<PAGE> 1
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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, 1998
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 REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
CALIFORNIA 95-4015834
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8955 BEVERLY BOULEVARD
LOS ANGELES, CALIFORNIA 90048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 786-1600.
FORMER NAME: DOVE ENTERTAINMENT, INC.
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
----------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the numbers of shares outstanding of each of the registrant's classes
of common equity, as of the latest practicable date: 6,715,442 as of July 24,
1998.
Transitional Small Business Disclosure Format (Check one):
Yes_______ No X
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<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NEWSTAR MEDIA INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 364,000
Accounts receivable, net of allowances of $851,000 4,088,000
Inventory 2,752,000
Film costs 2,844,000
Prepaid expenses and other assets 732,000
------------
Total current assets 10,780,000
NON-CURRENT ASSETS
Production masters 1,438,000
Film costs, net 3,289,000
Property and equipment, net 3,765,000
Goodwill and other assets 5,918,000
------------
Total non-current assets 14,410,000
------------
Total assets $ 25,190,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 7,438,000
Notes payable 2,659,000
Due to related party 8,000
Royalties payable 497,000
Advances and deferred income 2,246,000
Accrued dividends 589,000
------------
Total current liabilities 13,437,000
NON-CURRENT LIABILITIES
Notes payable, less current portion 10,174,000
Accrued liabilities 710,000
------------
Total non-current liabilities 10,884,000
------------
Total liabilities 24,321,000
SHAREHOLDERS' EQUITY
Preferred stock $.01 par value; 2,000,000 shares authorized and
220,087 shares issued and outstanding, liquidation preference $7,419,000 2,000
Common stock $.01 par value; 20,000,000 shares authorized and
6,715,442 shares issued and outstanding 67,000
Additional paid-in capital 28,556,000
Accumulated deficit (27,756,000)
------------
Total shareholders' equity 869,000
------------
Total liabilities and shareholders' equity $ 25,190,000
============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 3
NEWSTAR MEDIA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Quarter Ended June 30,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues
Publishing, net $ 1,966,000 $ 2,678,000
Film 5,654,000 1,081,000
----------- -----------
7,620,000 3,759,000
Less: Cost of sales
Publishing 1,318,000 3,019,000
Film 3,910,000 1,084,000
----------- -----------
5,228,000 4,103,000
----------- -----------
Gross profit / (loss) 2,392,000 (344,000)
Less: Selling, general and administrative expenses 2,734,000 2,860,000
Employee separation costs -- 1,614,000
----------- -----------
2,734,000 4,474,000
----------- -----------
Loss from operations (342,000) (4,818,000)
Less: Interest expense, net 155,000 57,000
----------- -----------
Loss before income taxes (497,000) (4,875,000)
Less: Income tax expense 2,000 14,000
----------- -----------
Net loss $ (499,000) $(4,889,000)
=========== ===========
Basic and diluted loss attributable to common shareholders $ (606,000) $(5,918,000)
=========== ===========
Basic and diluted loss per common share $ (0.09) $ (1.07)
=========== ===========
Weighted average number of common shares outstanding 6,664,000 5,550,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
NEWSTAR MEDIA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues
Publishing, net $ 3,515,000 $ 3,746,000
Film 6,798,000 2,674,000
------------ ------------
10,313,000 6,420,000
Less: Cost of sales
Publishing 2,504,000 4,629,000
Film 4,854,000 3,227,000
------------ ------------
7,358,000 7,856,000
------------ ------------
Gross profit / (loss) 2,955,000 (1,436,000)
Less: Selling, general and administrative expenses 4,913,000 5,047,000
Employee separation costs -- 1,614,000
------------ ------------
4,913,000 6,661,000
------------ ------------
Loss from operations (1,958,000) (8,097,000)
Less: Interest expense, net 302,000 193,000
------------ ------------
Loss before income taxes (2,260,000) (8,290,000)
Less: Income tax expense 2,000 23,000
------------ ------------
Net loss $ (2,262,000) $ (8,313,000)
============ ============
Basic and diluted loss attributable to common shareholders $ (2,475,000) $ (9,464,000)
============ ============
Basic and diluted loss per common share $ (0.37) $ (1.75)
============ ============
Weighted average number of common shares outstanding 6,669,000 5,414,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
NEWSTAR MEDIA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,262,000) $(8,313,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 269,000 273,000
Amortization of goodwill 126,000 126,000
Amortization of production masters 794,000 2,359,000
Amortization of film costs 4,022,000 3,227,000
Changes in operating assets and liabilities
Accounts receivable (2,015,000) 1,095,000
Inventory 285,000 (147,000)
Prepaid expenses (228,000) 144,000
Income taxes -- 172,000
Expenditures for production masters (705,000) (1,557,000)
Film costs (8,511,000) (6,519,000)
Accounts payable and accrued expenses 892,000 1,650,000
Advances and deferred revenue 1,722,000 2,881,000
Other 19,000 16,000
----------- -----------
Net cash used in operating activities (5,592,000) (4,593,000)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (99,000) (9,000)
----------- -----------
Net cash used in investing activities (99,000) (9,000)
----------- -----------
FINANCING ACTIVITIES
Proceeds from sale of preferred stock -- 4,879,000
Proceeds of bank borrowings 5,753,000 --
Proceeds from exercise of options -- 3,000
Repayments of bank borrowings and notes payable -- (462,000)
----------- -----------
Net cash provided by financing activities 5,753,000 4,420,000
----------- -----------
Net decrease in cash and cash equivalents 62,000 (182,000)
Cash and cash equivalents at beginning of the period 302,000 390,000
----------- -----------
Cash and cash equivalents at end of the period $ 364,000 $ 208,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 113,000 $ 195,000
Refunds received for income taxes $ -- 162,000
NON-CASH TRANSACTIONS
Common stock issued as payment for consulting fees
to related party $ 300,000 $ --
Preferred stock dividends accrued $ 213,000 $ 100,000
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 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.,
formerly known as Dove Entertainment, Inc. (the "Company"), are unaudited and
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB, for the
fiscal year ended December 31, 1997. In the opinion of management, the
accompanying consolidated financial statements include all adjustments
(consisting only of normal recurring adjustments) which are necessary for a fair
presentation. The results of operations for the six months ended June 30, 1998
are not necessarily indicative of results to be expected for the full year.
The Company is a diversified entertainment company primarily engaged in
publication of audio and printed books, the production of television programming
through its wholly-owned subsidiary Dove Four Point, Inc. ("NewStar
Television"), and the distribution of feature films and television product, both
domestically and internationally.
The Company acquires audio publishing rights for specific titles or groups of
titles for audio production and distribution, primarily in the United States of
America.
NewStar Television is an independent production company which develops and
produces television productions for which rights are controlled by NewStar
Television. In addition, NewStar Television is a producer-for-hire in connection
with a creative concept and literary property owned by another party to produce
all forms of television productions, including pilots, series, telefilms,
miniseries, talk shows and game shows for network, cable and syndicated
production.
At the Company's Annual Meeting of Shareholders held on April 30, 1998,
shareholders approved a change of the Company's name to NewStar Media Inc.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NET LOSS PER COMMON SHARE
SFAS No. 128, "Earnings per Share", is effective for financial statements issued
for periods ending after December 15, 1997. SFAS No. 128 replaces Accounting
Principles Board Opinion ("APB") No. 15 and simplifies the computation of
earnings per share ("EPS") by replacing the presentation of primary EPS with a
presentation of basic EPS. Basic EPS includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution from securities that could share in the earnings of the Company,
similar to fully diluted EPS under APB No. 15. The statement requires dual
presentation of basic and diluted EPS by entities with complex capital
structures. The Company adopted SFAS No. 128 for the financial statements ended
June 30, 1998. SFAS No. 128 had no impact on the previously reported loss per
share. Dilutive securities have been omitted from the diluted calculation since
they are anti-dilutive.
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<PAGE> 7
The net loss utilized in the calculation of net loss per common share is
increased by the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Quarter ended June 30,
Accrued dividends on Preferred Stock $ 107,000 $ 84,000
Imputed dividends on Preferred Stock -- 945,000
---------- ----------
Total $ 107,000 1,029,000
---------- ----------
Six months ended June 30,
Accrued dividends on Preferred Stock $ 213,000 $ 100,000
Imputed dividends on Preferred Stock -- 987,000
---------- ----------
Total $ 213,000 1,087,000
---------- ----------
</TABLE>
The imputed dividends on Preferred Stock have been treated as an increase and
decrease to Additional Paid-in Capital.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and disclosure of contingent
assets and liabilities to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates. Significant estimates include those related to ultimate revenues and
expenses related to film and television productions, the net realizability of
inventory and production masters and the allowance for returns on publishing
sales.
RECLASSIFICATION
Certain prior year accounts have been reclassified to conform to the current
year's presentation.
NOTE 3 - PROPERTY AND EQUIPMENT
A summary of property and equipment at June 30, 1998 is as follows:
<TABLE>
<S> <C>
Land $ 502,000
Building 2,161,000
Furniture, fixtures and equipment 2,511,000
Leasehold improvements 6,000
----------
Total 5,180,000
Less: Accumulated depreciation and amortization 1,415,000
----------
$3,765,000
==========
</TABLE>
NOTE 4 - PRODUCTION MASTERS
Production masters, net of accumulated amortization at June 30, 1998 consist of
the following:
<TABLE>
<S> <C>
Released titles $ 905,000
Unreleased titles 533,000
----------
Total $1,438,000
==========
</TABLE>
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<PAGE> 8
NOTE 5 - FILM COSTS
Film costs, net of accumulated amortization at June 30, 1998 consist of the
following:
<TABLE>
<S> <C>
Current: Television projects in development and production $2,844,000
Non-current: Television and theatrical projects released less accumulated
amortization 3,289,000
----------
Total $6,133,000
==========
</TABLE>
As of June 30, 1998 approximately 90% of the unamortized balance of film costs
will be amortized within the next three-year period based upon the Company's
revenue estimates at that date.
NOTE 6 - 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, 1998, the Company had net deferred tax
assets of approximately $10,342,000 against which a valuation allowance had been
fully recorded.
NOTE 7 - NOTES PAYABLE
Notes payable at June 30, 1998 consist of the following:
<TABLE>
<S> <C>
Current portion of notes payable:
Long term mortgage note payable $ 48,000
Capitalized leases 16,000
Chase Manhattan Bank "Futuresport" production loan 2,595,000
-----------
Total current portion of notes payable 2,659,000
Non-current notes payable:
Chase Manhattan Bank revolving credit loan 8,389,000
Long-term mortgage note payable, less current portion 1,758,000
Capitalized leases 27,000
-----------
Total non-current notes payable 10,174,000
-----------
Total notes payable $12,833,000
===========
</TABLE>
The long term mortgage note payable to Asahi Bank of California is secured by a
deed of trust on the Company's principal office building, 8955 Beverly
Boulevard, Los Angeles, CA 90048, and bears interest at a fixed rate of 8% per
annum. The loan matures in April 2001 and provides for a 20 year maturity
amortization payment rate through April 2001 with a repayment of the remaining
outstanding principal amount at that time.
On November 12, 1997, the Company entered into an agreement with The Chase
Manhattan Bank ("Chase Bank") providing the Company with an $8,000,000 loan
facility for working capital purposes ("Chase Loan"), increased in July 1998 to
$10,000,000. The Chase Loan is secured by substantially all of the Company's
assets, other than the Company's building. The Chase Loan runs for three years
until November 4, 2000. The Chase Loan establishes a "Borrowing Base" comprised
of: (1) 35% of an independent valuation of the Company's audio library, (2) 85%
of the Company's eligible receivables and (3) 30% of the Company's finished
goods audio and book inventory. At
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<PAGE> 9
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 an additional $4,000,000 (provided the aggregate amount borrowed does
not exceed $10,000,000) with the consent and guarantee of Media Equities
International L.L.C. ("MEI"). The Chase Loan provides for interest at the bank
prime rate (8-1/2% at June 30, 1998) plus 2% per annum or the bank's LIBOR rate
(5.7 % six month rate at June 30, 1998) plus 3% per annum, at the option of the
Company. Both rates are applicable to draw-downs on the Chase Loan at June 30,
1998. In addition, unused commitment fees are payable at 1/2% per annum. The
Chase Loan contains various covenants to which the Company must adhere including
limitations on additional indebtedness, investments, acquisitions, capital
expenditures and sale of assets, restrictions on the payment of dividends and
distributions to shareholders, and various financial compliance tests. The
Company was not in compliance with certain of the financial compliance tests at
December 31, 1997 and June 30, 1998 but received waiver and amendment from Chase
Bank. At June 30, 1998, the Company had borrowed $8,389,000 against the
facility. In addition, Chase Bank has provided letters of credit for $816,000.
In February 1998, the Company entered into an agreement with Chase Bank
providing the Company with an additional loan of a maximum of $3,289,000 for the
purpose of partly financing the made for television motion picture "Futuresport"
("Futuresport Loan"). The Futuresport Loan is incorporated into the Chase Loan
under the same terms and conditions as the Chase Loan. The Futuresport Loan is
secured by "Futuresport" and related license agreements. The Futuresport Loan is
repayable in September 1998.
On July 14, 1998, the Company entered into an agreement with Apollo Partners
LLC, whereby the Company borrowed $1,500,000 secured by a second mortgage on the
Company's principal office building, 8955 Beverly Boulevard, Los Angeles
("Apollo Loan"). The Apollo Loan provides for interest at the bank prime rate
(8-1/2% at June 30, 1998) plus 2% per annum. The Apollo Loan is required to be
repaid on the earlier of 180 days following July 21, 1998 or the sale of the
Company's principal office building or earlier at the option of the Company.
NOTE 8 - 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 $81,000
during the quarter ended June 30, 1998 of which $54,000 was in the form of
Series E Preferred Stock. 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 June 1997. In
addition, they are entitled to each receive a car allowance for 24 months from
June 1997 and reimbursement for certain medical and business expenses. Certain
payments under, and other provisions of, the Termination Agreement are subject
to arbitration proceedings.
To secure the Payments, the Company has issued into escrow 1,500 shares of its
Series E Preferred Stock, convertible into shares of Common Stock to the extent
set forth in the Certificate of Determination for the Series E Preferred Stock.
The Series E Preferred Stock will be held in escrow and will not be released to
the Former Principals except in the event of a default in the Payments by the
Company. In the event of a default in the Payments by the Company, the Series E
Preferred Stock will be released to the Former Principals, as the case may be,
in an amount equal to the portion of the Payments unpaid as a result of default
divided by the stated value of the Series E Preferred Stock. The Former
Principals have registration rights pursuant to a registration rights agreement,
dated June 10, 1997, among the Company and the Former Principals with respect to
common stock into which Series E Preferred Stock received by them may be
converted.
During the six months ended June 30, 1997, 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, 1997.
During the quarter ended June 30, 1998, the Company paid directors fees of
$1,000 to each of two independent directors.
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The Company accrued the following fees payable to MEI:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Quarter ended June 30,
Consulting fees pursuant to consulting agreement $ 75,000 $ 75,000
Guarantee fees pursuant to Chase Loan guarantee 7,000 --
-------- --------
Total $ 82,000 75,000
-------- --------
Six months ended June 30,
Consulting fees pursuant to consulting agreement $150,000 $ 75,000
Guarantee fees pursuant to Chase Loan guarantee 13,000 --
-------- --------
Total $163,000 75,000
-------- --------
</TABLE>
On January 2, 1998, the Company issued MEI 240,000 shares of Common Stock in
payment of accrued and prepaid consulting fees amounting to $300,000. These
shares were issued at fair market value.
Pursuant to guarantee agreements dated November 4, 1997, each of the principals
of MEI (i.e. Messrs. Elkes, Gorman, Healy, Maggin and Lightstone) collectively
guaranteed $ 3,035,000 borrowed under the Chase Loan. In order to secure the
repayment of any amounts the MEI principals may be required to pay to Chase Bank
under the guarantees, MEI has been granted a security interest in substantially
all of the assets of the Company, other than the Company's building. Such
security interest is junior to the security interest of Chase Bank which secures
the Company's obligations under the Chase Loan.
On July 21, 1998, the Company entered into an agreement with Apollo Partners
LLC, a partnership controlled by Messrs. Elkes and Gorman, whereby the Company
borrowed $1,500,000 secured by a second mortgage on the Company's principal
office building, 8955 Beverly Boulevard, Los Angeles ("Apollo Loan"). The Apollo
Loan provides for interest at the bank prime rate (8-1/2% at June 30, 1998) plus
2% per annum. The Apollo Loan is required to be repaid on the earlier of 180
days following July 21, 1998 or the sale of the Company's principal office
building or earlier at the option of the Company.
