-----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, UHXPx78/I8r1ivvHDQR+oooRvuZsrzbquh8A4XswGquBAxr/Le7d2yzobQPbswCA SNKHwss1fSPPbMb6P0OcUw== 0001019687-99-000511.txt : 19990824 0001019687-99-000511.hdr.sgml : 19990824 ACCESSION NUMBER: 0001019687-99-000511 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990823 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-24984 FILM NUMBER: 99697650 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 10QSB 1 NEWSTAR MEDIA INC. ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB ---------------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. COMMISSION FILE NUMBER 0-24984 NEWSTAR MEDIA INC. (Exact Name of Small Business Issuer as Specified in Its Charter) ---------------- CALIFORNIA 95-4015834 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 8955 BEVERLY BOULEVARD LOS ANGELES, CALIFORNIA 90048 (Address of Principal Executive Offices) (310) 786-1600 (Issuer's Telephone Number, Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE ---------------- 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 --- --- APPLICABLE ONLY TO CORPORATE ISSUERS State the numbers of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 25,565,658 as of August 8, 1999. Transitional Small Business Disclosure Format (Check one): Yes No X --- --- ================================================================================ PART I FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS NEWSTAR MEDIA INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) June 30, 1999
ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,109,000 Accounts receivable, net of allowances of $1,267,000 2,406,000 Inventory 2,994,000 Film costs 186,000 Due from related party 49,000 Prepaid expenses and other assets 618,000 ----------------- Total current assets 7,362,000 NON-CURRENT ASSETS Production masters, net 2,941,000 Film costs, net 4,227,000 Property and equipment, net 686,000 Goodwill and other assets 5,632,000 ----------------- Total non-current assets 13,486,000 ----------------- Total assets $ 20,848,000 ================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 4,243,000 Notes payable 16,000 Advances and deferred income 276,000 Accrued dividends 203,000 ----------------- Total current liabilities 4,738,000 NON-CURRENT LIABILITIES Note payable 7,511,000 Accrued liabilities 511,000 ----------------- Total non-current liabilities 8,022,000 ----------------- Total liabilities 12,760,000 ----------------- SHAREHOLDERS' EQUITY Preferred stock $.01 par value; 2,000,000 shares authorized and 220,033 shares issued and outstanding, liquidation preference $6,930,000 2,000 Common stock $.01 par value; 50,000,000 shares authorized and 21,528,017 shares issued and outstanding 215,000 Unearned compensation (171,000) Additional paid-in capital 42,542,000 Accumulated deficit (34,500,000) ----------------- Total shareholders' equity 8,088,000 ----------------- Total liabilities and shareholders' equity $ 20,848,000 =================
See accompanying notes to consolidated financial statements 2 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarter Ended June 30, --------------------------------------- 1999 1998 ---- ---- Revenues Publishing, net $ 1,215,000 $ 1,966,000 Film 266,000 5,654,000 ------------------ ------------------ 1,481,000 7,620,000 Cost of sales Publishing 582,000 1,318,000 Film 321,000 3,910,000 ------------------ ------------------ 903,000 5,228,000 ------------------ ------------------ Gross profit 578,000 2,392,000 Selling, general and administrative expenses 2,508,000 2,734,000 ------------------ ------------------ Loss from operations (1,930,000) (342,000) Interest expense, net (203,000) (155,000) ------------------ ------------------ Loss before income taxes (2,133,000) (497,000) Income tax expense -- (2,000) ------------------ ------------------ Net loss $ (2,133,000) $ (499,000) ================== ================== Basic and diluted loss attributable to common shareholders $ (2,235,000) $ (606,000) ================== ================== Basic and diluted loss per common share $ (.12) $ (.09) ================== ================== Weighted average number of common shares outstanding 19,253,000 6,664,000 ================== ==================
See accompanying notes to consolidated financial statements 3 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Six Months Ended June 30, --------------------------------------- 1999 1998 ---- ---- Revenues Publishing, net $ 2,513,000 $ 3,515,000 Film 391,000 6,798,000 ------------------ ------------------ 2,904,000 10,313,000 Cost of sales Publishing 1,555,000 2,504,000 Film 426,000 4,854,000 ------------------ ------------------ 1,981,000 7,358,000 ------------------ ------------------ Gross profit 923,000 2,955,000 Selling, general and administrative expenses 4,872,000 4,913,000 ------------------ ------------------ Loss from operations (3,949,000) (1,958,000) Gain on sale of long-term investment 594,000 -- Interest expense, net (401,000) (302,000) ------------------ ------------------ Loss before income taxes (3,756,000) (2,260,000) Income tax expense (2,000) (2,000) ------------------ ------------------ Net loss $ (3,758,000) $ (2,262,000) ================== ================== Basic and diluted loss attributable to common shareholders $ (3,971,000) $ (2,475,000) ================== ================== Basic and diluted loss per common share $ (.22) $ (.37) ================== ================== Weighted average number of common shares outstanding 18,291,000 6,669,000 ================== ==================
4 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, --------------------------------------- 1999 1998 ---- ---- OPERATING ACTIVITIES Net loss $ (3,758,000) $ (2,262,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 360,000 269,000 Amortization of goodwill 119,000 119,000 Amortization of production masters 464,000 794,000 Amortization of film costs 410,000 4,022,000 Provision for doubtful accounts 71,000 -- Gain on sale of long-term investment (594,000) -- Unearned Compensation 83,000 83,000 Changes in operating assets and liabilities: Accounts receivable 5,000 (2,015,000) Inventory 94,000 285,000 Prepaid expenses and other assets 47,000 (228,000) Expenditures for production masters (1,036,000) (705,000) Film cost additions (179,000) (8,511,000) Accounts payable and accrued expenses (531,000) 816,000 Advances and deferred revenue 16,000 1,722,000 Other 44,000 19,000 ------------------ ------------------ Net cash used in operating activities (4,385,000) (5,592,000) ------------------ ------------------ INVESTING ACTIVITIES Proceeds from sale of long-term investment, net 613,000 -- Purchase of Audio Literature (200,000) -- Purchase of property and equipment (66,000) (99,000) Proceeds from sale of property and equipment 83,000 -- ------------------ ------------------ Net cash provided by (used in) investing activities 430,000 (99,000) ------------------ ------------------ FINANCING ACTIVITIES Proceeds of bank borrowings 1,200,000 5,753,000 Repayments of bank borrowings (1,134,000) -- Proceeds from issuance of common stock 4,545,000 -- ------------------ ------------------ Net cash provided by financing activities 4,611,000 5,753,000 ------------------ ------------------ Net increase in cash and cash equivalents 656,000 62,000 Cash and cash equivalents at beginning of the period 453,000 302,000 ------------------ ------------------ Cash and cash equivalents at end of the period $ 1,109,000 $ 364,000 ================== ==================
See accompanying notes to consolidated financial statements. 5 NEWSTAR MEDIA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(CONTINUED)
Six Months Ended June 30, --------------------------------------- 1999 1998 ---- ---- SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 359,900 $ 113,000 NON-CASH TRANSACTIONS Common stock issued as payment for consulting fees to related party $ -- $ 300,000 Preferred stock dividends accrued $ 203,000 $ 213,000 Preferred stock dividends paid in common stock $ 10,000 $ -- Preferred stock issued as payment for amounts payable to former officers of the Company $ 135,000 $ 54,000 ACQUISITION OF AMERICAN AUDIO LITERATURE, INC Assets acquired $ 1,550,000 $ -- Liabilities incurred (300,000) $ -- Issuance of Common Stock (1,050,000) $ -- ------------------ ------------------ Net cash paid $ 200,000 $ --
See accompanying notes to consolidated financial statements 6 NEWSTAR MEDIA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION, ORGANIZATION AND BUSINESS The accompanying consolidated financial statements of NewStar Media Inc. (the "Company") are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB and 10-KSB/A for the fiscal year ended December 31, 1998. The accompanying consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) which in the opinion of management are necessary in order to make them not misleading. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of results to be expected for the full year. 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, including its new website AudioUniverse.com, the Company produces and distributes audio books and publishes printed books. Through Dove Four Point, Inc. and NewStar Television Inc. (collectively "NewStar Television"), wholly owned subsidiaries of the Company, the Company is engaged in the production and development of television programming. NewStar Worldwide Inc. ("NewStar Worldwide"), a wholly owned subsidiary of the Company, is engaged in the distribution of feature films and television programming. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NET LOSS PER COMMON SHARE SFAS No. 128 replaces Accounting Principles Board Opinion ("APB") No. 15 and simplifies the computation of earnings per share ("EPS") by replacing the presentation of primary EPS with a presentation of basic EPS. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Dilutive securities have been omitted from the diluted calculation where they are anti-dilutive. The net loss utilized in the calculation of basic loss per common share is increased by the following: 1999 1998 ---- ---- Quarter ended June 30, Accrued dividends on Preferred Stock $ 101,000 $ 107,000 Six months ended June 30, Accrued dividends on Preferred Stock $ 213,000 $ 213,000 STOCK-BASED COMPENSATION The Company has a stock incentive plan (the "Plan") which authorizes the granting of stock incentive awards ("Options") to qualified officers, employee directors, key employees and third parties providing valuable services to the Company. The Company accounts for the Plan in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all Options on the date of grant or, alternately, allows entities to continue to apply the provisions of APB Opinion No. 25 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 apply the provisions of APB Opinion No. 25 in accounting for its Plan, and accordingly, no compensation cost has been recognized. 7 Had the Company determined compensation cost based on the fair value at the grant date for its Options under SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below: Six Months Ended June 30, ------------------------------------- 1999 1998 ---- ---- Net loss attributable to common shareholders As reported $ (3,971,000) $ (2,475,000) Pro forma $ (4,015,000) $ (2,475,000) Net loss per share As reported $ (.22) $ (.37) Pro forma $ (.22) $ (.37) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Significant estimates include those related to ultimate revenues and expenses related to film and television productions, the net realizability of inventory and production masters and the allowance for returns on publishing sales. RECLASSIFICATION Certain prior year accounts have been reclassified to conform to the current year's presentation. NOTE 3 - INCOME TAXES Income taxes are computed in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The Company provides for income taxes during interim reporting periods based upon an estimate of its annual effective tax rate. This estimate includes all anticipated federal, state and foreign income taxes. SFAS No. 109 requires that a valuation allowance be recorded against tax assets which are not likely to be realized. Due to the uncertainty of their ultimate realization based upon past earnings performance and the expiration dates of carryforwards, the Company has established a valuation allowance against these tax assets except to the extent that they are realizable through carrybacks. Realization of additional amounts is entirely dependent upon future earnings in specific tax jurisdictions. While the need for this valuation allowance is subject to periodic review, if the allowance is reduced, the tax benefits of the carryforwards will be recorded in future operations as a reduction of the Company's income tax expense. At June 30, 1999, the Company had net deferred tax assets of approximately $12,493,000 against which a valuation allowance had been fully recorded. NOTE 4 - RELATED PARTY TRANSACTIONS Pursuant to an employment termination agreement entered into in 1997 ("Termination Agreement") with then principal shareholders and officers of the Company ("Former Principals"), the Company paid such Former Principals $135,000 during the six months ended June 30, 1999 in the form of Series E Preferred Stock for payments due by the Company for the period January through May, 1999. The Termination Agreement provides for the Former Principals to receive combined monthly payments (the "Payments") of approximately $27,000, and medical insurance for 60 months from September 1997. In addition, they are entitled to each receive a car allowance for 24 months from September 1997 and reimbursement for certain medical and business expenses. The Company did not make Payments in cash for June of 1999. The Former Principals are entitled to receive Series E Preferred Stock in lieu of such cash Payments but have chosen not to accept the Series E Preferred Stock. 8 The Company has issued into escrow 1,500 shares of its Series E Preferred Stock, convertible into shares of Common Stock to the extent set forth in the Certificate of Determination for the Series E Preferred Stock. The Series E Preferred Stock will be held in escrow and will be released to the Former Principals only if the Company does not make a Payment in cash. If the Company does not make a Payment in cash, the Series E Preferred Stock may be released to the Former Principals in an amount equal to the portion of the Payments unpaid divided by the stated value of the Series E Preferred Stock. The Former Principals have registration rights pursuant to a registration rights agreement, dated September 10, 1997, among the Company and the Former Principals with respect to common stock into which Series E Preferred Stock received by them may be converted. During the six months ended June 30, 1999, the Company made certain payments and entered into other transactions with the Former Principals and former directors as more fully described in the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. 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 Messrs. Gorman, Healy, Lightstone and Maggin are directors of the Company. Messrs. Elkes, Gorman and Lightstone are also members of the Office of the Chief Executive of the Company. During 1999, the Company reorganized the management of the Company whereby all operating officers report to the Office of the Chief Executive of which Mr. Elks is Chairman and Chief Executive Officer and Messrs. Gorman and Lightstone are Co-Vice Chairmen. The Company accrued the following fees payable to MEI:
Quarter ended June 30, 1999 1998 ---- ---- Consulting fees pursuant to consulting agreement $ -- $ 75,000 Guarantee fees pursuant to guarantee of Chase Bank loan facility 12,500 7,000 ---------------- ---------------- Total $ 12,500 $ 82,000 ================ ================
Six months ended June 30, 1999 1998 ---- ---- Consulting fees pursuant to consulting agreement $ -- $ 150,000 Guarantee fees pursuant to guarantee of Chase Bank loan facility 25,000 13,000 ---------------- ---------------- Total $ 25,000 $ 163,000 ================ ================
