE INDIVIDUAL GUARANTOR OR ANY OF HIS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE INDIVIDUAL GUARANTOR OR SUCH ASSETS MAY BE FOUND. SECTION 3.4 GOVERNING LAW. THIS GUARANTY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 3.5 NO WAIVER, ETC. Neither a failure nor a delay on the part of the Lender in exercising any right, power or privilege under this Guaranty Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Lender herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which it may have under this Guaranty Agreement, at law, in equity, by statute, or otherwise. SECTION 3.6 MODIFICATION, ETC. No modification, amendment or waiver of any provision of this Guaranty Agreement, nor the consent to any departure by the Individual Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific -6- instance and for the purpose for which given. No notice to or demand on the Individual Guarantor in any case shall entitle the Individual Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 3.7 SEVERABILITY. If any one or more of the provisions contained in this Guaranty Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall in no way be affected or impaired thereby. SECTION 3.8 HEADINGS. Section headings used herein are for convenience of reference only and are not to affect the construction of, or be taken into consideration in interpreting, this Guaranty Agreement. SECTION 3.9 WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, THE INDIVIDUAL GUARANTOR HEREBY WAIVES, AND COVENANTS THAT HE WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. THE INDIVIDUAL GUARANTOR ACKNOWLEDGES THAT HE HAS BEEN INFORMED BY THE LENDER THAT THE PROVISIONS OF THIS SECTION 3.9 CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDER HAS RELIED, IS RELYING AND WILL RELY IN MAKING THE LOANS EVIDENCED BY THE NOTE AND ENTERING INTO THIS GUARANTY AGREEMENT. THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 3.9 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE INDIVIDUAL GUARANTOR TO THE WAIVER OF HIS RIGHTS TO TRIAL BY JURY. IN WITNESS WHEREOF, the Individual Guarantor and the Lender have caused this Guaranty Agreement to be executed by its duly authorized officer, all as of the date first written above. /s/ Kenneth F. Gorman ------------------------- KENNETH F. GORMAN -7- Executed by the Lender THE CHASE MANHATTAN BANK in New York, New York By: /s/ Edmond DeForest ---------------------------- Name: Edmond DeForest Title: Vice President -8- Schedule 1 Equity Interests in Media Equities International, L.L.C. Guarantor Equity Interest - --------- --------------- Kenneth F. Gorman 33.57% (through Gorman's 50% interest in Apollo Partners, LLC, which holds 67.14% of MEI) -9- EXHIBIT K-3 FORM OF GUARANTY AGREEMENT GUARANTY AGREEMENT, dated as of August 16, 1999 (as the same may be further supplemented, amended or otherwise modified, renewed or replaced from time to time, the "Guaranty Agreement") between (i) BRUCE MAGGIN, an individual residing in Westchester County, New York (the "Individual Guarantor") and (ii) THE CHASE MANHATTAN BANK, a New York banking corporation (the "Lender"). Pursuant to the Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended and restated as of August 16, 1999 (as the same may be further amended, supplemented, or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among NewStar Media Inc. (formerly known as Dove Entertainment, Inc.), a California corporation (the "Borrower"), the Corporate Guarantors referred to therein and the Lender, the Lender has agreed to make Loans to the Borrower and issue Letters of Credit in an amount outstanding at any one time not in excess of $10,000,000. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. The Individual Guarantor, Terrence A. Elkes, Kenneth F. Gorman, Ronald Lightstone and John T. Healy (collectively, the "Guarantors") are the direct and indirect owners of Media Equities International, L.L.C. As an inducement to the Lender to make the Loans and issue Letters of Credit to the Borrower, each of the Guarantors has agreed to guaranty such obligations of the Borrower in an amount not to exceed the lesser of (x) $2,000,000 and (y) the amount by which the aggregate of outstanding principal of and any interest on all Loans and L/C Exposure exceeds the Borrowing Base (as defined in the Credit Agreement) on the date demand for payment hereunder is made (the "Maximum Guaranty Amount"). The Individual Guarantor individually has agreed to guaranty such obligations of the Borrower to the extent and in accordance with the terms hereof. -1- Therefore, for good and valuable consideration, the receipt of which is hereby acknowledged by the Individual Guarantor, the parties hereto agree as follows: 1. GUARANTY SECTION 1.1 GUARANTY. (a) The Individual Guarantor unconditionally and irrevocably guarantees the due and punctual payment by the Borrower in an amount not to exceed the product of 110% of the Individual Guarantor's ownership interest in MEI as of the date hereof (as set forth on Schedule 1 hereto) multiplied by the Maximum Guaranty Amount (the "Guaranteed Obligations"), as and when such amounts shall become due and payable whether by scheduled maturity, acceleration or otherwise and any extensions or renewals thereof, reimbursement obligations in respect of Letters of Credit, related costs and attorney's fees, and all other monetary obligations of the Borrower to the Lender under the Credit Agreement. (b) In furtherance of the provisions of this Guaranty Agreement, and not in limitation of any other right which the Lender may have at law or in equity against the Borrower or any other guarantor of the Guaranteed Obligations, upon failure of the Borrower to pay any of the Guaranteed Obligations when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, the Individual Guarantor hereby promises to and will, upon receipt of written demand by the Lender, forthwith pay or cause to be paid to the Lender in cash an amount equal to the unpaid balance of the Guaranteed Obligations then due and payable. (c) The Individual Guarantor, to the extent permitted by applicable law, waives presentation to, demand for payment from and protest to the Borrower and also waives notice of protest for nonpayment, notice of acceleration and notice of intent to accelerate. The obligations of the Individual Guarantor hereunder shall not be affected by (i) the failure of the Lender to assert any claim or demand or to enforce any right or remedy against the Borrower or any other guarantor of the Guaranteed Obligations under the provisions of the Credit Agreement or any other agreement or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of the Credit Agreement, the Note or any other agreement; (iv) the release, exchange, waiver