In January 1998, the Company and Mr. Ronald Ziskin, President of Dove
Television, agreed to cancel an option to purchase 300,000 shares of Common
Stock at an exercise price of $11.00 and in lieu thereof, the Company will grant
Mr. Ziskin the option to purchase 150,000 shares of Common Stock at an exercise
price of $1.50 per share. On May 6, 1998, the Company issued 107,407 shares of
Common Stock to Mr. Ronald Lightstone, President and Chief Executive Officer
representing vested shares pursuant to his Employment Agreement.
NOTE 9 - CAPITAL ACTIVITIES
COMMON STOCK
In March 1998, the Company issued 240,000 shares of Common Stock to MEI in
payment of consulting fees. These shares were issued at fair market value.
STOCK OPTIONS AND WARRANTS
Options outstanding under the Company's stock incentive plan (the "Plan") at
June 30, 1998 were as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Exercise
Shares Price Price
------ ----- -----
<S> <C> <C> <C>
88,000 $2.50-$6.00 $3.05
</TABLE>
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<PAGE> 11
At June 30, 1998, options to acquire 77,998 shares of Common Stock under the
Plan were exercisable.
In addition to the above options issued under the Plan, at June 30, 1998, the
following options to acquire shares of Common Stock were outstanding:
(1) 300,000 options at $11.00 per share issued in 1996 to one of the
principals of Four Point Entertainment, Inc. as part of an employment
agreement. None of these options were exercisable at June 30, 1998. In
January 1998, the Company agreed with the holder of such options to cancel
such options and in lieu thereof issue 150,000 options at $1.50 per share
under the Plan fully vested.
(2) 80,000 options issued in 1996 under the Plan, with an exercise price of
$3.50 per share to the Company's public relations firm. The Company has
terminated the agreement with the public relations firm.
On January 6, 1998, the Board approved the issuance of 601,500 options under the
Plan to employees which were issued in July 1998.
Warrants outstanding as of December 31, 1997 and June 30, 1998 were as follows:
<TABLE>
<CAPTION>
Number of Weighted
Number of Equivalent Common Average
Warrants Shares Exercise Price Exercise Price
--------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
4,712,763 4,664,013 $2.00-$12.00 $5.06
</TABLE>
At June 30, 1998 warrants to acquire 4,664,013 Shares of common stock were
exercisable.
NOTE 10 - MAJOR CUSTOMERS AND SUPPLIERS
Revenues, net of returns from Customers exceeding 10% of Company revenues were:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C>
Quarter ended June 30, 68% 20%
Six months ended June 30, 60% 28%
</TABLE>
A significant quantity of audio inventory is supplied by two manufacturers. The
Company believes there are other suppliers and accordingly, the Company is not
dependent on these manufacturers as its sole source of product.
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-
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looking statements. Such factors include, but are not limited to, the
following: uncertainty as to future operating results; growth and acquisition
risks; certain risks relating to the entertainment industry; dependence on a
limited number of projects; possible need for additional financing; potential
for liability claims; dependence on certain outlets for publishing product;
competition and legal proceedings and claims. Other factors which may materially
affect actual results include, among others, the following: general economic and
business conditions, industry capacity, changes in political, social and
economic conditions and various other factors beyond the Company's control. The
Company does not undertake and specifically declines any obligation to publicly
release the results of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events. See the
relevant discussions elsewhere herein, in the Company's registration statement
on Form S-3 (Registration No. 333-43527) and in the Company's periodic reports
and other documents filed with the Securities and Exchange Commission for
further discussions of these and other risks and uncertainties applicable to the
Company and its business.
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 1000 titles currently offered
for sale. Through NewStar Television, the Company is engaged in the production
and development of television programming. Other activities of the Company
include a limited printed book publishing program and the distribution of
feature films and television programming.
Revenues for the quarter ended June 30, 1998 were $7,620,000 compared with
$3,759,000 for the same period in 1997. The Company incurred a net loss of
$499,000 for the quarter compared to a net loss of $4,889,000 for the same
period in 1997.
Revenues for the six months ended June 30, 1998 were $10,313,000 compared with
$6,420,000 for the same period in 1997. The Company incurred a net loss of
$2,262,000 for the six months compared to a net loss of $8,313,000 for the same
period in 1997.
The increase in revenues was attributable to delivery of the television motion
picture, "Futuresport", partly offset by lower publishing revenues due to a
curtailed book publishing program. The reduced net loss was primarily
attributable to (i) increased publishing margins due to lower production and
distribution costs and reduced returns, (ii) profit from the delivery of
"Futuresport" and (iii) the expensing of employee separation costs of $1,614,000
in 1997.
"Futuresport", starring Wesley Snipes, Dean Cain and Vanessa L. Williams was
delivered to ABC Television in June 1998. NewStar Television has also entered
into an agreement for the license of home video rights and is currently
marketing international rights.
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.
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.
12
<PAGE> 13
RESULTS OF OPERATIONS
The following table sets forth divisional revenues and operating expenses as a
percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Publishing 26% 71% 34% 58%
Television and Film 74 29 66 42
--- --- --- ---
Total 100% 100% 100% 100%
--- --- --- ---
OPERATING EXPENSES
Publishing 17% 80% 24% 72%
Television and Film 51 29 47 50
Selling, general & administrative 36 76 48 79
Employee separation costs -- 43 -- 25
--- --- --- ---
Total 104% 228% 119% 226%
--- --- --- ---
</TABLE>
QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED JUNE 30, 1997
Publishing
Revenues. Net publishing revenues for the quarter ended June 30, 1998 decreased
$712,000 to $1,966,000 compared with $2,678,000 for the quarter ended June 30,
1997. The decrease in net publishing revenues was primarily attributable to a
curtailed book publishing program compared with the same period in the prior
year. Leading audio book publications during the current quarter included Flight
of Eagles by Jack Higgins, Double Image by David Morrell, The Predators by
Harold Robbins and Fortunes of War by Stephen Coonts.
Cost of Sales. Cost of sales for the quarter ended June 30, 1998 decreased
$1,701,000 to $1,318,000 compared with $3,019,000 for the quarter ended June 30,
1997. The decrease was attributable to the lower revenues as described above,
the decrease in returns of printed books, and lower production and distribution
costs of audio books. Furthermore, cost of sales in 1997 included a one-time
charge of $564,000 in respect of discontinued product. Cost of sales as a
percentage of net publishing revenues decreased from 113% in the quarter ended
June 30, 1997 to 67% for the quarter ended June 30, 1998.
Film and Television
Revenues. Film and television revenues for the quarter ended June 30, 1998
increased $4,573,000 to $5,654,000, compared with $1,081,000 for the quarter
ended June 30, 1997. The increase was due to delivery of the television motion
picture "Futuresport", delivered to ABC Television in June 1998.
Cost of sales. Film and television amortization for the quarter ended June 30,
1998 increased $2,826,000 to $3,910,000 compared with $1,084,000 for the quarter
ended June 30, 1997. The increase was attributable to the cost of production of
"Futuresport". In addition, cost of sales in 1997 included a one-time charge of
$590,000 arising from a review of the film library. Cost of sales as a
percentage of net film and television revenues decreased from 100% in the
quarter ended June 30, 1997 to 69% for the quarter ended June 30, 1998.
General
Gross Profit / (Loss). The Company experienced a gross profit of $2,392,000 for
the quarter ended June 30, 1998 versus a gross loss of $344,000 for the quarter
ended June 30, 1997, resulting from the matters previously discussed regarding
publishing and film revenues and cost of sales.
Selling, General and Administrative ("SG&A"). SG&A includes costs associated
with selling, marketing and promoting the Company's products, as well as general
corporate expenses including salaries, occupancy costs, professional fees,
travel and entertainment. SG&A decreased to $2,734,000 for the quarter ended
June 30, 1998 compared to $2,860,000 for the quarter ended June 30, 1997.
13
<PAGE> 14
Net Interest Expense. Net interest expense for the quarter ended June 30, 1998
was $155,000 compared with $57,000 for the quarter ended June 30, 1997. The
interest expense is primarily the result of increased utilization of the Chase
Loan.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Publishing
Revenues. Net publishing revenues for the six months ended June 30, 1998
decreased $231,000 to $3,515,000 compared with $3,746,000 for the six months
ended June 30, 1997. The decrease in net publishing revenues was primarily
attributable to a curtailed book publishing program compared with the same
period in the prior year. Leading audio book publications during the current six
months included Sudden Death by Robert B. Parker, Perfect Witness by Barry
Siegel, The Last Hostage by John J. Nance, Irish Whiskey by Andrew M. Greeley,
Flight of Eagles by Jack Higgins, Double Image by David Morrell, The Predators
by Harold Robbins and Fortunes of War by Stephen Coonts.
Cost of Sales. Cost of sales for the six months ended June 30, 1998 decreased
$2,125,000 to $2,504,000 compared with $4,629,000 for the six months ended June
30, 1997. The decrease was attributable to the decrease in returns of printed
books during the six months ended June 30, 1998 together with lower production
and distribution costs of audio books. Furthermore, cost of sales in 1997
included a one-time charge of $564,000 in respect of discontinued product. Cost
of sales as a percentage of net publishing revenues decreased from 124% in the
six months ended June 30, 1997 to 71% for the six months ended June 30, 1998.
Film and Television
Revenues. Film and television revenues for the six months ended June 30, 1998
increased $4,124,000 to $6,798,000, compared with $2,674,000 for the six months
ended June 30, 1997. The increase primarily was due to delivery of the
television movie "Futuresport" in June 1998. Revenues for the six months ended
June 30, 1998 were also derived from completion of the second series of the
syndicated production "Make Me Laugh" distributed by Buena Vista Television for
the cable network Comedy Central.
Cost of sales. Film and television amortization for the six months ended June
30, 1998 increased $1,627,000 to $4,854,000 compared with $3,227,000 for the six
months ended June 30, 1997 due primarily to the cost of production of
"Futuresport". In addition, cost of sales in 1997 included a one-time charge of
$590,000 arising from a review of the Company film library. Cost of sales as a
percentage of net film and television revenues decreased from 121% in the six
months ended June 30, 1997 to 71% for the six months ended June 30, 1998.
General
Gross Profit / (Loss). The Company experienced a gross profit of $2,955,000 for
the six months ended June 30, 1998 versus a gross loss of $1,436,000 for the six
months ended June 30, 1997, resulting from the matters previously discussed
regarding publishing and film revenues and cost of sales.
Selling, General and Administrative. SG&A decreased to $4,913,000 for the six
months ended June 30, 1998 compared to $5,047,000 for the six months ended June
30, 1997.
Net Interest Expense. Net interest expense for the six months ended June 30,
1998 was $302,000 compared with $193,000 for the six months ended June 30, 1997.
The interest expense is primarily the result of increased utilization of the
Chase Loan.
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, other than the Company's
14
<PAGE> 15
building. The Chase Loan runs for three years until November 4, 2000. The Chase
Loan establishes a "Borrowing Base" comprising: (1) 35% of an independent
valuation of the Company's audio library, (2) 85% of the Company's eligible
receivables and (3) 30% of the Company's finished goods audio and book
inventory. At any time, the Company may borrow 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 MEI. The Chase
Loan provides for interest at the bank prime rate plus 2% per annum or the
bank's LIBOR rate plus 3% per annum, at the option of the Company. In addition,
unused commitment fees are payable at 1/2% per annum. The Chase Loan contains
various covenants to which the Company must adhere including limitations on
additional indebtedness, investments, acquisitions, capital expenditures and
sale of assets, restrictions on the payment of dividends and distributions to
shareholders, and various financial compliance tests. The Company was not in
compliance with certain of the financial compliance tests at December 31, 1997
and June 30, 1998 but received waiver and amendment from Chase Bank. At June 30,
1998, the Company had borrowed $8,389,000 against the facility. In addition,
Chase Bank has provided letters of credit for $816,000.
In February 1998, the Company entered into an agreement with Chase Bank
providing the Company with an additional loan of a maximum of $3,289,000 for the
purpose of partly financing the made for television motion picture "Futuresport"
("Futuresport Loan"). The Futuresport Loan is incorporated into the Chase Loan
under the same terms and conditions as the Chase Loan. The Futuresport Loan is
secured by "Futuresport" and related license agreements. The Futuresport Loan is
repayable in September 1998 but the Company has entered into discussions with
Chase Bank with a view to deferring repayment in accordance with expected cash
receipts from the sale of home video and international rights for Futuresport.
At June 30, 1998, $2,595,000 was outstanding against the facility.
On July 14, 1998, the Company entered into an agreement with Apollo Partners
LLC, whereby the Company borrowed $1,500,000 secured by a second mortgage on the
Company's principal office building, 8955 Beverly Boulevard, Los Angeles
("Apollo Loan"). The Apollo Loan provides for interest at the bank prime rate
(8-1/2% at June 30, 1998) plus 2% per annum. The Apollo Loan is required to be
repaid on the earlier of 180 days following July 21, 1998 or the sale of the
Company's principal office building or earlier at the option of the Company.
The Company has historically experienced significant negative cash flows from
operations, including $8,546,000 for the year ended December 31, 1997 and
$5,601,000 for the six months ended June 30, 1998 - see "Financial Statements of
the Company - Consolidated Statements of Cash Flows". Such negative cash flows
have resulted from, among other things, use of working capital for expansion of
audio and printed book publishing, development of television programming and the
acquisition of theatrical motion picture product. The Company plans to
significantly increase the level of activity in both its audio book and
television production operations. In addition, the Company will consider
acquisitions of properties or libraries or companies in related lines of
business. It will be necessary to obtain additional capital in order to
accomplish its growth objective. Such additional capital may be obtained through
sales of equity securities, by obtaining debt financing or through the sale of
assets. Even if the Company does not pursue its growth objective, if the Company
is unable to realize anticipated revenues or if the Company incurs costs
inconsistent with anticipated levels, the Company would need to obtain
additional financing (through the sale of debt or equity securities, by
obtaining additional bank financing or through the sale of certain assets),
limit its commitments to new projects or possibly curtail its current
operations. There is no assurance that any such additional financing will be
available on acceptable terms.
The Company's television production activities can affect its capital needs in
that the revenues from the initial licensing of television programming may be
less than the associated production costs. The ability of the Company to cover
the production costs of particular programming is dependent upon the
availability, timing and the amount of fees obtained from distributors and other
third parties, including revenues from foreign or ancillary markets where
available. In any event, the Company from time to time is required to fund at
least a portion of its production costs, pending receipt of programming
revenues, out of its working capital. Although the Company's strategy generally
is not to commence principal photography without first obtaining commitments
which cover all or substantially all of the budgeted production costs, from time
to time the Company may commence principal photography without having obtained
commitments equal to or in excess of such costs. In such circumstances, the
Company will be required to fund at least a portion of production and
distribution costs, pending receipt of anticipated future revenues, from working
capital, from additional debt or equity financings from outside sources or from
other
15
<PAGE> 16
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.
The Company's operations in general, and its publishing and television
operations in particular, are capital intensive. The Company anticipates, based
on currently proposed plans and assumptions relating to its operations and
anticipated outcomes of current litigation, that the projected cash flow from
operations and available cash resources, including its existing financing
arrangements, will be sufficient to satisfy its anticipated cash requirements
for the next twelve months. In the event that the Company's plans change, its
assumptions change or prove to be inaccurate or the cash flow proves to be
insufficient to fund operations (due to unanticipated expenses, delays,
problems, difficulties or otherwise), the Company would be required to seek
additional financing sooner than anticipated or to curtail its activities.
As of July 30, 1998 the Company's unused sources of funds consisted primarily of
approximately $417,000 in cash and $701,000 available under the Chase Loan. Any
draw-downs of such currently available amounts under the Chase Loan are subject
to approval and guarantee by MEI.
INFLATION
The Company does not believe its business and operations have been materially
affected by inflation.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1997, the Company was served with a complaint in an action entitled
Michael Bass v. Penguin USA Inc., et al. (New York Superior Court Case No.
97-111143) (the "New York Bass Action"). The complaint alleged among other
things that the contribution of Liza Greer (one of the authors) to the book
"You'll Never Make Love In This Town Again" defamed Mr. Bass and violated his
rights of publicity under New York statutes. The complaint sought damages of
$70,000,000 for defamation and $20,000,000 for violation of the New York right
of publicity statutes and an injunction taking the book out of circulation and
prohibiting the use of Mr. Bass' name. The New York Bass Action was voluntarily
stayed after Mr. Bass filed a similar action in the State of California entitled
Michael Bass v. Penguin USA et. al. (California Superior Court Case No.
SC049191) seeking essentially the same damages as in the New York Bass Action
(the "California Bass Action"). The California Bass Action was dismissed with
prejudice on July 6, 1998. However, there is no assurance that the plaintiff
thereunder will not appeal the dismissal, or in the event of such an appeal,
that the Company will prevail.
