<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 21, 1997
REGISTRATION NO. 333-
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------
PARADIGM MUSIC ENTERTAINMENT COMPANY
(Name of small business issuer in its charter)
Delaware 7900 13-2852150
(Jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation) classification code number) I.D. number)
Paradigm Music Entertainment Company
67 Irving Place North
New York, New York 10003
(212) 387-7700
(Address and telephone number of principal executive offices)
THOMAS MCPARTLAND
PRESIDENT
PARADIGM MUSIC ENTERTAINMENT COMPANY
67 IRVING PLACE NORTH
NEW YORK, NEW YORK 10003
(212) 387-7700
(Name, address and telephone number of agent for service)
Copies to:
SHELDON MISHER, ESQ. BARRY BROOKS, ESQ.
TINA BAKER, ESQ. Paul, Hastings, Janofsky &
Bachner, Tally, Polevoy & Misher LLP Walker LLP
380 Madison Avenue 399 Park Avenue
New York, New York 10017 New York, New York 10022
(212) 687-7000 (212) 318-6000
Approximate date of proposed commencement of sale to public: As soon as
practicable after this Registration Statement becomes effective.
------
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, please check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
=============================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Title of Each Class of To Be Price Per Offering Registration
Securities To Be Registered Registered Unit (1) Price (1) Fee
----------------------------------- -------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Units, each consisting of one share
of Class A Common Stock, $.01 par
value, one Class A Warrant and one
Class B Warrant .................. 2,990,000(2) $5.00 $14,950,000 $ 4,530.30
Class A Common Stock, $.01 par
value, and Class B Warrants (3) .. 2,990,000(4) 6.50 19,435,000 5,889.39
Class A Common Stock, $.01 par
value (5) ........................ 5,980,000(4) 8.75 52,325,000 15,856.06
Unit Purchase Option (6) .......... 260,000 .001 260 .08
Units, each consisting of one share
of Class A Common Stock, $.01 par
value, one Class A Warrant and one
Class B Warrant .................. 260,000 6.00 1,560,000 472.73
Class A Common Stock, $.01 par
value, and Class B Warrants (7) .. 260,000 6.50 1,690,000 512.12
Class A Common Stock, $.01 par
value (7) ........................ 520,000 8.75 4,550,000 1,378.79
Class A Warrants (8) .............. 1,650,000 -- -- --
Class A Common Stock, $.01 par
value, and Class B Warrants (9) .. 1,650,000 6.50 10,725,000 3,250.00
Class A Common Stock, $.01 par
value (10) ....................... 1,650,000 8.75 14,437,500 4,375.00
Total ........................................................................ $36,264.47
</TABLE>
- - - - ------
(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 390,000 Units subject to the Underwriter's over-allotment
option.
(3) Issuable upon exercise of the Class A Warrants.
(4) Assumes the Underwriter's over-allotment option is exercised in full.
(5) Issuable upon exercise of the Class B Warrants.
(6) To be issued to the Underwriter.
(7) Issuable upon exercise of the Unit Purchase Option and/or the Warrants
exercisable thereunder.
(8) Held by selling securityholders.
(9) Issuable upon exercise of the Class A Warrants registered hereby for
resale by the selling securityholders.
(10) Issuable upon exercise of the Class B Warrants underlying the Class A
Warrants registered hereby for resale by the selling securityholders.
Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
are also being registered such additional shares of Common Stock as may
become issuable pursuant to anti-dilution provisions upon exercise of the
Warrants and the Unit Purchase Option.
------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
EXPLANATORY NOTE
This Registration Statement covers the registration of (i) up to 2,990,000
units ("Units"), including 390,000 Units to cover over-allotments, if any,
each Unit consisting of one share of Class A Common Stock, $.01 par value
("Common Stock"), of Paradigm Music Entertainment Company, a Delaware
corporation (the "Company"), one redeemable Class A Warrant ("Class A
Warrant") and one redeemable Class B Warrant ("Class B Warrant"), for sale by
the Company in an underwritten public offering and (ii) an additional
1,650,000 Class A Warrants (the "Selling Securityholder Warrants"), for sale
by the holders thereof (the "Selling Securityholders"), 1,650,000 Class B
Warrants (the "Selling Securityholder Class B Warrants") underlying the
Selling Securityholder Warrants and 3,300,000 shares of Common Stock (the
"Selling Securityholder Stock") underlying each of the Selling Securityholder
Warrants and the Selling Securityholder Class B Warrants, all for resale from
time to time by the Selling Securityholders subject to the contractual
restriction that the Selling Securityholders may not exercise and/or sell the
Selling Securityholder Warrants for specified periods after the closing of
the underwritten offering. The Selling Securityholder Warrants, the Selling
Securityholder Class B Warrants and the Selling Securityholder Stock are
sometimes collectively referred to herein as the "Selling Securityholder
Securities."
The complete Prospectus relating to the underwritten offering follows
immediately after this Explanatory Note. Following the Prospectus for the
underwritten offering are pages of the Prospectus relating solely to the
Selling Securityholder Securities, including alternative front and back cover
pages and sections entitled "Concurrent Public Offering," "Plan of
Distribution," and "Selling Securityholders" to be used in lieu of the
sections entitled "Concurrent Offering" and "Underwriting" in the Prospectus
relating to the underwritten offering. Certain sections of the Prospectus for
the underwritten offering will not be used in the Prospectus relating to the
Selling Securityholder Securities such as "Use of Proceeds" and "Dilution."
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION - DATED MARCH 21, 1997
PROSPECTUS
2,600,000 UNITS
[LOGO]
PARADIGM MUSIC
ENTERTAINMENT COMPANY
Each unit ("Unit") offered hereby (the "Offering") by Paradigm Music
Entertainment Company ("Paradigm" or the "Company") consists of one share of
class A common stock, $.01 par value ("Class A Common Stock"), one redeemable
class A warrant ("Class A Warrants") and one redeemable class B warrant
("Class B Warrants"). The components of the Units will be transferable
separately immediately upon issuance. Each Class A Warrant entitles the
holder to purchase one share of Class A Common Stock and one Class B Warrant
at an exercise price of $6.50, subject to adjustment, at any time until the
fifth anniversary of the date of this Prospectus. Each Class B Warrant
entitles the holder to purchase one share of Class A Common Stock at an
exercise price of $8.75, subject to adjustment, at any time until the fifth
anniversary of the date of this Prospectus. Commencing one year from the date
hereof, the Class A Warrants and Class B Warrants (collectively, the
"Warrants") are subject to redemption by the Company at a redemption price of
$.05 per Warrant on 30 days' written notice, provided the average closing bid
price of the Class A Common Stock for any 30 consecutive trading days ending
within 15 days of the notice of redemption exceeds $9.10 and $12.25 per
share, respectively (subject to adjustment in each case). See "Description of
Securities."
The Class A Common Stock and the Company's class B common stock, $.01 par
value ("Class B Common Stock"), are essentially identical in all respects,
except that the Class B Common Stock has five votes per share while the Class
A Common Stock has one vote per share. Further, the Class B Common Stock is
convertible into Class A Common Stock on a share for share basis and has
limited transferability. Upon completion of this Offering, the executive
officers and directors of the Company, as beneficial holders of Class B
Common Stock, will control approximately 53% of the total voting power of the
Company and will, therefore, be able to elect all of the Company's directors
and to control the Company. See "Principal Stockholders" and "Description of
Securities."
The registration statement of which this Prospectus is a part also covers
the offering for resale by certain securityholders (the "Selling
Securityholders") of 1,650,000 Class A Warrants (the "Selling Securityholder
Warrants"), and the Class A Common Stock and Class B Warrants underlying the
Selling Securityholder Warrants and the Class A Common Stock issuable upon
exercise of such Class B Warrants. The Selling Securityholder Warrants and
the shares underlying such Warrants are sometimes collectively referred to as
the "Selling Securityholder Securities." The Selling Securityholder Warrants
are issuable on the closing of the Offering to the Selling Securityholders
upon the automatic conversion of warrants (the "Bridge Warrants") acquired by
them in the Company's private placement in January 1997 (the "Bridge
Financing"). The Selling Securityholders have agreed not to exercise, sell,
transfer, hypothecate, assign or otherwise dispose of the Selling
Securityholder Warrants for one year after the closing of the Offering. See
"Concurrent Offering." Sales of the Selling Securityholder Warrants or the
underlying securities, or the potential of such sales, may have an adverse
effect on the market price of the securities offered hereby.
Prior to this Offering, there has been no public market for the Units,
Class A Common Stock or Warrants and there can be no assurance that such a
market will develop. The Company has applied for quotation of the Units,
Class A Common Stock, Class A Warrants and Class B Warrants on The Nasdaq
SmallCap Market ("Nasdaq") under the proposed symbols PMECU, PMEC, PMECW and
PMECZ, respectively. It is anticipated that the initial public offering price
will be $5.00 per Unit. See "Underwriting" for discussion of factors
considered in determining the initial public offering price. For information
concerning a Securities and Exchange Commission investigation relating to the
Underwriter, see "Risk Factors" and "Underwriting."
The Underwriter, an officer of the Underwriter, and certain officers,
directors and employees of D.H. Blair & Co., Inc., a member of the selling
group, beneficially own an aggregate of approximately 28.7% of the
outstanding shares of Class A Common Stock before the Offering. See
"Principal Stockholders" and "Underwriting." Pursuant to Rule 2720 of the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"), the Units are being offered at a price no greater than the maximum
recommended by RAS Securities Corp., a qualified independent underwriter.
------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON
PAGE 8 AND "DILUTION."
------
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
==============================================================================
Price to Underwriting Discounts Proceeds to
Public and Commissions(1) Company(2)
- - - - ------------------------------------------------------------------------------
Per Unit ... $ $ $
- - - - ------------------------------------------------------------------------------
Total(3) ... $ $ $
==============================================================================
(1) Does not include additional compensation paid or payable to the
Underwriter in the form of (i) a non-accountable expense allowance of
$ , or $ per Unit ($ if the over-allotment option is exercised in
full); and (ii) an option, exercisable over a period of three years
commencing two years from the date of this Prospectus, to purchase up to
260,000 Units (the "Unit Purchase Option") at $ per Unit (130% of the
initial public offering price per Unit). In addition, the Company has
agreed to indemnify the Underwriter against certain liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of this Offering payable by the Company,
estimated at $ , including the Underwriter's non-accountable expense
allowance.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
390,000 additional Units on the same terms and conditions as set forth
above, solely to cover over-allotments, if any. If the over-allotment
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The Units are offered by the Underwriter on a "firm commitment" basis,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter, and subject to the right of the Underwriter to withdraw, cancel
or modify such offer without notice and to reject orders in whole or in part
and to certain other conditions. It is expected that delivery of the
certificates representing the Units will be made at the offices of D.H. Blair
Investment Banking Corp., 44 Wall Street, New York, New York 10005, on or
about , 1997.
D.H. BLAIR INVESTMENT BANKING CORP.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[PICTURE]
The Company intends to furnish its stockholders and holders of Warrants
with annual reports containing audited financial statements and quarterly
reports for the first three quarters of each fiscal year containing unaudited
interim financial information.
------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, THE
CLASS A COMMON STOCK AND/OR THE WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to and
should be read in conjunction with, the more detailed information and
financial statements (including the notes thereto) appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information in this
Prospectus (a) assumes no exercise of: (i) the Underwriter's over-allotment
option; (ii) the Warrants; (iii) the Selling Securityholder Warrants; (iv)
the Unit Purchase Option; (v) 100,000 Class A Warrants issued in connection
with the acquisition of SonicNet, Inc. (the "SonicNet Warrants") in January
1997; (vi) an aggregate of 350,004 warrants to purchase Class A Common Stock
(the "Blair Warrants") issued in connection with the Company's Private
Placement in November 1995 (the "1995 Private Placement"); or (vii) options
granted or to be granted pursuant to the Company's 1996 Stock Option Plan
(the "Stock Option Plan") and (b) gives effect to the conversion, which will
occur upon the closing of the Offering, of the Bridge Warrants into the
Selling Securityholder Warrants. All share, per share and other information
contained herein reflects the recapitalization of the Company effected in
January 1997. See "Recapitalization."
THE COMPANY
The Company is a development stage entertainment company with a limited
operating history, having commenced operations in November 1995. The
Company's objective is to become a broad-based music entertainment company
producing and distributing prerecorded music products of both new artists and
catalog reissues (archival recordings) of established recording artists,
recruiting and developing new recording artists and developing
non-traditional syndicated music entertainment programming, such as original
content interactive programming on the Internet. The Company intends to
utilize traditional and non-traditional marketing and distribution channels,
such as Online services, interactive media and syndicated radio and cable
television, in order to cost effectively exploit the music entertainment
rights which it may develop or acquire and which could be made available to
third parties on a fee basis. The Company's business plan was developed by
the Company's Chairman of the Board of Directors, President and Chief
Executive Officer, Thomas McPartland. See "Management." To date, the
Company's primary focus has been on acquiring small independently owned and
distributed record labels ("Independent Labels"), the distribution of new
artist and catalog releases of established artists (such as Deep Purple), the
creation of a syndicated radio show, entering into an agreement with
Microsoft Corporation ("Microsoft") to provide programming for an Online
music show and the development of a vertically-integrated Online service that
would be available to promote the Company's music entertainment products and
those of third parties on a fee basis, through the acquisition of SonicNet,
Inc. ("SonicNet"), a New York based Internet music company and the proposed
acquisition of the "Addicted to Noise" website. Since inception, the
Company's revenues from operations have been insignificant. There can be no
assurance that any or all of the Company's business plan will be successfully
implemented or that the Company will generate sufficient revenues from
operations to meet the requirements of its business. "See "Risk Factors."