or foreclosure of any security held by the Lender for the Guaranteed Obligations or any of them or (v) the failure of the Lender to exercise any right or remedy against any other guarantor of the Guaranteed Obligations. (d) The Individual Guarantor further agrees that this guaranty is a continuing guaranty and constitutes a guaranty of performance and of payment when due and not just of collection, and waives, to the extent permitted by applicable law, any right to require that any resort be had by the Lender to any security held for payment of the Guaranteed Obligations or to any balance of any deposit, account or credit on the books of the Lender in favor of the Borrower or any other guarantor or to any other person. -2- (e) The Individual Guarantor hereby expressly assumes all responsibilities to remain informed of the financial condition of the Borrower and each other guarantor of the Guaranteed Obligations and any circumstances affecting the Collateral or the ability of the Borrower to perform under the Credit Agreement. (f) This guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed Obligations, the Note or any other instrument evidencing any of the Guaranteed Obligations, or by the existence, validity, enforceability, perfection or extent of any collateral therefor or by any other circumstance relating to the Guaranteed Obligations which might otherwise constitute a defense to the guaranty under this Guaranty Agreement. The Lender makes no representation or warranty in respect to any such circumstances nor has any duty or responsibility whatsoever to the Individual Guarantor in respect to the management and maintenance of the Guaranteed Obligations or the Collateral. (g) The Individual Guarantor hereby acknowledges that, subject to $2,000,000 limit set forth in the definition of "Maximum Guaranty Amount" above, the Maximum Guaranty Amount may increase or decrease as the amount of the Borrowing Base (as defined in the Credit Agreement) decreases or increases in accordance with the terms of the Credit Agreement. In addition, the Individual Guarantor acknowledges and agrees that neither he nor MEI shall have any approval rights over extensions of credit by the Lender in excess of the Borrowing Base, and further acknowledges that such extensions of credit shall be included within the scope of this Guaranty. SECTION 1.2 NO IMPAIRMENT OF GUARANTY. The obligations of the Individual Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense (other than payment of the Guaranteed Obligations) or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Individual Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lender to assert any claim or demand or to enforce any remedy hereunder or under the Credit Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure, or delay, willful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or thing, or omission or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of the Individual Guarantor or would otherwise operate as a discharge of the Individual Guarantor as a matter of law, unless and until the Guaranteed Obligations are paid in full. SECTION 1.3 CONTINUATION AND REINSTATEMENT, ETC. The Individual Guarantor further agrees that his guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or other -3- reorganization of the Borrower or any other guarantor of the Guaranteed Obligations or otherwise. SECTION 1.4 SUBROGATION. Subject to the prior final and indefeasible payment in full of all Obligations and to the extent of payments received by the Lender from the Individual Guarantor on the Guaranteed Obligations, the Individual Guarantor (and the other Guarantors) shall be subrogated to the rights of the Lender to receive payments or distributions of cash, property or securities of the Borrower applicable to the Obligations; provided, that all such rights of subrogation shall be subordinated and junior in right of payment to the prior payment in full of the Obligations to the Lender. SECTION 1.5 APPLICATION OF GUARANTEED AMOUNTS. In the event the Lender receives an amount in excess of the Maximum Guaranty Amount then due and payable from the Individual Guarantor and the other Guarantors pursuant to the terms of this Guaranty Agreement and the respective guaranty agreements of other Guarantors, the Lender shall remit such excess to MEI for disbursement to the Guarantors in such amounts as the Guarantors shall determine. SECTION 1.6 PRIOR GUARANTY. This Guaranty Agreement amends and restates in its entirety the Guaranty Agreement dated as of November 4, 1997 previously executed by the Individual Guarantor. The Individual Guarantor hereby rescinds the letter dated January 28, 1999 from Bruce Maggin (of The H.A.M. Group, LLC) to Ken Wilson (of Chase Securities Inc.) relating to the guaranties of the Individual Guarantor and John T. Healy, and acknowledges and agrees that the terms of such letter shall have no force or effect. 2. REPRESENTATIONS AND WARRANTIES The Individual Guarantor makes the following representations and warranties to the Lender, all of which shall survive the execution and delivery of the Note and this Guaranty Agreement and the making of the loans evidenced and to be evidenced by the Note: (i) The execution, delivery and performance of this Guaranty Agreement (a) will not violate, or involve the Lender in a violation of, any provision of applicable law or any order of any governmental authority or any judgment of any court applicable to the Individual Guarantor or his property, (b) will not violate any indenture, any agreement for borrowed money, any bond, note or other similar instrument or any other material agreement to which the Individual Guarantor is a party or by which the Individual Guarantor or any of his property is bound, (c) will not be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, bond, note, instrument or other material agreement to which the Individual Guarantor is a party and (d) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or assets of the Individual Guarantor other than pursuant to this Guaranty Agreement. -4- (ii) This Guaranty Agreement constitutes the legal, valid and binding obligation of the Individual Guarantor, enforceable in accordance with its terms, subject (a) as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency and other laws affecting creditors' rights generally and to moratorium laws from time to time in effect, (b) to general equitable principles which may limit the right to obtain the remedy of specific performance and (c) to the qualification that the enforceability of indemnification provisions may be limited by applicable federal and state securities laws, rules and regulations. (iii) The Individual Guarantor will realize a direct economic benefit as a result of the Loans being made to the Borrower pursuant to the Credit Agreement. 