In July 1997, Michael Viner and Deborah Raffin Viner (the "Former Principals")
commenced an arbitration against the Company. In their arbitration demand, the
Former Principals claimed that they were owed in excess of $1 million by the
Company relating to the motion picture entitled "Morning Glory". The Former
Principals claimed that they were also entitled to the repayment of certain
deferred amounts for producing and acting services rendered by them in
connection with "Morning Glory" and to 50% of the profits. They claimed that a
former director of the Company, Gerald Leider, is entitled to the other 50% of
the profits. The Former Principals also asserted that from any recovery of a
judgment confirming an arbitration award against Steven Stern and/or Sharmhill
Productions relating to "Morning Glory" (the "Stern Judgment"), they are
entitled to receive $1 million, as well as the deferred amounts and 50% of the
profits. The Company asked the arbitrator to determine that the Former
Principals are not entitled to any moneys or rights with respect to "Morning
Glory", including from the proceeds of the Stern Judgment. On June 17, 1998, the
arbitrator issued an order in which he ruled that the Former Principals were not
entitled to repayment of such deferred amounts, to any percentage of the profits
or to the $1,000,000 claimed by the Former Principals. The arbitrator also ruled
that the Former Principals were not entitled to any proceeds from the Stern
Judgment. The Former Principals requested that the arbitrator reconsider his
ruling. The arbitrator
16
<PAGE> 17
determined on July 15, 1998 that there was no basis for reconsideration. The
Company is not aware of any appeal by the Former Principals. In the event of
such an appeal, there is no assurance that the Company will prevail.
In August 1997, the Former Principals commenced an arbitration against the
Company seeking specific performance of, and alleging breach of, a termination
agreement to which they and the Company are a party (the "Termination
Agreement"), and claimed damages in excess of $165,000 and additional
reimbursements allegedly due for other items. The Company believed that, with
the exception of certain immaterial amounts which it expected to pay, it had
good and meritorious defenses to the claims by the Former Principals and it
filed its own claims against the Former Principals. On July 17, 1998, the
arbitrator ruled in favor of the Company on some issues and in favor of the
Former Principals on other issues, resulting in a net recovery by the Former
Principals of approximately $30,000. The arbitrator also confirmed an earlier
ruling that a provision of the Termination Agreement prohibiting the Former
Principals from competing with the Company in the audio book business for a
period of four years from June 10, 1997 is valid and enforceable, and enjoined
and restrained the Former Principals from engaging in the audio book business
during that period. The Former Principals have asserted that the arbitrator
lacked jurisdiction to render the award and have objected to the arbitrator's
rendering of the award. Notwithstanding such objection, the Former Principals
have requested the arbitrator to reconsider portions of the award in which the
arbitrator ruled in favor of the Company. The Company has requested the
arbitrator to reconsider portions of the award in which the arbitrator ruled in
favor of the Former Principals. There is no assurance that the Company will be
successful in its request for reconsideration or that the Former Principals will
not be successful in their request for reconsideration or their challenge to the
arbitrator's jurisdiction to render the award, or that the Former Principals
will not appeal, or in the event of such an appeal that the Company will
prevail.
A settlement has been reached in the securities class action lawsuits pending
against the Company and two former officers and directors and a Stipulation of
Settlement was filed with the Los Angeles Superior Court in July 1998. The
settlement has received preliminary court approval and is conditioned on certain
contingencies and final court approval following notice to be provided to the
plaintiff classes. Under the terms of the Stipulation of Settlement, all of the
pending class actions will be dismissed and a settlement fund of $3.75 million
will be created for the members of the proposed classes. The Stipulation of
Settlement provides that the settlement does not constitute an admission of
liability by the Company or any other party with respect to the matters alleged
in the class actions. The full amount of the settlement and associated legal
costs incurred by the Company to date have either been previously reserved for
or covered by the Company's insurance carriers. The pending class actions
consisted of three separate cases, Alan Field v. Dove Entertainment, Inc., et
al. (Los Angeles Superior Court No. BC174659), Global Asset Allocation
Consultants, L.L.C. v. Dove Entertainment, Inc., et al. (United States District
Court for the Central District of California Civil Action No. 97-6253-WDK) and
George, et al. v. Dove Entertainment, Inc. et al. (United States District Court
for the Central District of California Civil Action No. 97-7482-R). Although the
Company anticipates that the settlement will receive final court approval or
that members of the plaintiff classes will not opt out of the settlement and
pursue their own actions.
The Company has filed an appeal in the action entitled Greer v. Dove (Los
Angeles Superior Court Case No. BC 160871) (the "Greer Action"). In order to
file the appeal, the Company was required to post a bond in the amount of
approximately $179,000 (i.e., 150% of the judgment amount). There is no
assurance that the Company will prevail in such appeal. In June 1998, the
Company was served with a complaint filed in Los Angeles Superior Court (Case
No. BC193089) entitled Liza Greer v. NewStar Media Inc. for breach of contract,
breach of fiduciary duty, breach of agreement, breach of the implied covenant of
good faith and fair dealing and fraud, in connection with the book "You'll Never
Make Love in this Town Again" and circumstances relating to the Greer Action.
Ms. Greer claims, among other things, that she has suffered damages in excess of
$1,000,000. The Company believes it has good and meritorious defenses to the
action. Nevertheless, there is no assurance that the Company will prevail.
In May 1997, the Company was served with a complaint in an action entitled
Kenneth Raskoff v. Dove (Los Angeles Superior Court Case No. BC171355) (the
"Raskoff Action"). In June, 1998 the parties entered into a settlement agreement
and the action was dismissed.
In July 1997, the Company was served with a complaint in an action entitled
Steven A. Soloway v. Dove Entertainment, Inc., etc. et al. (Los Angeles Superior
Court Case No. BC 175516) (the "Soloway Action"). Mr. Soloway is a former
director and employee of the Company and sought damages of approximately
$350,000 for breach of contract. Mr. Soloway claimed that he was entitled to
declare his employment agreement terminated
17
<PAGE> 18
without cause and to receive has base salary through September 1999. In
September 1997, Mr. Soloway obtained a writ of attachment for $350,000 in
respect of his claims, for which the Company substituted an undertaking for the
amount of the attachment. The Company filed a cross-complaint against Mr.
Soloway for breach of fiduciary duty and legal malpractice asserting that Mr.
Soloway fabricated a version of his employment agreement, submitted the
fabricated version for inclusion in the Company's public documents, without
authorization or approval drafted and signed on behalf of the Company an
occupancy agreement pursuant to which the Former Principals unrightfully
occupied the Company's offices, fabricated minutes of the Board and disclosed
confidential information that he obtained as an officer. On July 21, 1998 a
Judgment Pursuant to Terms of Settlement was filed with the Los Angeles Superior
Court. Pursuant to the terms of the Settlement, Mr. Soloway received a cash
payment of $150,000 and common stock of the Company valued at $38,000.
In addition to the above claims, the Company is a party to claims previously
reported in its public filings and to various routine legal proceedings and
claims incidental to its business.
During the quarter ended June 30, 1998, there have been no other material
developments in legal proceedings pending against the Company or its properties
and no other material legal proceedings against the Company or its properties
were instituted or terminated (other than routine litigation that is incidental
to the Company's business).
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 1998, the Company issued 26,492 shares of common stock to the Dove
Entertainment, Inc. Cash or Deferred Profit Sharing Plan as the Company's
required contribution for the period from August 1, 1997 to March 31, 1998.
Also in May 1998, the Company issued 107,407 shares of Common Stock to Ronald
Lightstone, the Company's President and Chief Financial Officer, pursuant to the
vesting schedule in Mr. Lightstone's employment agreement with the Company.
All of the shares issued were issued in reliance on Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of Shareholders was held on April 30, 1998. The following
matters were submitted to shareholders and received the following vote
tabulation.
Amendment of the Company's Articles of Incorporation to change the name of the
Company from Dove Entertainment, Inc. to NewStar Media Inc.:
<TABLE>
<S> <C> <C> <C>
5,588,201 votes for 1,950 votes against 0 votes abstaining 0 broker non-votes
</TABLE>
Election of Directors to serve until the next Annual Meeting of Shareholders:
<TABLE>
<S> <C> <C> <C> <C>
Terrence Elkes 5,589,001 votes for 0 votes against 1,150 votes abstaining 0 broker non-votes
Ronald Lightstone 5,589,001 votes for 0 votes against 1,150 votes abstaining 0 broker non-votes
Bruce Maggin 5,589,001 votes for 0 votes against 1,150 votes abstaining 0 broker non-votes
Lee Masters 5,589,001 votes for 0 votes against 1,150 votes abstaining 0 broker non-votes
Steven Mayer 5,589,001 votes for 0 votes against 1,150 votes abstaining 0 broker non-votes
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C> <C> <C>
Series B Director Nominees
Ken Gorman 2,000,000 votes for 0 votes against 0 votes abstaining 0 broker non-votes
John T. Healy 2,000,000 votes for 0 votes against 0 votes abstaining 0 broker non-votes
</TABLE>
Ratification of KPMG Peat Marwick as the Company's auditors for fiscal years
1996 and 1997:
<TABLE>
<S> <C> <C> <C> <C>
5,589,001 votes for 1,150 votes against 0 votes abstaining 0 Broker non-votes
</TABLE>
ITEM 5. OTHER INFORMATION
On May 4, 1998, the Company filed with the California Secretary of State an
amendment to its Articles of Incorporation, changing the name of the Company to
NewStar Media Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
3.9 Certificate of Amendment of Articles of Incorporation of the
Company filed with the Secretary of State of the State of
California on May 4, 1998
10.65 Loan Agreement, dated as of July 21, 1998, between NewStar Media
Inc. and Dove Four Point, Inc. and Apollo Partners, LLC
10.66 Deed of Trust, dated July 21, 1998, among NewStar Media Inc.,
Apollo Partners, LLC and North American Title Company
27 Financial Data Schedule
(B) Reports on Form 8-K
A report on Form 8-K (dated June 9, 1998) was filed on June 19, 1998 reporting
under Item 5 the notification by The Nasdaq Stock Market, Inc. of its
determination that the Company's common stock would be delisted from the Nasdaq
SmallCap Market on June 18, 1998, and the stay of such delisting pending the
Company's requested hearing.
19
<PAGE> 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 3, 1998 NEWSTAR MEDIA INC.
By /s/ RONALD LIGHTSTONE
---------------------------------------
Ronald Lightstone, President,
Chief Executive Officer and Director
Date: August 3, 1998 By /s/ NEIL TOPHAM
---------------------------------------
Neil Topham
Chief Financial Officer
20
<PAGE> 21
NEWSTAR MEDIA, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number
<S> <C>
3.9 Certificate of Amendment of Articles of Incorporation of the
Company filed with the Secretary of State of the State of
California on May 4, 1998
10.65 Loan Agreement, dated as of July 21, 1998, between NewStar Media
Inc. and Dove Four Point, Inc. and Apollo Partners, LLC
10.66 Deed of Trust, dated July 21, 1998, among NewStar Media Inc.,
Apollo Partners, LLC and North American Title Company
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.9
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
DOVE ENTERTAINMENT, INC.
The undersigned certify that:
1. They are the President and Chief Executive Officer and the Secretary,
respectively, of Dove Entertainment, Inc., a California corporation (the
"Corporation").
2. Article I of the Corporation's Articles of Incorporation is amended in
its entirety to read as follows:
The name of this corporation is NewStar Media Inc.
3. The amendment herein set forth has been duly approved by the Board of
Directors of the Corporation.
4. The amendment herein set forth has been duly approved by the required
vote of the shareholders in accordance with Section 902 of the
California Corporations Code. The total number of outstanding shares of
common stock of the Corporation is 6,341,544. The number of shares
voting in favor of the amendment equaled or exceeded the vote required.
The percentage vote required was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: May 1, 1998
/s/ RONALD LIGHTSTONE
-------------------------------------
Ronald Lightstone, President and
Chief Executive Officer
/s/ ROBERT MURRAY
-------------------------------------
Robert Murray, Secretary
<PAGE> 1
EXHIBIT 10.65
$1,500,000
LOAN AGREEMENT
Dated as of July 21, 1998
between
NEWSTAR MEDIA INC.
DOVE FOUR POINT, INC.
AND
APOLLO PARTNERS, LLC
======================
<PAGE> 2
LOAN AGREEMENT dated as of July 21, 1998 (the "Agreement") between
NEWSTAR MEDIA INC., a California corporation, having its principal place of
business at 8955 Beverly Boulevard, Los Angeles, California 90048
("NewStar"),and DOVE FOUR POINT, INC., a Florida corporation, having its
principal place of business at 8955 Beverly Boulevard, Los Angeles, California
90048 ("Four Point"; New Star and Four Point, individually and collectively,
"Borrower"), and APOLLO PARTNERS, LLC, a New York limited liability company,
having its principal place of business at 1 Stamford Plaza, 12th Floor,
Stamford, Connecticut 06901 (the "Lender").
WHEREAS, Four Point is a wholly-owned subsidiary of New Star; the
Borrower has requested the Lender to make a loan in the amount of $1,500,000,
the proceeds of which shall be used by the Borrower to finance working capital
needs. The Lender is willing to extend such credit to the Borrower, subject to
the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing the parties hereto
agree to the following
I. DEFINITIONS
SECTION A. Definitions. As used herein, the following words and terms
shall have the following meanings:
"Affiliate" shall mean any corporation, partnership, limited
liability company, joint venture, trust or unincorporated organization which,
directly or indirectly, controls or is controlled by or is under common control
with the Borrower.
"Business Day" shall mean any day not a Saturday, Sunday or legal
holiday, on which the Lender is open for business in New York City.
"Closing Date" shall mean July 21, 1998.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Collateral" shall mean and include all of NewStar's right, title and
interest in and to the real property described on Exhibit A attached hereto,
together with all existing or subsequently erected or affixed buildings,
improvements and fixtures; all easements, rights of way and appurtenances; all
water, water rights and ditch rights (including stock in utilities with ditch or
irrigation rights); and all other rights, royalties and profits relating to the
real property including, without limitation, all minerals, oil, gas, geothermal
and similar matters.
"Contractual Obligation" shall mean as to any Person, any provision
of any security issued by such Person or any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
"Deed of Trust" shall mean a Deed of Trust, in substantially the form
attached hereto as Exhibit A, among New Star, Lender and the trustee thereunder,
pursuant to which New Star grants to Lender a lien on the collateral, as such
Deed of Trust may be amended, supplemental or otherwise modified from time to
time.
"Default" shall mean any of the events specified in Article VII
hereof, whether or not any requirement for the giving of notice or the lapse of
time or both or any other condition has been satisfied.
"Default Interest Rate" shall have the meaning set forth in Section
2.6 hereof.
<PAGE> 3
"Environmental Laws" shall mean any and all federal, state, local or
municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees
or requirements of any governmental authority regulating, relating to or
imposing liability or standards of conduct concerning any Hazardous Material or
environmental protection or health and safety, as now or may at any time
hereafter be in effect, including without limitation, the Clean Water Act also
known as the Federal Water Pollution Control Act ("FWPCA"), 33 U.S.C. Section
1251 et seq., the Clean Air Act ("CAA"), 42 U.S.C. Sections 7401 et seq., the
Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"), 7 U.S.C. Sections
136 et seq., the Surface Mining Control and Reclamation Act ("SMCRA"), 30 U.S.C.
Sections 1201 et seq., the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et seq., the Superfund
Amendments and Reauthorization Act of 1986 ("SARA"), Public Law 99-499, 100
Stat. 1613, the Emergency Planning and Community Right to Know Act ("ECPCRKA"),
42 U.S.C. Section 11001 et seq., the Resource Conservation and Recovery Act
("RCRA"), 42 U.S.C. Section 6901 et seq., the Occupational Safety and Health Act
as amended ("OSHA"), 29 U.S.C. Section 655 and Section 657, together, in each
case, with any amendment thereto, and the regulations adopted pursuant thereto.
"Event of Default" shall mean any Event of Default set forth in
Article VII.
"Hazardous Materials" shall mean any flammable materials, explosives,
radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic
substances, or similar materials defined in any Environmental Law.
"Indebtedness" shall have the meaning set forth in Section 6.2
hereof.
"Interest Payment Date" shall mean, the last day of each calendar
month during the term of the Loan, commencing August 31, 1998.
"Loan" shall mean the loan by the Lender to the Borrower pursuant to
Article II hereof.
"Loan Documents" shall mean collectively, this Agreement, the Note,
the Deed of Trust, any agreements or documents referred to in Article IV hereof
and all other documents, certificates and instruments executed in connection
therewith.
"Loan Maturity Date" shall mean the earlier of (a) the date which is
180 days following the date of this Agreement or (b) the date on which NewStar
sells the Collateral.
"Material Adverse Effect" shall mean a material adverse effect on (a)
the business, operations, property, condition (financial or otherwise) or
prospects of the Borrower and its subsidiaries taken as a whole, (b) the ability
of the Borrower to perform its obligations under the Loan Documents, or (c) the
validity or enforceability of any of the Loan Documents or the rights or
remedies of the Lender hereunder or thereunder.