There are currently six "major" record labels which dominate the recording
industry ("Major Labels") along with their subsidiary labels: Time/Warner;
Sony Music Group ("Sony"); Bertelsmann Music Group ("BMG"); Polygram;
Thorn-EMI; and Universal Records Group ("Universal"). Although Independent
Labels individually represent a small percentage of the market for
prerecorded music, in 1996, sales of albums (both new and catalog) by
Independent Labels as a group constituted the largest percentage of the
market share for prerecorded music. During 1995 and 1996, albums released by
Independent Labels as a group constituted 20.6% and 21.2%, respectively, of
total United States album sales. Independent Labels often lead the Major
Labels to new music trends, resulting in acquisition of both new talent and
Independent Labels by the Major Labels.
The Company currently operates through five separate divisions: Paradigm
Associated Labels, Archive Recordings, Paradigm Music Productions, New Media
and New Business Development/International. The Company intends to expand its
operations through acquisition of comple-
3
<PAGE>
mentary businesses and has entered into a letter of intent to acquire the
"Addicted to Noise" ("ATN") website. There can be no assurance that the
Company will successfully complete any acquisitions or that, if completed
successfully, any acquisitions will result in revenues to the Company. See
"Risk Factors."
Paradigm Associated Labels ("PAL"). PAL's primary focus is the development
of new artist releases and related artist development, encompassing modern
rock, alternative, power-pop, dance and techno artists. PAL's strategy is to
develop and acquire a core group of Independent Labels to which it will
provide support services in order to maximize the opportunities for
discovering (and minimize the risk associated with developing) future
successful recording artists. In February 1997, the Company acquired all of
the outstanding capital stock of Purple Demon, Inc. ("Purple Demon"), the
entity which owned and operated Big Deal Records ("Big Deal").
PAL currently has three wholly-owned Independent Labels: Paradigm Records,
Big Deal and Mutant Sound Systems ("Mutant"). Each of these labels maintains
a separate roster of artists, each with a separate and distinct repertoire
focus. The Company has acquired a 25% interest in Wingnut Records, Inc., a
California-based Independent Label ("Wingnut"), specializing in punk and
hardcore music. PAL also has a one-year exclusive production agreement with
Evil Teen Records ("Evil Teen"), a New York based Independent Label which
specializes in alternative rock artist development. PAL is currently
negotiating with Evil Teen to extend its current agreement. Releases by
Paradigm Records and Evil Teen are distributed by Alternative Distribution
Alliance ("ADA"), an affiliate of Time/Warner and releases by Big Deal are
distributed by Caroline Records/Distribution ("Caroline"), a division of
Thorn/EMI. The Company intends to enter into recording agreements with
additional artists and acquire interests in additional Independent Labels,
subject to available financing and revenues from operations. Through Paradigm
Records, PAL released two albums in the fourth quarter of 1996 by two
artists, 4th Floor and Xanax-25. PAL also released two albums in the fourth
quarter of 1996 by Pen Pal and Benna Cohen, artists that have recording
agreements with Evil Teen.
Archive Recordings ("Archive"). This division is focusing on developing a
catalog of classic rock archival recordings to which the Company will have
the exclusive right to own, control or exploit. To date, Archive has acquired
the rights to approximately 2,000 master recordings by way of catalog
acquisitions and related license agreements and has released a live recording
by "Deep Purple" through the Internet. Utilizing the proceeds from this
Offering, the Company intends to acquire additional master recordings and
expects to release between 20 and 30 albums on Archive in 1997, which it is
anticipated will be distributed by Navarre Corporation ("Navarre"). Archive
will also attempt to enter into license agreements with Major Labels in order
to more fully exploit Archive's catalog.
Paradigm Music Productions. To date, the activities of this division have
consisted of two separate programming initiatives. The Company has a joint
venture with Media America pursuant to which the Company has been developing
a new artist, live concert series called "All Access" for commercial radio
syndication. In addition, the Company has entered into an exclusive
programming agreement with Microsoft pursuant to which the Company is the
exclusive music program provider for "On Air", a show which commenced
broadcast on the Microsoft Network ("MSN") on February 23, 1997 for an
initial 13-week period.
New Media. This division will focus on alternative distribution channels,
such as the Internet, to market and distribute the music entertainment
products of the Company and third parties. To date, the activities of this
division have consisted of the acquisition of SonicNet, an Online music
entertainment network, and entering into a letter of intent to acquire the
ATN website. The emphasis of SonicNet's website is to inform consumers of new
artists and their performances and provide interviews and chats with artists,
product samples and reviews and the option to purchase related artist music
products and merchandise. SonicNet currently utilizes CDNow, a third-party
Online distribution service, to effectuate sales of artist music products and
merchandise. The Company intends to develop its own Online direct selling
capabilities within the next 12-24 months.
New Business Development/International. To date, the activities of this
division have resulted in a binding letter of intent with SuperSound Music
Production, Inc. ("SuperSound"). The Company and
4
<PAGE>
SuperSound have agreed to organize a partnership to develop and market music
in the Peoples' Republic of China (the "PRC"), in exchange for which the
Company contributed $150,000 and its rights to exploit recordings by "New
Religion," a United States artist, in the PRC. SuperSound has advised the
Company that it has acquired rights to PRC recording artist Helen Hong, which
rights SuperSound will contribute to the partnership. There are substantial
risks involved in conducting business in the PRC, including internal
political risks. See "Risk Factors."
The Company was incorporated in Delaware in August 1995 under the name
Paradigm Records, Inc. The Company commenced operations on November 14, 1995
and changed its name to Paradigm Music Entertainment Co. On January 9, 1997
the Company changed its name to Paradigm Music Entertainment Company. The
Company's executive offices are located at 67 Irving Place North, New York,
New York 10003, its telephone number is (212) 387-7700 and the address of its
Website is www.paradigmmusic.com. Unless otherwise indicated, all references
herein to the Company refer to Paradigm Music Entertainment Company and its
wholly-owned subsidiaries SonicNet, Inc. and Purple Demon, Inc.
RECAPITALIZATION
In January 1997, the Company (i) effected a one-for-three reverse split of
its outstanding Class A Common Stock, Class B Common Stock and warrants, (ii)
declared a one-for-two share dividend of Class E Common Stock, $.01 par value
of the Company (the "Class E Common Stock") to holders of then outstanding
Class A Common Stock, Class B Common Stock and warrants, and (iii) increased
its authorized capital to 40,000,000 shares, consisting of 31,999,900 shares
of Class A Common Stock, 1,000,100 shares of Class B Common Stock, 2,000,000
shares of Class E Common Stock and 5,000,000 shares of Preferred Stock. The
foregoing transactions are referred to herein as the "Recapitalization." The
Class A Common Stock, Class B Common Stock and Class E Common Stock are
referred to herein collectively as the "Common Stock."
THE OFFERING
Securities Offered............. 2,600,000 Units, each consisting of one
share of Class A Common Stock, one Class A
Warrant and one Class B Warrant. Each Class
A Warrant entitles the holder to purchase
one share of Class A Common Stock and one
Class B Warrant at an exercise price of
$6.50, subject to adjustment, at any time
until the fifth anniversary of the date of
this Prospectus. Each Class B Warrant
entitles the holder to purchase one share of
Class A Common Stock at an exercise price of
$8.75, subject to adjustment, at any time
until the fifth anniversary of the date of
this Prospectus. The Warrants are subject to
redemption in certain circumstances. See
"Description of Securities."
Securities Offered Concurrently
by Selling Securityholders... 1,650,000 Selling Securityholder Warrants,
1,650,000 shares of Class A Common Stock and
1,650,000 Class B Warrants issuable upon
exercise of such Selling Securityholder
Warrants and 1,650,000 shares of Class A
Common Stock issuable upon exercise of such
Class B Warrants. See "Concurrent Offering."
Common Stock Outstanding Before
Offering(1):................. Class A Common Stock 1,596,704 shares
(2)(3)
Class B Common Stock 1,000,005 shares(3)
Class E Common Stock 1,226,716 shares(4)
5
<PAGE>
Common Stock Outstanding After
Offering(1):................. Class A Common Stock 4,196,704 shares
(2)(3)(5)
Class B Common Stock 1,000,005 shares (3)
Class E Common Stock 1,226,716 shares (4)
Use of Proceeds................ For operating funds for SonicNet; catalog
acquisitions; acquisitions of complementary
businesses, including Independent Labels;
artist advances; repayment of an aggregate
of $3,300,000 principal amount of notes
issued pursuant to the Bridge Financing (the
"Bridge Notes"), plus accrued interest; and
working capital and general corporate
purposes. See "Use of Proceeds."
Risk Factors................... The securities offered hereby involve a high
degree of risk and immediate substantial
dilution to public investors. See "Risk
Factors" and "Dilution."
Proposed Nasdaq Symbols........ Units - PMECU
Class A Common Stock - PMEC
Class A Warrants - PMECW
Class B Warrants - PMECZ
- - - - ------
(1) For a description of the voting and other rights of the Class A Common
Stock, Class B Common Stock and Class E Common Stock, see "Description of
Securities -- Common Stock."
(2) Does not include an aggregate of 4,150,004 shares of Class A Common Stock
reserved for issuance upon exercise of (i) the Selling Securityholder
Warrants; (ii) the SonicNet Warrants; (iii) the Blair Warrants; and (iv)
options that may be granted under the Stock Option Plan. Also does not
include 333,333 shares of Class A Common Stock reserved for issuance by
the Company to certain directors, consultants and employees of the
Company (the "Reserved Incentive Shares"), of which 94,000 will be placed
in escrow upon issuance and an aggregate of 66,667 shares of Class A
Common Stock issuable 90 days from the date of this Prospectus in
connection with the acquisition of Purple Demon.
(3) 6,000 shares of Class A Common Stock and 566,670 shares of Class B Common
Stock have been deposited into escrow by the present holders thereof and
94,000 of the Reserved Incentive Shares will be placed into escrow upon
their issuance (the "Escrow Shares"). The Escrow Shares are subject to
forfeiture and will be contributed to the capital of the Company if the
Company does not attain certain earnings levels or the market price of
the Company's Class A Common Stock does not achieve certain targets,
during the next five years. See "Principal Stockholders -- Escrow
Arrangements."
(4) Does not include an aggregate of 175,006 shares of Class E Common Stock
issuable upon exercise of the Blair Warrants. The shares of Class E
Common Stock (the "Class E Shares") will automatically convert on a
share-for-share basis into Class A Common Stock if the Company attains
certain earnings levels or the market price of the Company's Class A
Common Stock achieves certain targets during the next five years. The
Class E Shares will be redeemed by the Company and cancelled if such
earnings levels or market price targets are not achieved. See "Principal
Stockholders -- Escrow Arrangements" and "Description of Securities."
(5) Does not include an aggregate of 10,400,000 shares of Class A Common
Stock issuable upon exercise of the Unit Purchase Option and the
Underwriter's over-allotment option and upon exercise of Class A Warrants
and Class B Warrants contained in and underlying the Units offered hereby
and upon exercise of the Underwriter's over-allotment option and Unit
Purchase Option.
6
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
Actual Pro Forma (2)
---------------------------------------------------- --------------
November 14,
November 14, 1995 Year 1995 Year
(inception) to Ended (inception) to Ended
December 31, December 31, December 31, December 31,
1995 1996 1996 1996
----------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ....................... $ -- $ 31,114 $ 31,114 $ 139,949
Interest income ................. 7,268 59,417 66,685 63,879
Fee income - Former Parent ...... -- -- -- 60,000
Advertising commission and
subscription income ............ -- -- -- 53,636
Total expenses .................. 139,017 2,489,995 2,629,012 5,669,829
----------------- -------------- -------------- --------------
Net (loss) ...................... $ (131,749) $(2,399,464) $(2,531,213) $(5,352,365)
================= ============== ============== ==============
Net (loss) per share(1) ......... $(.06) $(1.15) $(1.21) $(2.56)
================= ============== ============== ==============
Weighted average number of shares
outstanding(1) ................. 2,090,707 2,090,707 2,090,707 2,090,707
================= ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
December 31, 1996
------------------------------------------------
Pro Forma
As Adjusted
Actual Pro Forma (3) (3)(4)
------------- -------------- --------------
<S> <C> <C> <C>
Working capital (deficiency) . $ (311,863) $(1,201,057) $ 9,412,943
Total assets ................. 627,591 4,573,486 12,239,986
Total liabilities ............ 531,010 4,110,746 1,223,246
Deficit accumulated during the
developmental stage ......... (2,531,213) (3,652,554) (4,147,554)
------------- -------------- --------------
Stockholders' equity ......... $ 96,581 $ 462,740 $11,016,740
============= ============== ==============
</TABLE>
- - - - ------
(1) The Escrow Shares and Class E Shares are excluded from the computation of
net (loss) per share. See Notes B and H of Notes to Paradigm Financial
Statements.