3. MISCELLANEOUS SECTION 3.1 NOTICES. Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or if by telecopier, delivered by such equipment) addressed (i) if to the Lender, to it at 270 Park Avenue, 37th floor, New York, New York 10017, Attn: John J. Huber, III, Facsimile No.: (212) 270-4584, with a copy to Chase Securities Inc., 1800 Century Park East, Suite 400, Los Angeles, California 90067, Attn: Kenneth R. Wilson, Facsimile No.: (310) 788-5628, (ii) if to the Individual Guarantor, to him at c/o H.A.M. Media Group LLC, 305 Madison Avenue, Suite 301, New York, New York, 10017, or such other address as such party may from time to time designate by giving written notice to the other party hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Guaranty Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid return receipt requested, if by mail, or when receipt is acknowledged, if by telecopier, in each case addressed to such party as provided in this Section 3.1 or in accordance with the latest unrevoked written direction from such party. SECTION 3.2 SUCCESSORS. Each reference herein to a party hereto shall be deemed to include its respective successors, assigns, heirs, executors, administrators and legal representatives including but not by way of limitation, any party in whose favor the provisions of the Note shall inure, all of whom shall be bound by the provisions of this Guaranty Agreement. SECTION 3.3 SERVICE OF PROCESS. THE INDIVIDUAL GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK IN NEW YORK COUNTY AND TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT, OR THE SUBJECT MATTER HEREOF BROUGHT BY THE LENDER OR ITS SUCCESSORS OR ASSIGNS. THE INDIVIDUAL GUARANTOR TO THE EXTENT PERMITTED BY APPLICABLE LAW (A) HEREBY -5- WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT HE IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT HIS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, (B) HEREBY WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION, SUIT OR PROCEEDING INSTITUTED BY THE LENDER IN STATE COURT TO FEDERAL COURT, AND (C) HEREBY AGREES NOT TO ASSERT ANY OFFSETS OR COUNTERCLAIMS (OTHER THAN COMPULSORY COUNTERCLAIMS) IN ANY SUCH ACTION, SUIT OR PROCEEDING. THE INDIVIDUAL GUARANTOR HEREBY CONSENTS TO SERVICE OF PROCESS BY CERTIFIED MAIL AT THE ADDRESS TO WHICH NOTICES ARE TO BE GIVEN, AND AGREES THAT THE SUBMISSION TO JURISDICTION AND THE CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE LENDER. FINAL JUDGMENT AGAINST THE INDIVIDUAL GUARANTOR IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER JURISDICTIONS (X) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ANY INDEBTEDNESS OR LIABILITY OF THE INDIVIDUAL GUARANTOR THEREIN DESCRIBED OR (Y) IN ANY OTHER MANNER PROVIDED BY, OR PURSUANT TO, THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED, HOWEVER, THAT THE LENDER MAY AT ITS OPTION BRING SUIT OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE INDIVIDUAL GUARANTOR OR ANY OF HIS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE INDIVIDUAL GUARANTOR OR SUCH ASSETS MAY BE FOUND. SECTION 3.4 GOVERNING LAW. THIS GUARANTY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 3.5 NO WAIVER, ETC. Neither a failure nor a delay on the part of the Lender in exercising any right, power or privilege under this Guaranty Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Lender herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which it may have under this Guaranty Agreement, at law, in equity, by statute, or otherwise. -6- SECTION 3.6 MODIFICATION, ETC. No modification, amendment or waiver of any provision of this Guaranty Agreement, nor the consent to any departure by the Individual Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Individual Guarantor in any case shall entitle the Individual Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 3.7 SEVERABILITY. If any one or more of the provisions contained in this Guaranty Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall in no way be affected or impaired thereby. SECTION 3.8 HEADINGS. Section headings used herein are for convenience of reference only and are not to affect the construction of, or be taken into consideration in interpreting, this Guaranty Agreement. SECTION 3.9 WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, THE INDIVIDUAL GUARANTOR HEREBY WAIVES, AND COVENANTS THAT HE WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. THE INDIVIDUAL GUARANTOR ACKNOWLEDGES THAT HE HAS BEEN INFORMED BY THE LENDER THAT THE PROVISIONS OF THIS SECTION 3.9 CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDER HAS RELIED, IS RELYING AND WILL RELY IN MAKING THE LOANS EVIDENCED BY THE NOTE AND ENTERING INTO THIS GUARANTY AGREEMENT. THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 3.9 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE INDIVIDUAL GUARANTOR TO THE WAIVER OF HIS RIGHTS TO TRIAL BY JURY. -7- IN WITNESS WHEREOF, the Individual Guarantor and the Lender have caused this Guaranty Agreement to be executed by its duly authorized officer, all as of the date first written above. /s/ Bruce Maggin ----------------------------- BRUCE MAGGIN Executed by the Lender THE CHASE MANHATTAN BANK in New York, New York By: /s/ Edmond DeForest -------------------------- Name: Edmond DeForest Title: Vice President -8- Schedule 1 Equity Interests in Media Equities International, L.L.C. Guarantor Equity Interest - --------- --------------- Bruce Maggin 14.11% (through Maggin's 66 2/3% interest in H.A.M. Media Group, LLC, which holds 21.16% of MEI) -9- EXHIBIT K-4 FORM OF GUARANTY AGREEMENT GUARANTY AGREEMENT, dated as ofAugust 16, 1999 (as the same may be further supplemented, amended or otherwise modified, renewed or replaced from time to time, the "Guaranty Agreement") between (i) JOHN T. HEALY, an individual residing in New York County, New York (the "Individual Guarantor") and (ii) THE CHASE MANHATTAN BANK, a New York banking corporation (the "Lender"). Pursuant to the Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended and restated as of August 16, 1999 (as the same may be further amended, supplemented, or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among NewStar Media Inc. (formerly known as Dove Entertainment, Inc.), a California corporation (the "Borrower"), the Corporate Guarantors referred to therein and the Lender, the Lender has agreed to make Loans to the Borrower and issue Letters of Credit in an amount outstanding at any one time not in excess of $10,000,000. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. The Individual Guarantor, Terrence A. Elkes, Kenneth F. Gorman, Ronald Lightstone and Bruce Maggin (collectively, the "Guarantors") are the direct and indirect owners of Media Equities International, L.L.C. As an inducement to the Lender to make the Loans and issue Letters of Credit to the Borrower, each of the Guarantors has agreed to guaranty such obligations of the Borrower in an amount not to exceed the lesser of (x) $2,000,000 and (y) the amount by which the aggregate of outstanding principal of and any interest on all Loans and L/C Exposure exceeds the Borrowing Base (as defined in the Credit Agreement) on the date demand for payment hereunder is made (the "Maximum Guaranty Amount"). The Individual Guarantor individually has agreed to guaranty such obligations of the Borrower to the extent and in accordance with the terms hereof. -1- Therefore, for good and valuable consideration, the receipt of which is hereby acknowledged by the Individual Guarantor, the parties hereto agree as follows: 1. GUARANTY SECTION 1.1 GUARANTY. (a) The Individual Guarantor unconditionally and irrevocably guarantees the due and punctual payment by the Borrower in an amount not to exceed the product of 110% of the Individual Guarantor's ownership interest in MEI as of the date hereof (as set forth on Schedule 1 hereto) multiplied by the Maximum Guaranty Amount (the "Guaranteed Obligations"), as and when such amounts shall become due and payable whether by scheduled maturity, acceleration or otherwise and any extensions or renewals thereof, reimbursement obligations in respect of Letters of Credit, related costs and attorney's fees, and all other monetary obligations of the Borrower to the Lender under the Credit Agreement. (b) In furtherance of the provisions of this Guaranty Agreement, and not in limitation of any other right which the Lender may have at law or in equity against the Borrower or any other guarantor of the Guaranteed Obligations, upon failure of the Borrower to pay any of the Guaranteed Obligations when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, the Individual Guarantor hereby promises to and will, upon receipt of written demand by the Lender, forthwith pay or cause to be paid to the Lender in cash an amount equal to the unpaid balance of the Guaranteed Obligations then due and payable. (c) The Individual Guarantor, to the extent permitted by applicable law, waives presentation to, demand for payment from and protest to the Borrower and also waives notice of protest for nonpayment, notice of acceleration and notice of intent to accelerate. The obligations of the Individual Guarantor hereunder shall not be affected by (i) the failure of the Lender to assert any claim or demand or to enforce any right or remedy against the Borrower or any other guarantor of the Guaranteed Obligations under the provisions of the Credit Agreement or any other agreement or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of the Credit Agreement, the Note or any other agreement; (iv) the release, exchange, waiver or foreclosure of any security held by the Lender for the Guaranteed Obligations or any of them or (v) the failure of the Lender to exercise any right or remedy against any other guarantor of the Guaranteed Obligations. (d) The Individual Guarantor further agrees that this guaranty is a continuing guaranty and constitutes a guaranty of performance and of payment when due and not just of collection, and waives, to the extent permitted by applicable law, any right to require that any resort be had by the Lender to any security held for payment of the Guaranteed Obligations or to any balance of any deposit, account or credit on the books of the Lender in favor of the Borrower or any other guarantor or to any other person. -2- (e) The Individual Guarantor hereby expressly assumes all responsibilities to remain informed of the financial condition of the Borrower and each other guarantor of the Guaranteed Obligations and any circumstances affecting the Collateral or the ability of the Borrower to perform under the Credit Agreement. (f) This guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed Obligations, the Note or any other instrument evidencing any of the Guaranteed Obligations, or by the existence, validity, enforceability, perfection or extent of any collateral therefor or by any other circumstance relating to the Guaranteed Obligations which might otherwise constitute a defense to the guaranty under this Guaranty Agreement. The Lender makes no representation or warranty in respect to any such circumstances nor has any duty or responsibility whatsoever to the Individual Guarantor in respect to the management and maintenance of the Guaranteed Obligations or the Collateral. (g) The Individual Guarantor hereby acknowledges that, subject to $2,000,000 limit set forth in the definition of "Maximum Guaranty Amount" above, the Maximum Guaranty Amount may increase or decrease as the amount of the Borrowing Base (as defined in the Credit Agreement) decreases or increases in accordance with the terms of the Credit Agreement. In addition, the Individual Guarantor acknowledges and agrees that neither he nor MEI shall have any approval rights over extensions of credit by the Lender in excess of the Borrowing Base, and further acknowledges that such extensions of credit shall be included within the scope of this Guaranty. SECTION 1.2 NO IMPAIRMENT OF GUARANTY. The obligations of the Individual Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense (other than payment of the Guaranteed Obligations) or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Individual Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lender to assert any claim or demand or to enforce any remedy hereunder or under the Credit Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure, or delay, willful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or thing, or omission or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of the Individual Guarantor or would otherwise operate as a discharge of the Individual Guarantor as a matter of law, unless and until the Guaranteed Obligations are paid in full. SECTION 1.3 CONTINUATION AND REINSTATEMENT, ETC. The Individual Guarantor further agrees that his guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or other -3- reorganization of the Borrower or any other guarantor of the Guaranteed Obligations or otherwise. SECTION 1.4 SUBROGATION. Subject to the prior final and indefeasible payment in full of all Obligations and to the extent of payments received by the Lender from the Individual Guarantor on the Guaranteed Obligations, the Individual Guarantor (and the other Guarantors) shall be subrogated to the rights of the Lender to receive payments or distributions of cash, property or securities of the Borrower