"Obligations" shall mean all obligations, liabilities and
indebtedness of every nature of the Borrower from time to time owed to the
Lender under this Agreement or any of the Loan Documents including the principal
amount of all debts, claims and indebtedness, accrued and unpaid interest and
all fees, costs and expenses, whether primary, secondary, direct, contingent,
fixed or otherwise, heretofore, now and/or from time to time hereafter owing,
due or payable whether before or after the filing of a proceeding under the
United States Bankruptcy Code by or against the Borrower.
"Permitted Encumbrances" shall have the meaning assigned to such term
in Section 6.1 hereof.
"Person" shall mean any natural person, corporation, limited
liability company, business trust, joint venture, association, company,
partnership or government, or any agency or political subdivision thereof.
"Prime Rate" means the rate that The Chase Manhattan Bank announces
from time to time as its prime lending rate, as in effect from time to time.
<PAGE> 4
"Subsidiaries" shall mean any corporation, association or other
business entity more than 50% of the voting stock of which is at the time owned
or controlled, directly or indirectly, by the Borrower or one or more of its
Subsidiaries or a combination thereof.
SECTION 1.2 ACCOUNTING TERMS. Except as otherwise herein specifically
provided, each accounting term used herein shall have the meaning given to it
under Generally Accepted Accounting Principles. "Generally Accepted Accounting
Principles" shall mean those generally accepted accounting principles and
practices which are recognized as such by the American Institute of Certified
Public Accountants acting through the Financial Accounting Standards Board
("FASB") or through other appropriate boards or committees thereof and which are
consistently applied for all periods so as to properly reflect the financial
condition, and the results of operations and changes in financial position, of
the Borrower, except that any accounting principle or practice required to be
changed by the FASB (or other appropriate board or committee of the FASB) in
order to continue as a generally accepted accounting principle or practice may
be so changed. Any dispute or disagreement between the Borrower and the Lender
relating to the determination of Generally Accepted Accounting Principles shall,
in the absence of manifest error, be conclusively resolved for all purposes
hereof by the written opinion with respect thereto, delivered to the Lender, of
independent accountants selected by the Borrower and approved by the Lender.
II. LOAN
SECTION 2.1. LOAN. Subject to the following terms and conditions, and
relying upon the representations and warranties set forth herein, the Lender
agrees to make a "Loan" to the Borrower in an amount equal to $1,500,000.
Subject to the terms and conditions of this Agreement the Loan shall be made on
the closing date. NewStar and Four Point confirm and agree that all obligations
hereunder shall be joint and several and Four Point confirm that any and all
amounts loaned hereunder may be loaned to NewStar for the benefit of New Star
Four Point.
SECTION 2.2. NOTE.
The Loan by the Lender shall be evidenced by a promissory note (the
"Note"), substantially in the form attached hereto as Exhibit B, appropriately
completed, duly executed and delivered on behalf of the Borrower and payable to
the order of the Lender in the principal amount The aggregate principal amount
outstanding on the Note shall be payable on the Loan Maturity Date and all
accrued and unpaid interest thereon shall be payable on each Interest Payment
Date and on the Loan Maturity Date; provided, however, that if any such day is
not a Business Day, such principal and accrued interest, if any, shall be
payable on the next succeeding Business Day with additional accrued interest
until paid.
SECTION 2.3. INTEREST ON LOANS. The Loan shall bear interest on its
principal amount outstanding from time to time at a rate (computed on the basis
of the actual number of days elapsed over a year of 360 days) the Prime Rate
plus 2%.
SECTION 2.4. PAYMENT AND PREPAYMENT OF LOANS.
(a) The Borrower shall repay the principal amount of the
Loan plus all accrued and unpaid interest on the Loan Maturity Date.
(b) The Borrower may, at any time prepay the outstanding
amount of the Loan in whole or in part with accrued interest to the date of such
prepayment on the amount prepaid without premium or penalty; provided, however,
that each partial prepayment of the Loan shall be in a minimum amount of
$25,000.
<PAGE> 5
(c) Each partial prepayment of the Loan shall be permanent.
SECTION 2.5. OVERDUE INTEREST; ALTERNATE RATE OF INTEREST. Any amount
of principal, interest or any other amounts due hereunder which is not paid when
due ("Overdue Payment"), whether at stated maturity, by acceleration or
otherwise, shall, to the extent permitted by law, bear interest from such due
date until the Overdue Payment is paid in full, which interest shall be payable
on demand, at an interest rate per annum equal to two percent (2%) in excess of
the rate of interest on the Loan (the "Default Interest Rate").
SECTION 2.6. COMPUTATIONS. All computations of the interest rate
shall be made by the Lender on the basis of a year of 360 days, for the actual
number of days (including the first day but excluding the last day) occurring in
the period for which such interest is payable.
III. REPRESENTATIONS AND WARRANTIES
Each of NewStar and Four Point represents and warrants to the Lender,
that:
SECTION 3.1. ORGANIZATION, CORPORATE POWERS, ETC. NewStar is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of California. Four Point is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Florida has
the power and authority to own its properties and to carry on its business as
now being conducted, is duly qualified to do business in every jurisdiction
wherein the conduct of its business or the ownership of its properties is such
as to require such qualification and (iii) has the corporate power to execute,
deliver and perform the Loan Documents.
SECTION 3.2. CORPORATE AND GOVERNMENTAL AUTHORIZATION; NO
CONTRAVENTION. The execution, delivery and performance by each of NewStar and
Four Point of the Loan Documents and the borrowing by New Star and/or Four Point
hereunder (a) have been duly authorized, (b) will not violate (i) any provision
of law or any governmental rule or regulation applicable to Borrower or, (ii)
any order of any court or other agency of government binding on Borrower or any
indenture, agreement or other instrument either to which Borrower is a party, or
by which Borrower or any of its property is bound, and (c) will not be in
conflict with, result in a breach of or constitute (with due notice and/or lapse
of time) a default under, any such indenture, agreement or other instrument, or
result in the creation or imposition of any lien, charge or encumbrance of any
nature whatsoever upon any of their property or assets other than as
contemplated by the Loan Documents. Each person executing the Loan Documents has
full authority to execute and deliver same for and on behalf of the Borrower.
SECTION 3.3. SEC DOCUMENTS. The Borrower has furnished the following
information to the Lender: (a) the Report on Form 10-KSB of New Star and it
wholly-owned subsidiaries for the year ended December 31, 1997, (b) New Star's
Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31, 1998, and
(c) all other documents that New Star was required to file, which it represents
and warrants it did timely file with SEC under Section 13 or 14(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), since March
31, 1998 (collectively, the "SEC Documents"). As of their respective filing
dates, the SEC Documents complied in all material respects with the requires of
the Exchange Act or the Securities Act of 1933, as amended (the "Securities
Act"), as applicable. The SEC Documents as of their respective dates did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading. The
financial statements of New Star included in the SEC Documents (the "Financial
Statements") comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto. Except as may be indicated in the notes to the Financial
Statements or, in the case of unaudited statements, as permitted by Form 10-QSB,
the Financial Statements have been prepared in accordance with Generally
Accepted Accounting Principles consistently applied and fairly present the
consolidated financial position
<PAGE> 6
of New Star and any subsidiaries at the dates thereof and the consolidated
result of their operations and consolidated cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal, recurring
adjustments). The SEC Documents, this Agreement, the exhibits and schedules
hereto, and any certificates or documents to be delivered to the Lender pursuant
to this Agreement, when taken together, do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements contained herein and therein, in light of the circumstances under
which statements were made, not misleading.
SECTION 3.4. ABSENCE OF CHANGES. Except as otherwise disclosed in the
SEC Documents, since March 31, 1998, there has not been:
(a) any changes in the assets, liabilities, financial
condition or operations of the Borrower from that reflected in the Financial
Statements except changes in the ordinary course of business which have not
been, either in any individual case or in the aggregate, materially adverse,
(b) any material change, except in the ordinary course of
business, in the aggregate contingent obligations of the Borrower, whether by
way of guarantee, endorsement, indemnity, warrant or otherwise,
(c) any damage, destruction or loss, whether or not covered
by insurance, materially and adversely affecting the properties or business of
the Borrower;
(d) any declaration or payment of any dividend or other
distribution of the assets of the Borrower, or any stock split, stock dividend,
reclassification, reorganization, combination or the like;
(e) any labor organization activity;
(f) any transfer or grant of a right other than in the
ordinary course of business or any material change in the patents, patent
applications, copyrights, trade secrets, trademarks, proprietary information,
proprietary rights, and processes necessary for the Borrower's business as
currently conducted without any conflict with or infringement of the rights of
others;
(g) any notification or communication received by the
Borrower alleging that the Borrower, by conducting its business as currently
conducted, would violate any of the patents, trademarks, service marks, trade
names, copyrights, or trade secrets or other proprietary rights of any other
person or entity;
(h) any notification or communication received by the
Borrower that any of its employees or consultants is obligated under any
contract (including licenses, covenants, or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court or
administrative agency, that is violated by or would materially interfere with
the current or prospective services provided to the Borrower by the employee or
consultant or the use of his best efforts to promote the interests of the
Borrower or that would materially conflict with the Borrower's business as
currently conducted and proposed to be conducted;
(i) any claim or legal action or other proceeding
threatened or brought before any court, any arbitrator of any kind or any
administrative agency, or any governmental investigation, which could have a
Material Adverse Effect; or
(j) any other event or condition of any character which has
materially and adversely affected the Borrower's assets, liabilities, financial
condition or operations or prospects.
SECTION 3.5. TAXES. All assessed deficiencies resulting from Internal
Revenue Service examinations of the Federal income tax returns of the Borrower
have been discharged or reserved against. The Borrower has filed or caused to be
filed all Federal, state and local tax returns which are required to be filed,
and has paid or has caused to be paid all taxes as shown on said returns or on
any assessment received by it, to the extent that such taxes have become due,
except any such taxes that are immaterial in amount or are being contested in
good faith with appropriate reserves set aside therefor.
<PAGE> 7
SECTION 3.6. TITLE TO PROPERTIES. The Borrower has good and
marketable title to its properties and assets reflected in the Financial
Statements referred to in Section 3.3 hereof, except for equipment leases in the
ordinary course of business and such properties and assets as have been disposed
of since the date of such balance sheet as no longer used or useful in the
conduct of its business or as have been disposed of in the ordinary course of
business, and all such properties and assets are free and clear of mortgages,
pledges, liens, charges and other encumbrances, except as required or permitted
by the provisions hereof or as disclosed in the Financial Statements referred to
in Section 3.3 hereof.
SECTION 3.7. LITIGATION.
(a) There are no actions, suits or proceedings (whether or
not purportedly on behalf of the Borrower) pending or, to the knowledge of the
Borrower, threatened against or affecting the Borrower or any material property
of the Borrower, at law or in equity or before or by any Federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which involve any of the transactions
contemplated herein or which, if adversely determined against the Borrower,
would in the opinion of management have a Material Adverse Effect, other than as
shown in the SEC Documents;
(b) The Borrower is not in default with respect to any
judgment, writ, injunction, decree, rule or regulation of any court or Federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, which would have a Material
Adverse Effect.
SECTION 3.8. AGREEMENTS; NO DEFAULT. The Borrower is not a party to
any agreement or instrument or subject to any charter or other corporate
restriction or any judgment, order, writ, injunction, decree or regulation
materially and adversely affecting its business, properties or assets,
operations or condition (financial or otherwise). The Borrower is not in default
in any manner which would have a Material Adverse Effect or materially and
adversely affect the performance, observance or fulfillment of any of the
obligations, covenants or conditions contained in any other agreement or
instrument to which it is a party.
SECTION 3.9. PROCEEDS OF THE LOAN. The proceeds of the Loan shall be
used by the Borrower only for the purpose described in the preamble hereto.
SECTION 3.10. FEDERAL RESERVE REGULATIONS.
(a) The Borrower is not engaged principally in, nor has as
one of its important activities, the business of extending credit for the
purpose of purchasing or carrying any "margin stock" (within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System of the
United States, as amended to the date hereof). No part of the proceeds of the
Borrowing hereunder will be used to purchase or carry any margin stock or to
extend credit to others for the purpose of purchasing or carrying any such
margin stock. No part of the proceeds of the borrowing hereunder will be used
for any purpose which violates or which is inconsistent with the provisions of
Regulation X of said Board of Governors. If requested by the Lender, the
Borrower will furnish to the Lender a statement on Federal Reserve Form U-1.
(b) No part of the proceeds of the Loans will be used,
whether directly or indirectly, and whether immediately, incidentally or
ultimately, (i) to purchase or to carry margin stock or to extend credit to
others for the purpose of purchasing or carrying margin stock, or to refund
indebtedness originally incurred for such purpose, or (ii) for any purpose which
violates or is inconsistent with the provisions of the Regulations G, T, U, or X
of the Board of Governors of the Federal Reserve System.
SECTION 3.11. SUBSIDIARIES. The Borrower has no Subsidiaries other
than those set forth on Schedule 3.11 attached hereto.
SECTION 3.12. ENVIRONMENTAL MATTERS
<PAGE> 8
(a) The Borrower has not used, stored, treated,
transported, manufactured, refined, handled, produced or disposed of any
Hazardous Materials on, under, at or from any of its properties or assets owned
or leased by the Borrower, in any manner which at the time of the action in
question violated any Environmental Law governing the use, storage, treatment,
transportation, manufacture, refinement, handling, production or disposal of
Hazardous Materials and which violation would have a material adverse effect on
the business or financial condition of the Borrower and to the best of the
Borrower's knowledge, no prior owner of such property or asset or any tenant,
subtenant, prior tenant or prior subtenant thereof has used Hazardous Materials
on or affecting such property or asset, or otherwise, in any manner which at the
time of the action in question violated any Environmental Law governing the use,
storage, treatment, transportation, manufacture, refinement, handling,
production or disposal of Hazardous Materials.
(b) To the best of the Borrower's knowledge (i) the
Borrower has no obligations or liabilities, known or unknown, matured or not
matured, absolute or contingent, assessed or unassessed, which would reasonably
be expected to have a materially adverse effect on the business or condition
(financial or otherwise) of the Borrower and (ii) no claims have been made
against the Borrower during the past five years and no presently outstanding
citations or notices have been issued against the Borrower which could
reasonably be expected to have a materially adverse effect on the business or
condition (financial or otherwise) of the Borrower taken as a whole which in
either case have been or are imposed by reason of or based upon any provision of
any Environmental Law, including, without limitation, any such obligations or
liabilities relating to or arising out of or attributable, in whole or in part,
to the manufacture, processing, distribution, use, treatment, storage, disposal,
transportation or handling of any Hazardous Materials by the Borrower, or any of
its employees or predecessors in interest in connection with or in any way
arising from or relating to the Borrower or any of its owned or leased
properties, or relating to or arising from or attributable, in whole or in part,
to the manufacture, processing, distribution, use, treatment, storage, disposal,
transportation or handling of any such substance, by any other Person at or on
or under any of the real properties owned or used by the Borrower or any other
location where such could have materially adverse effect on the business or
condition (financial or otherwise) of the Borrower.
SECTION 3.13. NOT AN INVESTMENT COMPANY. The Borrower is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended. The Borrower is not subject to regulation under any Federal or State
statute or regulation which limits its ability to incur Indebtedness.
SECTION 3.14. GOVERNMENTAL APPROVAL. No registration with or consent
or approval of, or other action by, any Federal, state or other governmental
authority or regulatory body is required in connection with the execution,
delivery and performance of the Loan Documents or the borrowings hereunder.
SECTION 3.15. FULL DISCLOSURE. All written information heretofore
furnished by the Borrower to the Lender for purposes of or in connection with
this Agreement is true and accurate in all material respects on the date as of
which such information is stated or certified. The Borrower has disclosed to the
Lender in writing any and all facts which, in the reasonable judgment of the
Borrower, have or would be reasonably likely to cause a Material Adverse Effect.
SECTION 3.16. BINDING EFFECT. This Agreement and each other Loan
Document to which the Borrower is a party constitute the legal, valid and
binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization or similar laws affecting
the enforcement of creditors' rights generally or by equitable principles
relating to enforceability.
SECTION 3.17. DEED OF TRUST. The Deed of Trust, attached hereto as
Exhibit A creates a valid, binding and enforceable security interest in and lien
on the Collateral.
IV. CONDITIONS OF LENDING
The obligation of the Lender to make the Loan hereunder is subject to
the following conditions precedent:
<PAGE> 9
SECTION 4.1. REPRESENTATIONS AND WARRANTIES; NO DEFAULT. At the time
of the making of the Loan: (i) the representations and warranties set forth in
Article III hereof shall be true and correct in all material respects on and as
of such time with the same effect as though such representations and warranties
had been made on and as of such time; (ii) the Borrower shall be in compliance
with all the terms and provisions set forth herein and no Default or Event of
Default shall have occurred and be continuing; and (iii) in the judgment of
Lender, no Material Adverse Effect shall have occurred and be continuing and the
prospect of repayment shall not have been impaired.