The Company issued the following shares of Common Stock at fair market value to MEI in respect of consulting and guarantee fees: Date of Issue Number of Shares Amount of Fees ------------- ---------------- -------------- January 2, 1998 240,000 $300,000 Pursuant to guarantee agreements dated November 4, 1997, each of the principals of MEI had collectively guaranteed $366,000 and Messrs. Elkes, Gorman and Lightstone had collectively guaranteed $287,000 against borrowings under the Company's loan facility ("Chase Loan") with The Chase Manhattan Bank ("Chase Bank") to the extent such borrowings exceed the borrowing base as defined in the Chase Loan ("Borrowing Base"). At June 30, 1999, utilization of the Chase Loan exceeded the Borrowing Base by $653,000. In order to secure the repayment of any amounts the MEI principals may be required to pay to Chase Bank under the guarantees, MEI has been granted a security interest in substantially all of the assets of the Company. Such security interest is junior to the security interest of Chase Bank which secures the Company's obligations under the Chase Loan. 9 During the third quarter of 1999, in connection with obtaining certain amendments and waivers to the Chase Loan, the Company reached an agreement with MEI for a modification of the guarantee agreement to provide for a revised guarantee of $2,000,000. In consideration of the modification of the guarantee agreement, the Company has agreed to enter into an agreement to extend the warrants currently held by MEI for one year and to amend the terms thereof to permit a "cashless exercise" of such warrants. During the quarter ended June 30, 1999, MEI instituted an arbitration proceeding against the Former Principals. The Company's in-house legal staff provided legal services for MEI in connection with such proceedings. The Company entered into a Publishing Agreement with Affinity Communications Corp. ("Affinity") pursuant to which the Company published "The Libido Breakthrough: A Doctor's Guide to Restoring Sexual Vigor and Peak Health" by Stuart W. Fine, M.D. and Brenda Adderly, M.H.A. At the time of the agreement, Peter Engel, the Company's President of the publishing division, controlled and maintained a significant ownership interest in Affinity. In addition, Mr. Engel is married to Ms. Adderly. The terms of the publishing agreement are similar to those contained in publishing agreements the Company enters into with unrelated parties, except as follows: Affinity entered into and agreement with Rexall Sundown pursuant to which Rexall was to purchase 33,000 copies of the book from Affinity. The Company agreed that Affinity would purchase such 33,000 copies from the Company at cost plus $25,000. NOTE 5 - NOTES PAYABLE Notes payable at June 30, 1999 consist of the following: Chase Manhattan Bank revolving credit loan $ 7,500,000 Other 27,000 ----------------- Total notes payable $ 7,527,000 ================= On November 12, 1997, the Company entered into an agreement with Chase Bank providing the Company with an $8,000,000 loan facility for working capital purposes. In May 1998, the Chase Loan was increased to $10,000,000 with the other terms of the original agreement remaining substantially the same. The Chase Loan is secured by substantially all of the Company's assets. The Chase Loan runs for three years until November 4, 2000. The Chase Loan establishes a "Borrowing Base" comprised of: (1) 35% of an independent valuation of the Company's audio library, (2) 85% of the Company's eligible receivables and (3) 30% of the Company's finished goods audio and book inventory. At any time, the Company may borrow up to the Borrowing Base. In addition, the Company may borrow or have letters of credit issued for a further $4,000,000 provided the aggregate amount borrowed does not exceed $10,000,000, and with the consent and guarantee of MEI, a significant shareholder of the Company. The Chase Loan provides for interest at the bank prime rate (8% at June 30, 1999) plus 2% per annum or the bank's LIBOR rate (5.94% rate at June 30, 1999) plus 3% per annum, at the option of the Company. Both rates are applicable to Company draw-downs on the Chase Loan at June 30, 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 has requested waivers from Chase Bank. As of August 16, 1999, the Company received such waivers and the Company and Chase Bank have entered into amendments and waivers to the Chase Loan. At June 30, 1999, the Company had borrowed $7,500,000 against the facility and had $2,500,000 of available funds for borrowing. In addition, Chase Bank had provided a letter of credit for $287,000 in respect of certain litigation. On January 28, 1999, the Company and Chase Bank were notified by one of the principals of MEI that there would be no approvals for guarantees of further extensions of credit under the Chase Loan. Accordingly, as of January 28, 1999, the Company had borrowed the maximum amount permitted to be borrowed under the Chase Loan. In connection with the drafting of certain amendments and waivers to the Chase Loan, the Company has reached agreement with MEI for an extension and modification of the guarantee agreement to provide for a revised guarantee of $2,000,000. 10 In connection with the granting of certain waivers and amendments, Chase Bank had required that the Company raise a minimum of $4.1 million of new equity. As of June 30, 1999, the Company has received $4,545,000 in new equity through several private placements. NOTE 6 - AUDIO LITERATURE ACQUISITION On June 1, 1999, the Company entered into an Asset Purchase Agreement with American Audio Literature, Inc. ("Audio Literature") whereby the Company purchased certain assets of Audio Literature including all of their inventory, production masters, prepaid expenses, sales and customer data, interests in various contracts, the "Audio Literature" corporate name and certain other intangible and intellectual properties. The purchase price of such assets amounted to $1,550,000 and is comprised of 1) $200,000 in cash paid June 1, 1999, 2) $300,000 in cash subject to certain adjustments and payable 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 Company's 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 $0.50 per share. 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 form 10% to 30% per year, consistent with the estimated timing of future revenues to be earned. Management's estimate of the fair market value of the production masters is subject to adjustment, following the completion of an in-process 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 data which is being amortized on straight-line basis over five years. NOTE 7 - CAPITAL ACTIVITIES COMMON STOCK During the six months ended June 30, 1999, the Company issued the following shares of Common Stock: Number of Shares Consideration ---------------- ------------- 18,089 Preferred stock dividend, $10,000. 300,000 Acquisition of Audio Literature 140,280 Shares issued to former principals in connection with conversion of 189 shares of Series E Preferred Stock. As of June 30, 1999, the Company issued 3,768,448 shares of common stock in exchange for $4,545,000 through several private placements. During the six months ended June 30, 1999 the Company issued 135 shares of Series E Preferred Stock pursuant to the Termination Agreement. STOCK OPTIONS AND WARRANTS On January 6, 1998, the Board approved the issuance of 601,500 options under the Plan to employees, such options being issued in July 1998. 11 Options outstanding under the Plan at June 30, 1999 were as follows: Weighted Average Number of Exercise Exercise Shares Price Price -------- -------- -------- 573,500 $1.50 - $6.00 $1.71 At June 30, 1999, options to acquire 364,163 shares of Common Stock under the Plan were exercisable. Warrants outstanding at June 30, 1999 were as follows: Number of Weighted Equivalent Common Average Shares Exercise Price Exercise Price ----------------- -------------- -------------- 4,664,013 $2.00 - $12.00 $5.05 At June 30, 1999 all warrants to acquire shares of Common Stock were exercisable. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis below should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes to the Consolidated Financial Statements included elsewhere in this report. FORWARD LOOKING STATEMENTS Certain statements in this report, including those utilizing the phrases "will", "expects", "intends", "estimates", "contemplates", and similar phrases, are "forward-looking" statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended), including statements regarding, among other items, (i) the Company's growth strategy, (ii) the Company's intention to acquire or develop additional audio book, printed book and television product, (iii) the Company's intention to enter or broaden distribution markets, and (iv) the Company's ability to successfully implement its business strategy. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "will", "should", or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or be discussions of strategy that involve risks and uncertainties. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements of the Company and its subsidiaries to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the following: uncertainty as to future operating results; growth and acquisition risks; certain risks relating to the entertainment industry; dependence on a limited number of projects; possible need for additional financing; potential for liability claims; dependence on certain outlets for publishing product; competition and legal proceedings and claims. Other factors which may materially affect actual results include, among others, the following: general economic and business conditions, industry capacity, changes in political, social and economic conditions and various other factors beyond the Company's control. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. See the relevant discussions elsewhere herein, in the Company's registration statement on Form S-3 (Registration No. 333-82553) and in the Company's periodic reports and other documents filed with the Securities and Exchange Commission for further discussions of these and other risks and uncertainties applicable to the Company and its business. 12 OVERVIEW The Company commenced business in 1985 as one of the pioneers of the audio book industry and has become one of the leading independent producers (i.e., unaffiliated with any single book publisher) of audio books in the United States. The Company produces and distributes approximately 100 to 120 new titles annually and has built a library of approximately 1,700 titles (including Audio Literature titles) currently offered for sale. Additionally, the Company is engaged in the production and development of television programming. Other activities of the Company include a limited printed book publishing program and the distribution of feature films and television programming. Revenues for the quarter ended June 30, 1999 were $1,481,000 compared with $7,620,000 for the same period in 1998. Net loss for the quarter was $2,133,000 compared to a net loss of $499,000 for the same period in 1998. Revenues for the six months ended June 30, 1999 were $2,904,000 compared with $10,313,000 for the same period last year. The Company incurred a net loss of $3,758,000 for the six months compared to a net loss of $2,262,000 in 1998. The decrease in revenues for the quarter and six months ended June 30, 1999 was primarily a result of reduced television revenues due to timing of the delivery of television motion pictures and a reduced level of audio books released in the current period. In the second quarter of 1998, the Company delivered the television motion picture "Futuresport" to ABC Television. The increase in loss from operations for the quarter was primarily due to such reduced revenues. These items were offset in part by the sale of the Company's long-term investment in the Empire Studios for the six months ended June 30, 1999 and better margins in the publishing business. During the second quarter of 1999, the Company's publishing division launched its new website AudioUniverse.com in order to position itself to capitalize on the growth of e-commerce. AudioUniverse offers approximately 15,000 audio books for sale (including the Company's 1,700 titles) with sound samples for more than 1,000 titles. The demand for audio books is seasonal, with the majority of shipments taking place in the third and fourth quarters of the year. The Company believes that demand for audio books will remain seasonal, and this may adversely affect results of operations for the first and second quarters. Because a significant portion of the Company's expenses are relatively fixed, below-expectation sales in any quarter could adversely affect operating results for that quarter. Substantially all of the Company's sales of audio and printed book products are and will continue to be subject to potential returns by distributors and retailers if not sold to the public. Although the Company makes allowances and reserves for returned product that it believes are adequate, significant increases in return rates can materially and adversely impact the Company's financial condition or results of operations. The Company has a number of television concepts under development including several television motion pictures and a reality series. While the overall television market continues to expand with the growth of new networks and cable channels, increasingly, networks are striving to acquire full ownership rights to new product as distinct from the traditional license basis. Consequently, in order to retain the higher profit margin associated with traditional license arrangements, the Company's focus in the development of television product is to link high-profile event type projects with high-profile talent that will be attractive to networks on a license basis. >From time to time, the Company may have several television projects in development and generally seeks to limit its financial risk in the production of television motion pictures and mini-series by pre-sales and licensing to third parties. The production of television programming has been sporadic over the last several years and significant variances in operating results from year-to-year and quarter-to-quarter can be expected for television programming revenues due to the variable demand for content from broadcast and cable networks. In August 1999, production commenced on both "Quadroon Ball," a movie for the Lifetime cable channel, starring Vanessa L. Williams and "Random Acts of Comedy," a daily half-hour program for the Fox Family Channel, starring David Alan Grier. 13 RESULTS OF OPERATIONS The following table sets forth divisional revenues and operating expenses as a percentage of total revenues:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES Publishing 82 % 26 % 87 % 34 % Television and film 18 74 13 66 ----------- ---------- ----------- ---------- Total 100 % 100 % 100 % 100 % ----------- ---------- ----------- ---------- OPERATING EXPENSES Publishing 39 % 17 % 53 % 24 % Television and film 22 51 15 47 Selling, general & administrative 169 36 168 48 ----------- ---------- ----------- ---------- Total 230 % 104 % 236 % 119 % ----------- ---------- ----------- ----------
QUARTER ENDED JUNE 30, 1999 COMPARED TO QUARTER ENDED JUNE 30, 1998 - ------------------------------------------------------------------- Publishing - ---------- REVENUES. Net publishing revenues for the quarter ended June 30, 1999 decreased $751,000 to $1,215,000 compared with $1,966,000 for the quarter ended June 30, 1998 with the decrease being primarily attributable to a lower volume of new titles published. Leading audio book publications during the current quarter included "Cuba" by Stephen Coonts, "High Exposure" by David Breashears and "Front Row at the White House" by Helen Thomas. COST OF SALES. Cost of sales for the quarter ended June 30, 1999 decreased $736,000 to $582,000 from $1,318,000 for the quarter ended June 30, 1998. The decrease was attributable to a decrease in the number of audio books published, lower production and manufacturing costs and a change in the fourth quarter of 1998 in the estimate of percentages used to amortize capitalized production costs. As a result, cost of sales as a percentage of net publishing revenues was 48% in the quarter ended June 30, 1999 compared to the 67% for the quarter ended June 30, 1998. Film and Television - ------------------- REVENUES. Film and television revenues for the quarter ended June 30, 1999 decreased $5,388,000 to $266,000 from $5,654,000 for the quarter ended June 30, 1998. The decrease was primarily due to the absence in the second quarter of 1999 of the delivery of programming comparable to "Futuresport" which was delivered in the second quarter last year. COST OF SALES. Film and television amortization for the quarter ended June 30, 1999 decreased $3,589,000 to $321,000 from $3,910,000 for the quarter ended June 30, 1998. The decrease was attributable to the decline in film and television revenues mentioned previously. Cost of sales as a percentage of net film and television revenues was 121% and 69% for the quarters ended June 30, 1999 and 1998, respectively. The 1999 margin also reflects a film inventory valuation adjustment. General - ------- GROSS PROFIT. The Company experienced a gross profit of $578,000 for the quarter ended June 30, 1999 compared to $2,392,000 for the quarter ended June 30, 1998, resulting from the matters previously discussed regarding publishing and film revenues and cost of sales. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A includes costs associated with selling, marketing and promoting the Company's products, as well as general corporate expenses including salaries, occupancy costs, professional fees, travel and entertainment. SG&A declined to $2,508,000 for the quarter ended June 30, 1999 from $2,734,000 for the quarter ended June 30, 1998. 