(2) Assumes the acquisitions of SonicNet and Purple Demon were completed as
of January 1, 1996. See "Pro Forma Condensed Consolidated Financial
Statements."
(3) Gives pro forma effect to (i) the issuance of the Bridge Notes and the
Bridge Warrants pursuant to the Bridge Financing and the corresponding
charge to operations through the date of repayment of approximately
$521,000, representing debt discount and debt issuance costs associated
with the Bridge Financing, (ii) the acquisitions of SonicNet and Purple
Demon, (iii) the amortization of approximately $325,000 of goodwill in
connection with the acquisition of SonicNet and (iv) a charge to earnings
of approximately $275,000 for executive compensation and overhead not
reflected in SonicNet's statement of operations for the year ended
December 31, 1996. See "Capitalization -- Bridge Financing," "Pro Forma
Condensed Consolidated Financial Statements," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," Note J of
Notes to Paradigm Financial Statements and Note D of Notes to Sonic Net
Financial Statements.
(4) Adjusted to give effect to the sale of 2,600,000 Units offered hereby at
an offering price of $5.00 per Unit and the repayment of the Bridge
Notes. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note J of Notes to
Paradigm Financial Statements.
7
<PAGE>
RISK FACTORS
The securities offered hereby are highly speculative in nature and involve
a high degree of risk, and only those who can bear the loss of their entire
investment should purchase such securities. In addition to the other
information in this Prospectus, the following risk factors should be
carefully considered in evaluating the Company, its business and an
investment in the Units offered hereby. Except for historical information
contained herein, the discussion in this Prospectus contains forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus.
The Company's actual results could differ materially from those discussed in
this Prospectus. Factors that could cause or contribute to such differences
include those discussed below, as well as those discussed elsewhere herein.
Limited Operating History; Limited Revenues from Operations; Independent
Auditors' Report. Paradigm commenced operations in November 1995, is a
development stage enterprise and has a very limited operating history. From
inception to December 31, 1996, Paradigm recognized revenues of approximately
$31,000, experienced a net loss of approximately $2.5 million and had an
accumulated deficit of approximately $2.5 million. On a pro forma combined
basis, giving effect to the acquisitions of SonicNet and Purple Demon as if
such acquisitions had occurred on January 1, 1996, the Company would have
recognized revenues of approximately $320,000, experienced a net loss of
approximately $5.3 million and had an accumulated deficit of approximately
$3.7 million for the year ended December 31, 1996. The Company has continued
to operate at a deficit since December 31, 1996, and it expects to continue
to operate at a deficit until such time, if ever, as operations generate
sufficient revenues to cover its costs. The likelihood of the success of the
Company must be considered in light of the difficulties and risks inherent in
a new business. There can be no assurance that revenues will increase
significantly in the future or that the Company will ever achieve profitable
operations. The report of the Company's independent auditors contains an
explanatory paragraph regarding the Company's ability to continue as a going
concern. Among the factors cited by the accountants as raising substantial
doubt as to the Company's ability to continue as a going concern is that the
Company is in the development stage and has sustained recurring losses from
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Report of Independent Auditors to Paradigm
Financial Statements.
Need for Additional Financing. Although the Company believes that the net
proceeds from this Offering will be sufficient to finance the Company's
working capital requirements for at least the 24 month period following
completion of this Offering, there can be no assurance that the Company will
generate sufficient revenues to fund its operations after such period. In
order to implement its acquisition program, the Company may, either in the
future or prior to the expiration of such 24 month period, require additional
capital. If and when the Company needs additional cash for such activities,
it may make additional equity or debt offerings or may borrow on the security
of existing assets or the assets it is seeking to acquire or otherwise. The
issuance of debt securities or borrowings could result in increased leverage
and reduced or negative working capital There can be no assurance that the
Company will be able to obtain either equity or debt financing on terms
acceptable to the Company, and the inability to obtain such financing could
limit the Company's growth or have an adverse effect on its operations. The
Company has no commitments from others to provide additional financing, if
required, and there can be no assurance that any additional financing will be
available if needed or, if available, will be on terms acceptable to the
Company. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Competition. The music industry is currently dominated by the Major Labels
and their respective subsidiary labels. These competitors are
well-established, have significantly greater financial and other resources
than the Company and larger music catalogs. They have all been in existence
for a substantially longer period of time than the Company, and enjoy a
certain name recognition that will only accrue to the Company over time, if
at all. The Company will also be competing with other significant Independent
Labels. These Independent Labels have also been in existence longer than the
Company. Established labels, independent or otherwise, may offer artists a
more established alternative to the Company. In addition, the Company
experiences competition from music publishing companies, and various media
companies, both emerging and established, seeking to develop
8
<PAGE>
interactive and enhanced format music entertainment products. The Company
faces intense competition for discretionary consumer spending from numerous
other record companies and other forms of entertainment offered by film
companies, Online information service providers, video companies and others.
Many of the Company's current and potential competitors in the music
entertainment and Online information services businesses have longer
operating histories, significantly greater financial, technical and marketing
resources, greater name recognition and larger existing customer bases than
the Company. In addition, these competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements
and to devote greater resources to the development, promotion and sale of
their products or services than the Company. The Company's ability to compete
successfully will be largely dependent upon its ability to build upon and
maintain its reputation for quality music entertainment products and to
introduce music entertainment products which are accepted by consumers. Due
to the Company's relative lack of experience in the business, its limited
financial and other resources and other factors relating to competition from
well-established companies, the Company may not be able to compete
successfully, if at all, with other competitors in the field. See "Business
- - - - -- Competition."
New Concept. The Company's success is dependent on successful
implementation of its business plan, which involves developing and expanding
each of the Company's operating divisions into profit centers on a
"stand-alone" basis, the success of PAL as an Independent Label consortium,
developing and/or acquiring music entertainment products and recording
artists and developing non-traditional marketing and promotional channels,
such as creating a vertically-integrated Online service that would be
available to promote the Company's music entertainment products as well as
third party music entertainment products on a fee basis. The Company is
unaware of any other entity that has attempted to establish an Independent
Label consortium and there is no assurance that the Company will be
successful or that PAL will be accepted in the industry or result in the
generation of significant revenues by the Company. Further, there can be no
assurance that the Company will be successful in developing its proposed
Online service, that any music entertainment products or artists acquired by
or under contract to the Company will prove to be commercially successful or
that the Company will discover or develop other music entertainment products
or artists that will prove to be commercially successful. See "Business --
Business Strategy."
Risks Associated with Fluctuations in Prerecorded Music Sales and Product
Returns. The record industry experienced an overall reduction in growth
during 1996 which is expected to continue. During 1996, several of the
country's largest record store chains and hundreds of independent music shops
have either declared bankruptcy or gone out of business and sales of
prerecorded music decreased over 1995. It is anticipated that Independent
Labels will be particularly vulnerable due to an increase in record returns
and a reduction in available music retail outlets. Industry analysts suggest
several factors, including a glut of products in the market, as being
responsible. Generally, in the record industry, prerecorded music is shipped
to wholesalers and/or retailers on a returnable basis. In accordance with
industry practice, the Company's prerecorded music products are expected to
be sold primarily on a returnable basis and, in the case of sales through
independent distributors, on a 100% returnable basis. The Company will
establish reserves for future returns of products based on its return
policies and return experience. An increase in returns over the Company's
reserves could adversely affect the Company's results of operations. See
"Business -- Industry Overview."
Risks Associated with the Prerecorded Music Industry and Talent
Development; Fluctuations in Operating Results. The prerecorded music
industry, like other creative industries, involves a substantial degree of
risk. Each recording is an individual artistic work, and its commercial
success is primarily determined by consumer taste, which is unpredictable and
constantly changing. Accordingly, there can be no assurance as to the
financial success of any particular release, the timing of such success or
the popularity of any particular artist. There can be no assurance that any
of the prerecorded music products released by the Company or artists to whom
the Company makes cash advances will produce sales revenue for the Company,
or if they do, that such revenue will be sufficient to recoup any costs
incurred by the Company or cash advances made to any artists by the Company.
In the event that an established artist enters into a recording contract with
the Company, the Company's operating expenses would most likely be higher
than those currently contemplated. This could result in an exhaustion of the
Company's financing earlier than anticipated, unless offset or exceeded by
increased sales of the established artist's products. In addition, there can
be no assurance that any artist developed by the Company will not request a
release from his or her agreement with the Company. Because of the highly
personal and creative nature of the artist's contractual obligations to the
Company, it is not feasible to force an unwilling artists to perform the
terms of his or her contract with the Company. The loss of an artist could
have a materially adverse effect on the Company. See "Business -- The
Company's Divisions."
9
<PAGE>
Furthermore, changes in the timing of new releases can cause significant
fluctuations in quarterly operating results. The Company's results of
operations from period to period may be materially affected by the timing of
new record releases and, if such releases are delayed beyond the peak holiday
season, the Company's operating results could be materially adversely
affected. Additionally, due to the success of particular artists, artists
touring schedules and the timing of music television specials, it is possible
that the Company could also experience material fluctuations in revenue from
year to year. There can be no assurance that the Company will be able to
generate sufficient revenues from successful releases to cover the costs of
unsuccessful releases. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
Lack of Manufacturing Facilities and Distribution Network. The Company has
no manufacturing or distribution capabilities. The Company currently
distributes records released by artists signed directly to the Company and to
Evil-Teen through ADA, records released by Big Deal are manufactured and
distributed through Caroline and records released by Archive are expected to
be distributed through Navarre. The Company has no distribution facility for
its record labels and, accordingly, is dependent upon maintaining its
existing relationship with its distributors and/or establishing and
maintaining new distribution relationships with comparable distributors.
There can be no assurance that the Company can maintain its relationship with
ADA beyond the term of its existing agreement, which will expire on September
30, 1998, that Big Deal can maintain its relationship with Caroline beyond
the term of its existing agreement or that the Company can maintain is
relationship with Navarre or enter into binding agreements with Navarre or
any other distributors. The termination of such relationships would, absent
establishing a substitute relationship with one or more of the few other
major distributors in the industry, have a material adverse effect on the
Company. See "Business -- Manufacturing and Distribution."
Licensing Activity. The Company is engaged in licensing activity involving
both the acquisition of rights to certain master recordings and compositions
for its own projects and the granting of rights to third parties in the
master recordings and compositions it owns. The availability on acceptable
terms of such cross-licensing arrangements are generally made possible by
existing industry practices based on reciprocity. Should such industry
practices change, there can no be assurance that the Company will be able to
obtain licenses from third parties on terms satisfactory to the Company or at
all, and the Company's business, particularly with respect to compilation
products, could be materially adversely affected. See "Business Copyrights
and Intellectual Property."
Reliance on and Risks Relating to Acquisitions; Potential Charge to
Earnings for Amortization of Goodwill from Acquisitions; Possible Issuance of
Additional Common Stock in Acquisitions. The Company expects to continue its
strategy of identifying, acquiring and exploiting music entertainment
products, master recordings, music publishing rights, other Independent
Labels and complementary music entertainment businesses. The Company believes
that its future growth depends, in part, upon the successful implementation
of this program. See "Business - Business Strategy." The failure of the
acquisition program could have a material adverse effect on the Company. Many
of these activities may require substantial working capital in addition to
the direct acquisition costs. The Company intends to utilize a portion of the
proceeds of this Offering to pursue potential acquisition opportunities and
expects to continue to seek acquisition candidates. Furthermore, in certain
instances, an acquisition may adversely affect the Company's operations in
the short-term, depending on many factors, including capital requirements and
the accounting treatment of such acquisitions. If any potential acquisition
opportunities are identified, there can be no assurance that the Company will
consummate such acquisitions or, if any such acquisition does occur, that it
will be successful in enhancing the Company's business. The Company may in
the future face increased competition for acquisition opportunities, which
may inhibit the Company's ability to consummate suitable acquisitions and
increase the expense of completing acquisitions. In addition, to the extent
that the Company's strategy results in the acquisition of businesses, such
acquisitions could pose a number of special risks, including the diversion of
management's attention, the assimilation of the operations and personnel of
the acquired companies, the incorporation of acquired products into existing
product lines, adverse short-term effects on reported operating results, the
amortization of acquired intangible assets (such as goodwill), the loss of
key employees and the difficulty of presenting a unified corporate image.
There can be no assurance that the Company will successfully identify,
complete or integrate acquisitions or that any acquisitions, if completed
successfully, will perform as expected, will not result in significant
unexpected liabilities or will ever contribute significant revenues or
profits to the Company. The failure to successfully integrate the business of
any entity acquired by the Company would have a material adverse affect on
the Company. See "Business."
10
<PAGE>
Further, the consideration for acquisitions may involve cash, notes and a
significant number of shares of Common Stock or warrants to purchase shares
of Common Stock, depending on the size of the acquisition. For example, in
connection with its acquisition of SonicNet, the Company issued 200,000
shares of Class A Common Stock and 100,000 Class A Warrants. In connection
with the acquisition of Purple Demon, the Company issued an aggregate of
33,333 shares of Class A Common Stock and is obligated to issue 66,667
additional shares of Class A Common Stock on the earlier of December 31, 1997
or 90 days from the date of this Prospectus. The Company may issue a
substantial number of additional shares of Common Stock if it consummates
several acquisitions, which may result in dilution to investors in this
Offering.