SECTION 4.2. DEED OF TRUST. On or prior to the Closing Date, the
Lender shall have received the Mortgage from the Borrower substantially in the
form attached hereto as Exhibit A.
SECTION 4.3. NO DEFAULT CERTIFICATE; DEEMED REPRESENTATION. On the
Closing Date, the Borrower shall deliver to the Lender a certificate, dated such
date and signed by the Chief Financial Officer of the Borrower confirming
compliance with the conditions precedent set forth in clauses (i) and (ii) of
Section 4.1 hereof.
SECTION 4.4. BORROWER DOCUMENTS. On or before the Closing Date, the
Borrower shall deliver to the Lender (i) copies of its Articles of Incorporation
and By-laws, certified as of the Closing Date by its corporate secretary and
(ii) resolutions of the Board of Directors approving and authorizing the
execution, delivery and performance of this Agreement and the other Loan
Documents, certified as of the Closing Date by its corporate secretary as being
in full force and effect without modification or amendment.
SECTION 4.5. OPINION OF BORROWER'S COUNSEL. The Lender shall have
received on originally executed copy of a favorable written opinion of Robert C.
Murray, counsel for the Borrower, in form and substance reasonably satisfactory
to the Lender and its counsel, dated as of the Closing Date.
SECTION 4.6. OTHER INFORMATION, DOCUMENTATION. The Lender shall
receive such other and further information and documentation as it may
reasonably require.
V. AFFIRMATIVE COVENANTS
The Borrower covenants and agrees with the Lender that, so long as
this Agreement shall remain in effect or any of the principal of or interest on
the Note remain unpaid, it will:
SECTION 5.1. CORPORATE EXISTENCE, PROPERTIES, INSURANCE, ETC. Except
as permitted in Section 5.2, do or cause to be done all things necessary to
preserve and keep in full force and effect its existence as a corporation, its
rights and franchises and comply, in all material respects, with all laws
applicable to it; at all times maintain, preserve and protect all franchises,
trade names licenses, patents, trademarks and copyrights and preserve all
material property used or useful in the conduct of its business and keep the
same in good repair, working order and condition, reasonable wear and tear
excluded, and from time to time make, or cause to be made, all needful and
proper repairs, renewals, replacements, betterments and improvements thereto so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times; at all times keep its insurable
properties adequately insured and maintain (i) insurance to such extent and
against such risks, including fire, public liability and business interruption,
as is customary with companies in the same or similar business, (ii) workmen's
compensation insurance in the amount required by applicable law, (iii)
professional liability insurance in the amount customary with companies in the
same or similar business and (iv) such other insurance as may be required by law
or as may be reasonably required in writing by the Lender.
SECTION 5.2. PAYMENT OF INDEBTEDNESS, TAXES, ETC.
(a) Pay, and cause each of its Subsidiaries to pay, all
indebtedness and obligations in the manner consistent with its operations over
the past 6 months; and
(b) Pay and discharge or cause to be paid and discharged
promptly all taxes, assessments and governmental charges or levies imposed upon
it or any of its Subsidiaries or upon their income and profits, or upon
<PAGE> 10
any of their property, real, personal or mixed, or upon any part thereof, before
the same shall become in default, as well as all lawful claims for labor,
materials and supplies or otherwise which, if unpaid, might become a lien or
charge upon such properties or any part thereof; provided, however, that neither
the Borrower nor any of its Subsidiaries shall be required to pay and discharge
or cause to be paid and discharged any such tax, assessment, charge, levy or
claim so long as the validity thereof shall be contested in good faith by
appropriate proceedings, and the Borrower or its Subsidiaries, as the case may
be, shall have set aside on its books adequate reserves with respect to any such
tax, assessment, charge, levy or claim so contested; and further provided that,
subject to the foregoing provision, the Borrower or its Subsidiaries, as the
case may be, will pay or cause to be paid all such taxes, assessments, charges,
levies or claims upon the commencement of proceedings to foreclose any lien
which has attached as security therefor.
SECTION 5.3. ACCESS TO PREMISES AND RECORDS. Maintain financial
records in accordance with Generally Accepted Accounting Principles and permit
representatives of the Lender to have access to such financial records, the
Collateral and the premises of the Borrower upon five (5) Business Days notice,
and to make such excerpts from such records or to conduct such audits and field
examinations as such representatives deem reasonably necessary, the costs
thereof to be borne by the Borrower.
SECTION 5.4. NOTICE OF ADVERSE CHANGE. Promptly, but not later than
ten (10) Business Days after any change or information shall have come to the
attention of any executive officer of the Borrower, notify the Lender in writing
of (a) any change in the business or the operations which, in the good faith
judgment of such Person, would be reasonably likely to have a Material Adverse
Effect, and (b) any information which indicates that any financial statements
which are the subject of any representation contained in this Agreement, or
which are furnished to the Lender pursuant to this Agreement, fail, to any
material extent, to present fairly the financial condition and results of
operations purported to be presented therein, disclosing the nature thereof.
SECTION 5.5. NOTICE OF DEFAULT. Promptly, in the event any executive
officer of the Borrower knows of any Default or Event of Default, or knows of an
event of default under any other of the Loan Documents, furnish to the Lender a
written statement as to such occurrence, specifying the nature and extent
thereof and the action (if any) which is proposed to be taken with respect
thereto.
SECTION 5.6. COMPLIANCE WITH CONTRACTUAL OBLIGATIONS AND REQUIREMENTS
AND REQUIREMENTS OF LAW; APPLICABLE LAWS. Comply, in all material respects, with
all Contractual Obligations and all applicable requirements of law, the breach
of which would be reasonably likely to have a Material Adverse Effect.
SECTION 5.7. INSURANCE.
(a) Keep its assets which are of an insurable character
insured (to the extent and for the time periods consistent with normal industry
practices) by financially sound and reputable insurers against loss or damage by
fire, explosion, theft or other hazards which are included under extended
coverage in amounts not less than the insurable value of the property insured or
such lesser amounts, and with such self-insured retention or deductible levels,
as are consistent with normal industry practices.
(b) Maintain with financially sound and reputable insurers,
insurance against other hazards and risks and liability to Persons and property
to the extent and in the manner customary for companies in similar business.
SECTION 5.8. TITLE INSURANCE. Promptly after the Closing Date, cause
to be issued to the Lender a standard coverage form policy of title insurance
covering the real property described in the Deed of Trust issued by a title
company reasonably satisfactory to the Lender in the full amount of the Loan.
<PAGE> 11
VI. NEGATIVE COVENANTS
The Borrower covenants and agrees with the Lender that, so long as
this Agreement shall remain in effect or any of the principal of or interest on
the Note remain unpaid, it will not, directly or indirectly, and it will not,
directly or indirectly cause or permit any Subsidiary to:
SECTION 6.1. LIENS. Incur, create, assume or suffer to exist any
mortgage, pledge, lien, charge or other encumbrance or restriction of any nature
whatsoever (including conditional sales or other title retention agreements) on
the Collateral, other than the following "Permitted Encumbrances":
(a) liens existing on the Closing Date;
(b) deposits under workmen's compensation, unemployment
insurance and social security laws, or to secure the performance of bids,
tenders, contracts (other than for the repayment of borrowed money) or leases or
to secure statutory obligations or surety, appeal bonds or discharge of lien
bonds, or to secure indemnity, performance or other similar bonds in the
ordinary course of business;
(c) statutory liens of landlords and other liens imposed by
law, such as carriers', warehousemen's or mechanic's liens, incurred in good
faith in the ordinary course of business (provided that the Borrower will pay or
cause to be paid or bonded any such liens in an amount greater than or equal to
$25,000) and deposits made or bonds filed in the ordinary course of business to
obtain the release of such liens.
SECTION 6.2. INDEBTEDNESS. Incur, create, assume or permit to exist
or otherwise become liable in respect of any indebtedness or liability for
borrowed money evidenced by notes, bonds, debentures, or similar obligations, or
accept any deposits, advances or progress payments under contracts (excluding
unearned retainers and advances) ("Indebtedness"), other than:
(a) Indebtedness outstanding as of the Closing Date
(b) Indebtedness to the Lender outstanding as of the
Closing Date or hereafter incurred; or
(c) Indebtedness incurred under the Credit, Security and
Guarantee Agreement, dated as of November 4, 1997, among New Star, the
guarantors named therein and The Chase Manhattan Bank As it may be amended,
supplemented or otherwise modified from time to time
(d) Short-term unsecured Indebtedness incurred in the
ordinary course of business, not in excess of $150,000 in the aggregate
outstanding at any time;
SECTION 6.3. GUARANTEES. Guarantee, endorse, become surety for, or
otherwise in any way become or be responsible for any obligations of any Person
(other than NewStar's Subsidiaries) in excess of $50,000 in the aggregate,
provided, however, that the Borrower may endorse negotiable instruments in the
ordinary course of business and make guarantees to the Lender.
SECTION 6.4. SALE OF ASSETS, CONSOLIDATION OR MERGER, SALE AND
LEASEBACK.
(a) Sell, lease transfer or otherwise dispose of all or a
substantial portion of its properties, capital stock and assets or
(b) consolidate with or merge into any other corporation,
or permit another corporation to merge into it, or acquire all or substantially
all of the property or assets of any Person, unless the Borrower is the
surviving entity and there exists no Default or Event of Default hereunder, both
before and after such merger or acquisition or
<PAGE> 12
(c) enter into any arrangement, directly or indirectly,
with any Person whereby the Borrower shall sell or transfer property, real or
personal, whether now owned or hereafter acquired, if the Borrower, at the time
of such sale or disposition, intends to lease or otherwise acquire the right to
use or possess (except by purchase) such property or like property for a
substantially similar purpose; provided that NewStar may sell the Collateral for
an amount not less than $3,850,000 if net proceeds are used first, to repay the
indebtedness owing to Asahi Bank of California under that certain Business Loan
Agreement dated April 24, 1996, and second to repay the Loan.
SECTION 6.5. SALE OF NOTES. Sell, transfer, discount or otherwise
dispose of notes, accounts receivable or other rights to receive payment with or
without recourse, except for the purpose of collection in the ordinary course of
business.
SECTION 6.6. CHANGE IN BUSINESS. Materially change or alter the
nature of its business from the business currently engaged in.
SECTION 6.7. DISTRIBUTIONS. Declare or pay any dividends or
distribution to the shareholders of the Borrower other than for accrual of
dividends on Preferred Stock.
SECTION 6.8. AMENDMENT TO CERTIFICATE OF INCORPORATION OR BY-LAWS.
Amend its Certificate of Incorporation or By-Laws in a material manner without
the prior written consent of the Lender.
VII. EVENTS OF DEFAULT
SECTION 7.1. EVENTS OF DEFAULT. In the case of the happening of any
of the following events ("Events of Default"):
(a) default shall occur (i) in the payment of the principal
or interest on the Note when due or (ii) in the payment of any other amounts due
hereunder;
(b) any representation or warranty herein or in any of the
Loan Documents, in any certificate or report furnished in connection herewith or
in any amendment to this Agreement, shall prove to be false or misleading in any
material respect when made or given or deemed made or given;
(c) default shall be made in respect of any agreement or
obligation relating to any obligation of the Borrower in excess of $100,000 for
borrowed money (other than the Note), if the effect of such default or the
result of any action by the obligee is to accelerate the maturity of such
obligation or to permit the holder or obligee thereof (or a trustee on behalf of
such holder or obligee) to cause such obligation to become due prior to the
stated maturity thereof or which, with the passage of time, the giving of notice
or both would constitute an event of default under any agreement, or any such
obligation shall not be paid when due after giving effect to any applicable
grace period;
(d) default shall be made in the due observance or
performance of any covenant, condition or agreement to be performed pursuant to
this Agreement or any of the Loan Documents and such default continues for at
least thirty (30) days;
(e) the Borrower (i) voluntarily commences any case,
proceeding or other action or file any petition seeking relief under Title 11 of
the United States Code or any other existing or future Federal domestic or
foreign Bankruptcy, insolvency or similar law, (ii) consents to the institution
of, or fails to controvert in a timely and appropriate manner, any such
proceeding or the filing of any such petition, (iii) applies for or consents to
the employment of a receiver, trustee, custodian, sequestrator or similar
official for the Borrower or for a substantial part of it's property, (iv) files
an answer admitting the material allegations of a petition filed against it in
any such proceeding, (v) makes a general assignment for the benefit of
creditors, (vi) becomes unable, admits in writing its inability or fails
generally to pay its debts as they become due or (vii) takes corporate action
for the purpose of effecting any of the foregoing;
<PAGE> 13
(f) an involuntary case, proceeding or other action shall
be commenced or an involuntary petition shall be filed in a court of competent
jurisdiction seeking (i) relief in respect of the Borrower or of a substantial
part of it's property, under Title 11 of the United States Code or any other
existing or future Federal, domestic or foreign bankruptcy, insolvency or
similar law, (ii) the appointment of a receiver, trustee, custodian,
sequestrator or similar official for the Borrower or for a substantial part of
its property, or (iii) the winding-up or liquidation of the Borrower; and such
proceeding or petition shall continue undismissed for sixty (60) days or an
order or decree approving or ordering any of the foregoing shall continue
unstayed and in effect for sixty (60) days;
(g) there shall be commenced against the Borrower, any
case, proceeding or other action seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or any substantial part of
its assets which results in the entry of an order for any such relief which
shall not have been vacated, discharged or stayed or bonded pending appeal
within sixty (60) days from the entry thereof;
(h) final judgments or orders for the payment of money in
excess of $100,000 in the aggregate shall be rendered against the Borrower, and
the same shall remain undischarged, unsatisfied or unbonded for a period of
thirty (30) days during which execution shall not be effectively stayed;
(i) dissolution of the Borrower (without automatic
reconstitution) and no successor acceptable to the Lender shall have acquired
substantially all the assets and assumed substantially all the liabilities of
the Borrower including, without limitation, the Obligations;
(j) termination, expiration or cancellation of, or re-entry
of dispossession by summary proceedings or otherwise by the landlord with
respect to any lease material to the business of Borrower unless, at such time,
the Borrower is in possession of alternate leased premises reasonably approved
by the Lender;
then, at any time thereafter during the continuance of any such event, the
Lender may, by written notice to the Borrower (i) declare the Note to be
forthwith due and payable, both as to principal and interest, without
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived, anything contained herein or in the Note to the
contrary notwithstanding, and (iii) charge the Default Interest Rate for the
days that the Event of Default continues provided, however, that if an event
specified in Section 7.1 (e), (f) or (g) hereof shall have occurred, the Loan
shall automatically terminate and the Note shall immediately become due and
payable, and the Lender in each instance shall have the right to exercise its
rights under the Loan Documents as permitted by law.
VIII. MISCELLANEOUS
SECTION 8.1. NOTICES. All notices, requests and other communications
provided for hereunder shall be in writing and shall be deemed to have been duly
given or made when delivered by certified mail with a return receipt requested,
three days after the day on which mailed, or, in the case of overnight courier
service, one business day after delivery to such courier service, addressed as
set forth below, or to such other address as may be hereafter notified by the
respective parties hereto:
if to the Lender, at:
Apollo Partners, LLC
One Stamford Plaza, 12th Floor
Stamford, CT 06901
Attention: Terrence Elkes and Ken Gorman
with a copy to:
Morrison Cohen Singer & Weinstein
750 Lexington Avenue
New York, NY 10022
Attention: Joel Feldman
<PAGE> 14
if to the Borrower, at
NewStar Media Inc.
8955 Beverly Boulevard
Los Angeles, California 90048
Attention: Chief Financial Officer
SECTION 8.2. SURVIVAL OF AGREEMENT; SUCCESSORS AND ASSIGNS.
(a) All covenants, agreements, representations and
warranties made herein and in the certificates delivered pursuant hereto shall
survive the making by the Lender of the Loan herein contemplated and the
execution and delivery to the Lender of the Note evidencing the Loan and shall
continue in full force and effect so long as the Note is outstanding and unpaid.
(b) Whenever in this Agreement any of the parties hereto is
referred to, such reference shall be deemed to include the successors and
assigns of such party. All covenants, promises and agreements by or on behalf of
the Borrower which are contained in this Agreement shall bind and inure to the
benefit of the respective successors and assigns of the Lender. No other Person
shall be a direct or indirect legal beneficiary of, or have any direct or
indirect cause of action or claim in connection with this Agreement or any of
the other Loan Documents. The Lender shall not have any obligation to any Person
not a party to this Agreement or other Loan Documents.
SECTION 8.3. EXPENSES OF THE LENDER; INDEMNIFICATION.