14 NET INTEREST EXPENSE. Net interest expense for the quarter ended June 30, 1999 was $203,000 compared with $155,000 for the quarter ended June 30, 1998. The increase in net interest expense is primarily the result of increased utilization of the Chase Loan facility. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 - ------------------------------------------------------------------------- Publishing - ---------- REVENUES. Net publishing revenues for the six months ended June 30, 1999 decreased $1,002,000 to $2,513,000 compared with $3,515,000 for the quarter ended June 30, 1998 with the decrease being primarily attributable to a lower volume of new titles published. Leading audio book publications during the current quarter included "Cuba" by Stephen Coonts, "High Exposure" by David Breashears and "Front Row at the White House" by Helen Thomas. COST OF SALES. Cost of sales for the six months ended June 30, 1999 decreased $949,000 to $1,555,000 from $2,504,000 for the six months ended June 30, 1998. The decrease was attributable to a decrease in the number of audio books published, lower production and manufacturing costs and a change in the fourth quarter of 1998 in the estimate of percentages used to amortize capitalized production costs. As a result, cost of sales as a percentage of net publishing revenues was 62% for the six months ended June 30, 1999 compared to the 71% for the six months ended June 30, 1998 reflect cost savings in packaging and production. Film and Television - ------------------- REVENUES. Film and television revenues for the six months ended June 30, 1999 decreased $6,407,000 to $391,000 from $6,798,000 for the six months ended June 30, 1998. The decrease was primarily due to the absence in the first half of 1999 of the delivery of newly produced programming as compared to the same period last year. COST OF SALES. Film and television amortization for the six months ended June 30, 1999 decreased $4,428,000 to $426,000 from $4,854,000 for the quarter ended June 30, 1998. The decrease was attributable to the decline in film and television revenues mentioned previously. Cost of sales as a percentage of net film and television revenues increased to 109% from 71% for the six months ended June 30 1998 as a result of a film inventory valuation adjustment. General - ------- GROSS PROFIT. The Company experienced a gross profit of $923,000 for the first half year ended June 30, 1999 compared to $2,955,000 for the same period in 1998, resulting from the matters previously discussed regarding publishing and film revenues and cost of sales. SELLING, GENERAL AND ADMINISTRATIVE. SG&A includes costs associated with selling, marketing and promoting the Company's products, as well as general corporate expenses including salaries, occupancy costs, professional fees, travel and entertainment. SG&A decreased to $4,872,000 for the six months ended June 30, 1999 from $4,913,000 for the six months ended June 30, 1998. NET INTEREST EXPENSE. Net interest expense for the period ended June 30, 1999 was $401,000 compared with $302,000 for the six months ended June 30, 1998. The increase in net interest expense is primarily the result of increased utilization of the Chase Loan facility. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- On November 12, 1997, the Company entered into an agreement with Chase Bank providing the Company with an $8,000,000 loan facility for working capital purposes ("Chase Loan"). This facility was increased in July 1998 to $10,000,000. The Chase Loan is secured by substantially all of the Company's assets. The Chase Loan terminates on November 4, 2000. The Chase Loan establishes a "Borrowing Base" comprising: (1) 35% of an independent valuation of the Company's audio library, (2) 85% of the Company's eligible receivables and (3) 30% of the Company's finished goods audio and book inventory. At any time, the Company may borrow or have letters of credit issued up to the Borrowing Base. In addition, the Company may borrow or have letters of credit issued for a further $4,000,000 (provided the aggregate amount borrowed does not exceed $10,000,000) with the consent and guarantee of the principals of MEI. The 15 Chase Loan provides for interest at the bank prime rate plus 2% per annum or the bank's LIBOR rate plus 3% per annum, at the option of the Company. In addition, unused commitment fees are payable at 1/2% per annum. The Chase Loan contains various covenants to which the Company must adhere including limitations on additional indebtedness, investments, acquisitions, capital expenditures and sale of assets, restrictions on the payment of dividends and distributions to shareholders, and various financial compliance tests. The Company was not in compliance with certain of the financial compliance tests at December 31, 1998, March 31, 1999 and June 30, 1999 and has requested waivers from Chase Bank. As of August 16, 1999, the Company received such waivers and the Company and Chase Bank have entered into amendments and waivers to the Chase Loan. At June 30, 1999, the Company had borrowed $7,500,000 against the total facility of $10,000,000. In addition, Chase Bank had provided a letter of credit for $287,000 in respect of certain litigation. On January 28, 1999, the Company and Chase Bank were notified by one of the principals of MEI that there would be no approvals for guarantees of further extensions of credit under the Chase Loan. Accordingly, as of January 28, 1999, the Company had borrowed the maximum amount permitted to be borrowed under the Chase Loan. In connection with entering into 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. The Company has experienced significant negative cash flows from operations, including $10,659,000 for the year ended December 31, 1998 and $4,385,000 for the six months ended June 30, 1999 - see "Financial Statements of the Company - Consolidated Statements of Cash Flows". Such negative cash flows have resulted from, among other things, losses from operations, use of working capital for expansion of audio and printed book publishing, development of television programming and the acquisition of theatrical motion picture product. The Company plans to significantly increase the level of activity in both its audio book and television production operations. In addition, the Company has plans to expand its development, production and distribution activities, including the expansion of its publishing and television operations (although there is no assurance that the Company will expand or that such expansion will be profitable). Such expansion may include future acquisitions of library product or other assets complementary to its current operations or acquisitions of rights involving significantly greater outlays of capital than required in the business conducted to date by the Company. In the event that additional working capital is not obtained or not obtained in sufficient amounts, the Company's operations may be significantly curtailed. The Company's television production activities can affect its capital needs in that the revenues from the initial licensing of television programming may be less than the associated production costs. The ability of the Company to cover the production costs of particular programming is dependent upon the availability, timing and the amount of fees obtained from distributors and other third parties, including revenues from foreign or ancillary markets where available. In any event, the Company from time to time is required to fund at least a portion of its production costs, pending receipt of programming revenues, out of its working capital. Although the Company's strategy generally is not to commence principal photography without first obtaining commitments which cover all or substantially all of the budgeted production costs, from time to time the Company may commence principal photography without having obtained commitments equal to or in excess of such costs. In such circumstances, the Company will be required to fund at least a portion of production and distribution costs, pending receipt of anticipated future revenues, from working capital, from additional debt or equity financings from outside sources or from other financing arrangements, including bank financing. There is no assurance that any such additional financing will be available on acceptable terms. If the Company is unable to obtain such financing, it may be required to reduce or curtail certain operations. In order to obtain rights to certain properties for the Company's publishing and television operations, the Company may be required to make advance cash payments to sources of such properties, including book authors and publishers. While the Company generally attempts to minimize the magnitude of such payments and to obtain advance commitments to offset such payments, the Company is not always able to do so and there is no assurance it will be able to do so in the future. Between April 1, 1999 and June 30, 1999, the Company issued 3,768,448 shares of common stock in exchange for $4,545,000 through several private placements. As of August 12, 1999 the Company's unused sources of funds consisted primarily of approximately $2,134,000 available under the Chase Loan facility. 16 YEAR 2000 Some of the Company's financial business systems or those of its vendors or customers may have been written using two digits rather than four, to define the applicable year. As a result, those systems may have date-sensitive software that recognizes a date "00" as the year 1900 rather than 2000. If not modified or updated, this could cause system failure or miscalculations, potentially resulting in the temporary disruption of operations due to the inability to process certain transactions. The Company has contracted with Mercedes Distribution to provide a full distribution service for its publishing operations. This distribution service includes complete computer systems needs for distribution of the Company's publishing operations together with information systems pertaining thereto. If Mercedes were to experience year 2000 problems, the Company could experience significant deterioration of operating efficiency. Mercedes Distribution has represented to the Company that such systems are year 2000 compliant. The Company utilizes MAS 90, a widely available package system for its financial systems. The vendor of MAS 90 has represented to the Company that MAS 90 is year 2000 compliant. The Company has initiated communications with significant suppliers and customers to determine the extent that they may be vulnerable to their own year 2000 issues. Based on the representations of suppliers and customers contacted, management does not believe the Company's continued operation is at risk due to key business partners not addressing the year 2000 issue. The Company does not believe that year 2000 problems that may be experienced by its customers, suppliers and vendors (other than the Company's audiobook distribution companies) would result in a significant deterioration of operating efficiency. However, until the Company has completed its evaluation of the year 2000 issue, no assurance can be given that the Company will avoid deterioration of operating efficiency or programming costs because of year 2000 problems. The Company estimates the incremental costs associated with addressing and fixing potential year 2000 problems to be no more than $25,000. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The discussion in this Item 1 should be read in conjunction with the Company's Annual Report on Form 10-KSB and 10-KSB/A for the year ended December 31, 1998 and the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999, which contain descriptions of pending legal proceedings to which the Company is a party. 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 Alexandria Datig v. Dove Books, Inc., etc., et al, which opinion was modified on August 13, 1999. The appeals court reversed the judgment and remanded the proceedings to the trial court. While the Company believes that it has good and meritorious defenses to the claims in the action at the trial court level, there is no assurance that the Company will prevail in the action. 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. Mr. Viner and Ms. Raffin are former officers and directors of the Company. The plaintiffs allege violation of the Lanham Act, statutory and common law unfair competition and false advertising, and seek 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 Stated District Court for the Central District of California Western Division (case No. 99-07970 CBM (SHx)). While the Company believes that it has good and meritorious defenses to the claims in the action, there is no assurance that the Company will prevail in the action. 17 In addition to the above claims and the claims identified in the Company's Annual Report on Form 10-KSB and 10-KSB/A for the year ended December 31, 1998 and the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999, the Company is a party to various other routine legal proceedings and claims incidental to its business. There can be no assurance that the ultimate outcome of these matters will be resolved in favor of the Company. In addition, even if the ultimate outcome is resolved in favor of the Company, involvement in any litigation or claims could entail considerable cost to the Company and the diversion of the attention of management, either of which could have a material adverse effect on the business of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The Company amended its Articles of Incorporation, which amendment increased the number of shares of the Company's authorized common stock from 20,000,000 shares to 50,000,000 shares. See Item 4 below. Pursuant to a Stock Purchase Agreement, dated as of April 1, 1999, between the Company and Ronald Lightstone, Mr. Lightstone purchased from the Company 30,000 shares of common stock of the Company on April 6, 1999 for $19,125 (or $0.6375 per share). Pursuant to a Stock Purchase Agreement, dated as of May 4, 1999, between the Company and Gorman Limited Partnership ("GLP"), GLP purchased from the Company 416,667 shares of common stock of the Company on May 24, 1999 for $500,000 (or $1.20 per share). Pursuant to a Stock Purchase Agreement, dated as of May 4, 1999, between the Company and Elkes Limited Partnership ("ELP"), ELP purchased from the Company 416,667 shares of common stock of the Company on May 25, 1999 for $500,000 (or $1.20 per share). Pursuant to a Stock Purchase Agreement, dated as of April 1, 1999, between the Company and GLP, GLP purchased from the Company (i) 531,561 shares of common stock of the Company on May 13, 1999 for $675,085 (or $1.27 per share), (ii) 136,219 shares of common stock of the Company on May 17, 1999 for $173,000 (or $1.27 per share), (iii) 157,200 shares of common stock of the Company on June 1, 1999 for $199,644 (or $1.27 per share), (iv) 50,400 shares of common stock of the Company on June 3, 1999 for $64,008 (or $1.27 per share), (v) 333,334 shares of common stock of the Company on May 21, 1999 for $400,000 (or $1.27 per share), (vi) 16,667 shares of common stock of the Company on June 4, 1999 for $20,000 (or $1.20 per share) (vii) 46,400 shares of common stock of the Company on June 3, 1999 for $55,680 (or $1.20 per share). Pursuant to a Stock Purchase Agreement, dated as of April 1, 1999, between the Company and ELP, ELP purchased from the Company (i) 300,000 shares of common stock of the Company on April 22, 1999 for $393,733 (or $1.31 per share) and (ii) 1,000,000 shares of common stock of the Company on May 6, 1999 for $1,200,000 (or $1.20 per share). Pursuant to a Stock Purchase Agreement, dated as of May 19, 1999, between the Company and Peter Engel, Mr. Engel purchased from the Company 250,000 shares of common stock of the Company for $300,000 (or $1.20 per share). On May 24, 1999 the Company issued and sold 83,833 shares of common stock of the Company for $100,000 (or $1.20 per share) in a private placement. On July 6, 1999 the Company issued 37,641 shares of common stock of the Company to Steinberg, Nutter & Brent in satisfaction of amounts owed by the Company to that firm. All of the shares were issued in reliance on Section 4(2) of the Securities Act of 1933 as amended. On June 3, 1999 the Company issued and delivered 300,000 shares of common stock of the Company to American Audio Literature as partial payment for all of the assets of American Audio Literature. The shares were issued in reliance on Regulation D promulgated under the Securities Act of 1933. 18 During the period April 1, 1999 to June 30, 1999, 54 shares of the Company's Series E Preferred Stock were released from escrow in lieu of payments to certain former officers for the Company. During the period April 1, 1999 to June 30, 1999, 140,280 shares of common stock of the Company were issued upon conversion of 189 shares of Series E Preferred Stock held by such officers. 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 the Company, the guarantors named therein and The Chase Manhattan Bank provides that the Company is prohibited from declaring cash dividends on its common stock. ITEM 3. DEFAULTS UPON SENIOR SECURITIES See the discussion in Note 5 of the Notes to Consolidated Financial Statements in Item 1 of Part I herein which discussion is incorporated by reference in this Item 3 of Part II. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 21, 1999, the Board of Directors of the Company approved and adopted an amendment to the Articles of Incorporation of the Company that increased the number of shares of the Company's authorized Common Stock from 20,000,000 shares to 50,000,000 shares (the "Amendment"). In accordance with the California General Corporation Law and the By-Laws of the Company, on April 1, 1999, Media Equities International, LLC ("MEI"), ELP, GLP and Mr. Lightstone, who then held, in the aggregate, approximately 66% of the outstanding voting power of the Company, approved the Amendment by written consent in lieu of a meeting of shareholders. 10,419,435 common shares, 4,000 Series B Preferred Stock shares, 1,920 Series C Preferred Stock Shares, and 214,113 Series D Preferred Stock Shares were voted in favor of the Amendment. On April 21, 1999, the Board of Directors of the Company approved a private placement and issuance of shares of common stock of the Company to raise additional equity capital for the Company (the "Equity Investment"). In accordance with the California General Corporation Law and the By-Laws of the Company, on April 1, 1999, MEI, ELP, GLP and Mr. Lightstone, who then held, in the aggregate, approximately 66% of the outstanding voting power of the Company, approved the Equity Investment by written consent in lieu of a meeting of shareholders. 10,419,435 common shares, 4,000 Series B Preferred Stock shares, 1,920 Series C Preferred Stock Shares, and 214,113 Series D Preferred Stock Shares were voted in favor of the Equity Investment. The Equity Investment provided the Company with approximately $4.5 million of additional equity capital through the sale of approximately 3.7 million shares of Common Stock to persons previously unaffiliated with the Company, and certain of the Company's officers and other holders of common stock of the Company. Pursuant to Section 14(c) of the Securities and Exchange Act of 1934, in connection with the approval of the Amendment and the Equity Investment by written consent of the shareholders in lieu of a meeting of shareholders, the Company filed a Schedule 14C Information Statement with the Securities and Exchange Commission on June 8, 1999 and mailed the Information Statement on or about June 8, 1999 to all holders of the Company's common stock and preferred stock. 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) Exhibits: 10.1 Stock Purchase Agreement dated as of April 1, 1999, between NewStar Media Inc. and Ronald Lightstone 10.2 Stock Purchase Agreement dated as of April 1, 1999, between NewStar Media Inc. and Gorman Limited Partnership 10.3 Stock Purchase Agreement dated as of April 1, 1999, between NewStar Media Inc. and Elkes Limited Partnership 10.4 Stock Purchase Agreement dated as of May 4, 1999, between NewStar Media Inc. and Gorman Limited Partnership 10.5 Stock Purchase Agreement dated as of May 4, 1999, between NewStar Media Inc. and Elkes Limited Partnership 10.6 Stock Purchase Agreement dated as of May 19, 1999, between NewStar Media Inc. and Peter Engel 10.7 Registration Rights Agreement dated as of May 17, 1999 between NewStar Media Inc. and Peter Engel 27 Financial Data Schedule (B) Reports on Form 8-K: A report on Form 8-K (dated May 17, 1999) was filed on May 27, 1999 reporting under Item 5 (i) the appointment of Terrence A. Elkes as Chairman of the Company and Ronald Lightstone and Kenneth F. Gorman as Co-Vice Chairmen and the appointment of the new senior management team of the publishing division of the Company and (ii) the sale of approximately 3.5 million shares of common stock of the Company for approximately $4.2 million. 20 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 23, 1999 NEWSTAR MEDIA INC. By /s/ Terrence A. Elkes ------------------------------- Terrence A. Elkes Chairman and Chief Executive Officer Date: August 23, 1999 By /s/ John T. Brady ------------------------------ John T. Brady Chief Financial Officer 21 NEWSTAR MEDIA INC. INDEX TO EXHIBITS Exhibit Number ------------ 10.1 Stock Purchase Agreement dated as of April 1, 1999, between NewStar Media Inc. and Ronald Lightstone 10.2 Stock Purchase Agreement dated as of April 1, 1999, between NewStar Media Inc. and Gorman Limited Partnership 10.3 Stock Purchase Agreement dated as of April 1, 1999, between NewStar Media Inc. and Elkes Limited Partnership 10.4 Stock Purchase Agreement dated as of May 4, 1999, between NewStar Media Inc. and Gorman Limited Partnership 10.5 Stock Purchase Agreement dated as of May 4, 1999, between NewStar Media Inc. and Elkes Limited Partnership 10.6 Stock Purchase Agreement dated as of May 19, 1999, between NewStar Media Inc. and Peter Engel 10.7 Registration Rights Agreement dated as of May 17, 1999 between NewStar Media Inc. and Peter Engel 27 Financial Data Schedule 22 EX-10.1 2 STOCK PURCHASE AGREEMENT - RONALD LIGHTSTONE Exhibit 10.1 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (the "AGREEMENT") made as of April 1, 1999, among NewStar Media Inc., a California corporation (the "COMPANY") and Ronald Lightstone ("Lightstone"). WITNESSETH: WHEREAS, the Company may from time to desire to issue and sell to purchasers shares of Common Stock of the Company, par value $0.1 per share ("Common Stock"); WHEREAS, such purchasers may desire to purchase registered shares of Common Stock; WHEREAS, Lightstone owns shares of Common Stock covered by an effective registration statement ("Registered Shares"); WHEREAS, in order to assist the Company in obtaining financing, Lightstone has agreed with the Company that from time to time Lightstone will sell Registered Shares to purchasers identified by the Company at such prices and in such amounts as may be approved by the Company; provided that Lightstone shall simultaneously purchase from the Company, and the Company shall issue and sell to Lightstone, an equal number of shares of Common Stock at the same price that Lightstone sold Registered Shares; provided further, that Lightstone shall not be obligated or required to sell Registered Shares hereunder; WHEREAS, the Board of Directors of the Company has approved the purchase of Common Stock by Lightstone as contemplated in this Agreement and has approved and authorized such transactions as exempt transactions under Rule 16b-3(d) promulgated under Section 16 of the Securities and Exchange Act of 1938. NOW, THEREFORE, in the consideration of the foregoing and the covenants, agreements, representations and warranties herein contained, and intending to be legally bound, the parties hereby mutually agree as follows: 1 SECTION 1 SALE AND PURCHASE OF THE COMPANY'S SECURITIES; CLOSING 1.1. SALE OF THE SECURITIES. During the period commencing on the date hereof and ending June 15, 1999, the Company shall have the right to request that Lightstone sell from time to time up to 2,000,000 Registered Shares to one or more purchasers for such prices and in such amounts and at such times as the Company may determine. If Lightstone agrees to sell Registered Shares to the purchasers at the time and for the price determined by the Company (a "Transaction"), Lightstone shall purchase from the Company, and the Company shall sell and issue to Lightstone, the Replacement Shares (as defined below) for a purchase price equal to the Replacement Price (as defined below). For any Transaction, the "Replacement Shares" shall be that number of shares of Common Stock equal to the number of Registered Shares sold in the Transaction, and the "Replacement Price" shall be the price that Lightstone received for the Registered Shares from the purchaser of such Registered Shares in the Transaction. 1.2 PURCHASE OF REPLACEMENT SHARES; DELIVERY. Immediately upon sale of Registered Shares by Lightstone hereunder, Lightstone shall pay the Replacement Price for the Replacement Shares to the Company. Upon amendment of the Company's articles of incorporation to increase the authorized number of shares, and shareholder approval of the transactions contemplated herein in accordance with Regulation 14C of the Securities and Exchange Act of 1934, the Company shall issue and deliver to Lightstone a certificate or certificates, registered in the name of Ronald Lightstone, representing the Replacement Shares. 1.3 NATURE OF TRANSACTION. It is the intent of the parties hereto that the transactions contemplated in this Agreement are solely to assist the Company in raising equity financing from persons other than Lightstone, and that Lightstone will derive no economic benefit from any of the transactions contemplated in this Agreement. It is not intended that Lightstone receive an economic benefit upon the consummation of the transactions contemplated in this Agreement. The parties hereto acknowledge that Lightstone may suffer an economic detriment because, upon consummation of the transactions, Lightstone will own the same number of shares of Common Stock as he did before the transaction, but such shares will be unregistered, and accordingly may have a value less that the registered shares owned by Lightstone prior to the transaction. 2 1.4 TAXES. If Lightstone is required by law to make any payment on account of any Federal or state income taxes due the sale and/or purchase of Common Stock pursuant to this Agreement, the Company shall pay to Lightstone all such amounts before the date on which penalties attach thereto, and such sum payable by the Company shall be increased to the extent necessary to ensure that, after the making of any payment of taxes on amounts to be received by Lightstone from the Company under this Section 1.4, Lightstone receives a sum equal to what it would have received had no taxes been payable by Lightstone on account of any sales and/or purchases hereunder. SECTION 2 THE COMPANY'S REPRESENTATIONS AND WARRANTIES The Company represents and warrants to Lightstone the following: 2.1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California, and has all requisite corporate power and authority to own and lease its properties and assets and to conduct its business as currently conducted. 2.2. The Company has all requisite corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. The execution, delivery, and performance of this agreement by the Company have been duly authorized by all requisite corporate action, and this Agreement when duly executed and delivered by the Company will constitute the valid and binding obligations of the Company enforceable against the Company in accordance with its respective terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 2.3. The sale, issuance and delivery of the Replacement Shares in accordance with the terms of this Agreement have been authorized by all necessary corporate action, and the Replacement Shares when sold, issued and delivered, against the full payment of the Replacement Price, will be duly and validly issued, fully paid and nonassessable. The sale, issuance and delivery of the Replacement Shares are not subject to any preemptive rights of stockholders of the Company or to any right of first refusal or other similar right in favor of any person. 2.4. PRIVATE OFFERING. Neither the Company nor anyone acting on behalf of the Company has offered the Replacement Shares for sale to, or solicited offers to buy from, or otherwise approached or negotiated with, any individual or entity in connection with the sale of such securities other than a limited number of investors, including Lightstone. Assuming the accuracy of Lightstone's representations contained in Section 3 of this Agreement, the offer, issuance and delivery of the Replacement Shares to Lightstone are exempt from registration under the Securities Act of 1933, as amended (the "1933 ACT"). 3 SECTION 3 PURCHASER'S REPRESENTATIONS AND WARRANTIES Lightstone represents and warrants to the Company the following: 3.1. AUTHORIZATION. Lightstone has all requisite power and authority to execute this Agreement and to carry out the transactions contemplated hereby. The execution, delivery and performance of this Agreement by Lightstone have been duly authorized by all requisite corporate action, and this Agreement when executed and delivered by Lightstone will constitute its valid and binding obligation, enforceable against Lightstone in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 3.2. PURCHASE FOR INVESTMENT. The Replacement Shares are being acquired by Lightstone for its own account, not as a nominee or agent, for investment and not with a view to resale or distribution within the meaning of the 1933 Act, and the rules and regulations thereunder, and Lightstone will not distribute the Replacement Shares in violation or contravention of the 1933 Act. Lightstone is not aware of any facts or circumstances that contradict the representation in the first sentence of Section 2.4. 3.3. RESTRICTIONS ON TRANSFER. Lightstone acknowledges that (a) the Replacement Shares will not be registered under the 1933 Act at the time of delivery of such shares to Lightstone, (b) the Replacement Shares will not be transferable unless so registered or unless an exception for such registration is applicable and (c) certificates representing the Replacement Shares will bear a legend substantially in the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES MAY BE MADE BY THE COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM." 4 3.4. SOPHISTICATION: ACCESS TO INFORMATION. (a) Lightstone represents and warrants to the Company, that Lightstone and if Lightstone is a limited liability company each member of Lightstone (i) is an "accredited investor" as defined in the 1933 Act and is financially able to purchase the Replacement Shares, (ii) is fully capable of understanding the type of investment being made pursuant to this Agreement, and the risks involved in connection therewith, (iii) believes that the nature of the Replacement Shares is consistent with their overall investment programs and financial position, (iv) recognizes that there are substantial risks involved in their purchase of the Replacement Shares, (v) is capable of bearing the economic risk of its investment for an indefinite period of time and can afford a complete loss of its investment, (vi) has adequate means of providing for their current liquidity needs, (vii) has no need for liquidity of their investment, (viii) is not expecting any short term income from their investment and (ix) has no reason to anticipate any change in personal circumstances, financial or otherwise, which may cause or require any sale of the Replacement Shares. (b) Lightstone acknowledges to the Company that it has had the opportunity to ask questions of and receive answers from the Company's officers and directors concerning the terms and conditions of the (i) purchase and delivery of the Replacement Shares and (ii) business and financial conditions of the Company; and Lightstone has received to its satisfaction, such additional information about the business and financial conditions of the Company and the terms and conditions of the purchase and delivery of the Replacement Shares, as it has requested. SECTION 4 MISCELLANEOUS 4.1. GOVERNING LAW. This agreement shall be governed by and construed and enforced in accordance with laws of the State of New York, without reference to conflict of law provisions. 4.2. ENTIRE AGREEMENT. This Agreement including any Appendices, Schedules or Exhibits hereto, contains the entire agreement and understanding among the parties with respect to the subject matter hereof and shall not be modified or affected by any offer, proposal, statement or representation, oral or written, made by or for any party in connection with the negotiation of the terms hereof. All references herein to this Agreement shall specifically include, incorporate and refer to the Appendices, Schedules and Exhibits attached hereto which are hereby made a part hereof. There are no representations, promises, warranties, covenants, undertakings or assurances (express or implied) other than those expressly set forth or provided for herein and in the other documents referred to herein. This Agreement may not be modified or amended orally, but only by a writing signed by the parties. 5 4.3. SEVERABILITY. If any part of this Agreement is held to be unenforceable or invalid under, or in conflict with, the applicable law of any jurisdiction, the unenforceable, invalid or conflicting part shall, to the extent permitted by applicable law, be narrowed or replaced, to the extent possible, with a judicial construction in such jurisdiction that effects the intent of the parties regarding this Agreement and such unenforceable, invalid or conflicting part. To the extent permitted by applicable law, notwithstanding the unenforceability, invalidity or conflict with applicable law of any part of this Agreement, the remaining parts shall be valid, enforceable and binding on the parties. 