Broad Discretion as to Use of Proceeds; Absence of Substantive Disclosure
Relating to Acquisitions. The Company has broad discretion with respect to
the specific application of a significant portion of the net proceeds of this
Offering, as approximately 28.6% of the net proceeds of this Offering will be
applied to working capital and approximately 9.0% of the net proceeds of this
Offering are intended to be applied towards consummating acquisitions.
Further, if all or a portion of the Underwriter's over allotment is
exercised, it is anticipated that the net proceeds therefrom will be utilized
for working capital purposes. Although the Company continually explores
acquisition possibilities, it is not currently negotiating any acquisitions
other than ATN and has no agreements, arrangements or understandings
regarding acquisitions other than ATN. There can be no assurance that the
acquisition of ATN will be successfully completed, that the Company will make
any acquisitions other than SonicNet and Purple Demon or, if made, that such
acquisitions will be successful. A Company decision to utilize a substantial
portion of the net proceeds of this Offering for acquisitions reduces the
resources available to complete its other expansion and growth objectives. In
such event, the Company may be required to obtain additional financing to
achieve such objectives. There can be no assurance that such financing will
be available, or, if available, will be on terms acceptable to the Company.
Although management of the Company will endeavor to evaluate the risks
inherent in an particular acquisition, there can be no assurance that the
Company will properly ascertain all such risks. Management of the Company
will have virtually unrestricted flexibility in identifying and selecting a
prospective acquisition candidate. The Company does not intend to seek
stockholder approval for any acquisitions unless required by applicable law
or regulations and stockholders will most likely not have an opportunity to
review financial information on an acquisition candidate prior to
consummation of an acquisition. See "Use of Proceeds."
Risks Relating to Growth and Expansion. One element of the Company's
strategy is to expand its business through internal expansion and through
acquisitions. Rapid growth of the Company's business may significantly strain
the Company's management, personnel and other resources. There can be no
assurance that the Company will achieve rapid growth. The growth of the
Company's business would result in an increase in the level of responsibility
for existing management personnel and the need to hire additional qualified
management personnel. Failure to manage growth and expansion would have a
material adverse effect on the business of the Company.
Dependence on Key Personnel. The Company's success depends on the
continued contributions of its executive officers, especially its Chairman of
the Board, President and Chief Executive Officer, Thomas McPartland. Although
the Company has entered into a three-year employment agreement with Mr.
McPartland and has obtained "key-man" insurance on the life of Mr. McPartland
in the amount of $2,000,000, the loss of Mr. McPartland's services would have
a material adverse affect on the Company. Further, there can be no assurance
that the Company will be able to attract additional qualified employees. See
"Management."
Infringement of Company's Copyrighted Materials. Infringement of the
Company's copyrights, in the form of unauthorized reproduction and sale of
the Company's musical entertainment products, including artists' recordings,
may occur. If the Company achieves significant commercial success with one or
more of its musical entertainment products or recordings, such products or
recordings could be a target of "pirating" -- copying and sale in violation
of the Company's copyrights in such products or recordings. It is impossible
to estimate the potential loss in sales that could result from illegal
copying and sales of the Company's products or recordings. The Company
intends to enforce against unlawful infringement all copyrights owned by or
licensed to it which are material to its business. There can be no assurance,
however, that the Company will be successful in protecting such copyrights.
See "Business -- Copyrights and Intellectual Property."
Risks Relating to the Internet. Use of the Internet by consumers is at a
very early stage of development, and market acceptance of the Internet as a
medium for commerce and advertising is subject to a high level of
11
<PAGE>
uncertainty. The rapid growth of global commerce and the exchange of
information on the Internet and other Online networks is new and evolving,
making it difficult to predict whether the Internet will prove to be a viable
commercial marketplace. The Company believes that its future success may
depend on its ability to significantly increase revenues from its music
entertainment operations, which may require the development and widespread
acceptance of the Internet and Online services as a medium for commerce and
advertising. The Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, such as
reliable network backbones, or complementary services, such as high speed
modems and security procedures for financial transactions. Consumer concern
over Internet security has been, and could continue to be, a barrier to
commercial activities requiring consumers to send their credit card
information over the Internet. The Internet has experienced, and is expected
to continue to experience, significant growth in the number of users and
amount of traffic. There can be no assurance that the Internet infrastructure
will continue to be able to support the demands placed on it by sustained
growth. In addition, the viability of the Internet may prove uncertain due to
delays in the development and adoption of new standards and protocols, the
inability to handle increased levels of Internet activity or due to increased
government regulation. If use of the Internet does not continue to grow, or
if the necessary Internet infrastructure or complementary services are not
developed to effectively support growth that may occur, the Company's
business, results of operations and financial condition could be materially
adversely affected. See "Business -- Business Strategy" and "-- Marketing and
Promotion."
Risks Relating to Operations in China. To the extent that the Company
establishes an entity to conduct business in the PRC, there are risks
involved with the conduct of business in the PRC, including internal
political risks, government control of the economy and inflation. The PRC is
a socialist state which since 1949 has been, and is expected to continue to
be, controlled by the Communist Party of China. Changes in the top political
leadership of the Chinese government may have a significant impact on policy
and the political and economic environment in the PRC. Moreover, economic
reforms and growth in the PRC have been more successful in certain provinces
than in other, and the continuation or increase of such disparities could
affect political or social stability. The PRC only recently has permitted
greater provincial and local economic autonomy and private economic
activities, and the government of China has exercised and continues to
exercise substantial control over virtually every section of the Chinese
economy through regulation and state ownership. Accordingly, government
actions in the future, including any decisions not to continue to support the
economic reform program that commenced in the late 1970's and possibly to
return to the more centrally-planned economy that existed prior thereto,
could have a significant effect on economic conditions in the PRC and on the
success of any venture by the Company in the PRC. In addition, over the last
few years, China's economy has registered a high growth rate and there have
been recent indications that rates of inflation have increased. In response,
the Chinese government recently has taken measures to curb the excessive
expansion of the economy. These measures have included devaluations of the
Chinese currency, the Renminbi and restrictions on the availability of
domestic credit. There can be no assurance that these austerity measures
alone will succeed in slowing down the economy's excessive expansion or
control inflation, nor that they will not result in several dislocations in
the Chinese economy in general. To further combat inflation, the Chinese
government may adopt measures, including the establishment of freezes or
restraints on certain projects or markets, which may have an adverse effect
on any venture by the Company in the PRC.
Charge to Income in the Event of Release of Escrow Shares or Conversion of
Class E Shares. In the event any Escrow Shares or Class E Shares held by the
stockholders of the Company who are officers, directors, employees or
consultants of the Company are released from escrow or converted,
compensation expense will be recorded for financial reporting purposes.
Therefore, in the event the Company attains any of the earnings thresholds or
the Company's Class A Common Stock meets certain minimum bid prices required
for the release of the Escrow Shares or conversion of the Class E Shares,
such release or conversion will be deemed additional compensation expense of
the Company. Accordingly, the Company will, in the event of the release of
the Escrow Shares or conversion of the Class E Shares, recognize during the
period in which the reportable earnings thresholds are met or such minimum
bid prices obtained, what could be a substantial charge which would have the
effect of substantially increasing the Company's reportable loss or reducing
or eliminating reportable earnings, if any, at such time. Although the amount
of compensation expense recognized by the Company will not affect the
Company's total stockholders' equity, it may have a depressive effect on the
market price of the Company's securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
12
<PAGE>
"Principal Stockholders - Escrow Arrangements" and "Description of
Securities." Notwithstanding the foregoing discussion, there can be no
assurance that the Company will attain the targets which would enable the
Escrow Shares to be released from escrow or the conversion of the Class E
Shares.
Immediate Dilution. The purchasers of the Units in this Offering will
incur an immediate dilution of approximately $3.28 or 66% in the pro forma
per share net tangible book value of their Class A Common Stock ($3.02 or 60%
if the Underwriter's over-allotment option is exercised in full). Additional
dilution to public investors may result to the extent that the SonicNet
Warrants, the Blair Warrants, the Selling Securityholder Warrants, the
Warrants and/or the Underwriter's Unit Purchase Option are exercised at a
time when the net tangible book value per share of Common Stock exceeds the
exercise price of any such securities. See "Dilution."
Charge Arising from Debt Issuance Costs. Upon completion of this Offering
and repayment of the Bridge Notes, a non-recurring non-cash charge of
approximately $521,000, representing the unamortized debt discount and debt
issuance costs incurred in connection with the Bridge Financing, will be
charged to operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note J of Notes to Paradigm
Financial Statements.
Control by Insiders. Immediately following this Offering, the executive
officers and directors of the Company, as holders of shares of Class B Common
Stock, will beneficially own 100% of the outstanding Class B Common Stock
(including the Escrow Shares) and approximately 41% of the Class E Shares of
the Company, representing approximately 53% of the voting power and will be
able to elect all the Company's directors and thereby direct the policies of
the Company. Furthermore, the disproportionate vote afforded the Class B
Common Stock could also serve to impede or prevent a change of control of the
Company. As a result, potential acquirors may be discouraged from seeking to
acquire control of the Company through the purchase of Class A Common Stock,
which could have a depressive effect on the price of the Company's
securities. See "Principal Stockholders" and "Description of Securities."
Future Sales of Common Stock. Of the Company's 5,196,709 shares of Class A
and Class B Common Stock outstanding, 2,596,709 shares are "restricted
securities" as that term is defined in Rule 144 promulgated under the
Securities Act of 1933, as amended, (the "Securities Act") and under certain
circumstances may be sold without registration pursuant to such rule. Such
shares will be eligible for sale under Rule 144 commencing 90 days after the
date of this Prospectus (subject to the restrictions on transfer with respect
to the Escrow Shares and Class E Shares). The Company has also registered on
behalf of the Selling Securityholders an aggregate of 1,650,000 Selling
Securityholder Warrants and the securities underlying such Class A Warrants,
subject to a contractual restriction that the Selling Securityholders not
exercise or sell any of the Selling Securityholder Warrants for one year from
the closing of the Offering. In addition, the Company may issue up to 333,333
Reserved Incentive Shares in the future to certain directors, consultants and
employees of the Company and has reserved 300,000 shares of Class A Common
Stock for issuance upon exercise of options to be granted under the Stock
Option Plan. The Company is unable to predict the effect that sales made
under Rule 144, or otherwise, may have on the then prevailing market price of
the Company's securities although any future sales of substantial amounts of
securities pursuant to Rule 144 could adversely affect prevailing market
prices. The Company's officers and directors and holders of Class B Common
Stock have agreed not to offer, sell or otherwise dispose of any of their
shares of Class A or Class B Common Stock (or Class A Common Stock into which
shares of Class B Common Stock are convertible) or Class E Shares for a
period of 13 months after the consummation of this Offering without the prior
written consent of the Underwriter and holders of approximately 80% of the
outstanding shares of Class A Common Stock have agreed not to offer, sell or
otherwise dispose of their shares for a period of either 12 months or 13
months after the consummation of the Offering without the prior written
consent of the Underwriter. See "Principal Stockholders," "Concurrent
Offering," "Underwriting" and "Shares Eligible For Future Sale."
Dividends Unlikely. The Company has not paid any cash dividends on its
Common Stock and does not intend to declare or pay cash dividends in the
foreseeable future. The Company expects that it will retain all available
earnings, if any, to finance and expand its business. See "Dividend Policy."
Arbitrary Determination of Offering and Exercise Prices; Possible
Volatility of Stock Price. The exercise prices of the Warrants have been
determined by negotiation between the Company and the Underwriter pursu-
13
<PAGE>
ant to Rule 2720 of the NASD's Conduct Rules and are not necessarily related
to the Company's asset value, net worth or other established criteria of
value. Market prices for the securities following this Offering will be
influenced by a number of factors, including quarterly variations in the
financial results of the Company and any competitors, changes in earnings,
estimates by analysts, conditions in the record industry, the overall economy
and the financial markets.
Non-Registration in Certain Jurisdictions of Shares Underlying the
Warrants; Need for Current Prospectus. The Company will be unable to sell the
securities upon exercise of the Warrants to holders residing in jurisdictions
where such securities are not presently qualified for sale. In such event,
the Company would be unable to issue shares and/or Class B Warrants to those
persons desiring to exercise their Warrants unless and until the underlying
securities could be qualified for sale in jurisdictions in which such
purchasers reside, or an exemption to such qualification exists in such
jurisdiction. In addition, the Class A Warrants and Class B Warrants will not
be exercisable unless at the time of exercise the Company has a current
prospectus covering the securities underlying the Warrants. No assurances can
be given that the Company will be able to effect any required registration or
qualification or maintain a current prospectus.
Potential Adverse Effect of Redemption of Warrants. Commencing on year
from the date of this Prospectus, the Warrants may be redeemed by the Company
at a redemption price of $.05 per Warrant upon 30 days' notice provided the
average closing bid price (as defined herein) of the Class A Common Stock for
any 30 consecutive trading days ending within 15 days of the notice of
redemption exceeds $9.10, in the case of the Class A Warrants, or $12.25, in
the case of the Class B Warrants (subject to adjustment in each case).