(a) The Borrower will pay all reasonable out-of-pocket
costs and expenses incurred by the Lender in connection with the preparation,
development and execution of the Loan Documents and any amendment, supplement or
modification to this Agreement, the Note and the other Loan Documents including,
without limitation, the fees and disbursements of counsel to the Lender incurred
in connection with the preparation, negotiation, execution, waiver, modification
and enforcement of this Agreement or any of the Loan Documents.
(b) The Borrower agrees to indemnify the Lender and its
respective directors, officers, employees and agents against, and to hold the
Lender and each such person harmless from, any and all losses, claims, damages,
liabilities and related expenses, including reasonable counsel fees and
expenses, incurred by or asserted against the Lender or any such person arising
out of, in any way connected with, or as a result of (i) the use of any of the
proceeds of the Loans, (ii) this Agreement or other Loan Documents, (iii) the
performance by the parties hereto and thereto of their respective obligations
hereunder and thereunder and consummation of the transactions contemplated
hereby and thereby, (iv) breach of any representation or warranty or (v) any
claim, litigation, investigation or proceedings relating to any of the
foregoing, whether or not the Lender or any such person is a party thereto;
provided, however, that such indemnity shall not, as to the Lender, apply to any
such losses, claims, damages, liabilities or related expenses to the extend that
they result from the gross negligence or willful misconduct of the Lender.
(c) The Borrower agrees to indemnify, defend and hold
harmless the Lender and its respective officers, directors, shareholder, agents
and employees (collectively, the "Indemnitees") from and against any loss, cost,
damage, liability, lien, deficiency, fine, penalty or expense (including,
without limitation, reasonable attorney's fees and reasonable expenses for
investigation, removal, cleanup and remedial costs and modification costs
incurred to permit continue or resume normal operations of any property or
assets or business of the firm) arising from a violation of, or failure to
comply with any Environmental Laws and to remove any lien arising therefrom
except to the extent caused by the gross negligence or willful misconduct of any
Indemnitee, which any of the Indemnitees may incur of which may be claimed or
recorded against any of the Indemnitees by any Person.
(d) The provisions of this Section 8.3 shall remain
operative and in full force and effect regardless of the expiration of the term
of this Agreement, the consummation of the transactions contemplated hereby, the
repayment of any of the Loans, the invalidity or unenforceability of any term or
provision of this Agreement or any of the Loan Documents, or any investigation
made by or on behalf of the Lender. All amounts due under this Section 8.3 shall
be payable on written demand therefor.
<PAGE> 15
SECTION 8.4. APPLICABLE LAW. This Agreement, the Note and the other
Loan Documents (other than those containing a contrary express choice of law)
shall be governed and construed by and interpreted in accordance with the laws
of the State of California.
SECTION 8.5. WAIVER OF RIGHTS BY THE LENDER; WAIVER OF JURY TRIAL,
ETC.
(a) Neither any failure nor any delay on the part of the
Lender in exercising any right, power or privilege hereunder or under the Loan
Documents shall operate as a waiver thereof, nor shall a single or partial
exercise thereof preclude any other or further exercise of any other right,
power or privilege. Except as prohibited by law, each party hereto hereby waives
any right it may have to claim or recover in any litigation referred to in this
Section any special, exemplary, punitive or consequential damages or any damages
other than, or in addition to, actual damages. Each party hereto (i) certifies
that neither any representative, agent or attorney of the Lender has
represented, expressly or otherwise, that the Lender would not, in the event of
litigation, seek to enforce the foregoing waivers and (ii) acknowledges that it
has been induced to enter into this Agreement or the Loan Documents, as
applicable, by, among other things, the mutual waivers and certifications
herein.
(b) THE BORROWER AND THE LENDER HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVE, AND COVENANT THAT THEY WILL NOT ASSERT (WHETHER AS
PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN
RESPECT OF ANY ISSUE, CLAIM OR ACTION IN ANY WAY, INVOLVING OR ARISING, DIRECTLY
OR INDIRECTLY, OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.
SECTION 8.6. ACKNOWLEDGMENTS. The Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation,
execution and delivery of this Agreement, the Note and the other Loan Documents;
(b) no joint venture exists among the Borrower and the
Lender.
SECTION 8.7. CONSENT TO JURISDICTION.
(a) The Borrower hereby irrevocably submits to the
non-exclusive jurisdiction of any United States federal or California state
court sitting in Los Angeles in any action or proceedings arising out of or
relating to any Loan Documents and the Borrower hereby irrevocably agrees that
all claims in respect of such action or proceeding may be heard and determined
in any such court and irrevocably waives any objection it may now or hereafter
have as to the venue of any such action or proceeding brought in such a court or
the fact that such court is an inconvenient forum.
(b) The Borrower irrevocably and unconditionally consents
to the service or process in any such action or proceeding in any of the
aforesaid courts by the mailing of copies of such process to them by certified
or registered mail at its address specified in Subsection 8.1.
SECTION 8.8. EXTENSION OF MATURITY. Except as otherwise expressly
provided herein, whenever a payment to be made hereunder shall fall due and
payable on any day other than a Business Day, such payment may be made on the
next succeeding Business Day, and such extension of time shall be included in
computing interest.
SECTION 8.9. MODIFICATION OF AGREEMENT. No modification, amendment or
waiver of any provision of this Agreement or the Note, nor consent to any
departure by the Borrower therefrom shall in any event be effective unless the
same shall be in writing and signed by the Lender and then such waiver or
consent shall be effective only in the specific instance and for the purpose for
which given. No notice to or demand on the Borrower in any case shall entitle
the Borrower to any other or further notice or demand in the same, similar or
other circumstance.
<PAGE> 16
SECTION 8.10. PARTICIPATION AND ASSIGNMENTS.
(a) The Borrower may not assign or transfer any of their
interests under this Agreement, the Note or the Loan Documents without the prior
written consent of the Lender.
(b) The Lender reserves the right to grant participation in
or to sell and assign its rights, duties or obligations with respect to the Loan
or the Commitment to such lending institutions or other parties as it may
choose, without the consent of the Borrower, which consent is deemed to be
granted.
SECTION 8.11. SEVERABILITY. In case any one or more of the provisions
contained in this Agreement or in the Note should be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby.
SECTION 8.12 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original, but all of which,
when taken together, shall constitute but one instrument.
SECTION 8.13. ENTIRE AGREEMENT; CUMULATIVE REMEDIES.
(a) This Agreement and the other Loan Documents constitute
the entire agreement among the parties hereto and thereto as to the subject
matter hereof and thereof and supersede any previous agreement, oral or written,
as to such subject matter.
(b) The rights and remedies herein provided are cumulative
and not exclusive of any rights or remedies provided by law.
SECTION 8.14. HEADINGS. Section headings used herein are for
convenience of reference only and are not to affect the construction of or be
taken into consideration in interpreting this Agreement.
[SIGNATURES ON NEXT PAGE]
<PAGE> 17
IN WITNESS WHEREOF, the Borrower and the Lender have caused this
Agreement to be duly executed by their duly authorized officers, all of the day
and year first above written.
NEWSTAR MEDIA INC.
By: /s/ NEIL TOPHAM
------------------------------------------
Name: Neil Topham
Title: Vice President and Chief Financial Officer
DOVE FOUR POINT, INC.
By: /s/ NEIL TOPHAM
------------------------------------------
Name: Neil Topham
Title: Vice President
APOLLO PARTNERS, LLC
By: /s/ KENNETH GORMAN
------------------------------------------
Name:
Title:
<PAGE> 18
Schedule 3.11 - Subsidiaries
Dove Four Point, Inc.
NewStar Worldwide Inc.
NewStar Television Inc.
Dove Entertainment, Inc.
Dove Audio, Inc.
Dove Retail, Inc.
<PAGE> 19
EXHIBIT A
PARCEL 1:
LOT 332 OF TRACT NO. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES,
STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN
THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
EXCEPT THE SOUTHERLY 55 FEET THEREOF.
PARCEL 2:
LOT 331 AND THE SOUTHERLY 55 FEET OF LOT 332 OF TRACT NO. 5125, IN THE CITY OF
WEST HOLLYWOOD, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED
IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID
COUNTY.
PARCEL 3:
LOTS 284, 285, 286, 329 AND 330 OF TRACT 5125, IN THE CITY OF WEST HOLLYWOOD,
COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES
39 AND 40 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
PARCEL 4:
LOT 282 OF TRACT. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES,
STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGE 39 OF MAPS, IN THE
OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
PARCEL 5:
LOT 283 OF TRACT NO. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES,
STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN
THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
<PAGE> 20
EXHIBIT B
$1,500,000 Los Angeles, California
July ____, 1998
FOR VALUE RECEIVED, the undersigned, NEWSTAR MEDIA INC., a California
corporation, and DOVE FOUR POINT, INC., a Florida corporation, DO HEREBY JOINTLY
AND SEVERALLY PROMISE to pay to the order of Apollo Partners, LLC (the
"Lender"), at the office of the Lender 1 Stamford Plaza, 12th Floor, Stamford,
Connecticut 06901, or such other address as may be designated in writing by the
Lender, on the Loan Maturity Date (as such term and all other capitalized terms
in this Note are defined in the Loan Agreement (the "Agreement") dated as of
July 21, 1998 between the Borrower and the Lender) in lawful money of the United
States of America, in immediately available funds, (i) the principal amount of
One Million Five Hundred Thousand Dollars ($1,500,000) and (ii) interest from
the date hereof on the unpaid principal amount hereof, in like money, at said
office, on the dates and at the rate provided in accordance with Article II of
the Agreement and, upon default, on demand from time to time, on any overdue
principal and on any overdue charge or fee, and, to the extent permitted by law,
on any overdue interest, for each day from the due date thereof (by acceleration
or otherwise) until such sum is paid in full, at a rate of two percent (2%) per
annum in excess of the rate in effect from time to time on the Loan.
This Note is the Note referred to in Section 2.2 of the Agreement,
and is subject to prepayment and acceleration of maturity as set forth in the
Agreement.
This Note shall be governed by and construed in accordance with the
laws of the State of California and any applicable laws of the United States of
America.
NEWSTAR MEDIA INC.
By:
-------------------------------------
Name:
Title:
DOVE FOUR POINT, INC.
By:
-------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.66
DEED OF TRUST
THIS DEED OF TRUST IS DATED JULY 21, 1998 AMONG NEWSTAR MEDIA INC., WHOSE
ADDRESS IS 8955 BEVERLY BOULEVARD, WEST HOLLYWOOD, CA 90028 (REFERRED TO BELOW
AS "TRUSTOR"); APOLLO PARTNERS, LLC, WHOSE ADDRESS IS 1 STAMFORD PLAZA, 12TH
FLOOR, STAMFORD, CONNECTICUT 06901 (REFERRED TO BELOW SOMETIMES AS "LENDER" AND
SOMETIMES AS "BENEFICIARY"); AND NORTH AMERICAN TITLE COMPANY WHOSE ADDRESS IS
520 NORTH BRAND BOULEVARD, GLENDALE, CA 91203 (REFERRED TO BELOW AS "TRUSTEE").
CONVEYANCE AND GRANT. FOR VALUABLE CONSIDERATION, TRUSTOR IRREVOCABLY GRANTS,
TRANSFERS AND ASSIGNS TO TRUSTEE IN TRUST, WITH POWER OF SALE, FOR THE BENEFIT
OF LENDER AS BENEFICIARY, all of Trustor's right title and interest in and to
the following described real property, together with all existing or
subsequently erected or affixed buildings, improvements and fixtures; all
easements, rights of way , and appurtenances; all water, water rights and ditch
rights (including stock in utilities with ditch or irrigation rights); and all
other rights, royalties and profits relating to the real property, including
without limitations all mineral, oil, gas, geothermal and similar matters,
LOCATED IN LOS ANGELES COUNTY, STATE OF CALIFORNIA (THE "REAL PROPERTY"):
PLEASE SEE EXHIBIT "A" ATTACHED HERETO AND BY THIS REFERENCE MADE A
PART HEREOF.
THE REAL PROPERTY OR ITS ADDRESS IS COMMONLY KNOWN AS 8955 BEVERLY BOULEVARD,
WEST HOLLYWOOD, CA 90048.
In addition, Trustor grants Lender a Uniform Commercial Code security interest
in the Personal Property defined below.
DEFINITIONS. The following words shall have the following meanings when used in
this Deed of Trust. Terms not otherwise defined in this Deed of Trust shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
reference to dollar amounts shall mean amounts in lawful money of the United
States of America.
BENEFICIARY. The word "Beneficiary" means APOLLO PARTNERS, LLC its
successors and assigns. APOLLO PARTNERS, LLC also is referred to as
"Lender" in this Deed of Trust.
DEED OF TRUST. The words "Deed of Trust" mean this Deed of Trust among
Trustor, Lender, and Trustee, and includes without limitation all
assignment and security interest provisions relating to the Personal
Property.
IMPROVEMENTS. The word "Improvements" means and includes without
limitation all existing and future improvements, fixtures, buildings,
structures, mobile homes affixed on the Real Property, facilities,
additions, replacements and other construction on the Real Property.
INDEBTEDNESS. The word "Indebtedness" means all principal and interest
payable under the Note and any amounts expended or advanced by Lender to
discharge obligations of Trustor or expenses incurred by Trustee or
Lender to enforce obligations of Trustor under this Deed of Trust,
together with interest on such amounts as provided in this Deed of Trust.
LENDER. The word "Lender" means APOLLO PARTNERS, LLC, its successors and
assigns.
NOTE. THE WORD "NOTE" MEANS THE NOTE DATED JULY 21, 1998, IN THE
PRINCIPAL AMOUNT OF $1,500,000.00 from Trustor to Lender, together with
all renewals, extensions, modifications, refinancings, and substitutions
for the Note.
PERSONAL PROPERTY. The words "Personal Property" mean all equipment,
fixtures, and other articles of personal property now or hereafter owned
by Trustor, and now or hereafter attached or affixed to the Real
Property; together with all accessions, parts, and additions to, all
replacements of, and all substitutions for, any
<PAGE> 2
of such property; and together with all proceeds (including without
limitation all insurance proceeds and refunds of premiums) from any sale
or other disposition of the Property.
PROPERTY. The word "Property" means collectively the Real Property and
the Personal Property.
REAL PROPERTY. The words "Real Property" mean the property, interests and
rights described above in the "Conveyance and Grant" section.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages,
deeds of trust, and all other instruments, agreements and documents,
whether now or hereafter existing, executed in connection with the
Indebtedness.
TRUSTEE. The word "Trustee" means North American Title Company and any
substitute or successor trustees.
TRUSTOR. The word "Trustor" means any and all persons and entities
executing this Deed of Trust, including without limitation all Trustors
named above.
THIS DEED OF TRUST, INCLUDING THE SECURITY INTEREST IN THE PERSONAL PROPERTY, IS
GIVEN TO SECURE (1) PAYMENT OF THE INDEBTEDNESS AND (2) PERFORMANCE OF ANY AND
ALL OBLIGATIONS OF TRUSTOR UNDER THE NOTE, THE RELATED DOCUMENTS, AND THIS DEED
OF TRUST. THIS DEED OF TRUST IS GIVEN AND ACCEPTED ON THE FOLLOWING TERMS:
PAYMENT AND PERFORMANCE. Except as otherwise provided in this Deed of Trust,
Trustor shall pay to Lender all amounts secured by this Deed of Trust as they
become due, and shall strictly and in a timely manner perform all of Trustor's
obligations under the Note, this Deed of Trust, and the Related Documents.
POSSESSION AND MAINTENANCE OF THE PROPERTY. Trustor agrees that Trustor's
possession and use of the Property shall be governed by the following
provisions:
POSSESSION AND USE. Until the occurrence of an Event of Default Trustor
may (a) remain in possession and control of the Property and (b) use,
operate or manage the Property.
DUTY TO MAINTAIN. Trustor shall maintain the Property in tenantable
condition and promptly perform all repairs, replacements, and maintenance
necessary to preserve its value.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Deed of
Trust, shall have the same meanings as set forth in the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"),
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901,
et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health
and Safety Code, Section 25100, et seq., or other applicable state or
Federal laws, rules or regulations adopted pursuant to any of the
foregoing. The terms "hazardous waste" and "hazardous substance" shall
also include, without limitation, petroleum and petroleum by-products or
any fraction thereof and asbestos. Trustor represents and warrants to
Lender that: (a) During the period of Trustor's ownership of the
Property, there as been no use, generation, manufacture, storage,
treatment, disposal, release or threatened release of any hazardous waste
or substance by any person on, under, about or from the Property; (b)
Trustor has no knowledge of, reason to believe that there has been,
except as previously disclosed to and acknowledged by Lender in writing,
(i) any use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or substance on,
under, about or from the Property by any prior owners or occupants of the
Property or (ii) any actual or threatened litigation or claims of any
kind by any person relating to such matters; and (c) Except as previously
disclosed to and acknowledged by Lender in
<PAGE> 3
writing, (i) neither Trustor nor any tenant, contractor, agent or other
authorized user of the Property shall use, generate, manufacture, store,
treat, dispose of, or release any hazardous waste or substance on, under,
about or from the Property and (ii) any such activity shall be conducted
in compliance with all applicable federal, state, and local laws,
regulations and ordinances, including without limitation those laws,
regulations, and ordinances described above. Trustor authorizes Lender
and its agents to enter upon the Property to make such inspections and
tests, at Trustor's expense, as Lender may deem appropriate to determine
compliance of the Property with this section of the Deed of Trust. Any
inspections or tests made by Lender shall be for Lender's purposes only
and shall not be construed to create any responsibility or liability on
the part of Lender to Trustor or to any other person. The representations
and warranties contained herein are based on Trustor's due diligence in
investigating the Property for hazardous waste and hazardous substances.