4.4. HEADINGS. The headings of the Sections of this Agreement are reinstated for convenience of reference only and shall not be considered a part hereof. 4.5. COUNTERPARTS. This agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 6 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date set forth above. THE COMPANY: NEWSTAR MEDIA INC. By: /S/ROBERT MURRAY ------------------------------- Name: Robert Murray Title: Vice President & General Counsel THE PURCHASER: /S/ RONALD LIGHTSTONE ------------------------------- Ronald Lightstone EX-10.2 3 STOCK PURCHASE AGREEMENT - GORMAN LTD. PARTNERSHIP Exhibit 10.2 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (the "AGREEMENT") made as of April 1, 1999, among NewStar Media Inc., a California corporation (the "COMPANY") and Gorman Limited Partnership ("GLP"). WITNESSETH: WHEREAS, the Company may from time to desire to issue and sell to purchasers shares of Common Stock of the Company, par value $0.1 per share ("Common Stock"); WHEREAS, such purchasers may desire to purchase registered shares of Common Stock; WHEREAS, GLP owns shares of Common Stock covered by an effective registration statement ("Registered Shares"); WHEREAS, in order to assist the Company in obtaining financing, GLP has agreed with the Company that from time to time GLP will sell Registered Shares to purchasers identified by the Company at such prices and in such amounts as may be approved by the Company; provided that GLP shall simultaneously purchase from the Company, and the Company shall issue and sell to GLP, an equal number of shares of Common Stock at the same price that GLP sold Registered Shares; provided further, that GLP shall not be obligated or required to sell Registered Shares hereunder; WHEREAS, the Board of Directors of the Company has approved the purchase of Common Stock by GLP as contemplated in this Agreement and has approved and authorized such transactions as exempt transactions under Rule 16b-3(d) promulgated under Section 16 of the Securities and Exchange Act of 1938. NOW, THEREFORE, in the consideration of the foregoing and the covenants, agreements, representations and warranties herein contained, and intending to be legally bound, the parties hereby mutually agree as follows: SECTION 1 SALE AND PURCHASE OF THE COMPANY'S SECURITIES; CLOSING 1 1.1. SALE OF THE SECURITIES. During the period commencing on the date hereof and ending June 15, 1999, the Company shall have the right to request that GLP sell from time to time up to 2,000,000 Registered Shares to one or more purchasers for such prices and in such amounts and at such times as the Company may determine. If GLP agrees to sell Registered Shares to the purchasers at the time and for the price determined by the Company (a "Transaction"), GLP shall purchase from the Company, and the Company shall sell and issue to GLP, the Replacement Shares (as defined below) for a purchase price equal to the Replacement Price (as defined below). For any Transaction, the "Replacement Shares" shall be that number of shares of Common Stock equal to the number of Registered Shares sold in the Transaction, and the "Replacement Price" shall be the price that GLP received for the Registered Shares from the purchaser of such Registered Shares in the Transaction. 1.2 PURCHASE OF REPLACEMENT SHARES; DELIVERY. Immediately upon sale of Registered Shares by GLP hereunder, GLP shall pay the Replacement Price for the Replacement Shares to the Company. Upon amendment of the Company's articles of incorporation to increase the authorized number of shares, and shareholder approval of the transactions contemplated herein in accordance with Regulation 14C of the Securities and Exchange Act of 1934, the Company shall issue and deliver to GLP a certificate or certificates, registered in GLP's name, representing the Replacement Shares. 1.3 NATURE OF TRANSACTION. It is the intent of the parties hereto that the transactions contemplated in this Agreement are solely to assist the Company in raising equity financing from persons other than GLP, and that GLP will derive no economic benefit from any of the transactions contemplated in this Agreement. It is not intended that GLP receive an economic benefit upon the consummation of the transactions contemplated in this Agreement. The parties hereto acknowledge that GLP may suffer an economic detriment because, upon consummation of the transactions, GLP will own the same number of shares of Common Stock as it did before the transaction, but such shares will be unregistered, and accordingly may have a value less that the registered shares owned by GLP prior to the transaction. 1.4 TAXES. If GLP is required by law to make any payment on account of any Federal or state income taxes due the sale and/or purchase of Common Stock pursuant to this Agreement, the Company shall pay to GLP all such amounts before the date on which penalties attach thereto, and such sum payable by the Company shall be increased to the extent necessary to ensure that, after the making of any payment of taxes on amounts to be received by GLP from the Company under this Section 1.4, GLP receives a sum equal to what it would have received had no taxes been payable by GLP on account of any sales and/or purchases hereunder. 2 SECTION 2 THE COMPANY'S REPRESENTATIONS AND WARRANTIES The Company represents and warrants to GLP the following: 2.1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California, and has all requisite corporate power and authority to own and lease its properties and assets and to conduct its business as currently conducted. 2.2. The Company has all requisite corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. The execution, delivery, and performance of this agreement by the Company have been duly authorized by all requisite corporate action, and this Agreement when duly executed and delivered by the Company will constitute the valid and binding obligations of the Company enforceable against the Company in accordance with its respective terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 2.3. The sale, issuance and delivery of the Replacement Shares in accordance with the terms of this Agreement have been authorized by all necessary corporate action, and the Replacement Shares when sold, issued and delivered, against the full payment of the Replacement Price, will be duly and validly issued, fully paid and nonassessable. The sale, issuance and delivery of the Replacement Shares are not subject to any preemptive rights of stockholders of the Company or to any right of first refusal or other similar right in favor of any person. 2.4. PRIVATE OFFERING. Neither the Company nor anyone acting on behalf of the Company has offered the Replacement Shares for sale to, or solicited offers to buy from, or otherwise approached or negotiated with, any individual or entity in connection with the sale of such securities other than a limited number of investors, including GLP. Assuming the accuracy of GLP's representations contained in Section 3 of this Agreement, the offer, issuance and delivery of the Replacement Shares to GLP are exempt from registration under the Securities Act of 1933, as amended (the "1933 ACT"). 3 SECTION 3 PURCHASER'S REPRESENTATIONS AND WARRANTIES GLP represents and warrants to the Company the following: 3.1. AUTHORIZATION. GLP has all requisite power and authority to execute this Agreement and to carry out the transactions contemplated hereby. The execution, delivery and performance of this Agreement by GLP have been duly authorized by all requisite corporate action, and this Agreement when executed and delivered by GLP will constitute its valid and binding obligation, enforceable against GLP in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 3.2. PURCHASE FOR INVESTMENT. The Replacement Shares are being acquired by GLP for its own account, not as a nominee or agent, for investment and not with a view to resale or distribution within the meaning of the 1933 Act, and the rules and regulations thereunder, and GLP will not distribute the Replacement Shares in violation or contravention of the 1933 Act. GLP is not aware of any facts or circumstances that contradict the representation in the first sentence of Section 2.4. 3.3. RESTRICTIONS ON TRANSFER. GLP acknowledges that (a) the Replacement Shares will not be registered under the 1933 Act at the time of delivery of such shares to GLP, (b) the Replacement Shares will not be transferable unless so registered or unless an exception for such registration is applicable and (c) certificates representing the Replacement Shares will bear a legend substantially in the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES MAY BE MADE BY THE COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM." 4 3.4. SOPHISTICATION: ACCESS TO INFORMATION. (a) GLP represents and warrants to the Company, that GLP and if GLP is a limited liability company each member of GLP (i) is an "accredited investor" as defined in the 1933 Act and is financially able to purchase the Replacement Shares, (ii) is fully capable of understanding the type of investment being made pursuant to this Agreement, and the risks involved in connection therewith, (iii) believes that the nature of the Replacement Shares is consistent with their overall investment programs and financial position, (iv) recognizes that there are substantial risks involved in their purchase of the Replacement Shares, (v) is capable of bearing the economic risk of its investment for an indefinite period of time and can afford a complete loss of its investment, (vi) has adequate means of providing for their current liquidity needs, (vii) has no need for liquidity of their investment, (viii) is not expecting any short term income from their investment and (ix) has no reason to anticipate any change in personal circumstances, financial or otherwise, which may cause or require any sale of the Replacement Shares. (b) GLP acknowledges to the Company that it has had the opportunity to ask questions of and receive answers from the Company's officers and directors concerning the terms and conditions of the (i) purchase and delivery of the Replacement Shares and (ii) business and financial conditions of the Company; and GLP has received to its satisfaction, such additional information about the business and financial conditions of the Company and the terms and conditions of the purchase and delivery of the Replacement Shares, as it has requested. SECTION 4 MISCELLANEOUS 4.1. GOVERNING LAW. This agreement shall be governed by and construed and enforced in accordance with laws of the State of New York, without reference to conflict of law provisions. 4.2. ENTIRE AGREEMENT. This Agreement including any Appendices, Schedules or Exhibits hereto, contains the entire agreement and understanding among the parties with respect to the subject matter hereof and shall not be modified or affected by any offer, proposal, statement or representation, oral or written, made by or for any party in connection with the negotiation of the terms hereof. All references herein to this Agreement shall specifically include, incorporate and refer to the Appendices, Schedules and Exhibits attached hereto which are hereby made a part hereof. There are no representations, promises, warranties, covenants, undertakings or assurances (express or implied) other than those expressly set forth or provided for herein and in the other documents referred to herein. This Agreement may not be modified or amended orally, but only by a writing signed by the parties. 5 4.3. SEVERABILITY. If any part of this Agreement is held to be unenforceable or invalid under, or in conflict with, the applicable law of any jurisdiction, the unenforceable, invalid or conflicting part shall, to the extent permitted by applicable law, be narrowed or replaced, to the extent possible, with a judicial construction in such jurisdiction that effects the intent of the parties regarding this Agreement and such unenforceable, invalid or conflicting part. To the extent permitted by applicable law, notwithstanding the unenforceability, invalidity or conflict with applicable law of any part of this Agreement, the remaining parts shall be valid, enforceable and binding on the parties. 4.4. HEADINGS. The headings of the Sections of this Agreement are reinstated for convenience of reference only and shall not be considered a part hereof. 4.5. COUNTERPARTS. This agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 6 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date set forth above. The Company: NEWSTAR MEDIA INC. By:/s/ROBERT MURRAY ---------------------------------- Name: Robert Murray Title: Vice President & General Counsel The Purchaser: GORMAN LIMITED PARTNERSHIP By:/s/ Kenneth F. Gorman ---------------------------------- Kenneth F. Gorman Managing General Partner EX-10.3 4 STOCK PURCHASE AGREEMENT - ELKES LTD. PARTNERSHIP Exhibit 10.3 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (the "AGREEMENT") made as of April 1, 1999, among NewStar Media Inc., a California corporation (the "COMPANY") and Elkes Limited Partnership ("ELP"). WITNESSETH: WHEREAS, the Company may from time to desire to issue and sell to purchasers shares of Common Stock of the Company, par value $0.1 per share ("Common Stock"); WHEREAS, such purchasers may desire to purchase registered shares of Common Stock; WHEREAS, ELP owns shares of Common Stock covered by an effective registration statement ("Registered Shares"); WHEREAS, in order to assist the Company in obtaining financing, ELP has agreed with the Company that from time to time ELP will sell Registered Shares to purchasers identified by the Company at such prices and in such amounts as may be approved by the Company; provided that ELP shall simultaneously purchase from the Company, and the Company shall issue and sell to ELP, an equal number of shares of Common Stock at the same price that ELP sold Registered Shares; provided further, that ELP shall not be obligated or required to sell Registered Shares hereunder; WHEREAS, the Board of Directors of the Company has approved the purchase of Common Stock by ELP as contemplated in this Agreement and has approved and authorized such transactions as exempt transactions under Rule 16b-3(d) promulgated under Section 16 of the Securities and Exchange Act of 1938. NOW, THEREFORE, in the consideration of the foregoing and the covenants, agreements, representations and warranties herein contained, and intending to be legally bound, the parties hereby mutually agree as follows: SECTION 1 SALE AND PURCHASE OF THE COMPANY'S SECURITIES; CLOSING 1 1.1. SALE OF THE SECURITIES. During the period commencing on the date hereof and ending June 15, 1999, the Company shall have the right to request that ELP sell from time to time up to 2,000,000 Registered Shares to one or more purchasers for such prices and in such amounts and at such times as the Company may determine. If ELP agrees to sell Registered Shares to the purchasers at the time and for the price determined by the Company (a "Transaction"), ELP shall purchase from the Company, and the Company shall sell and issue to ELP, the Replacement Shares (as defined below) for a purchase price equal to the Replacement Price (as defined below). For any Transaction, the "Replacement Shares" shall be that number of shares of Common Stock equal to the number of Registered Shares sold in the Transaction, and the "Replacement Price" shall be the price that ELP received for the Registered Shares from the purchaser of such Registered Shares in the Transaction. 1.2 PURCHASE OF REPLACEMENT SHARES; DELIVERY. Immediately upon sale of Registered Shares by ELP hereunder, ELP shall pay the Replacement Price for the Replacement Shares to the Company. Upon amendment of the Company's articles of incorporation to increase the authorized number of shares, and shareholder approval of the transactions contemplated herein in accordance with Regulation 14C of the Securities and Exchange Act of 1934, the Company shall issue and deliver to ELP a certificate or certificates, registered in ELP's name, representing the Replacement Shares. 1.3 NATURE OF TRANSACTION. It is the intent of the parties hereto that the transactions contemplated in this Agreement are solely to assist the Company in raising equity financing from persons other than ELP, and that ELP will derive no economic benefit from any of the transactions contemplated in this Agreement. It is not intended that ELP receive an economic benefit upon the consummation of the transactions contemplated in this Agreement. The parties hereto acknowledge that ELP may suffer an economic detriment because, upon consummation of the transactions, ELP will own the same number of shares of Common Stock as it did before the transaction, but such shares will be unregistered, and accordingly may have a value less that the registered shares owned by ELP prior to the transaction. 