Redemption of the Warrants could force the holders to exercise the Warrants
and pay the exercise price at a time when it may be disadvantageous for the
holders to do so, to sell the Warrants at the then current market price when
they might otherwise wish to hold the Warrants, or to accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants at the time of redemption. See "Description of Securities --
Redeemable Warrants."
Effect of Outstanding Options and Warrants. Upon completion of this
Offering, the Company will have outstanding (i) 4,610,000 Class A Warrants,
including the Selling Securityholder Warrants, the SonicNet Warrants and the
Class A Warrants contained in the Unit Purchase Option (and 4,610,000 Class B
Warrants issuable upon the exercise of these Class A Warrants), (ii)
2,860,000 Class B Warrants, including the Class B Warrants contained in the
Unit Purchase Option and (iii) the Blair Warrants to purchase an aggregate of
350,004 shares of Class A Common Stock. Further, the Company has reserved
300,000 shares of Class A Common Stock for options to be granted under the
Stock Option Plan and the 333,333 Reserved Incentive Shares. For the
respective terms of such securities, the holders thereof are given an
opportunity to profit from a rise in the market price of the Company's Class
A Common Stock with a resulting dilution in the interests of the other
stockholders. Further, the terms on which the Company may obtain additional
financing during that period may be adversely affected by the existence of
such options and warrants. The holders of the Warrants and the Selling
Securityholder Warrants may exercise them at a time when the Company might be
able to obtain additional capital through a new offering of securities on
terms more favorable than those provided therein. In addition, holders of the
Unit Purchase Option have registration rights with respect to such option and
the underlying securities. Exercise of the registration rights may involve
substantial expense to the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Description of
Securities."
Possible Adverse Effects of Authorization of Preferred Stock;
Anti-Takeover Provisions. The Company's Certificate of Incorporation
authorizes the issuance of 5,000,000 shares of "blank check" preferred stock
with such designations, rights and preferences as may be determined from time
to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval (but subject to applicable government
regulatory restrictions), to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect
the voting power or other rights of the holders of the Company's Common
Stock. In the event of issuance, the preferred stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Although the Company has no present
intention to issue any shares of its preferred stock, there can be no
assurance that the Company will not do so in the future. The issuance of such
preferred stock could make the possible takeover of the Company or the
removal of management of the Company more difficult, discourage hostile bids
for control of the Company
14
<PAGE>
in which stockholders may receive premiums for their shares of Class A Common
Stock or otherwise dilute the rights of holders of Class A Common Stock and
the market price of the Class A Common Stock. The Company is subject to the
Delaware General Corporation Law provisions that may have the effect of
discouraging persons from pursuing a non-negotiated takeover of the Company
and preventing certain changes of control. The disproportionate vote afforded
the shares of Class B Common Stock could also serve to impede or prevent a
change of control of the Company. As a result, potential acquirors may be
discouraged from seeking to acquire control of the Company through the
purchase of Class A Common Stock, which could have a negative effect on the
price of the Company's securities. See "Management," "Principal Stockholders"
and "Description of Securities."
Current Prospectus and State Registration to Exercise Warrants. Holders of
Warrants will be able to exercise the Warrants only if (i) a current
prospectus under the Securities Act relating to the securities underlying the
Warrants is then in effect and (ii) such securities are qualified for sale or
exempt from qualification under the applicable securities laws of the states
in which the various holders of Warrants reside. Although the Company has
undertaken and intends to use its best efforts to maintain a current
prospectus covering the securities underlying the Warrants following
completion of the Offering to the extent required by Federal securities laws,
there can be no assurance that the Company will be able to do so. The value
of the Warrants may be greatly reduced if a prospectus covering the
securities issuable upon the exercise of the Warrants is not kept current or
if the securities are not qualified, or exempt from qualification, in the
states in which the holders of Warrants reside. Persons holding Warrants who
reside in jurisdictions in which such securities are not qualified and in
which there is no exemption will be unable to exercise their Warrants and
would either have to sell their Warrants in the open market or allow them to
expire unexercised. If and when the Warrants become redeemable by the terms
thereof, the Company may exercise its redemption right even if it is unable
to qualify the underlying securities for sale under all applicable state
securities laws. See "Description of Securities -- Redeemable Warrants."
Possible Adverse Effect on Liquidity of the Company's Securities Due to
the Investigation of D.H. Blair Investment Banking Corp. and D.H. Blair &
Co., Inc. by the Securities and Exchange Commission. The Secur- ities and
Exchange Commission (the "Commission") is conducting an investigation
concerning various business activities of the Underwriter and D.H. Blair &
Co., Inc. ("Blair & Co."), a selling group member which will distribute
substantially all of the Units offered hereby. The investigation appears to
be broad in scope, involving numerous aspects of the Underwriter's and Blair
& Co.'s compliance with the Federal securities laws and compliance with the
Federal securities laws by issuers whose securities were underwritten by the
Underwriter or Blair & Co., or in which the Underwriter or Blair & Co. made
over-the-counter markets, persons associated with the Underwriter or Blair &
Co., such issuers and other persons. The Company has been advised by the
Underwriter that the investigation has been ongoing since at least 1989 and
that it is cooperating with the investigation. The Underwriter cannot predict
whether this investigation will ever result in any type of formal enforcement
action against the Underwriter or Blair & Co., or, if so, whether any such
action might have an adverse effect on the Underwriter or the securities
offered hereby. The Company has been advised that Blair & Co. intends to make
a market in the securities following the Offering. An unfavorable resolution
of the Commission's investigation could have the effect of limiting such
firm's ability to make a market in the Company's securities, which could
adversely affect the liquidity or price of such securities. See
"Underwriting."
Possible Restrictions on Market-Making Activities in Company's
Securities. The Underwriter has advised the Company that Blair & Co. intends
to make a market in the Company's securities. Regulation M, which was
recently adopted to replace Rule 10b-6 and certain other rules promulgated
under the Securities Act of 1934, as amended (the "Exchange Act"), may
prohibit Blair & Co. from engaging in any market-making activities with
regard to the Company's securities for the period from five business days (or
such other applicable period as Regulation M may provide) prior to any
solicitation by the Underwriter of the exercise of Warrants until the later
of the termination of such solicitation activity or the termination (by
waiver or otherwise) of any right that the Underwriter may have to receive a
fee for the exercise of Warrants following such solicitation. As a result,
Blair & Co. may be unable to provide a market for the Company's securities
during certain periods while the Warrants are exercisable. In addition, under
applicable rules and regulations under the Exchange Act, any person engaged
in the distribution of the Selling Securityholder Warrants may not
simultaneously engage in market- making activities with respect to any
securities of the Company for the applicable "cooling off" period (currently
at least two and possibly nine business days) prior to the commencement of
such distribution. Accordingly, in
15
<PAGE>
the event the Underwriter or Blair & Co. is engaged in a distribution of the
Selling Securityholder Warrants, neither of such firms will be able to make a
market in the Company's securities during the applicable restrictive period.
Any temporary cessation of such market-making activities could have an
adverse effect on the market price of the Company's securities. See
"Underwriting."
Listing and Maintenance Requirements of The Nasdaq Stock Market; Risk of
Delisting. The Company proposes to list the Units, Class A Common Stock,
Class A Warrants and Class B Warrants on the Nasdaq SmallCap Market. See
"Cover Page." Continued listing on Nasdaq generally requires that (i) the
Company maintain at least $2,000,000 in total assets and $1,000,000 in
capital and surplus, (ii) the minimum bid price of the Class A Common Stock
be $1.00 per share, (iii) there be at least 100,000 shares in the public
float valued at $1,000,000 or more, (iv) the Class A Common Stock have at
least two active markets makers, and (v) the Common Stock be held by at least
300 holders.
Nasdaq has recently proposed more stringent financial requirements for
listing on Nasdaq. With respect to continued listing, such new requirements
are that the Company, among other things, have at least $2,000,000 in "net
tangible assets" ("net tangible assets" equals total assets less total
liabilities and goodwill) or at least $35,000,000 in total market value or at
least $500,000 in net income in two out of its last three fiscal years, as
well as least 500,000 shares in the public float, at least $1,000,000 in
market value of the public float, a bid price of not less than $1.00 per
share, a minimum of two independent directors and other corporate governance
criteria which are the same as those for the Nasdaq National Market. Adoption
of any or all of the proposals could make it more difficult for the Company
to maintain compliance with the listing criteria, assuming the Company is
accepted for listing on the SmallCap Market. Upon notice of a deficiency in
one or more of the maintenance requirements, the Company would be given 90
days (30 days in the case of the number of market-makers) to comply with the
maintenance standards.
If the Company is unable to satisfy Nasdaq's maintenance requirements, its
securities may be delisted from Nasdaq. In such event, trading, if any, in
the Units, Class A Common Stock and Warrants would thereafter be conducted in
the over-the-counter market in the so-called "pink sheets" maintained by the
National Quotation Bureau Incorporated or the OTC "Electronic Bulletin
Board." As a consequence of such delisting, an investor could find it more
difficult to dispose of or to obtain accurate quotations as to the market
value of the Company's securities. Among other consequences, delisting from
Nasdaq may cause a decline in the stock price, the loss of news coverage
about the Company and difficulty in obtaining future financing. Consequently,
the liquidity of the Company's securities could be impaired, not only in the
number of securities which could be bought and sold, but also through delays
in the timing of transactions, reduction in security analysts' and the news
media's coverage of the Company and lower prices for the Company's securities
than might otherwise be attained.
Risk of Low-Priced Stock. If the Company's securities were delisted from
Nasdaq (See "-- Listing and Maintenance Requirements of The Nasdaq Stock
Market; Risk of Delisting"), they could become subject to Rule 15g-9 under
the Exchange Act, which imposes additional sales practice requirements on
broker-dealers which sell such securities to persons other than established
customers and "accredited investors" (generally, individuals with net worths
in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000
together with their spouses). For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, such rule may adversely affect the ability of
broker-dealers to sell the Company's securities and may adversely affect the
ability of purchasers in this Offering to sell any of the securities acquired
hereby in the secondary market.
The Commission adopted regulations which generally define a "penny stock"
to be any non-Nasdaq equity security that has a market price (as therein
defined) of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving
a penny stock, unless exempt, the rules require delivery, prior to any
transaction in a penny stock, of a disclosure schedule prepared by the
Commission relating to the penny stock market. Disclosure is also required to
be made about commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.
16
<PAGE>
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or
meet certain minimum net tangible assets or average revenue criteria. There
can be no assurance that the Company's securities will qualify for exemption
from these restrictions. In any event, even if the Company's securities were
exempt from such restrictions, it would remain subject to Section 15(b)(6) of
the Exchange Act, which gives the Commission the authority to prohibit any
person that is engaged in unlawful conduct while participating in a
distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds
that such a restriction would be in the public interest.
If the Company's securities were subject to the existing or proposed rules
on penny stocks, the market liquidity for the Company's securities could be
severely adversely affected.
17
<PAGE>
USE OF PROCEEDS
The net proceeds (after deducting underwriting discounts and commissions
and other expenses of the Offering payable by the Company) from the sale of
the 2,600,000 Units offered hereby, are estimated at approximately
$11,109,000 ($12,805,500 if the Underwriter's over-allotment option is
exercised in full). The Company intends to use the net proceeds over at least
the 24 month period following the completion of this Offering for the
following purposes:
<TABLE>
<CAPTION>
Approximate Amount
Application of Net Proceeds
------------- ------------------
<S> <C>
SonicNet Operating Funds (1) ....................... $ 2,000,000
Acquisitions (2) ................................... 1,000,000
Catalog Acquisitions (3) ........................... 500,000
Repayment of Bridge Notes and Other Indebtedness (4) 3,429,000
Artist Advances (5) ................................ 1,000,000
Working Capital and General Corporate Purposes (6) . 3,180,000
TOTAL ......................................... $11,109,000
==================
</TABLE>
- - - - ------
(1) In connection with its acquisition of SonicNet, the Company is obligated
to provide up to $2,000,000 over the next 12 months in order to fund
SonicNet's operations, which amount includes approximately $270,000 in
executive salaries and $100,000 in lease payments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Notes to SonicNet Financial Statements.
(2) The Company intends to acquire Independent Labels and may, when and if
the opportunity arises, acquire other businesses which are related to the
Company's business with a portion of the net proceeds. Other than
Addicted to Noise, the Company has no specific arrangement with respect
to any such acquisition at the present time and is not presently involved
in any negotiations with respect to any such acquisition. There can be no
assurance that any particular acquisition will be made.
(3) For master purchase and licensing acquisitions of catalog reissues of
prerecorded music by Archive Recordings.
(4) Represents principal amount of the Bridge Notes issued in the Bridge
Financing completed by the Company in January 1997 together with
estimated accrued interest through May 1, 1997. The Bridge Notes bear
interest at the rate of 10% per annum and mature on the earlier of the
closing of this Offering or one year from the date of issuance. The
proceeds of the Bridge Notes have been used for the SonicNet acquisition
and will be used for working capital purposes including general and
administrative expenses. Also represents $50,000 in principal amount and
approximate accrued interest of 6% per annum payable on of before July 1,
1997 by Purple Demon. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," Note J of Notes to
Paradigm Financial Statements and Note D of Notes to Purple Demon
Financial Statements.