applicable to the Obligations; provided, that all such rights of subrogation shall be subordinated and junior in right of payment to the prior payment in full of the Obligations to the Lender. SECTION 1.5 APPLICATION OF GUARANTEED AMOUNTS. In the event the Lender receives an amount in excess of the Maximum Guaranty Amount then due and payable from the Individual Guarantor and the other Guarantors pursuant to the terms of this Guaranty Agreement and the respective guaranty agreements of other Guarantors, the Lender shall remit such excess to MEI for disbursement to the Guarantors in such amounts as the Guarantors shall determine. SECTION 1.6 PRIOR GUARANTY. This Guaranty Agreement amends and restates in its entirety the Guaranty Agreement dated as of November 4, 1997 previously executed by the Individual Guarantor. The Individual Guarantor hereby rescinds the letter dated January 28, 1999 from Bruce Maggin (of The H.A.M. Group, LLC) to Ken Wilson (of Chase Securities Inc.) relating to the guaranties of the Individual Guarantor and Bruce Maggin, and acknowledges and agrees that the terms of such letter shall have no force or effect. 2. REPRESENTATIONS AND WARRANTIES The Individual Guarantor makes the following representations and warranties to the Lender, all of which shall survive the execution and delivery of the Note and this Guaranty Agreement and the making of the loans evidenced and to be evidenced by the Note: (i) The execution, delivery and performance of this Guaranty Agreement (a) will not violate, or involve the Lender in a violation of, any provision of applicable law or any order of any governmental authority or any judgment of any court applicable to the Individual Guarantor or his property, (b) will not violate any indenture, any agreement for borrowed money, any bond, note or other similar instrument or any other material agreement to which the Individual Guarantor is a party or by which the Individual Guarantor or any of his property is bound, (c) will not be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, bond, note, instrument or other material agreement to which the Individual Guarantor is a party and (d) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or assets of the Individual Guarantor other than pursuant to this Guaranty Agreement. -4- (ii) This Guaranty Agreement constitutes the legal, valid and binding obligation of the Individual Guarantor, enforceable in accordance with its terms, subject (a) as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency and other laws affecting creditors' rights generally and to moratorium laws from time to time in effect, (b) to general equitable principles which may limit the right to obtain the remedy of specific performance and (c) to the qualification that the enforceability of indemnification provisions may be limited by applicable federal and state securities laws, rules and regulations. (iii) The Individual Guarantor will realize a direct economic benefit as a result of the Loans being made to the Borrower pursuant to the Credit Agreement. 3. MISCELLANEOUS SECTION 3.1 NOTICES. Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or if by telecopier, delivered by such equipment) addressed (i) if to the Lender, to it at 270 Park Avenue, 37th floor, New York, New York 10017, Attn: John J. Huber, III, Facsimile No.: (212) 270-4584, with a copy to Chase Securities Inc., 1800 Century Park East, Suite 400, Los Angeles, California 90067, Attn: Kenneth R. Wilson, Facsimile No.: (310) 788-5628, (ii) if to the Individual Guarantor, to him at c/o H.A.M. Media Group LLC, 305 Madison Avenue, Suite 301, New York, New York, 10017, or such other address as such party may from time to time designate by giving written notice to the other party hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Guaranty Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid return receipt requested, if by mail, or when receipt is acknowledged, if by telecopier, in each case addressed to such party as provided in this Section 3.1 or in accordance with the latest unrevoked written direction from such party. SECTION 3.2 SUCCESSORS. Each reference herein to a party hereto shall be deemed to include its respective successors, assigns, heirs, executors, administrators and legal representatives including but not by way of limitation, any party in whose favor the provisions of the Note shall inure, all of whom shall be bound by the provisions of this Guaranty Agreement. SECTION 3.3 SERVICE OF PROCESS. THE INDIVIDUAL GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK IN NEW YORK COUNTY AND TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT, OR THE SUBJECT MATTER HEREOF BROUGHT BY THE LENDER OR ITS SUCCESSORS OR ASSIGNS. THE INDIVIDUAL GUARANTOR TO THE EXTENT PERMITTED BY APPLICABLE LAW (A) HEREBY -5- WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT HE IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT HIS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, (B) HEREBY WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION, SUIT OR PROCEEDING INSTITUTED BY THE LENDER IN STATE COURT TO FEDERAL COURT, AND (C) HEREBY AGREES NOT TO ASSERT ANY OFFSETS OR COUNTERCLAIMS (OTHER THAN COMPULSORY COUNTERCLAIMS) IN ANY SUCH ACTION, SUIT OR PROCEEDING. THE INDIVIDUAL GUARANTOR HEREBY CONSENTS TO SERVICE OF PROCESS BY CERTIFIED MAIL AT THE ADDRESS TO WHICH NOTICES ARE TO BE GIVEN, AND AGREES THAT THE SUBMISSION TO JURISDICTION AND THE CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE LENDER. FINAL JUDGMENT AGAINST THE INDIVIDUAL GUARANTOR IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER JURISDICTIONS (X) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ANY INDEBTEDNESS OR LIABILITY OF THE INDIVIDUAL GUARANTOR THEREIN DESCRIBED OR (Y) IN ANY OTHER MANNER PROVIDED BY, OR PURSUANT TO, THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED, HOWEVER, THAT THE LENDER MAY AT ITS OPTION BRING SUIT OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE INDIVIDUAL GUARANTOR OR ANY OF HIS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE INDIVIDUAL GUARANTOR OR SUCH ASSETS MAY BE FOUND. SECTION 3.4 GOVERNING LAW. THIS GUARANTY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 3.5 NO WAIVER, ETC. Neither a failure nor a delay on the part of the Lender in exercising any right, power or privilege under this Guaranty Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Lender herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which it may have under this Guaranty Agreement, at law, in equity, by statute, or otherwise. -6- SECTION 3.6 MODIFICATION, ETC. No modification, amendment or waiver of any provision of this Guaranty Agreement, nor the consent to any departure by the