1.4 TAXES. If ELP is required by law to make any payment on account of any Federal or state income taxes due the sale and/or purchase of Common Stock pursuant to this Agreement, the Company shall pay to ELP all such amounts before the date on which penalties attach thereto, and such sum payable by the Company shall be increased to the extent necessary to ensure that, after the making of any payment of taxes on amounts to be received by ELP from the Company under this Section 1.4, ELP receives a sum equal to what it would have received had no taxes been payable by ELP on account of any sales and/or purchases hereunder. 2 SECTION 2 THE COMPANY'S REPRESENTATIONS AND WARRANTIES The Company represents and warrants to ELP the following: 2.1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California, and has all requisite corporate power and authority to own and lease its properties and assets and to conduct its business as currently conducted. 2.2. The Company has all requisite corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. The execution, delivery, and performance of this agreement by the Company have been duly authorized by all requisite corporate action, and this Agreement when duly executed and delivered by the Company will constitute the valid and binding obligations of the Company enforceable against the Company in accordance with its respective terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 2.3. The sale, issuance and delivery of the Replacement Shares in accordance with the terms of this Agreement have been authorized by all necessary corporate action, and the Replacement Shares when sold, issued and delivered, against the full payment of the Replacement Price, will be duly and validly issued, fully paid and nonassessable. The sale, issuance and delivery of the Replacement Shares are not subject to any preemptive rights of stockholders of the Company or to any right of first refusal or other similar right in favor of any person. 2.4. PRIVATE OFFERING. Neither the Company nor anyone acting on behalf of the Company has offered the Replacement Shares for sale to, or solicited offers to buy from, or otherwise approached or negotiated with, any individual or entity in connection with the sale of such securities other than a limited number of investors, including ELP. Assuming the accuracy of ELP's representations contained in Section 3 of this Agreement, the offer, issuance and delivery of the Replacement Shares to ELP are exempt from registration under the Securities Act of 1933, as amended (the "1933 ACT"). 3 SECTION 3 PURCHASER'S REPRESENTATIONS AND WARRANTIES ELP represents and warrants to the Company the following: 3.1. AUTHORIZATION. ELP has all requisite power and authority to execute this Agreement and to carry out the transactions contemplated hereby. The execution, delivery and performance of this Agreement by ELP have been duly authorized by all requisite corporate action, and this Agreement when executed and delivered by ELP will constitute its valid and binding obligation, enforceable against ELP in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 3.2. PURCHASE FOR INVESTMENT. The Replacement Shares are being acquired by ELP for its own account, not as a nominee or agent, for investment and not with a view to resale or distribution within the meaning of the 1933 Act, and the rules and regulations thereunder, and ELP will not distribute the Replacement Shares in violation or contravention of the 1933 Act. ELP is not aware of any facts or circumstances that contradict the representation in the first sentence of Section 2.4. 3.3. RESTRICTIONS ON TRANSFER. ELP acknowledges that (a) the Replacement Shares will not be registered under the 1933 Act at the time of delivery of such shares to ELP, (b) the Replacement Shares will not be transferable unless so registered or unless an exception for such registration is applicable and (c) certificates representing the Replacement Shares will bear a legend substantially in the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES MAY BE MADE BY THE COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM." 4 3.4. SOPHISTICATION: ACCESS TO INFORMATION. (a) ELP represents and warrants to the Company, that ELP and if ELP is a limited liability company each member of ELP (i) is an "accredited investor" as defined in the 1933 Act and is financially able to purchase the Replacement Shares, (ii) is fully capable of understanding the type of investment being made pursuant to this Agreement, and the risks involved in connection therewith, (iii) believes that the nature of the Replacement Shares is consistent with their overall investment programs and financial position, (iv) recognizes that there are substantial risks involved in their purchase of the Replacement Shares, (v) is capable of bearing the economic risk of its investment for an indefinite period of time and can afford a complete loss of its investment, (vi) has adequate means of providing for their current liquidity needs, (vii) has no need for liquidity of their investment, (viii) is not expecting any short term income from their investment and (ix) has no reason to anticipate any change in personal circumstances, financial or otherwise, which may cause or require any sale of the Replacement Shares. (b) ELP acknowledges to the Company that it has had the opportunity to ask questions of and receive answers from the Company's officers and directors concerning the terms and conditions of the (i) purchase and delivery of the Replacement Shares and (ii) business and financial conditions of the Company; and ELP has received to its satisfaction, such additional information about the business and financial conditions of the Company and the terms and conditions of the purchase and delivery of the Replacement Shares, as it has requested. SECTION 4 MISCELLANEOUS 4.1. GOVERNING LAW. This agreement shall be governed by and construed and enforced in accordance with laws of the State of New York, without reference to conflict of law provisions. 4.2. ENTIRE AGREEMENT. This Agreement including any Appendices, Schedules or Exhibits hereto, contains the entire agreement and understanding among the parties with respect to the subject matter hereof and shall not be modified or affected by any offer, proposal, statement or representation, oral or written, made by or for any party in connection with the negotiation of the terms hereof. All references herein to this Agreement shall specifically include, incorporate and refer to the Appendices, Schedules and Exhibits attached hereto which are hereby made a part hereof. There are no representations, promises, warranties, covenants, undertakings or assurances (express or implied) other than those expressly set forth or provided for herein and in the other documents referred to herein. This Agreement may not be modified or amended orally, but only by a writing signed by the parties. 5 4.3. SEVERABILITY. If any part of this Agreement is held to be unenforceable or invalid under, or in conflict with, the applicable law of any jurisdiction, the unenforceable, invalid or conflicting part shall, to the extent permitted by applicable law, be narrowed or replaced, to the extent possible, with a judicial construction in such jurisdiction that effects the intent of the parties regarding this Agreement and such unenforceable, invalid or conflicting part. To the extent permitted by applicable law, notwithstanding the unenforceability, invalidity or conflict with applicable law of any part of this Agreement, the remaining parts shall be valid, enforceable and binding on the parties. 4.4. HEADINGS. The headings of the Sections of this Agreement are reinstated for convenience of reference only and shall not be considered a part hereof. 4.5. COUNTERPARTS. This agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 6 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date set forth above. The Company: NEWSTAR MEDIA INC. By: /s/ ROBERT MURRAY --------------------------------- Name: Robert Murray Title: Vice President and General Counsel The Purchaser: ELKES LIMITED PARTNERSHIP By: /s/ TERRENCE A. ELKES --------------------------------- Terrence A. Elkes Managing General Partner EX-10.4 5 STOCK PURCHASE AGREEMENT - GORMAN LTD. PARTNERSHIP Exhibit 10.4 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (the "AGREEMENT") made as of May 4, 1999, among NewStar Media Inc., a California corporation (the "COMPANY"), and Gorman Limited Partnership (the "PURCHASER"). WITNESSETH: WHEREAS, the Company desires to sell, and the Purchaser desires to purchase, subject to the terms and conditions of this Agreement, shares of the Common Stock of the Company, par value $.01 per share (the "COMMON STOCK"). NOW, THEREFORE, in the consideration of the foregoing and the covenants, agreements, representations and warranties herein contained, and intending to be legally bound, the parties hereby mutually agree as follows: SECTION 1 SALE AND PURCHASE OF THE COMPANY'S SECURITIES; CLOSING 1.1. SALE OF THE SECURITIES. Subject to the terms and conditions herein set forth, the Company agrees to sell and issue to the Purchaser, and the Purchaser agrees to purchase from the Company, 416,667 shares of Common Stock of the Company for a purchase price per share equal to $1.20 (or an aggregate of $500,000). The shares being purchased hereunder are hereinafter referred to as the "PURCHASED SHARES". In connection with the purchase of the Purchased Shares, the Purchaser shall have the right to assign all or a portion of its rights (but not its obligation) to purchase the Purchased Shares from the Company under this Agreement to one or more persons affiliated with the Purchaser, provided that such person(s) submits to the Company a certificate setting forth the representations in Section 3 below. Any such assignees shall be deemed a "Purchaser" hereunder. 1.2. CLOSING. The closing of the issuance and sale of the Purchased Shares to the Purchaser (the "CLOSING") shall take place at on or before May 11, 1999 (the "CLOSING DATE"). 1.3 DELIVERY. At the Closing, the Company shall deliver to the Purchaser a Registration Rights Agreement in form and substance satisfactory to the Purchaser, duly executed by the Company, and the Purchaser shall pay the purchase price for the Purchased Shares to the Company. Upon notice to the Company's shareholders of the amendment of the Company's articles of incorporation to increase the authorized number of shares, in accordance with Regulation 14C of the Securities and Exchange Act of 1934, the Company shall issue and deliver to the Purchaser a certificate or certificates, registered in the name of the Purchaser, representing the Purchased Shares. 1 SECTION 2 THE COMPANY'S REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Purchaser the following: 2.1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California, and has all requisite corporate power and authority to own and lease its properties and assets and to conduct its business as currently conducted. 2.2. The Company has all requisite corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. The execution, delivery, and performance of this agreement by the Company have been duly authorized by all requisite corporate action, and this Agreement when duly executed and delivered by the Company will constitute the valid and binding obligations of the Company enforceable against the Company in accordance with its respective terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 2.3. The sale, issuance and delivery of the Purchased Shares in accordance with the terms of this Agreement have been authorized by all necessary corporate action, and the Purchased Shares when sold, issued and delivered, against the full payment of the purchase price, will be duly and validly issued, fully paid and nonassessable. The sale, issuance and delivery of the Purchased Shares are not subject to any preemptive rights of stockholders of the Company or to any right of first refusal or other similar right in favor of any person. 2.4. PRIVATE OFFERING. Neither the Company nor anyone acting on behalf of the Company has offered the Purchased Shares for sale to, or solicited offers to buy from, or otherwise approached or negotiated with, any individual or entity in connection with the sale of such securities other than a limited number of investors, including the Purchaser. Assuming the accuracy of the Purchaser's representations contained in Section 3 of this Agreement, the offer, issuance and delivery of the Purchased Shares are exempt from registration under the Securities Act of 1933, as amended (the "1933 ACT"). 2 SECTION 3 PURCHASER'S REPRESENTATIONS AND WARRANTIES The Purchaser represents and warrants to the Company the following: 3.1. AUTHORIZATION. The Purchaser has all requisite power and authority to execute this Agreement and to carry out the transactions contemplated hereby. The execution, delivery and performance of this Agreement by the Purchaser have been duly authorized by all requisite corporate action, and this Agreement when executed and delivered by the Purchaser will constitute its valid and binding obligation, enforceable against the Purchaser in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 3.2. PURCHASE FOR INVESTMENT. The Purchased Shares are being acquired by the Purchaser for its own account, not as a nominee or agent, for investment and not with a view to resale or distribution within the meaning of the 1933 Act, and the rules and regulations thereunder, and the Purchaser will not distribute the Purchased Shares in violation or contravention of the 1933 Act; provided that immediately upon the purchase of the Purchased Shares by the Purchaser, the Purchaser intends to exchange the Purchased Shares, on a one for one basis, for issued and outstanding shares of Common Stock of the Company that are covered by an effective registration statement, with such persons as will make to the Purchaser substantially the same representations and warranties as contained in this Section 3. The Purchaser is not aware of any facts or circumstances that contradict the representation in the first sentence of Section 2.4. 3.3. RESTRICTIONS ON TRANSFER. The Purchaser acknowledges that (a) the Purchased Shares are not registered under the 1933 Act as of the Closing Date, (b) the Purchased Shares will not be transferable unless so registered or unless an exception for such registration is applicable and (c) certificates representing the Purchased Shares will bear a legend substantially in the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES MAY BE MADE BY THE COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM." 3 3.4. SOPHISTICATION: ACCESS TO INFORMATION. (a) The Purchaser represents and warrants to the Company, that the Purchaser and if the Purchaser is a limited liability company each member of the Purchaser (i) is an "accredited investor" as defined in the 1933 Act and is financially able to purchase the Purchased Shares (ii) is fully capable of understanding the type of investment being made pursuant to this Agreement, and the risks involved in connection therewith, (iii) believes that the nature of the Purchased Shares is consistent with their overall investment programs and financial position, (iv) recognizes that there are substantial risks involved in their purchase of the Purchased Shares, (v) is capable of bearing the economic risk of its investment for an indefinite period of time and can afford a complete loss of its investment, (vi) has adequate means of providing for their current liquidity needs, (vii) has no need for liquidity of their investment, (viii) is not expecting any short term income from their investment and (ix) has no reason to anticipate any change in personal circumstances, financial or otherwise, which may cause or require any sale of the Purchased Shares. (b) The Purchaser acknowledges to the Company that it has had the opportunity to ask questions of and receive answers from the Company's officers and directors concerning the terms and conditions of the (i) purchase and delivery of the Purchased Shares and (ii) business and financial conditions of the Company; and the Purchaser has received to its satisfaction, such additional information about the business and financial conditions of the Company and the terms and conditions of the purchase and delivery of the Purchased Shares, as it has requested. SECTION 4 MISCELLANEOUS 4.1. GOVERNING LAW. This agreement shall be governed by and construed and enforced in accordance with laws of the State of New York, without reference to conflict of law provisions. 4.2. ENTIRE AGREEMENT. This Agreement including any Appendices, Schedules or Exhibits hereto, contain the entire agreement and understanding among the parties with respect to the subject matter hereof and shall not be modified or affected by any offer, proposal, statement or representation, oral or written, made by or for any party in connection with the negotiation of the terms hereof. All references herein to this Agreement shall specifically include, incorporate and refer to the Appendices, Schedules and Exhibits attached hereto which are hereby made a part hereof. There are no representations, promises, warranties, covenants, undertakings or assurances (express or implied) other than those expressly set forth or provided for herein and in the other documents referred to herein. This Agreement may not be modified or amended orally, but only by a writing signed by the parties. 