(6) Includes salaries and fees payable to the Company's executive officers,
directors, consultants and other significant employees aggregating
approximately $2,100,000.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of this Offering based upon the current status of its
business operations, its current plans and current economic conditions.
Future events, including the problems, delays, expenses and complications
frequently encountered by early stage companies as well as changes in
competitive conditions affecting the Company's business and the success or
lack thereof of the Company's marketing efforts, may make shifts in the
allocation of funds necessary or desirable. The Company, therefore, reserves
the right to reallocate the net proceeds of this Offering among the various
categories set forth above as it, in its sole discretion, deems necessary or
advisable.
Prior to expenditure, the net proceeds will be invested in short-term
interest bearing securities or money market funds. Any proceeds received upon
exercise of the Underwriter's over-allotment option, the Warrants, the
Selling Securityholder Warrants or the Unit Purchase Option, as well as
income from investments, will be used for general corporate purposes.
18
<PAGE>
CAPITALIZATION
The following table sets forth (a) the actual capitalization of the
Company as of December 31, 1996, after giving effect to the Recapitalization,
(b) the pro forma capitalization of the Company as of December 31, 1996
giving effect to the (i) the Recapitalization, (ii) the issuance of the
Bridge Notes and the Bridge Warrants pursuant to the Bridge Financing, (iii)
the issuance of 200,000 shares of Class A Common Stock in January 1997 in
connection with the acquisition of SonicNet and (iv) the issuance of 33,333
shares of Class A Common Stock in February 1997 in connection with the
acquisition of Purple Demon, and (c) the pro forma capitalization of the
Company as of December 31, 1996, as adjusted to give effect to the issuance
and sale of the 2,600,00 Units offered hereby and the repayment of the Bridge
Notes out of the net proceeds therefrom. This table should be read in
conjunction with the Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------
Pro Forma
As
Actual Pro Forma(5) Adjusted(5)(6)
------------- ------------- ---------------
<S> <C> <C> <C>
Bridge Notes Payable, net of discount ............... -0- $ 2,887,500 $ -0-
Stockholders' Equity:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding
actual, pro forma and as adjusted (1) .......... -0- -0- -0-
Class A Common Stock, $.01 par value, 31,999,900
shares authorized; 1,363,371 shares issued and
outstanding actual; 1,596,704 shares issued and
outstanding pro forma; 4,196,704 shares issued
and outstanding as adjusted (2) ................ 13,634 15,967 41,967
Class B Common Stock, $. 01 par value, 1,000,100
shares authorized; 1,000,005 shares issued and
outstanding actual, pro forma and as adjusted
(3) ............................................ 10,000 10,000 10,000
Class E Common Stock, $.01 par value, 2,000,000
shares authorized, 1,266,716 shares issued and
outstanding actual, pro forma and as adjusted
(4) ............................................ 12,267 12,267 12,267
Additional paid-in capital .......................... 2,591,893 4,077,060 15,100,060
Deficit accumulated during the developmental stage (2,531,213) (3,652,554) (4,147,554)
Total Stockholders' Equity ..................... 96,581 462,740 11,016,740
</TABLE>
- - - - ------
(1) See "Description of Securities -- Preferred Stock."
(2) Does not include: (i) 390,000 shares of Class A Common Stock included in
the Units which may be sold pursuant to the over-allotment option or the
1,170,000 shares of Class A Common Stock issuable upon exercise of the
Class A and Class B Warrants included in or underlying such Units; (ii)
7,800,000 shares of Class A Common Stock reserved for issuance upon
exercise of the Class A and Class B Warrants; (iii) 260,000 shares of
Class A Common Stock included in the Units subject to the Unit Purchase
Option or the 780,000 shares of Class A Common Stock issuable upon
exercise of the Class A and Class B Warrants included in or underlying
such Units; (iv) 3,500,000 shares of Class A Common Stock issuable upon
exercise of the Selling Securityholder Warrants and the SonicNet
Warrants, including shares of Class A Common Stock issuable upon exercise
of the Class B Warrants underlying such warrants; (v) 300,000 shares of
Class A Common Stock issuable upon exercise of options reserved for
issuance pursuant to the Stock Option Plan; (vi) 333,333 Reserved
Incentive Shares; (vii) 350,004 shares of Class A Common Stock issuable
upon exercise of the Blair Warrants; or (viii) 1,401,722 shares of Class
A Common Stock issuable upon conversion of the Class E Shares. See
"Management -- Stock Option Plan," "Principal Stockholders -- Escrow
Arrangements," "Certain Transactions," "Description of Securities" and
"Underwriting."
(3) Includes the Escrow Shares. "See "Principal Stockholders -- Escrow
Arrangements."
(4) Does not include an aggregate of 175,006 shares of Class E Common Stock
issuable upon exercise of the Blair Warrants.
19
<PAGE>
(5) Gives pro forma effect to (i) the recognition of an approximately
$521,000 non-cash charge representing the unamortized debt discount and
debt issuance costs relating to the Bridge Financing and the repayment of
the Bridge Notes, (ii) the acquisitions of both SonicNet and Purple
Demon, (iii) the amortization of approximately $325,000 of goodwill in
connection with the acquisition of SonicNet and (iv) a charge to earnings
of approximately $275,000 for executive compensation and overhead not
reflected in SonicNet's statement of operations for the year ended
December 31, 1996. See "Use of Proceeds," "Pro Forma Condensed
Consolidated Financial Statements," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," Note J of Notes to
Paradigm Financial Statements and Note D of Notes to SonicNet Financial
Statements.
(6) Adjusted to give effect to the sale of the 2,600,000 Units offered hereby
at an offering price of $5.00 per Unit and the repayment of the Bridge
Notes.
BRIDGE FINANCING
In January 1997, the Company completed the Bridge Financing of an
aggregate of $3,300,000 principal amount of Bridge Notes and 1,650,000 Bridge
Warrants. The Company paid the placement agent a commission of $330,000 and a
non-accountable expense allowance of $99,000 in connection with the Bridge
Financing. The Bridge Notes issued in the Bridge Financing are payable,
together with accrued interest at the rate of 10% per annum, on the earlier
of January 15, 1998 or the closing of this Offering. See "Use of Proceeds."
In connection with the Bridge Financing, the Company issued an aggregate
of 1,650,000 Bridge Warrants. The Bridge Warrants entitled the holders
thereof to purchase one share of Class A Common Stock commencing in January
1998, but will be exchanged automatically on the closing of this Offering for
the Selling Securityholder Warrants, each of which will be identical to the
Class A Warrants included in the Units offered hereby. The Selling
Securityholder Securities have been registered for resale in the Registration
Statement of which this Prospectus forms a part, subject to the contractual
restriction that the Selling Securityholders have agreed not to exercise
and/or sell the Selling Securityholder Warrants for a period of one year from
the closing of this Offering. See "Concurrent Offering."
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
intend to declare or pay cash dividends on its Common Stock in the
foreseeable future. The Company expects it will retain all available earnings
to finance and expand its business. Declaration of dividends in the future
will be at the discretion of the Company's Board of Directors, which will
review its dividend policy from time to time.
20
<PAGE>
DILUTION
The following discussion and tables treat the Class A, Class B and Class E
Common Stock as a single class and allocate no value to the Warrants
contained in the Units.
Dilution represents the difference between the initial public offering
price paid by the purchasers in the Offering and the net tangible book value
per share immediately after completion of the Offering. Net tangible book
value per share represents the amount of the Company's total assets minus the
amount of its intangible assets and liabilities, divided by the number of
shares of Common Stock outstanding. The pro forma adjustment to the
historical net tangible book value gives effect to the issuance in January
1997 of the Bridge Notes, net of debt issue costs and debt discounts, the
acquisition of SonicNet and the issuance of 33,333 shares of Class A Common
Stock in February 1997 in connection with the acquisition of Purple Demon. At
December 31, 1996, the Company had a pro forma net tangible book value of
$462,740 or $.12 per share ($.23 per share if the Escrow Shares and the Class
E Shares were excluded). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." After giving retroactive
effect to the sale of 2,600,000 Units offered hereby, and the Company's
receipt of the net proceeds therefrom less underwriting discounts,
commissions and other estimated offering expenses (anticipated to aggregate
$1,891,000), the net tangible book value of the Company, as adjusted at
December 31, 1996, would have been $11,016,740, or $1.72 per share. This
would result in an immediate dilution to new investors of $3.28 per share
($2.62 per share if the Escrow Shares and the Class E Shares were excluded).
The following table illustrates the pro forma information with respect to
dilution to be incurred by new investors from the public offering price on a
per Unit basis:
Assumed public offering price per Unit ................ $5.00
Pro forma net tangible book value per share before
Offering ......................................... $ .12
Increase per share attributable to new investors .... 1.55
------
Net tangible book value per share after Offering ...... 1.72
-------
Dilution of net tangible book value to new investors
(1) ................................................. $3.28
=======
- - - - ------
(1) If the over-allotment option is exercised in full, the net tangible book
value after the Offering would be approximately $1.98 per share,
resulting in dilution to new investors in the Offering of $3.02 per
share.
The following table sets forth the difference between existing
stockholders and new investors with respect to the number of shares of Common
Stock purchased from the Company, the total consideration paid to the Company
and the average price per share paid by existing stockholders and by new
investors:
<TABLE>
<CAPTION>
Shares Purchased Cash Consideration Paid
---------------------------- ---------------------------------------------
Percent Percent Average Price
Number of Total Amount(1) of Total Per Share
-------------- ---------- ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders 3,823,424(2) 59.52% $ 3,040,400 18.95% $0.80
New Investors ........ 2,600,000 40.48 13,000,000 81.05% $5.00
-------------- ---------- ------------- ----------
6,423,424 100.00% $16,040,400 100.00%
============== ========== ============= ==========
</TABLE>
- - - - ------
(1) Prior to deduction of costs of issuance.
(2) Includes the Escrow Shares and Class E Shares. See "Principal
Stockholders -- Escrow Arrangements."
The foregoing table does not give effect to the potential issuance of the
Reserved Incentive Shares, the exercise of any outstanding warrants or
options and assumes no exercise of the over-allotment option. To the extent
such options or warrants are exercised, there will be further dilution to new
investors. See "Capitalization -- Bridge Financing," "Management -- Stock
Option Plan" and "Description of Securities."
21
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY,
SONICNET, INC. AND PURPLE DEMON, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma condensed consolidated balance sheet at December
31, 1996 and condensed consolidated statement of operations for the year
ended December 31, 1996 give effect to the acquisitions of SonicNet and
Purple Demon as if they had taken place at the beginning of the period
presented. The pro forma information is based on the historical financial
statements of the Company, SonicNet, and Purple Demon, Inc. giving effect to
the transactions under the purchase method of accounting and the assumptions
and adjustments in the accompanying notes to the pro forma financial
statements. Under purchase accounting, SonicNet and Purple Demon assets and
liabilities are required to be adjusted to their estimated fair values. The
estimated fair value adjustments have been determined by the Company based
upon available information. The Company cannot be certain that such estimated
fair values represent fair values that will ultimately be determined.
The pro forma statements have been prepared by the Company based upon the
financial statements of SonicNet and Purple Demon included elsewhere herein.
These pro forma statements may not be indicative of the results that actually
would have occurred if the combinations had been in effect on the dates
indicated or which may be obtained in the future. In the opinion of the
Company's management, all adjustments necessary to present fairly such pro
forma unaudited balance sheet and statement of operations have been made. The
pro forma financial statements should be read in conjunction with the notes
thereto and the financial statements and notes of the Company, SonicNet, and
Purple Demon included elsewhere in this Prospectus.