Trustor hereby (a) releases and waives any future claims against Lender
for indemnity or contribution in the event Trustor becomes liable for
cleanup or other costs under any such laws, and (b) agrees to indemnify
and hold harmless Lender against any and all claims, losses, liabilities,
damages, penalties, and expenses which Lender may directly or indirectly
sustain or suffer resulting from a breach of this section of the Deed of
Trust or as a consequence of any use, generation, manufacture, storage,
disposal, release or threatened release occurring prior to Trustor's
ownership or interest in the Property, whether or not the same was or
should have been known to Trustor. The provisions of this section of the
Deed of Trust, including the obligation to indemnify, shall survive the
payment of the Indebtedness and the satisfaction and reconveyance of the
lien of this Deed of Trust and shall not be affected by Lender's
acquisition of any interest in the Property, whether by foreclosure or
otherwise.
NUISANCE, WASTE. Trustor shall not cause, conduct or permit any nuisance
nor commit, permit, or suffer any stripping of or waste on or to the
Property or any portion of the Property. Without limiting the generality
of the foregoing, Trustor will not remove, or grant to any other party
the right to remove, any timber, minerals (including oil and gas), soil,
gravel or rock products without the prior written consent of Lender.
REMOVAL OF IMPROVEMENTS. Trustor shall not demolish or remove any
Improvements from the Real Property without the prior written consent of
Lender. As a condition to the removal of any Improvements, Lender may
require Trustor to make arrangements satisfactory to Lender to replace
such Improvements with Improvements of at least equal value.
LENDER'S RIGHT TO ENTER. Lender and its agents and representatives may
enter upon the Real Property at all reasonable times to attend to
Lender's interests and to inspect the Property for purposes of Trustor's
compliance with the terms and conditions of this Deed of Trust.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Trustor shall promptly comply
with all laws, ordinances, and regulations, now or hereafter in effect of
all governmental authorities applicable to the use or occupancy of the
Property, including without limitation, the Americans With Disabilities
Act. Trustor may contest in good faith any such law, ordinance, or
regulation and withhold compliance during any proceeding, including
appropriate appeals, so long as Trustor has notified Lender in writing
prior to doing so and so long as, in Lender's sole opinion, Lender's
interests in the Property are not jeopardized. Lender may require Trustor
to post adequate security or a surety bond, reasonably satisfactory to
Lender, to protect Lender's interest.
DUTY TO PROTECT. Trustor agrees neither to abandon nor leave unattended
the Property. Trustor shall do all other act, in addition to those acts
set forth above in this section, which from the character and use of the
Property are reasonably necessary to protect and preserve the Property.
DUE ON SALE - CONSENT BY LENDER. Lender may, at its option, declare immediately
due and payable all sums secured by this Deed of Trust upon the sale or
transfer, without the Lender's prior written consent, of all or any part of the
Real Property, or any interest in the Real Property. A "sale or transfer" means
the conveyance of Real Property or any right, title or interest therein; whether
legal, beneficial or equitable; whether voluntary or involuntary; whether by
outright sale, deed, installment sale contract, land contract, contract for
deed, leasehold interest with a term greater than three (3) years, lease-option
contract, or by sale, assignment, or transfer of any beneficial interest in or
to any land trust holding title to the Real Property, or by any other method of
conveyance of
<PAGE> 4
Real Property interest. If any Trustor is a corporation, partnership or limited
liability company, transfer also includes any change in ownership of more than
twenty-five percent (25%) of the voting stock, partnership interests or limited
liability company interests, as the case may be, of Trustor. However, this
option shall not be exercised by Lender if such exercise is prohibited by
applicable law.
TAXES AND LIENS. The following provisions relating to the taxes and liens on the
Property are a part of this Deed of Trust.
PAYMENT. Trustor shall pay when due (and in all events at least (10) days
prior to delinquency) all taxes, special taxes, assessments, charges
(including water and sewer), fines and impositions levied against or on
account of the Property, and shall pay when due all claims for work done
on or for services rendered or material furnished to the Property.
Trustor shall maintain the Property free of all liens having priority
over or equal to the interest of Lender under this Deed of Trust, except
(i) the interest of Asahi Bank of California under the Deed of Trust (the
"Asahi Deed of Trust") dated April 24, 1996 among Trustor, Asahi Bank of
California and the trustee named therein, (ii) for the lien of taxes and
assessments not due and (iii) as otherwise provided in this Deed of
Trust.
RIGHT TO CONTEST. Trustor may withhold payment of any tax, assessment, or
claim in connection with a good faith dispute over the obligation to pay,
so long as Lender's interest in the Property is not jeopardized. If a
lien arises or is filed as a result of nonpayment, Trustor shall within
fifteen (15) days after the lien arises or, if a lien is filed, within
fifteen (15) days after Trustor has notice of the filing, secure the
discharge of the lien, or if requested by Lender, deposit with Lender
cash or a sufficient corporate surety bond or other security satisfactory
to Lender in an amount sufficient to discharge the lien plus any costs
and attorneys' fees or other charges that could accrue as a result of a
foreclosure or sale under the lien. In any contest, Trustor shall defend
itself and Lender and shall satisfy any adverse judgment before
enforcement against the Property. Trustor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
EVIDENCE OF PAYMENT. Trustor shall upon demand furnish to Lender
satisfactory evidence of payment of the taxes or assessments and shall
authorize the appropriate governmental official to deliver to Lender at
any time a written statement of the taxes and assessments against the
Property.
NOTICE OF CONSTRUCTION. Trustor shall notify Lender at least fifteen (15)
days before any work is commenced, any services are furnished, or any
materials are supplied to the Property, if any mechanic's lien,
materialmen's lien, or other lien could be asserted on account of the
work, services, or materials. Trustor will upon request of Lender furnish
to Lender advance assurances satisfactory to Lender that Trustor can and
will pay the cost of such improvements.
PROPERTY DAMAGE INSURANCE. The following provisions relating to insuring the
Property are a part of this Deed of Trust.
MAINTENANCE OF INSURANCE. Trustor shall procure and maintain policies of
fire insurance with standard extended coverage endorsements on a
replacement basis for the full insurable value covering all improvements
on the Real Property in an amount sufficient to avoid application of any
coinsurance clause, and with a standard mortgagee clause in favor of
Lender. Grantor shall also procure and maintain comprehensive general
liability insurance in such coverage amounts as Lender may request with
trustee and Lender being named as additional insureds in such liability
insurance policies. Additionally, Grantor shall maintain such other
insurance, including but not limited to hazard, business interruption,
and boiler insurance, as Lender may reasonably require. Notwithstanding
the foregoing, in no event shall Trustor be required to provide hazard
insurance in excess of the replacement value of the improvements on the
Real Property. Policies shall be written in form, amounts, coverages and
basis reasonably acceptable to Lender and issued by a company or
companies reasonably acceptable to Lender. Trustor, upon request of
Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be canceled or diminished without at
least ten (10) days' prior written notice to Lender.
<PAGE> 5
Each insurance policy also shall include an endorsement providing that
coverage in favor of Lender will not be impaired in any way by any act,
omission or default of Trustor or any other person. Should the Real
Property at any time become located in an area designated by the Director
of the Federal Emergency Management Agency as a special flood hazard
area, Trustor agrees to obtain and maintain Federal Flood Insurance to
the extent such insurance is required by Lender and is or becomes
available, for the term of the loan and for the full unpaid principal
balance of the loan, or the maximum limit of coverage that is available,
whichever is less.
APPLICATION OF PROCEEDS. Trustor shall promptly notify Lender of any loss
or damage to the Property. Lender may make proof of loss if Trustor fails
to do so within fifteen (15) days of the casualty. Subject to the
interest of Asahi Bank of California in the proceeds of insurance, if in
Lender's sole judgment Lender's security interest in the Property has
been impaired, Lender may, at its election, receive and retain the
proceeds of any insurance and apply the proceeds to the reduction of the
Indebtedness, payment of any lien affecting the Property, or the
restoration and repair of the Property. If the proceeds are to be applied
to restoration and repair, Trustor shall repair or replace the damaged or
destroyed Improvements in a manner satisfactory to Lender. Lender shall,
upon satisfactory proof of such expenditure, pay or reimburse Trustor
from the proceeds for the reasonable cost of repair or restoration if
Trustor is not in default under this Deed of Trust. Subject to the
interest of Asahi Bank of California in the proceeds of insurance, any
proceeds which have not been disbursed within 180 days after their
receipt and which Lender has not committed to the repair or restoration
of the Property shall be used first to pay any amount owing to Lender
under this Deed of Trust, then to pay accrued interest, and the
remainder, if any, shall be applied to the principal balance of the
Indebtedness. If Lender holds any proceeds after payment in full of the
indebtedness such proceeds shall be paid to Trustor as Trustor's
interests may appear.
UNEXPIRED INSURANCE AT SALE. Any unexpired insurance shall inure to the
benefit of, and pass to, the purchaser of the Property covered by this
Deed of Trust at any trustee's sale or other sale held under the
provisions of this Deed of Trust, or at any foreclosure sale of such
Property.
TRUSTOR'S REPORT ON INSURANCE. Upon request of Lender, however not more
than once a year, Trustor shall furnish to Lender a report on each
existing policy of insurance showing: (a) the name of the insurer; (b)
the risks insured; (c) the amount of the policy; (d) the property
insured, the then current replacement value of such property, and the
manner of determining that value; and (e) the expiration date of the
policy. Trustor shall, upon the request of Lender, have an independent
appraiser satisfactory to Lender determine the cash value replacement
cost of the Property.
EXPENDITURES BY LENDER. If Trustor fails to comply with any provisions of this
Deed of Trust, or if any action or proceeding is commenced that would materially
affect Lender's interests in the Property, Lender on Trustor's behalf may, but
shall not be required to, take any action that Lender deems appropriate. Any
amount that Lender expends in so doing will bear interest at the rate charged
under the Note from the date incurred or paid by Lender to the date of repayment
by Trustor. All such expenses, at Lender's option, will (a) be payable on
demand, (b) be added to the balance of the Note and be apportioned among and be
payable with any installment payments to become due during either (i) the term
of any applicable insurance policy or (ii) the remaining term of the Note, or
(c) be treated as a balloon payment which will be due and payable at the Note's
maturity. This Deed of Trust also will secure payment of these amounts. The
rights provided for in this paragraph shall be in addition to any other rights
or any remedies to which Lender may be entitled on account of the default. Any
such action by Lender shall not be construed as curing the default so as to bar
Lender from any remedy that it otherwise would have had.
WARRANTY; DEFENSE OF TITLE. The following provisions relating to ownership of
the Property are a part of this Deed of Trust.
TITLE. Trustor warrants that: (a) Trustor holds good and marketable title
of record to the Property in fee simple, free and clear of all liens and
encumbrances other than (i) the lien of Asahi Bank of California granted
in the Asahi Deed of Trust, (ii) those set forth in the Real Property
description, in the Preliminary Title Report delivered to the Lender or
in any other title insurance policy, title report, or final title opinion
delivered to the
<PAGE> 6
Lender and (b) Trustor has the full right, power, and authority to
execute and deliver this Deed of Trust to Lender.
DEFENSE OF TITLE. Subject to the exception in the paragraph above,
Trustor warrants and will forever defend the title to the Property
against the lawful claims of all persons. In the event any action or
proceeding is commenced that questions Trustor's title or the interest of
Trustee or Lender under this Deed of Trust, Trustor shall defend the
action at Trustor's expense. Trustor may be the nominal party in such
proceeding, but Lender shall be entitled to participate in the proceeding
and to be represented in the proceeding by counsel of Lender's own
choice, and Trustor will deliver, or cause to be delivered, to Lender
such instruments as Lender may request from time to time to permit such
participation.
COMPLIANCE WITH LAWS. Trustor warrants that the Property and Trustor's
use of the Property complies with all existing applicable laws,
ordinances, and regulations of governmental authorities.
CONDEMNATION. The following provisions relating to condemnation proceedings are
a part of this Deed of Trust.
APPLICATION OF NET PROCEEDS. If all or any part of the Property is
condemned by eminent domain proceedings or by any proceeding or purchase
in lieu of condemnation, Lender may at its election require that all or
any portion of the net proceeds of the award be applied to the
Indebtedness or the repair or restoration of the Property, subject to the
interests of Asahi Bank of California to such proceeds. The net proceeds
of the award shall mean the award after payment of all reasonable costs,
expenses, and attorneys' fees incurred by Trustee or Lender in connection
with the condemnation.
PROCEEDINGS. If any proceeding in condemnation is filed, Trustor shall
promptly notify Lender in writing, and Trustor shall promptly take such
steps as may be necessary to defend the action and obtain the award.
Trustor may be the nominal party in such proceeding, but Lender shall be
entitled to participate in the proceeding and to be represented in the
proceeding by counsel of its own choice, and Trustor will deliver or
cause to be delivered to Lender such instruments as may be requested by
it from time to time to permit such participation.
IMPOSITION OF TAXES, FEES AND CHARGES BY GOVERNMENTAL AUTHORITIES. The following
provisions relating to governmental taxes, fees and charges are a part of this
Deed of Trust:
CURRENT TAXES, FEES AND CHARGES. Upon request by Lender, Trustor shall
execute such documents in addition to this Deed of Trust and take
whatever other action is requested by Lender to perfect and continue
Lender's lien on the Real Property. Trustor shall reimburse Lender for
all taxes, as described below, together with all expenses incurred in
recording, perfecting or continuing this Deed of Trust, including without
limitation all taxes, fees, documentary stamps, and other charges for
recording or registering this Deed of Trust.
TAXES. The following shall constitute taxes to which this section
applies: (a) a specific tax upon this type of Deed of Trust or upon all
or any part of the Indebtedness secured by this Deed of Trust; (b) a
specific tax on Trustor which Trustor is authorized or required to deduct
from payments on the Indebtedness secured by this type of Deed of Trust;
(c) a tax on this type of Deed of Trust chargeable against the Lender or
the holder of the Note; and (d) a specific tax on all or any portion of
the Indebtedness or on payments of principal and interest made by
Trustor.
SUBSEQUENT TAXES. If any tax to which this section applies is enacted
subsequent to the date of this Deed of Trust, this event shall have the
same effect as an Event of Default (as defined below), and Lender may
exercise any or all of its available remedies for an Event of Default as
provided below unless Trustor either (a) pays the tax before it becomes
delinquent, or (b) contests the tax as provided above in the Taxes and
Liens section and deposits with Lender cash or a sufficient corporate
surety bond or other security satisfactory to Lender.
<PAGE> 7
SECURITY AGREEMENT; FINANCING STATEMENTS. The following provisions relating to
this Deed of Trust as a security agreement are a part of this Deed of Trust.
SECURITY AGREEMENT. This instrument shall constitute a security agreement
to the extent any of the Property constitutes fixtures or other personal
property, and Lender shall have all of the rights of a secured party
under the Uniform Commercial Code as amended from time to time.
SECURITY INTEREST. Upon request by Lender, Trustor shall execute
financing statements and take whatever other action is requested by
Lender to perfect and continue Lender's security interest in the Personal
Property. Trustor shall reimburse Lender for all expenses incurred in
perfecting or continuing this security interest. Upon default, Trustor
shall assemble the Personal Property in a manner and at a place
reasonably convenient to Trustor and Lender and make it available to
Lender within three (3) days after receipt of written demand from Lender.
ADDRESSES. The mailing addresses of Trustor (debtor) and Lender (secured
party), from which information concerning the security interest granted
by this Deed of Trust may be obtained (each as required by the Uniform
Commercial Code), are as stated on the first page of this Deed of Trust.
FURTHER ASSURANCES; ATTORNEY-IN-FACT. The following provisions relating to
further assurances and attorney-in-fact are a part of this Deed of Trust.