4 4.3. SEVERABILITY. If any part of this Agreement is held to be unenforceable or invalid under, or in conflict with, the applicable law of any jurisdiction, the unenforceable, invalid or conflicting part shall, to the extent permitted by applicable law, be narrowed or replaced, to the extent possible, with a judicial construction in such jurisdiction that effects the intent of the parties regarding this Agreement and such unenforceable, invalid or conflicting part. To the extent permitted by applicable law, notwithstanding the unenforceability, invalidity or conflict with applicable law of any part of this Agreement, the remaining parts shall be valid, enforceable and binding on the parties. 4.4. HEADINGS. The headings of the Sections of this Agreement are reinstated for convenience of reference only and shall not be considered a part hereof. 4.5. COUNTERPARTS. This agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 5 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date set forth above. The Company: NEWSTAR MEDIA INC. By: /s/ John T. Brady -------------------------------- Name: John T. Brady Title: Vice President & Chief Financial Officer The Purchaser: GORMAN LIMITED PARTNERSHIP By: /s/ Kenneth F. Gorman -------------------------------- Name: Kenneth F. Gorman Title: General Partner EX-10.5 6 STOCK PURCHASE AGREEMENT - ELKES LTD. PARTNERSHIP Exhibit 10.5 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (the "AGREEMENT") made as of May 4, 1999, among NewStar Media Inc., a California corporation (the "COMPANY"), and Elkes Limited Partnership ("PURCHASER"). WITNESSETH: WHEREAS, the Company desires to sell, and the Purchaser desires to purchase, subject to the terms and conditions of this Agreement, shares of the Common Stock of the Company, par value $.01 per share (the "COMMON STOCK"). NOW, THEREFORE, in the consideration of the foregoing and the covenants, agreements, representations and warranties herein contained, and intending to be legally bound, the parties hereby mutually agree as follows: SECTION 1 SALE AND PURCHASE OF THE COMPANY'S SECURITIES; CLOSING 1.1. SALE OF THE SECURITIES. Subject to the terms and conditions herein set forth, the Company agrees to sell and issue to the Purchaser, and the Purchaser agrees to purchase from the Company, 416,667 shares of Common Stock of the Company for a purchase price per share equal to $1.20 (or an aggregate of $500,000). The shares being purchased hereunder are hereinafter referred to as the "PURCHASED SHARES". In connection with the purchase of the Purchased Shares, the Purchaser shall have the right to assign all or a portion of its rights (but not its obligation) to purchase the Purchased Shares from the Company under this Agreement to one or more persons affiliated with the Purchaser, provided that such person(s) submits to the Company a certificate setting forth the representations in Section 3 below. Any such assignees shall be deemed a "Purchaser" hereunder. 1.2. CLOSING. The closing of the issuance and sale of the Purchased Shares to the Purchaser (the "CLOSING") shall take place at on or before May 11, 1999 (the "CLOSING DATE"). 1.3 DELIVERY. At the Closing, the Company shall deliver to the Purchaser a Registration Rights Agreement in form and substance satisfactory to the Purchaser, duly executed by the Company, and the Purchaser shall pay the purchase price for the Purchased Shares to the Company. Upon notice to the Company's shareholders of the amendment of the Company's articles of incorporation to increase the authorized number of shares, in accordance with Regulation 14C of the Securities and Exchange Act of 1934, the Company shall issue and deliver to the Purchaser a certificate or certificates, registered in the name of the Purchaser, representing the Purchased Shares. 1 SECTION 2 THE COMPANY'S REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Purchaser the following: 2.1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California, and has all requisite corporate power and authority to own and lease its properties and assets and to conduct its business as currently conducted. 2.2. The Company has all requisite corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. The execution, delivery, and performance of this agreement by the Company have been duly authorized by all requisite corporate action, and this Agreement when duly executed and delivered by the Company will constitute the valid and binding obligations of the Company enforceable against the Company in accordance with its respective terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 2.3. The sale, issuance and delivery of the Purchased Shares in accordance with the terms of this Agreement have been authorized by all necessary corporate action, and the Purchased Shares when sold, issued and delivered, against the full payment of the purchase price, will be duly and validly issued, fully paid and nonassessable. The sale, issuance and delivery of the Purchased Shares are not subject to any preemptive rights of stockholders of the Company or to any right of first refusal or other similar right in favor of any person. 2.4. PRIVATE OFFERING. Neither the Company nor anyone acting on behalf of the Company has offered the Purchased Shares for sale to, or solicited offers to buy from, or otherwise approached or negotiated with, any individual or entity in connection with the sale of such securities other than a limited number of investors, including the Purchaser. Assuming the accuracy of the Purchaser's representations contained in Section 3 of this Agreement, the offer, issuance and delivery of the Purchased Shares are exempt from registration under the Securities Act of 1933, as amended (the "1933 ACT"). 2 SECTION 3 PURCHASER'S REPRESENTATIONS AND WARRANTIES The Purchaser represents and warrants to the Company the following: 3.1. AUTHORIZATION. The Purchaser has all requisite power and authority to execute this Agreement and to carry out the transactions contemplated hereby. The execution, delivery and performance of this Agreement by the Purchaser have been duly authorized by all requisite corporate action, and this Agreement when executed and delivered by the Purchaser will constitute its valid and binding obligation, enforceable against the Purchaser in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 3.2. PURCHASE FOR INVESTMENT. The Purchased Shares are being acquired by the Purchaser for its own account, not as a nominee or agent, for investment and not with a view to resale or distribution within the meaning of the 1933 Act, and the rules and regulations thereunder, and the Purchaser will not distribute the Purchased Shares in violation or contravention of the 1933 Act; provided that immediately upon the purchase of the Purchased Shares by the Purchaser, the Purchaser intends to exchange the Purchased Shares, on a one for one basis, for issued and outstanding shares of Common Stock of the Company that are covered by an effective registration statement, with such persons as will make to the Purchaser substantially the same representations and warranties as contained in this Section 3. The Purchaser is not aware of any facts or circumstances that contradict the representation in the first sentence of Section 2.4. 3.3. RESTRICTIONS ON TRANSFER. The Purchaser acknowledges that (a) the Purchased Shares are not registered under the 1933 Act as of the Closing Date, (b) the Purchased Shares will not be transferable unless so registered or unless an exception for such registration is applicable and (c) certificates representing the Purchased Shares will bear a legend substantially in the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES MAY BE MADE BY THE COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM." 3 3.4. SOPHISTICATION: ACCESS TO INFORMATION. (a) The Purchaser represents and warrants to the Company, that the Purchaser and if the Purchaser is a limited liability company each member of the Purchaser (i) is an "accredited investor" as defined in the 1933 Act and is financially able to purchase the Purchased Shares (ii) is fully capable of understanding the type of investment being made pursuant to this Agreement, and the risks involved in connection therewith, (iii) believes that the nature of the Purchased Shares is consistent with their overall investment programs and financial position, (iv) recognizes that there are substantial risks involved in their purchase of the Purchased Shares, (v) is capable of bearing the economic risk of its investment for an indefinite period of time and can afford a complete loss of its investment, (vi) has adequate means of providing for their current liquidity needs, (vii) has no need for liquidity of their investment, (viii) is not expecting any short term income from their investment and (ix) has no reason to anticipate any change in personal circumstances, financial or otherwise, which may cause or require any sale of the Purchased Shares. (b) The Purchaser acknowledges to the Company that it has had the opportunity to ask questions of and receive answers from the Company's officers and directors concerning the terms and conditions of the (i) purchase and delivery of the Purchased Shares and (ii) business and financial conditions of the Company; and the Purchaser has received to its satisfaction, such additional information about the business and financial conditions of the Company and the terms and conditions of the purchase and delivery of the Purchased Shares, as it has requested. SECTION 4 MISCELLANEOUS 4.1. GOVERNING LAW. This agreement shall be governed by and construed and enforced in accordance with laws of the State of New York, without reference to conflict of law provisions. 4.2. ENTIRE AGREEMENT. This Agreement including any Appendices, Schedules or Exhibits hereto, contain the entire agreement and understanding among the parties with respect to the subject matter hereof and shall not be modified or affected by any offer, proposal, statement or representation, oral or written, made by or for any party in connection with the negotiation of the terms hereof. All references herein to this Agreement shall specifically include, incorporate and refer to the Appendices, Schedules and Exhibits attached hereto which are hereby made a part hereof. There are no representations, promises, warranties, covenants, undertakings or assurances (express or implied) other than those expressly set forth or provided for herein and in the other documents referred to herein. This Agreement may not be modified or amended orally, but only by a writing signed by the parties. 4 4.3. SEVERABILITY. If any part of this Agreement is held to be unenforceable or invalid under, or in conflict with, the applicable law of any jurisdiction, the unenforceable, invalid or conflicting part shall, to the extent permitted by applicable law, be narrowed or replaced, to the extent possible, with a judicial construction in such jurisdiction that effects the intent of the parties regarding this Agreement and such unenforceable, invalid or conflicting part. To the extent permitted by applicable law, notwithstanding the unenforceability, invalidity or conflict with applicable law of any part of this Agreement, the remaining parts shall be valid, enforceable and binding on the parties. 4.4. HEADINGS. The headings of the Sections of this Agreement are reinstated for convenience of reference only and shall not be considered a part hereof. 4.5. COUNTERPARTS. This agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 5 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date set forth above. The Company: NEWSTAR MEDIA INC. By:/s/ JOHN T. BRADY --------------------------------- Name: John T. Brady Title: Vice President and Chief Financial Officer The Purchaser: ELKES LIMITED PARTNERSHIP By:/s/ TERRENCE A. ELKES --------------------------------- Name: Title: General Partner EX-10.6 7 STOCK PURCHASE AGREEMENT - PETER ENGEL Exhibit 10.6 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (the "AGREEMENT") made as of May 19, 1999, among NewStar Media Inc., a California corporation (the "COMPANY"), and Peter Engel (the "PURCHASER"). WITNESSETH: WHEREAS, the Company desires to sell, and the Purchaser desires to purchase, subject to the terms and conditions of this Agreement, shares of the Common Stock of the Company, par value $.01 per share (the "COMMON STOCK"). NOW, THEREFORE, in the consideration of the foregoing and the covenants, agreements, representations and warranties herein contained, and intending to be legally bound, the parties hereby mutually agree as follows: SECTION 1 SALE AND PURCHASE OF THE COMPANY'S SECURITIES; CLOSING 1.1. SALE OF THE SECURITIES. Subject to the terms and conditions herein set forth, the Company agrees to sell and issue to the Purchaser, and the Purchaser agrees to purchase from the Company, 250,000 shares of Common Stock of the Company for a purchase price per share equal to $1.20 (or an aggregate of $300,000). The shares being purchased hereunder are hereinafter referred to as the "PURCHASED SHARES". In connection with the purchase of the Purchased Shares, the Purchaser shall have the right to assign all or a portion of its rights (but not its obligation) to purchase the Purchased Shares from the Company under this Agreement to one or more persons affiliated with the Purchaser, provided that such person(s) submits to the Company a certificate setting forth the representations in Section 3 below. Any such assignees shall be deemed a "Purchaser" hereunder. 1.2. CLOSING. The closing of the issuance and sale of the Purchased Shares to the Purchaser (the "CLOSING") shall take place on or before May 25, 1999 (the "CLOSING DATE"). 1.3 DELIVERY. At the Closing, the Company shall (i) issue and deliver to the Purchaser a certificate or certificates, registered in the name of the Purchaser, representing the Purchased Shares and (ii) deliver to the Purchaser a Registration Rights Agreement in form and substance satisfactory to the Purchaser, duly executed by the Company, and the Purchaser shall pay the purchase price for the Purchased Shares to the Company. 1 SECTION 2 THE COMPANY'S REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Purchaser the following: 2.1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California, and has all requisite corporate power and authority to own and lease its properties and assets and to conduct its business as currently conducted. 2.2. The Company has all requisite corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. The execution, delivery, and performance of this agreement by the Company have been duly authorized by all requisite corporate action, and this Agreement when duly executed and delivered by the Company will constitute the valid and binding obligations of the Company enforceable against the Company in accordance with its respective terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 2.3. The sale, issuance and delivery of the Purchased Shares in accordance with the terms of this Agreement have been authorized by all necessary corporate action, and the Purchased Shares when sold, issued and delivered, against the full payment of the purchase price, will be duly and validly issued, fully paid and nonassessable. The sale, issuance and delivery of the Purchased Shares are not subject to any preemptive rights of stockholders of the Company or to any right of first refusal or other similar right in favor of any person. 2.4. PRIVATE OFFERING. Neither the Company nor anyone acting on behalf of the Company has offered the Purchased Shares for sale to, or solicited offers to buy from, or otherwise approached or negotiated with, any individual or entity in connection with the sale of such securities other than a limited number of investors, including the Purchaser. Assuming the accuracy of the Purchaser's representations contained in Section 3 of this Agreement, the offer, issuance and delivery of the Purchased Shares are exempt from registration under the Securities Act of 1933, as amended (the "1933 ACT"). 2 SECTION 3 PURCHASER'S REPRESENTATIONS AND WARRANTIES The Purchaser represents and warrants to the Company the following: 3.1. AUTHORIZATION. The Purchaser has all requisite power and authority to execute this Agreement and to carry out the transactions contemplated hereby. The execution, delivery and performance of this Agreement by the Purchaser have been duly authorized by all requisite corporate action, and this Agreement when executed and delivered by the Purchaser will constitute its valid and binding obligation, enforceable against the Purchaser in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and general equitable principles. 