22
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY,
SONICNET, INC. AND PURPLE DEMON, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Paradigm Music Pro Forma
Entertainment Purple Pro Forma Consolidated
Company SonicNet, Inc. Demon, Inc. Adjustments Adjustments
-------------- -------------- ------------- -------------- --------------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash .................................... $ 125,201 $ 11,308 $ 52 $ (181,000)(A) $ 2,449,155
(10,000)(B)
2,778,594 (C)
(275,000)(D)
Accounts receivable -- net .............. 27,621 55,500 -- 83,121
Inventories ............................. 25,431 -- 30,749 -- 65,708
Other current assets .................... 40,894 12,000 14,884 -- 67,778
-------------- -------------- ------------- -------------- --------------
Total current assets ................. 219,147 78,808 45,685 2,312,594 2,665,762
Property, plant and
equipment, net ..................... 182,094 199,469 -- -- 381,563
Investments .......................... 80,000 -- -- -- 80,000
Notes receivable --
officer/stockholder ................ 50,000 -- -- -- 50,000
Deferred registration costs .......... 60,000 -- -- -- 60,000
Deferred financing fees .............. -- -- -- 521,406 (C) --
(521,406)(D)
Costs in excess of fair value of net
assets acquired .................... -- -- -- 1,112,100 (A) 1,299,739
512,574 (B)
(324,935)(D)
Other assets ......................... 36,350 9,600 -- -- 45,950
-------------- -------------- ------------- -------------- --------------
$ 627,591 $ 287,877 $ 45,685 $ 3,612,333 $ 4,573,486
============== ============== ============= ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses, and
other current liabilities ............ $ 291,010 $ 103,513 $ 148,259 $ 542,782
Bridge Notes ............................ -- -- $ 2,887,500 (C) 2,887,500
Notes payable ........................... 50,000 50,000
Unearned revenues -- Former Parent
Company, current portion ............. -- 300,519 (240,519)(A) 60,000
Unearned revenues ....................... -- 62,715 -- 62,715
Leases payable -- current ............... -- 14,294 -- 14,294
Due to officer/stockholder .............. 240,000 -- -- -- 240,000
-------------- -------------- ------------- -------------- --------------
Total current liabilities ............ 531,010 481,041 198,259 2,646,981 3,857,291
Unearned revenues _ Former Parent Company . -- 1,202,078 (962,078)(A) 240,000
Leases payable ............................ -- 13,455 -- 13,455
Stockholders' equity:
Preferred stock ......................... -- 225,000 (225,000)(A) --
Common stock -- Class A ................. 13,634 45,970 200 2,000 (A) 15,967
(45,970)(A)
(200)(B)
333 (B)
Common stock -- Class B ................. 10,000 -- -- 10,000
Common stock -- Class E ................. 12,267 -- -- 12,267
Additional paid -- in capital ........... 2,591,893 -- 723,000 (A) 4,077,060
349,667 (B)
412,500 (C)
Deficit accumulated during the
developmental stage .................. (2,531,213) (1,679,667) (152,774) 1,679,667 (A) (3,652,554)
143,246 (B)
(1,121,341)(D)
-------------- -------------- ------------- -------------- --------------
$ 627,591 $ 287,877 $ 45,685 $ 3,612,333 $ 4,573,486
============== ============== ============= ============== ==============
</TABLE>
23
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY,
SONICNET, INC. AND PURPLE DEMON, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Paradigm Music Consolidated
Entertainment Pro Forma Pro Forma
Company SonicNet, Inc. Purple Demon, Inc. Adjustments Adjustments
-------------- -------------- ------------------ --------------- --------------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales ................. $ 31,114 $ -- $ 108,835 $ -- $ 139,949
Fee income -- Former Parent
Company .................. -- 300,519 -- (240,519)(D) 60,000
Advertising, commission and
subscription income ...... -- 53,636 -- -- 53,636
Interest and other income . 59,417 4,462 -- -- 63,879
-------------- -------------- ------------------ --------------- --------------
90,531 358,617 108,835 (240,519) 317,464
Costs and expenses:
Cost of goods sold ...... 12,097 -- 87,120 -- 99,217
Advances and recording
costs ................ 628,099 -- -- -- 628,099
Selling and marketing
expenses ............. 298,641 267,218 54,591 -- 620,450
Production expenses ..... -- 1,361,904 -- -- 1,361,904
General and
administrative
expenses ............. 1,551,158 212,243 75,417 1,121,341 (D) 2,960,159
-------------- -------------- ------------------ --------------- --------------
2,489,995 1,841,365 217,128 1,121,341 5,669,829
-------------- -------------- ------------------ --------------- --------------
Net loss .................. $(2,399,464) $(1,482,748) $(108,293) $(1,361,860) $(5,352,365)
============== ============== ================== =============== ==============
Loss per share of common
stock ................... $ (2.56)
==============
Weighted average number of
shares outstanding ...... 2,090,707
==============
</TABLE>
24
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY,
SONICNET, INC. AND PURPLE DEMON, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
A. Acquisition of SonicNet, Inc.:
<S> <C>
Total consideration:
Cash payment .......................................................... $ 100,000
Issuance of 200,000 shares of Class A Common Stock ....................... 700,000
Issuance of 100,000 Class A Warrants .................................. 25,000
Investment banking and legal fees ..................................... 81,000
-------------
Total investment .................................................... 906,000
Adjusted book value of SonicNet:
Historical book value of SonicNet ..................................... (1,408,697)
Add adjustments to reflect market value (1):
Unearned revenues parent ............................................ 1,202,597
-------------
Total ............................................................... (206,100)
Excess of cost over fair value of assets acquired ........................ $ 1,112,100
=============
(1) Based on a preliminary estimate of the allocation of the purchase price in accordance
with Accounting
Principles Board Opinion No. 16.
B. Acquisition of Purple Demon, Inc.:
Issuance of 33,333 shares of Class A Common Stock ........................ $ 116,666
66,667 Shares of Class A Common Stock to be issued no later than December
31, 1997 .............................................................. 233,334
Legal fees and other expenses ............................................ 10,000
-------------
Total investment .................................................... 360,000
Historical book value of Purple Demon, Inc. which approximates fair value (152,774)
-------------
Excess of cost over fair value of assets acquired ........................ $ 512,574
=============
</TABLE>
C. To record issuance of $3,300,000 Bridge Notes and $1,650,000 Class A
Warrants subsequent to the balance sheet date and related fees and other
expenses.
D. For purposes of determining the pro forma effect of the SonicNet
acquisition on the Paradigm consolidated statement of operations, the
following pro forma adjustments have been made:
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
-----------------
<S> <C>
Elimination of portion of unearned revenue from Former Parent ............. $ 240,519
-----------------
Amortization of deferred financing fees (1 year) .......................... 521,406
Amortization of cost in excess of fair value of net assets acquired (5
years) ................................................................. 324,935
Executive compensation and overhead ....................................... 275,000
-----------------
1,121,341
-----------------
$(1,361,860)
=================
</TABLE>
25
<PAGE>
SELECTED HISTORICAL AND PRO FORMA
CONDENSED COMBINED FINANCIAL DATA
The selected financial data set forth below from inception to December 31,
1995, as of December 31, 1996 and cumulative from inception through December
31, 1996 have been derived from the audited financial statements of the
Company, which together with the notes thereto and the related report of
Janover Rubinroit, LLC, independent certified public accountants, are
included elsewhere in this Prospectus. Pro forma adjustments have been made
to the combined statement of operations data for the year ended December 31,
1996 as if, at January 1, 1996, the acquisition of both SonicNet and Purple
Demon had been consummated. Pro forma adjustments have been made to the
combined balance sheet data as at December 31, 1996 as if, at such date, the
Company had consummated the acquisition of both SonicNet and Purple Demon and
completed this Offering. The selected financial data set forth below should
be read in conjunction with the financial statements of the Company and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
The Pro Forma Condensed Combined Financial Statements of the Company have
been derived from the audited historical financial statements of the Company,
SonicNet and Purple Demon. The pro forma condensed combined statement of
operations and balance sheet data set forth below do not purport to be
indicative of the consolidated financial position or consolidated results of
operations that would have occurred had the transactions been completed on
January 1, 1996 or on December 31, 1996 or which may be expected to occur in
the future.
<TABLE>
<CAPTION>
Actual Pro Forma (2)
---------------------------------------------------- --------------
November 14,
November 14, 1995 Year 1995 Year
(inception) to Ended (inception) to Ended
December 31, December 31, December 31, December 31,
1995 1996 1996 1996
----------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales ....................... $ -- $ 31,114 $ 31,114 $ 139,949
Interest income ................. 7,268 59,417 66,685 63,879
Fee income - Former Parent
Company ........................ 60,000
Advertising, commission and
subscription income ............ 53,636
Total expenses .................. 139,017 2,489,995 2,629,012 5,669,829
----------------- -------------- -------------- --------------
Net (loss) ...................... $ (131,749) $(2,399,464) $(2,531,213) $(5,352,365)
================= ============== ============== ==============
Net (loss) per share(1) ......... $ (.06) $ (1.13) $ (1.21) $ (2.56)
================= ============== ============== ==============
Weighted average number of shares
outstanding(1) ................. 2,090,707 2,090,707 2,090,707 2,090,707
================= ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------
Pro Forma
As Adjusted
Actual Pro Forma (3) (3)(4)
------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital (deficiency) . $ (311,863) $ (1,201,057) $ 9,412,943
Total assets ................. 627,591 4,573,486 12,239,986
Total liabilities ............ 531,010 4,110,746 1,223,246
Deficit accumulated during the
developmental stage ......... (2,531,213) (3,652,554) (4,147,554)
------------- -------------- --------------
Stockholders' equity (capital
deficiency) ................. $ 96,581 $ 462,740 $11,016,740
============= ============== ==============
</TABLE>
- - - - ------
(1) The Escrow Shares and Class E Shares are excluded from the computation of
net (loss) per share. See Notes B and H of Notes to Paradigm Financial
Statements.
26
<PAGE>
(2) Assumes the acquisition of both SonicNet and Purple Demon were completed
as of the beginning of the periods presented. See "Pro Forma Condensed
Consolidated Financial Statements."
(3) Gives pro forma effect to (i) the issuance of the Bridge Notes and the
Bridge Warrants pursuant to the Bridge Financing and the corresponding
charge to operations through the date of repayment of approximately
$521,000 representing debt discount and debt issuance costs associated
with the Bridge Financing, (ii) the acquisition of SonicNet and Purple
Demon, (iii) the amortization of approximately $325,000 of goodwill in
connection with the acquisition of SonicNet and (iv) a charge to earnings
of approximately $275,000 for executive compensation and overhead not
reflected in SonicNet's statement of operations for the year ended
December 31, 1996. See "Capitalization - Bridge Financing," "Pro Forma
Condensed Consolidated Financial Statements," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," Note J of
Notes to Paradigm Financial Statements and Note D of Notes to SonicNet
Financial Statements.
(4) Adjusted to give effect to the sale of 2,600,000 Units offered hereby at
an offering price of $5.00 per Unit and the repayment of the Bridge
Notes. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note J of Notes to
Paradigm Financial Statements.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes appearing elsewhere in the Prospectus.
OVERVIEW
The Company is a development stage music entertainment company engaged
primarily in the marketing of music entertainment rights through traditional
and non-traditional marketing and distribution channels, such as Online
services, interactive media and syndicated radio and cable television.
Paradigm commenced operations in November 1995 and from inception to December
31, 1996, recognized revenues of approximately $31,000 and had an accumulated
deficit of approximately $2.5 million. In January 1997, the Company acquired
all of the outstanding capital stock of SonicNet, an operator of an Online
computer network focusing on alternative music and culture. SonicNet
commenced operations in June 1994 and, for the year ended December 31, 1996,
had recognized revenues of approximately $360,000 and had an accumulated
deficit of approximately $1.7 million. On February 14, 1997, the Company
acquired all of the outstanding capital stock of Purple Demon, which owned
and operated Big Deal. Purple Demon commenced operations on January 1, 1994
and, for the year ended December 31, 1996, recognized revenues of
approximately $109,000 and had an accumulated deficit of approximately
$143,000. The Company has continued to operate at a deficit since December
31, 1996 and it expects to continue to operate at a deficit until such time,
if ever, as operations generate sufficient revenues to cover its costs.
RESULTS OF OPERATIONS
PARADIGM
Paradigm had no revenues from operations for the period from November 14,
1995 (date of inception) through December 31, 1995. For the period from
November 14, 1995 (date of inception) through December 31, 1995, Paradigm had
a net loss of approximately $132,000 which was primarily attributable to
general and administrative expenses. Paradigm had approximately $31,000 in
revenues for the year ended December 31, 1996, all of which were earned
subsequent to October 1, 1996, and which resulted from sales of Paradigm's
music entertainment products. Paradigm had interest income of approximately
$59,000 during the year ended December 31, 1996, resulting from the
investment of funds from the 1995 Private Placement prior to their
expenditure. During the period prior to October 1, 1996, Paradigm established
operations, hired staff, signed artists, and produced records. All costs
associated with these activities were charged to operations as incurred. For
the year ended December 31, 1996, Paradigm had a net loss of approximately
$2.4 million, consisting primarily of general and administrative expenses of
approximately $1.5 million, recording advances and recording costs of
approximately $628,000, and selling expenses of approximately $299,000.
SonicNet
For the year ended December 31, 1995, SonicNet had approximately $32,000
in revenues from operations and a net loss of approximately $1.4 million,
which was primarily attributable to production expenses. SonicNet had
approximately $359,000 in revenues for the year ended December 31, 1996,
approximately $300,000 of which were advances received from its former parent
company. Such advances from its former parent company are not expected to
continue. See Note D of Notes to SonicNet Financial Statements. For the year
ended December 31, 1996, SonicNet had a net loss of approximately $1.5
million, resulting from general and administrative expenses of approximately
$212,000, production expenses of approximately $1.4 million and selling
expenses of approximately $267,000.
Purple Demon
Purple Demon had approximately $109,000 and $148,000 in revenues from
operations for the year ended December 31, 1995 and December 31, 1996,
respectively, which consisted of sales of Big Deal's prerecorded music
products. Cost of sales, which includes actual returns, reserves for
estimated future returns and estimated unrecoupable costs, such as artist
advances, were approximately $92,000 and $87,000 for the year ended
28
<PAGE>
December 31, 1995 and December 31, 1996, respectively. Selling, general and
administrative expenses were approximately $112,000 and $130,000 for the year
ended December 31, 1995 and December 31, 1996, respectively, resulting in an
overall net loss of approximately $56,000 and $108,000 for the two periods.