Individual Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Individual Guarantor in any case shall entitle the Individual Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 3.7 SEVERABILITY. If any one or more of the provisions contained in this Guaranty Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall in no way be affected or impaired thereby. SECTION 3.8 HEADINGS. Section headings used herein are for convenience of reference only and are not to affect the construction of, or be taken into consideration in interpreting, this Guaranty Agreement. SECTION 3.9 WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, THE INDIVIDUAL GUARANTOR HEREBY WAIVES, AND COVENANTS THAT HE WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. THE INDIVIDUAL GUARANTOR ACKNOWLEDGES THAT HE HAS BEEN INFORMED BY THE LENDER THAT THE PROVISIONS OF THIS SECTION 3.9 CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDER HAS RELIED, IS RELYING AND WILL RELY IN MAKING THE LOANS EVIDENCED BY THE NOTE AND ENTERING INTO THIS GUARANTY AGREEMENT. THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 3.9 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE INDIVIDUAL GUARANTOR TO THE WAIVER OF HIS RIGHTS TO TRIAL BY JURY. -7- IN WITNESS WHEREOF, the Individual Guarantor and the Lender have caused this Guaranty Agreement to be executed by its duly authorized officer, all as of the date first written above. /s/ John T. Healy ------------------------------ JOHN T. HEALY Executed by the Lender THE CHASE MANHATTAN BANK in New York, New York By: /s/ Edmond DeForest --------------------------- Name: Edmond DeForest Title: Vice President -8- Schedule 1 Equity Interests in Media Equities International, L.L.C. Guarantor Equity Interest - --------- --------------- John T. Healy 7.05% (through Healy's 33 1/3% interest in H.A.M. Media Group, LLC, which holds 21.16% of MEI) -9- EXHIBIT K-5 FORM OF GUARANTY AGREEMENT GUARANTY AGREEMENT, dated as of August 16, 1999 (as the same may be further supplemented, amended or otherwise modified, renewed or replaced from time to time, the "Guaranty Agreement") between (i) RONALD LIGHTSTONE, an individual residing in Los Angeles County, California (the "Individual Guarantor") and (ii) THE CHASE MANHATTAN BANK, a New York banking corporation (the "Lender"). Pursuant to the Amended and Restated Credit, Security, Guaranty and Pledge Agreement dated as of November 4, 1997, as amended and restated as of August 16, 1999 (as the same may be further amended, supplemented, or otherwise modified, renewed or replaced from time to time, the "Credit Agreement") among NewStar Media Inc. (formerly known as Dove Entertainment, Inc.), a California corporation (the "Borrower"), the Corporate Guarantors referred to therein and the Lender, the Lender has agreed to make Loans to the Borrower and issue Letters of Credit in an amount outstanding at any one time not in excess of $10,000,000. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. The Individual Guarantor, Terrence A. Elkes, Kenneth F. Gorman, John T. Healy and Bruce Maggin (collectively, the "Guarantors") are the direct and indirect owners of Media Equities International, L.L.C. As an inducement to the Lender to make the Loans and issue Letters of Credit to the Borrower, each of the Guarantors has agreed to guaranty such obligations of the Borrower in an amount not to exceed the lesser of (x) $2,000,000 and (y) the amount by which the aggregate of outstanding principal of and any interest on all Loans and L/C Exposure exceeds the Borrowing Base (as defined in the Credit Agreement) on the date demand for payment hereunder is made (the "Maximum Guaranty Amount"). -1- The Individual Guarantor individually has agreed to guaranty such obligations of the Borrower to the extent and in accordance with the terms hereof. Therefore, for good and valuable consideration, the receipt of which is hereby acknowledged by the Individual Guarantor, the parties hereto agree as follows: 1. GUARANTY SECTION 1.1 GUARANTY. (a) The Individual Guarantor unconditionally and irrevocably guarantees the due and punctual payment by the Borrower in an amount not to exceed the product of 110% of the Individual Guarantor's ownership interest in MEI as of the date hereof (as set forth on Schedule 1 hereto) multiplied by the Maximum Guaranty Amount (the "Guaranteed Obligations"), as and when such amounts shall become due and payable whether by scheduled maturity, acceleration or otherwise and any extensions or renewals thereof, reimbursement obligations in respect of Letters of Credit, related costs and attorney's fees, and all other monetary obligations of the Borrower to the Lender under the Credit Agreement. (b) In furtherance of the provisions of this Guaranty Agreement, and not in limitation of any other right which the Lender may have at law or in equity against the Borrower or any other guarantor of the Guaranteed Obligations, upon failure of the Borrower to pay any of the Guaranteed Obligations when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, the Individual Guarantor hereby promises to and will, upon receipt of written demand by the Lender, forthwith pay or cause to be paid to the Lender in cash an amount equal to the unpaid balance of the Guaranteed Obligations then due and payable. (c) The Individual Guarantor, to the extent permitted by applicable law, waives presentation to, demand for payment from and protest to the Borrower and also waives notice of protest for nonpayment, notice of acceleration and notice of intent to accelerate. The obligations of the Individual Guarantor hereunder shall not be affected by (i) the failure of the Lender to assert any claim or demand or to enforce any right or remedy against the Borrower or any other guarantor of the Guaranteed Obligations under the provisions of the Credit Agreement or any other agreement or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of the Credit Agreement, the Note or any other agreement; (iv) the release, exchange, waiver or foreclosure of any security held by the Lender for the Guaranteed Obligations or any of them or (v) the failure of the Lender to exercise any right or remedy against any other guarantor of the Guaranteed Obligations. (d) The Individual Guarantor further agrees that this guaranty is a continuing guaranty and constitutes a guaranty of performance and of payment when due and not just of collection, and waives, to the extent permitted by applicable law, any right to require that any resort be had by the Lender to any security held for payment of the Guaranteed Obligations or to -2- any balance of any deposit, account or credit on the books of the Lender in favor of the Borrower or any other guarantor or to any other person. (e) The