3.2. PURCHASE FOR INVESTMENT. The Purchased Shares are being acquired by the Purchaser for its own account, not as a nominee or agent, for investment and not with a view to resale or distribution within the meaning of the 1933 Act, and the rules and regulations thereunder, and the Purchaser will not distribute the Purchased Shares in violation or contravention of the 1933 Act. 3.3. RESTRICTIONS ON TRANSFER. The Purchaser acknowledges that (a) the Purchased Shares are not registered under the 1933 Act as of the Closing Date, (b) the Purchased Shares will not be transferable unless so registered or unless an exception for such registration is applicable and (c) certificates representing the Purchased Shares will bear a legend substantially in the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES MAY BE MADE BY THE COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM." 3 3.4. SOPHISTICATION: ACCESS TO INFORMATION. (a) The Purchaser represents and warrants to the Company, that the Purchaser and if the Purchaser is a limited liability company each member of the Purchaser (i) is an "accredited investor" as defined in the 1933 Act and is financially able to purchase the Purchased Shares (ii) is fully capable of understanding the type of investment being made pursuant to this Agreement, and the risks involved in connection therewith, (iii) believes that the nature of the Purchased Shares is consistent with their overall investment programs and financial position, (iv) recognizes that there are substantial risks involved in their purchase of the Purchased Shares, (v) is capable of bearing the economic risk of its investment for an indefinite period of time and can afford a complete loss of its investment, (vi) has adequate means of providing for their current liquidity needs, (vii) has no need for liquidity of their investment, (viii) is not expecting any short term income from their investment and (ix) has no reason to anticipate any change in personal circumstances, financial or otherwise, which may cause or require any sale of the Purchased Shares. (b) The Purchaser acknowledges to the Company that it has had the opportunity to ask questions of and receive answers from the Company's officers and directors concerning the terms and conditions of the (i) purchase and delivery of the Purchased Shares and (ii) business and financial conditions of the Company; and the Purchaser has received to its satisfaction, such additional information about the business and financial conditions of the Company and the terms and conditions of the purchase and delivery of the Purchased Shares, as it has requested. SECTION 4 MISCELLANEOUS 4.1. GOVERNING LAW. This agreement shall be governed by and construed and enforced in accordance with laws of the State of New York, without reference to conflict of law provisions. 4.2. ENTIRE AGREEMENT. This Agreement contains the entire agreement and understanding among the parties with respect to the subject matter hereof and shall not be modified or affected by any offer, proposal, statement or representation, oral or written, made by or for any party in connection with the negotiation of the terms hereof. There are no representations, promises, warranties, covenants, undertakings or assurances (express or implied) other than those expressly set forth or provided for herein and in the other documents referred to herein. This Agreement may not be modified or amended orally, but only by a writing signed by the parties. 4 4.3. SEVERABILITY. If any part of this Agreement is held to be unenforceable or invalid under, or in conflict with, the applicable law of any jurisdiction, the unenforceable, invalid or conflicting part shall, to the extent permitted by applicable law, be narrowed or replaced, to the extent possible, with a judicial construction in such jurisdiction that effects the intent of the parties regarding this Agreement and such unenforceable, invalid or conflicting part. To the extent permitted by applicable law, notwithstanding the unenforceability, invalidity or conflict with applicable law of any part of this Agreement, the remaining parts shall be valid, enforceable and binding on the parties. 4.4. HEADINGS. The headings of the Sections of this Agreement are reinstated for convenience of reference only and shall not be considered a part hereof. 4.5. COUNTERPARTS. This agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 5 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date set forth above. The Company: NEWSTAR MEDIA INC. By:/s/JOHN T. BRADY ----------------------------------- Name: John T. Brady Title: Vice President & CFO The Purchaser: /s/ PETER ENGEL -------------------------------------- Peter Engel EX-10.7 8 REGISTRATION RIGHTS AGREEMENT - PETER ENGEL Exhibit 10.7 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT dated as of May 17, 1999, by and among NewStar Media Inc., a California corporation (the "COMPANY"), located at 8955 Beverly Blvd., Los Angeles, CA 90048, and Peter Engel (the "PURCHASER"), located at 619 S. June Street, Los Angeles, CA 90065. WHEREAS, the Purchaser is acquiring securities of the Company pursuant to a Stock Purchase Agreement dated the date hereof between the Company and the Purchaser (the "STOCK PURCHASE AGREEMENT"; capitalized terms used in this Registration Rights Agreement without definition shall have the meanings ascribed thereto in the Stock Purchase Agreement). NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein and intending to be legally bound, the parties hereto agree as follows: 1. REGISTRATION RIGHTS 1.1 (a) The Company shall as expeditiously as practicable, but in any event not later than 90 days from the Closing Date, prepare and file with the Securities and Exchange Commission (the "COMMISSION") one or more registration statements (individually and collectively, the "REGISTRATION STATEMENT") under the Securities Act of 1933 (the "1933 ACT"), providing for the registration of the Purchased Shares (together with all shares of Common Stock issued in connection therewith, including by way of a stock split or other adjustment or stock dividend, the "REGISTRABLE SECURITIES") for sale by the Purchaser. Thereafter, the Company shall use its reasonable best efforts to cause such Registration Statement to be declared effective as promptly as practicable. If at any time after the Registration Statement becomes effective, the Registration Statement is not available for sales by the Purchaser, then the Company shall, as expeditiously as possible, prepare and file with the Commission, to the extent required, an amendment or new registration statement in order to afford the Purchaser the benefit of the registration contemplated in this Section 1.1, and shall use its reasonable best efforts to have such amendment or new registration statement declared effective as promptly as practicable. (b) Notwithstanding the foregoing, in the event that the Company proposes to undertake an underwritten public offering immediately prior to the filing of or during the pendency of effectiveness of the Registration Statement, the Purchaser will be obligated to either (x) join the underwritten offering 1 with respect to all or a portion of the Registerable Securities requested by the Purchaser to be included therein (subject to the approval of the managing underwriter, which may exclude such shares entirely or require pro rata cut-back with other selling shareholders) and/or (y) execute a "lock-up" agreement with respect to the sale or other disposition of any Registrable Securities not so included or permitted to be included for a period commencing with the filing of the related registration statement and ending 90 days after the effective date of the related registration statement, but in any event not more than 135 days in the aggregate. 1.2. REGISTRATION PROCEDURES. (a) The Registration Statement may be in any form for which the Company then qualifies or which counsel for the Company deems appropriate; (b) After the filing of the Registration Statement, the Company will promptly notify the Purchaser of any stop order issued or, to the knowledge of the Company, threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered; (c) The Company shall prepare and file with the Commission such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep the registration statement effective for three years from the date of effectiveness of the Registration Statement, and so long as such registration is necessary to permit the public resale thereof without any limitation on the amount of such sales pursuant to Rule 144 under the Securities Act or otherwise, and comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities during such period in accordance with the intended methods of disposition set forth in the Registration Statement; (d) The Company shall furnish to the Purchaser, before filing the Registration Statement, if requested, copies of the Registration Statement as proposed to be filed, and thereafter furnish to the Purchaser such number of copies of the Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in the registration statement (including each preliminary prospectus) and such other document as the Purchaser may reasonably request in order to facilitate the disposition of the Registrable Securities; 2 (e) The Company shall notify the Purchaser, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, of the happening of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of the Purchaser prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (f) The Company shall otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders, as soon as reasonably practicable, an earnings statement satisfying the provisions of Section 11(a) of the 1933 Act and covering a period of twelve months, beginning within three months after the effective date of the Registration Statement; (g) The Company shall use its commercially reasonable efforts to cause all Registrable Securities to be listed on each securities exchange (if any) on which similar securities issued by the Company are then listed; and (h) The Company shall provide a transfer agent and registrar for all of the Registrable Securities not later then the effective date of such Registration Statement. 1.3. DISCONTINUANCE OF DISPOSITION. The Purchaser, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 1.2 (e) shall forthwith discontinue disposition of the Registrable Securities until the Purchaser receives copies of the supplemented or amended prospectus contemplated by Section 1.2 (e) or until it is advised in writing (the "Advice") by the Company that the use of the prospectus may be resumed and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus. 1.4. INFORMATION TO BE FURNISHED BY PURCHASERS. The Purchaser shall furnish to the Company such information and execute such documents regarding the Registrable Securities held by the Purchaser and the intended method of disposition thereof as the Company shall reasonably request in connection with the action to be taken by the Company. 3 1.5. EXPENSES OF REGISTRATION. The Company shall pay all expenses incurred by the Company in complying with Section 1.1 and 1.3 (other than the underwriter's discounts and commissions and fees and expenses of special counsel to the Purchaser, if any), including, without limitation, all registration and filing fees (including all expenses incident to filing with the National Association of Securities Dealers, Inc.), printing expenses, fees, and disbursements of counsel to the Company, and of the Company's independent public accountants. 1.6. INDEMNIFICATION. (a) The Company shall indemnify and hold harmless the Purchaser, its executive officers, directors and controlling persons (within the meaning of the 1933 Act) and each person who participates as an underwriter or controlling person of an underwriter (within the meaning of the 1933 Act) with respect to a Registration Statement pursuant to Section 1.1 against any losses, claims, damages or liabilities to which any of them may become subject under the 1933 Act or otherwise insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or allegedly untrue statement of any material fact contained in a registration statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein not misleading, and will reimburse any of them for any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable hereunder in any such case if any such loss, claim, damage or liability arise out of or is based upon any untrue statement or allegedly untrue statement or omission or alleged omission made in such registration statement, prospectus or amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company for such purpose by such Purchaser or by its representative. (b) The Purchaser shall indemnify and hold harmless the Company, its executive officers, directors and controlling persons (within the meaning of the 1933 Act) and each person who participates as an underwriter or controlling person of an underwriter (within the meaning of the 1933 Act) with respect to a Registration Statement pursuant to Section 1.1 against any losses, claims, damages or liabilities to which any of them may become subject under the 1933 Act or otherwise insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, in reliance upon and in conformity with written information furnished to the supplement thereof, in reliance upon and in conformity with written information furnished to the Company by each Purchaser or by its representative, and will reimbursement any of them for any legal or other expenses reasonably incurred by them in connection with investigating or defending, any such, loss, claim, damage, liability or action. 4 (c) A party's obligation to indemnify (the "indemnifying party") and the other party's rights to indemnity and payment (the "indemnified party") under Section 1.6 is contingent upon the indemnified party (i) giving the indemnifying party prompt written notice of such claim; (ii) allowing the indemnifying party to have sole right to control and direct the investigation, preparation and defense of any such claim or action and all negotiations for its settlement or compromise; and (iii) providing reasonable assistance to the indemnifying party, such assistance to be solely at the cost and expense of the indemnifying party. The indemnified party, at its own expense, shall be entitled to participate in the defense and to receive copies of all pleadings and other papers in connection with the claim. (d) If for any reason the indemnification provided for in the preceding Sections 1.6 (a) and 1.6 (b) is unavailable to an indemnified party as contemplated by those sections, then the indemnifying party will contribute to the amount paid or payable to the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations. 1.7. UNDERWRITING AGREEMENT. If the Registrable Securities are to be sold pursuant to a registration statement in an underwritten offering in which no shares of the Company are being sold for the account of the Company, the Company agrees to enter into an underwriting agreement with the underwriter or underwriters (who shall be subject to the approval of the Company) containing customary representations and warranties with respect to the business and operations of the Company, including without limiting the generality of the foregoing, customary provisions with respect to indemnification by the Company of the underwriters of such offering. 2. MISCELLANEOUS 2.1. OWNER OF REGISTRABLE SECURITIES. The Company may deem and treat the person in whose name the Registrable Securities are registered as the absolute owner thereof for all purposes whatsoever. 5 2.2. SUCCESSORS. This Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the Purchaser, and the term "Purchaser" shall be deemed to include each such holder of Registrable Securities. This Agreement shall be binding upon and shall inure to the benefit of the Company and its successors and assigns. 2.3. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without regard to such state's conflicts of law principles. 2.4. NOTICE. Any notice or other communication required or permitted hereunder shall be sufficiently given only if sent by facsimile transmission or by registered or certified mail, postage prepaid, addressed to the address indicated on the first page hereof or such other address or addresses as may hereafter be furnished in writing by notice similarly given by one party to the other. 2.5. FULL AGREEMENT. This Agreement sets forth the entire understanding of the parties with respect to transactions contemplated hereby, and shall not be modified or amended except by written agreement of all parties hereto. 2.6. HEADINGS. The headings of the Sections of this Agreement are inserted for convenience of reference only and shall not be considered a part hereof. 2.7. COUNTERPARTS. This Agreement may be simultaneously executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. [Remainder of Page Intentionally Left Blank] 6 IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the date first forth above. The Company: NEWSTAR MEDIA INC. By:/s/JOHN T. BRADY --------------------------------- Name: John T. Brady Title: Vice President and CFO The Purchaser: /s/ PETER ENGEL ------------------------------------ Peter Engel EX-27 9 FINANCIAL DATA SCHEDULE
5 this is the legend 1,000 6-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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