FURTHER ASSURANCES. At any time, and from time to time, upon request of
Lender, Trustor will make, execute and deliver, or will cause to be made,
executed or delivered, to Lender or to Lender's designee, and when
requested by Lender, cause to be filed, recorded, refiled, or
re-recorded, as the case may be, at such times and in such offices and
places as Lender may deem appropriate, any and all such mortgages, deeds
of trust, security deeds, security agreements, financing statements,
continuation statements, instruments of further assurance, certificates,
and other documents as may, in the sole opinion of Lender, be necessary
or desirable in order to effectuate, complete, perfect, continue, or
preserve (a) the obligations of Trustor under the Note, this Deed of
Trust, and the Related Documents, and (b) the liens and security
interests created by this Deed of Trust as first and prior liens on the
Property, whether now owned or hereafter acquired by Trustor. Unless
prohibited by law or agreed to the contrary by Lender in writing, Trustor
shall reimburse Lender for all costs and expenses incurred in connection
with the matters referred to in this paragraph.
ATTORNEY-IN-FACT. If Trustor fails to do any of the things referred to in
the preceding paragraph, Lender may do so for and in the name of Trustor
and at Trustor's expense. For such purposes, Trustor hereby irrevocably
appoints Lender as Trustor's attorney-in-fact coupled with an interest
for the purpose of making, executing, delivering, filing, recording, and
doing all other things as may be necessary or desirable, in Lender's sole
opinion, to accomplish the matters referred to in the preceding
paragraph.
FULL PERFORMANCE. If Trustor pays all the Indebtedness when due, and otherwise
performs all the obligations imposed upon Trustor under this Deed of Trust,
Lender shall execute and deliver to Trustee a request for full reconveyance and
shall execute and deliver to Trustor suitable statements of termination of any
financing statement on file evidencing Lender's security interest in the
Personal Property. Lender may charge Trustor a reasonable reconveyance fee at
the time or reconveyance.
DEFAULT. Each of the following, at the option of Lender, shall constitute an
event of default ("Event of Default") under this Deed of Trust:
DEFAULT ON INDEBTEDNESS. Failure of Trustor to make any payment when due
on the Indebtedness.
DEFAULT ON OTHER PAYMENTS. Failure of Trustor within the time required by
this Deed of Trust to make any payment for taxes or insurance and any
other payment required by this Deed of Trust, or any other payment
necessary to prevent filing of or to effect discharge of any lien.
<PAGE> 8
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower default under any
loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or
person that may materially affect any of Borrower's property or
Borrower's ability to repay the Loans or perform their respective
obligations under this Deed of Trust or any of the Related Documents.
COMPLIANCE DEFAULT. Failure to comply with any other term, obligation,
covenant or condition contained in this Deed of Trust, the Note or in
any of the Related Documents. If such a failure is curable and if Trustor
has not been given a notice of breach of the same provision of this Deed
of Trust within the preceding twelve (12) months, it may be cured (and no
Event of Default will have occurred) if Trustor, after Lender sends
written notice demanding cure of such failure: (a) cures the failure
within fifteen (15) days; or (b) if the cure requires more than fifteen
(15) days, immediately initiates steps sufficient to cure the failure and
thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Trustor under this Deed of Trust,
the Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
INSOLVENCY. The dissolution or termination of Trustor's existence as a
going business, the insolvency of Trustor, the appointment of a receiver
for any part of Trustor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Trustor.
FORECLOSURE, FORFEITURE, ETC. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or
any other method, by any creditor of Trustor or by any governmental
agency against any of the Property. However, this subsection shall not
apply in the event of a good faith dispute by Trustor as to the validity
or reasonableness of the claim which is the basis of the foreclosure or
forfeiture proceeding, provided that Trustor gives Lender written notice
of such claim and furnishes reserves or a surety bond for the claim
satisfactory to Lender.
ADVERSE CHANGE. A material adverse change occurs in Trustor's financial
condition, or Lender believes the prospect of payment or performance of
the Indebtedness is impaired.
RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of any Event of Default and
at any time thereafter, Trustee or Lender, at its option, may exercise any one
or more of the following rights and remedies, in addition to any other rights or
remedies provided by law:
FORECLOSURE BY SALE. Upon an Event of Default under this Deed to Trust,
Beneficiary may declare the entire Indebtedness secured by this Deed of
Trust immediately due and payable by delivery to Trustee of written
declaration of default and demand for sale and of written notice of
default and of election to cause to be sold the Property, which notice
Trustee shall cause to be filed for record. Beneficiary also shall
deposit with Trustee this Deed of Trust, the Note, other documents
requested by Trustee, and all documents evidencing expenditures secured
hereby. After the lapse of such time as may then be required by sale
following the recordation of the notice of default, and notice of sale
having been given as then required by law, Trustee, without demand on
Trustor, shall sell the Property at the time and place fixed by it in the
notice of sale, either as a whole or in separate parcels, and in such
order as it may determine, at public auction to the highest bidder for
cash in lawful money of the United States, payable at time of sale.
Trustee may postpone sale of all or any portion of the Property by public
announcement at such time and place of sale, and from time to time
thereafter may postpone such sale by public announcement at the time
fixed by the preceding postponement in accordance with applicable law.
Trustee shall deliver to such purchaser its deed conveying the Property
so sold, but without any covenant or warranty, express or implied. The
recitals in such deed of any matters or facts shall be conclusive proof
of the truthfulness thereof. Any person, including Trustor, Trustee or
Beneficiary may purchase at such sale. After deducting all costs, fees
and expenses of Trustee and of this Trust, including cost of evidence of
title in connection with sale, Trustee shall apply the proceeds of sale
to
<PAGE> 9
payment of: all sums expended under the terms hereof, not then repaid,
with accrued interest at the amount allowed by law in effect at the date
hereof; all other sums then secured hereby; and the remainder, if any, to
the person or persons legally entitled thereto.
JUDICIAL FORECLOSURE. With respect to all or any part of the Real
Property, Lender shall have the right in lieu of foreclosure by power of
sale to foreclose by judicial foreclosure in accordance with and to the
full extent provided by California law.
UCC REMEDIES. With respect to all or any part of the Personal Property,
Lender shall have all the rights and remedies of a secured party under
the Uniform Commercial Code, including without limitation the right to
recover any deficiency in the manner and to the full extent provided by
California law.
APPOINT RECEIVER. Lender shall have the right to have a receiver
appointed to take possession of all or any part of the Property and
collect rents, if any, with the power to protect and preserve the
Property, to operate the Property preceding foreclosure or sale, and
apply the proceeds, over and above the cost of the receivership, against
the Indebtedness. The receiver may serve without bond if permitted by
law. Lender's right to the appointment of a receiver shall exist whether
or not the apparent value of the Property exceeds the indebtedness by a
substantial amount. Employment by Lender shall not disqualify a person
from serving as a receiver.
TENANCY AT SUFFERANCE. If Trustor remains in possession of the Property
after the Property is sold as provided above or Lender otherwise becomes
entitled to possession of the Property upon default of Trustor, Trustor
shall become a tenant at sufferance of Lender or the purchaser of the
Property and shall, at Lender's option, either (a) pay a reasonable
rental for the use of the Property, or (b) vacate the Property
immediately upon the demand of Lender.
OTHER REMEDIES. Trustee or Lender shall have all other rights and
remedies provided in this Deed of Trust or the Note or by law.
NOTICE OF SALE. Lender shall give Trustor reasonable notice of the time
and place of any public sale of the Personal Property or of the time
after which any private sale or other intended disposition of the
Personal Property is to be made. Reasonable notice shall mean notice
given at least five (5) days before the time of the sale or disposition.
Any sale of Personal Property may be made in conjunction with any sale of
the Real Property.
SALE OF THE PROPERTY. To the extent permitted by applicable law, Trustor
hereby waives any and all rights to have the Property marshalled. In
exercising its rights and remedies, the Trustee or Lender shall be free
to sell all or any part of the Property together or separately, in one
sale or by separate sales. Lender shall be entitled to bid at any public
sale on all or any portion of the Property.
WAIVER; ELECTION OF REMEDIES. A waiver by any party of a breach of a
provision of this Deed of Trust shall not constitute a waiver of or
prejudice the party's rights otherwise to demand strict compliance with
that provision or any other provision. Election by Lender to pursue any
remedy provided in this Deed of Trust, the Note, in any Related Document,
or provided by law shall not exclude pursuit of any other remedy, and an
election to make expenditures or to take action to perform an obligation
of Trustor under this Deed of Trust after failure of Trustor to perform
shall not affect Lender's right to declare a default and to exercise any
of its remedies.
ATTORNEYS' FEES; EXPENSES. Whether or not any court action is involved,
all reasonable expenses incurred by Lender which in Lender's opinion are
necessary at any time for the protection of its interest or the
enforcement of its rights shall become a part of the Indebtedness payable
on demand and shall bear interest at the Note rate from the date of
expenditure until repaid. Expenses covered by this paragraph include,
without limitation, however subject to any limits under applicable law,
Lender's attorneys' fees whether or not there is a lawsuit, including
attorneys' fees for bankruptcy proceedings (including efforts to modify
or vacate any automatic stay
<PAGE> 10
or injunction), appeals and any anticipated post-judgment collection
services, the cost of searching records, obtaining title reports
(including foreclosure reports), surveyors' reports, appraisal fees,
title insurance, and fees for the Trustee, to the extent permitted by
applicable law. Trustor also will pay any court costs, in addition to all
other sums provided by law.
RIGHTS OF TRUSTEE. Trustee shall have all of the rights and duties of
Lender as set forth in this section.
POWERS AND OBLIGATIONS OF TRUSTEE. The following provisions relating to the
powers and obligations of Trustee are part of this Deed of Trust.
POWERS OF TRUSTEE. In addition to all powers of Trustee arising as a
matter of law, Trustee shall have the power to take the following actions
with respect to the Property upon the written request of Lender and
Trustor: (a) join in preparing and filing a map or plat of the Real
Property, including the dedication of streets or other rights to the
public; (b) join in granting any easement or creating any restriction on
the Real Property; and (c) join in any subordination or other agreement
affecting this Deed of Trust or the interest of Lender under this Deed of
Trust.
OBLIGATIONS TO NOTIFY. Trustee shall not be obligated to notify any other
party of a pending sale under any other trust deed or lien, or of any
action or proceeding in which Trustor, Lender, or Trustee shall be a
party.
TRUSTEE. Trustee shall meet all qualifications required for Trustee under
applicable law. In addition to the rights and remedies set forth above,
with respect to all or any part of the Property, the Trustee shall have
the right to foreclose by notice and sale, and Lender shall have the
right to foreclose by judicial foreclosure, in either case in accordance
with and to the full extent provided by applicable law.
SUCCESSOR TRUSTEE. Lender, at Lender's option, may from time to time
appoint a successor Trustee to any Trustee appointed hereunder by an
instrument executed and acknowledged by Lender and recorded in the office
of the recorder of Los Angeles County, California. The instrument shall
contain, in addition to all other matters required by state law, the
names of the original Lender, Trustee, and Trustor, the book and page
where this Deed of Trust is recorded, and the name and address of the
successor trustee, and the instrument shall be executed and acknowledged
by Lender or its successors in interest. The successor trustee, without
conveyance of the Property, shall succeed to all the title, power, and
duties conferred upon the Trustee in this Deed of Trust and by applicable
law. This procedure for substitution of trustee shall govern to the
exclusion of all other provisions for substitution.
NOTICES TO TRUSTOR AND OTHER PARTIES. Any notice under this Deed of Trust shall
be in writing, may be sent by tele-facsimile, and shall be effective when
actually delivered, or when deposited with a nationally recognized overnight
courier, or, if mailed, shall be deemed effective when deposited in the United
States mail first class, registered mail, postage prepaid, directed to the
addresses shown near the beginning of this Deed of Trust. Any party may change
its address for notices under this Deed of Trust by giving formal written notice
to the other parties, specifying that the purpose of the notice is to change the
party's address. All copies of notices of foreclosure from the holder of any
lien which has priority over this Deed of Trust shall be sent to Lender's
address, as shown near the beginning of this Deed of Trust. For notice purposes,
Trustor agrees to keep Lender and Trustee informed at all times of Trustor's
current address. Each Trustor requests that copies of any notices of default and
sale be directed to Trustor's address shown near the beginning of this Deed of
Trust.
STATEMENT OF OBLIGATION. Lender may collect a fee, in an amount not to exceed to
statutory maximum, for furnishing the statement of obligation as provided by
Section 2943 of the Civil Code of California.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Deed of Trust:
AMENDMENTS. This Deed of Trust, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Deed of Trust. No alteration of or
amendment to
<PAGE> 11
this Deed of Trust shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.
ACCEPTANCE BY TRUSTEE. Trustee accepts this Trust when this Deed of
Trust, duly executed and acknowledged, is made a public record as
provided by law.
APPLICABLE LAW. THIS DEED OF TRUST HAS BEEN DELIVERED TO LENDER AND
ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. THIS DEED OF TRUST SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.
CAPTION HEADINGS. Caption headings in this Deed of Trust are for
convenience purposes only and are not to be used to interpret or define
the provisions of this Deed of Trust.
MERGER. There shall be no merger of the interest or estate created by
this Deed of Trust with any other interest or estate in the Property at
any time held by or for the benefit of Lender in any capacity, without
the written consent of Lender.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Deed of Trust to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Deed of Trust in all other respects shall remain valid and
enforceable.
SUCCESSORS AND ASSIGNS. Subject to the limitations stated in this Deed of
Trust on transfer of Trustor's interest, this Deed of Trust shall be
binding upon and inure to the benefit of the parties, their successors
and assigns. If ownership of the Property becomes vested in a person
other than Trustor, Lender, without notice to Trustor, may deal with
Trustor's successors with reference to this Deed of Trust and the
Indebtedness by way of forbearance or extension without releasing Trustor
from the obligations of this Deed of Trust or liability under the
Indebtedness.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Deed of Trust.
WAIVERS AND CONSENTS. Lender shall not be deemed to have waived any
rights under this Deed of Trust (or under the Related Documents) unless
such waiver is in writing and signed by Lender. No delay or omission on
the part of Lender in exercising any right shall operate as a waiver of
such right or any other right. A waiver by any party of a provision of
this Deed of Trust shall not constitute a waiver of or prejudice the
party's right otherwise to demand strict compliance with that provision
or any other provision. No prior waiver by Lender, nor any course of
dealing between Lender and Trustor, shall constitute a waiver of any of
Lender's rights or any of Trustor's obligations as to any future
transactions. Whenever consent by Lender is required in this Deed of
Trust, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent
is required.
<PAGE> 12
TRUSTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS DEED OF TRUST, AND
TRUSTOR AGREES TO ITS TERMS.
TRUSTOR
NEWSTAR MEDIA INC.
BY: /s/ NEIL TOPHAM
----------------------------------
NEIL TOPHAM, VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
<PAGE> 13
CERTIFICATE OF ACKNOWLEDGMENT
STATE OF CALIFORNIA )
) ss
COUNTY OF LOS ANGELES )
On July 20, 1998 before me, David A Sailing, personally appeared Neil Topham,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he executed the same in his authorized capacity, and
that by his signature on the instrument the person, or the entity upon behalf of
which the person acted, executed the instrument.
WITNESS MY HAND AND OFFICIAL SEAL.
SIGNATURE /s DAVID A. SAILING (SEAL)
-------------------------------
<PAGE> 14
EXHIBIT A
PARCEL 1:
LOT 332 OF TRACT NO. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES,
STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN
THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
EXCEPT THE SOUTHERLY 55 FEET THEREOF.
PARCEL 2:
LOT 331 AND THE SOUTHERLY 55 FEET OF LOT 332 OF TRACT NO. 5125, IN THE CITY OF
WEST HOLLYWOOD, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED
IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID
COUNTY.
PARCEL 3:
LOTS 284, 285, 286, 329 AND 330 OF TRACT 5125, IN THE CITY OF WEST HOLLYWOOD,
COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES
39 AND 40 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
PARCEL 4:
LOT 282 OF TRACT. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES,
STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGE 39 OF MAPS, IN THE
OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
PARCEL 5:
LOT 283 OF TRACT NO. 5125, IN THE CITY OF WEST HOLLYWOOD, COUNTY OF LOS ANGELES,
STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 62 PAGES 39 AND 40 OF MAPS, IN
THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 364,000
<SECURITIES> 0
<RECEIVABLES> 4,939,000
<ALLOWANCES> 851,000
<INVENTORY> 2,752,000
<CURRENT-ASSETS> 10,780,000
<PP&E> 5,180,000
<DEPRECIATION> 1,415,000
<TOTAL-ASSETS> 25,190,000
<CURRENT-LIABILITIES> 13,437,000
<BONDS> 10,884,000
0
67,000
<COMMON> 2,000
<OTHER-SE> 800,000
<TOTAL-LIABILITY-AND-EQUITY> 869,000
<SALES> 7,620,000
<TOTAL-REVENUES> 7,620,000
<CGS> 5,228,000
<TOTAL-COSTS> 5,228,000
<OTHER-EXPENSES> 2,734,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 155,000
<INCOME-PRETAX> (497,000)
<INCOME-TAX> 2,000
<INCOME-CONTINUING> (499,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (499,000)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