Individual Guarantor hereby expressly assumes all responsibilities to remain informed of the financial condition of the Borrower and each other guarantor of the Guaranteed Obligations and any circumstances affecting the Collateral or the ability of the Borrower to perform under the Credit Agreement. (f) This guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed Obligations, the Note or any other instrument evidencing any of the Guaranteed Obligations, or by the existence, validity, enforceability, perfection or extent of any collateral therefor or by any other circumstance relating to the Guaranteed Obligations which might otherwise constitute a defense to the guaranty under this Guaranty Agreement. The Lender makes no representation or warranty in respect to any such circumstances nor has any duty or responsibility whatsoever to the Individual Guarantor in respect to the management and maintenance of the Guaranteed Obligations or the Collateral. (g) The Individual Guarantor hereby acknowledges that, subject to $2,000,000 limit set forth in the definition of "Maximum Guaranty Amount" above, the Maximum Guaranty Amount may increase or decrease as the amount of the Borrowing Base (as defined in the Credit Agreement) decreases or increases in accordance with the terms of the Credit Agreement. In addition, the Individual Guarantor acknowledges and agrees that neither he nor MEI shall have any approval rights over extensions of credit by the Lender in excess of the Borrowing Base, and further acknowledges that such extensions of credit shall be included within the scope of this Guaranty. SECTION 1.2 NO IMPAIRMENT OF GUARANTY. The obligations of the Individual Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense (other than payment of the Guaranteed Obligations) or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Individual Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Lender to assert any claim or demand or to enforce any remedy hereunder or under the Credit Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure, or delay, willful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or thing, or omission or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of the Individual Guarantor or would otherwise operate as a discharge of the Individual Guarantor as a matter of law, unless and until the Guaranteed Obligations are paid in full. -3- SECTION 1.3 CONTINUATION AND REINSTATEMENT, ETC. The Individual Guarantor further agrees that his guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Lender upon the bankruptcy or other reorganization of the Borrower or any other guarantor of the Guaranteed Obligations or otherwise. SECTION 1.4 SUBROGATION. Subject to the prior final and indefeasible payment in full of all Obligations and to the extent of payments received by the Lender from the Individual Guarantor on the Guaranteed Obligations, the Individual Guarantor (and the other Guarantors) shall be subrogated to the rights of the Lender to receive payments or distributions of cash, property or securities of the Borrower applicable to the Obligations; provided, that all such rights of subrogation shall be subordinated and junior in right of payment to the prior payment in full of the Obligations to the Lender. SECTION 1.5 APPLICATION OF GUARANTEED AMOUNTS. In the event the Lender receives an amount in excess of the Maximum Guaranty Amount then due and payable from the Individual Guarantor and the other Guarantors pursuant to the terms of this Guaranty Agreement and the respective guaranty agreements of other Guarantors, the Lender shall remit such excess to MEI for disbursement to the Guarantors in such amounts as the Guarantors shall determine. SECTION 1.6 PRIOR GUARANTY. This Guaranty Agreement amends and restates in its entirety the Guaranty Agreement dated as of November 4, 1997 previously executed by the Individual Guarantor. 2. REPRESENTATIONS AND WARRANTIES The Individual Guarantor makes the following representations and warranties to the Lender, all of which shall survive the execution and delivery of the Note and this Guaranty Agreement and the making of the loans evidenced and to be evidenced by the Note: (i) The execution, delivery and performance of this Guaranty Agreement (a) will not violate, or involve the Lender in a violation of, any provision of applicable law or any order of any governmental authority or any judgment of any court applicable to the Individual Guarantor or his property, (b) will not violate any indenture, any agreement for borrowed money, any bond, note or other similar instrument or any other material agreement to which the Individual Guarantor is a party or by which the Individual Guarantor or any of his property is bound, (c) will not be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, bond, note, instrument or other material agreement to which the Individual Guarantor is a party and (d) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or assets of the Individual Guarantor other than pursuant to this Guaranty Agreement. -4- (ii) This Guaranty Agreement constitutes the legal, valid and binding obligation of the Individual Guarantor, enforceable in accordance with its terms, subject (a) as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency and other laws affecting creditors' rights generally and to moratorium laws from time to time in effect, (b) to general equitable principles which may limit the right to obtain the remedy of specific performance and (c) to the qualification that the enforceability of indemnification provisions may be limited by applicable federal and state securities laws, rules and regulations. (iii) The Individual Guarantor will realize a direct economic benefit as a result of the Loans being made to the Borrower pursuant to the Credit Agreement. 3. MISCELLANEOUS SECTION 3.1 NOTICES. Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or if by telecopier, delivered by such equipment) addressed (i) if to the Lender, to it at 270 Park Avenue, 37th floor, New York, New York 10017, Attn: John J. Huber, III, Facsimile No.: (212) 270-4584, with a copy to Chase Securities Inc., 1800 Century Park East, Suite 400, Los Angeles, California 90067, Attn: Kenneth R. Wilson, Facsimile No.: (310) 788-5628, (ii) if to the Individual Guarantor, to him at 400 Parkwood Drive, Los Angeles, California 90077-3530, or such other address as such party may from time to time designate by giving written notice to the other party hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Guaranty Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid return receipt requested, if by mail, or when receipt is acknowledged, if by telecopier, in each case addressed to such party as provided in this Section 3.1 or in accordance with the latest unrevoked written direction from such party. SECTION 3.2 SUCCESSORS. Each reference herein to a party hereto shall be deemed to include its respective successors, assigns, heirs, executors, administrators and legal representatives including but not by way of limitation, any party in whose favor the provisions of the Note shall inure, all of whom shall be bound by the provisions of this Guaranty Agreement. SECTION 3.3 SERVICE OF PROCESS. THE INDIVIDUAL GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK IN NEW YORK COUNTY AND TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT, OR THE SUBJECT MATTER HEREOF BROUGHT BY THE LENDER OR ITS SUCCESSORS OR ASSIGNS. THE INDIVIDUAL GUARANTOR TO THE EXTENT PERMITTED BY APPLICABLE LAW (A) HEREBY -5- WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT HE IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT HIS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER, OR THAT THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, (B) HEREBY WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION, SUIT OR PROCEEDING INSTITUTED BY THE LENDER IN STATE COURT TO FEDERAL COURT, AND (C) HEREBY AGREES NOT TO ASSERT ANY OFFSETS OR COUNTERCLAIMS (OTHER THAN COMPULSORY COUNTERCLAIMS) IN ANY SUCH ACTION, SUIT OR PROCEEDING. THE INDIVIDUAL GUARANTOR HEREBY CONSENTS TO SERVICE OF PROCESS BY CERTIFIED MAIL AT THE ADDRESS TO WHICH NOTICES ARE TO BE GIVEN, AND AGREES THAT THE SUBMISSION TO JURISDICTION AND THE CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE LENDER. FINAL JUDGMENT AGAINST THE INDIVIDUAL GUARANTOR IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN OTHER JURISDICTIONS (X) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND OF THE AMOUNT OF ANY INDEBTEDNESS OR LIABILITY OF THE INDIVIDUAL GUARANTOR THEREIN DESCRIBED OR (Y) IN ANY OTHER MANNER PROVIDED BY, OR PURSUANT TO, THE LAWS OF SUCH OTHER JURISDICTION; PROVIDED, HOWEVER, THAT THE LENDER MAY AT ITS OPTION BRING SUIT OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE INDIVIDUAL GUARANTOR OR ANY OF HIS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE INDIVIDUAL GUARANTOR OR SUCH ASSETS MAY BE FOUND. SECTION 3.4 GOVERNING LAW. THIS GUARANTY AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 3.5 NO WAIVER, ETC. Neither a failure nor a delay on the part of the Lender in exercising any right, power or privilege under this Guaranty Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Lender herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which it may have under this Guaranty Agreement, at law, in equity, by statute, or otherwise. -6- SECTION 3.6 MODIFICATION, ETC. No modification, amendment or waiver of any provision of this Guaranty Agreement, nor the consent to any departure by the Individual Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Individual Guarantor in any case shall entitle the Individual Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 3.7 SEVERABILITY. If any one or more of the provisions contained in this Guaranty Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall in no way be affected or impaired thereby. SECTION 3.8 HEADINGS. Section headings used herein are for convenience of reference only and are not to affect the construction of, or be taken into consideration in interpreting, this Guaranty Agreement. SECTION 3.9 WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, THE INDIVIDUAL GUARANTOR HEREBY WAIVES, AND COVENANTS THAT HE WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS GUARANTY AGREEMENT OR THE SUBJECT MATTER HEREOF, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. THE INDIVIDUAL GUARANTOR ACKNOWLEDGES THAT HE HAS BEEN INFORMED BY THE LENDER THAT THE PROVISIONS OF THIS SECTION 3.9 CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDER HAS RELIED, IS RELYING AND WILL RELY IN MAKING THE LOANS EVIDENCED BY THE NOTE AND ENTERING INTO THIS GUARANTY AGREEMENT. THE LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 3.9 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE INDIVIDUAL GUARANTOR TO THE WAIVER OF HIS RIGHTS TO TRIAL BY JURY. -7- IN WITNESS WHEREOF, the Individual Guarantor and the Lender have caused this Guaranty Agreement to be executed by its duly authorized officer, all as of the date first written above. /s/ Ronald Lightstone --------------------------------- RONALD LIGHTSTONE Executed by the Lender THE CHASE MANHATTAN BANK in New York, New York By: /s/ Edmond DeForest ------------------------------ Name: Edmond DeForest Title: Vice President -8- Schedule 1 Equity Interests in Media Equities International, L.L.C. Guarantor Equity Interest - --------- --------------- Ronald Lightstone 11.70% in MEI -9- SPOUSAL CONSENT --------------- The undersigned acknowledges that she has read the foregoing Guaranty Agreement (the "Guaranty Agreement") and that she knows its content. The undersigned is aware that by its provisions her spouse agrees to guarantee certain obligations owed by NewStar Media Inc. to The Chase Manhattan Bank (the "Lender") under that certain Amended and Restated Credit, Security, Guaranty and Pledge Agreement, dated as of November 4, 1997, as amended and restated as of June __, 1999, among NewStar Media Inc., as borrower, the Corporate Guarantors referred to therein and the Lender (as the same may be amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement"). The undersigned hereby consents to the Guaranty Agreement and accepts all of the provisions of such Guaranty Agreement to the extent of her community property interests in whatever property is subject to the Guaranty Agreement, and further agrees that the undersigned will take no action at any time to hinder the enforcement of the Guaranty Agreement, the Credit Agreement, or any related document or instrument, or any provision contained therein. Dated: As of June ___, 1999 /s/ Nancy Lightstone ------------------------- Nancy Lightstone -10- EX-23 7 CONSENT OF KPMG The Board of Directors of NewStar Media, Inc.: We consent to incorporation by reference in the registration statements (No. 333-43527, No. 333-6059, No. 333- 82553, No. 333-67901, and No. 333-59681) on Form S-3 and registration statement (No. 333-06595) on Form S-8 of NewStar Media Inc. of our report dated April 12, 2000, relating to the consolidated balance sheet of NewStar Media, Inc. and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-KSB of NewStar Media Inc. /s/ KPMG LLP KPMG LLP Los Angeles, California April 12, 2000 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 45 0 3728 0 1762 11502 518 0 22766 20095 0 0 2 216 2286 22766 10800 10800 10435 21569 (594) 0 918 (10805) 3 (10808) 0 0 0 (10808) (.55) (.55)
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