LIQUIDITY AND CAPITAL RESOURCES
Paradigm has experienced net losses and negative cash flow from operations
since its inception and at December 31, 1996 had a working capital deficit of
approximately $312,000. Paradigm has financed its operations primarily
through the 1995 Private Placement pursuant to which 1,000,027 shares of
Class A Common Stock were issued for net proceeds of approximately $2.5
million and a loan from one of its directors in December 1995 in the
principal amount of $250,000 which was repaid, with interest, out of the
proceeds of the Bridge Financing. In January 1997, the Company completed the
Bridge Financing of $3,300,000 principal amount of Bridge Notes and 1,650,000
common stock purchase warrants which will automatically convert into Class A
Warrants upon completion of this Offering. See "Concurrent Offering." The net
proceeds of the Bridge Financing were approximately $2,800,000 after
deducting commissions and a non-accountable expense allowance aggregating
$429,000 paid to the Underwriter and other expenses of the Bridge Financing.
Such proceeds are being used for working capital purposes, including general
and administrative expenses. The Company has allocated a portion of the
proceeds of this Offering to repay principal and accrued interest on the
Bridge Notes. See "Use of Proceeds."
The Company had no material capital commitments at December 31, 1996.
However, the Company is a party to agreements with its Chief Executive
Officer which provides aggregate minimum annual compensation of $375,000 for
calendar year 1997 and 1998 and is a party to agreements with other employees
and consultants which provide for aggregate minimum annual compensation
payments of $680,000 during calendar year 1997. The Company is also a party
to two office leases expiring on May 21, 2001, with total future minimum
lease payments of approximately $586,000. See "Management" and Note G of
Notes to Paradigm Financial Statements.
Pursuant to the Stock Purchase Agreement dated January 9, 1997 (the
"SonicNet Agreement") between Paradigm, Prodigy Services Corporation
("Prodigy") and Sunshine Interactive Network, Inc. ("Sunshine"), the Company
is obligated to provide an aggregate of $2,000,000 in working capital to
SonicNet over the next twelve months, subject to certain conditions, in order
to enable SonicNet to continue operations in the ordinary course. Such
expenditure is expected to include approximately $270,000 in executive
salaries and $100,000 in lease payments. See Note J of Notes to Paradigm
Financial Statements and Notes to SonicNet Financial Statements.
Purple Demon borrowed $50,000 from an unaffiliated investor on July 1,
1996 pursuant to a note payable on or before July 1, 1997 at an interest rate
of 6% per annum, which the Company anticipates will be repaid out of the
proceeds from this Offering. See "Use of Proceeds" and Note D of Notes to
Purple Demon Financial Statements. In addition, as of December 31, 1996,
Purple Demon had approximately $81,000 in recoupable advances which will be
deducted from future sales revenues payable by its distributor, Caroline. See
Note C of Notes to Purple Demon Financial Statements.
At December 31, 1996 Paradigm had available net operating loss
carryforwards to reduce future taxable income of approximately $2,480,000,
which being to expire in 2010. In addition, the Company had net operating
loss carry-forwards available from SonicNet and Purple Demon of approximately
$2,056,000 and $153,000, respectively, which begin to expire in 2010. The
Company's ability to utilize net operating loss carryforwards from SonicNet
and Purple Demon will be subject to annual limitations pursuant to Section
382 of the Internal Revenue Code if future changes in ownership occur,
including an annual limitation of not more than approximately $144,000 and
$11,000, respectively, resulting from the change in ownership arising from
the Offering. See Note F of Notes to Paradigm Financial Statements and Note E
of Notes to SonicNet Financial Statements.
The Company expects to incur a charge to income of approximately $521,000
upon repayment of the Bridge Notes, representing the unamortized portion of
the debt discount, interest and deferred financing costs of the Bridge
Financing. The charge to income will be recorded in the second quarter of
1997.
The Company believes that the net proceeds from this Offering will be
sufficient to finance the Company's working capital requirements for at least
the 24 month period following completion of this Offering. See "Use
29
<PAGE>
of Proceeds." There can be no assurance that the Company will generate
sufficient revenues to fund its operations after such period. There can be no
assurance that any additional financing will be available if needed, or, if
available, will be on terms acceptable to the Company.
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROWED SHARES OR CONVERSION OF
CLASS E SHARES
The Commission has adopted a position with respect to arrangements such as
the one entered into among the Company and its stockholders who are officers,
directors, employees or consultants of the Company with respect to the Escrow
Shares and the Class E Shares. In the event the Company attains any of the
earnings thresholds or the Company's Class A Common Stock meets certain
minimum bid prices required for the release of the Escrow Shares or
conversion of the Class E Shares, such release or conversion will be deemed
additional compensation expense of the Company. Accordingly, the Company
will, in the event of the release of shares from escrow or conversion of the
Class E Shares, recognize during the periods in which the earnings thresholds
are met or are probable of being met or such minimum bid prices attained,
what will likely be one or more substantial charges which would have the
effect of substantially increasing the Company's reportable loss or reducing
or eliminating reportable earnings, if any, at such time. Although the amount
of compensation expense recognized by the Company will not affect the
Company's total stockholders' equity or its working capital, it may have a
negative effect on the market price of the Company's securities. See "Risk
Factors -- Charge to Income in the Event of Release of Escrow Shares or
Conversion of Class E Shares" and Note H of Notes to Paradigm Financial
Statements.
30
<PAGE>
BUSINESS
GENERAL
The Company is a development stage entertainment company with a limited
operating history, having commenced operations in November 1995. The
Company's objective is to become a broad-based music entertainment company
producing and distributing prerecorded music products of both new artists and
catalog reissues (archival recordings) of established recording artists,
recruiting and developing new recording artists and developing
non-traditional syndicated music entertainment programming, such as original
content interactive programming on the Internet. The Company intends to
utilize traditional and non-traditional marketing and distribution channels,
such as Online services, interactive media and syndicated radio and cable
television, in order to cost effectively exploit the music entertainment
rights which it may develop or acquire, and which could be made available to
third parties on a fee basis. The Company's business plan was developed by
the Company's Chairman of the Board of Directors, President and Chief
Executive Officer, Thomas McPartland. See "Management." To date, the
Company's primary focus has been on the development of Paradigm Associated
Labels and Archive Recordings, the creation of "All Access," a syndicated
radio show, its agreement with Microsoft to provide 13 weeks of programming
for MSN's "On Air" Online show and the development of a vertically-integrated
Online service that would be available to promote the Company's music
entertainment products and those of third parties on a fee basis through the
acquisition of SonicNet and the proposed acquisition of the "Addicted to
Noise" website. Since inception, revenue from operations have been
insignificant. There can be no assurance that any or all of the Company's
business plan will be successfully implemented or that the Company will
generate sufficient revenues from operations to meet the requirements of its
business.
The Company currently operates through five separate divisions: Paradigm
Associated Labels, Archive Recordings, Paradigm Music Productions, New Media
and New Business Development/International. The Company intends to expand its
operations through acquisition of complementary businesses. In January 1997,
the Company acquired 100% of the capital stock of SonicNet, an Online music
marketing and program provider and, in February 1997, entered into a letter
of intent to acquire the "Addicted to Noise" website. There can be no
assurance that the Company will successfully complete any additional
acquisitions or that, if completed successfully, any acquisitions will result
in revenues to the Company. See "Risk Factors."
INDUSTRY OVERVIEW
According to the Recording Industry Association of America (the "RIAA"), a
trade group whose members manufacture most of the music recordings produced
in the United States, industry-wide retail prerecorded music sales (which
includes compact discs and other digital formats, analog cassettes, music
videos, singles and full length vinyl records) in the United States rose to
$12.5 billion in 1996, a 1.7% increase over 1995 sales. Also according to the
RIAA, industry-wide retail prerecorded music sales in the United States were
just over $12 billion in 1994, an increase of approximately 20% from 1993
sales. Although consumers continue to buy prerecorded music in record
numbers, the size of the increase in annual domestic shipments and sales of
prerecorded music has declined since 1994. The Company believes, however,
that such trends in the prerecorded music industry are cyclical and that
overall sales will continue to increase.
The vast majority of the music listening audience is comprised primarily
of two age groups: 15-24 and 25-49. For most individuals in these groups,
popular music has been, and remains, a major force in their lives. Although
teenagers and young adults purchase the majority of prerecorded music, the
RIAA estimates that their numbers have declined in recent years and that the
over-35 market has been increasing. This increase has been attributed to the
continuing trend by record labels to release product with broad-based appeal
that is able to attract occasional buyers. The Company intends to capitalize
on this trend in music by developing artists that will appeal to the
occasional buyers in selected markets.
There are currently six Major Labels which dominate the recording industry
along with their subsidiary labels: Time/Warner; Sony; BMG; Polygram;
Thorn-EMI; and Universal. The six Major Labels and their subsidiaries supply
approximately 80% of prerecorded music to the United States marketplace.
Independent Labels supply the remaining products to the marketplace, but the
number of Independent Labels is constantly changing due to buy-outs by Major
Labels, consolidations and business failures. Although Independent Labels
individu-
31
<PAGE>
ally represent a small percentage of the market for prerecorded music, in
1996 sales of albums (both new and catalog) by Independent Labels as a group
constituted the largest percentage market share in the prerecorded music
market. During 1995 and 1996, albums released by Independent Labels as a
group constituted 20.6% and 21.2%, respectively, of total United States album
sales. The Company believes that new artists and new trends in music are more
likely to come from an Independent Label as they can more easily react and
adapt to shifting consumer tastes.
BUSINESS STRATEGY
The Company's overall business strategy is to develop and expand each of
the Company's operating divisions which are specifically devoted to
developing and enhancing the music entertainment products and services which
the Company may offer to its customers and third party Independent Labels.
See " -- The Company's Divisions." The Company's objective is to develop each
of its operating divisions into profit centers on a "stand- alone" basis. The
Company intends to develop non-traditional marketing and promotional channels
to market and promote the Company's music entertainment products and third
party music entertainment products on a fee basis through the creation of a
vertically-integrated Online service. In furtherance of this objective, the
Company acquired SonicNet and has entered into a letter of intent to acquire
the ATN website. The Company also intends, within the next 12-24 months, to
establish its own Online distribution services with direct selling
capabilities.
A major component of the Company's strategy is to create a consortium of
Independent Labels which would develop new artists through the release of
low-cost recordings, thereby minimizing the risk of investment and maximizing
potential return. To date, the Company has devoted substantial resources to
develop and grow Paradigm Associated Labels through the acquisition of
certain Independent Labels. The Company has acquired Big Deal and a minority
interest in Wingnut, entered into a license agreement with Evil Teen and
developed Paradigm Records and Mutant. The Company may either offer
distribution services, development funding and non- traditional marketing and
distribution resources to a select group of Independent Labels in exchange
for acquiring rights to music entertainment product already owned by such
Independent Labels and access to other resources or acquire equity interests
in a small number of Independent Labels. There can be no assurance, however,
that the Company will be successful in entering into any agreements with any
other Independent Labels, that any Independent Labels acquired by the Company
will be profitable or that the agreements currently in place will result in
any revenues to the Company. The Company's strategy is also to generate
revenues from sales of catalog reissues, without the Company making a
substantial investment in acquiring rights to such archival recordings,
through its Archive division. Through Paradigm Music Productions, the
Company's strategy is to generate advertising and other revenue opportunities
from the production of original content music entertainment programs, as well
as to utilize such programs as marketing and promotional tools for PAL's
proprietary prerecorded music products. Through its New Media Division, the
Company intends to create a vertically-integrated Online marketing and
promotion tool for music entertainment products in order to generate revenue
from advertising sales, syndication of proprietary programming content and
the direct marketing of prerecorded music products and related merchandise
either being exploited by the Company or third parties.
Another major portion of the Company's strategy is to expand its
operations through acquisition of complementary businesses. In addition to
Independent Labels, the Company will focus its acquisition activities on
small complementary businesses such as software and on-line service providers
and small independent companies in the music and entertainment industry.
Further, the Company will focus on acquiring companies which it believes can
be integrated into the Company's division structure. There can be no
assurance that the Company's acquisition program will be successful, that the
Company will successfully complete any additional acquisitions or that, if
completed successfully, any companies acquired will be profitable, or will
result in revenues to the Company. Through this strategy, the Company hopes
to expand the range of music entertainment products and services it provides
and the size of its business.
THE COMPANY'S DIVISIONS
Paradigm Associated Labels ("PAL"). PAL's primary focus is the development
of new artist releases and related artist development, encompassing modern
rock, alternative, power-pop, dance and techno artists. PAL's
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strategy is to develop and acquire a core group of Independent Labels to
which it will provide support services in order to maximize the opportunities
for discovering (and minimize the risk associated with developing) future
successful recording artists. PAL currently has three wholly-owned
Independent Labels: Paradigm Records, Big Deal and Mutant, each of which
maintain a separate roster of artists with a separate and distinct repertoire
focus. In February 1997, the Company acquired all of the outstanding shares
of Purple Demon, the Company that owned and operated Big Deal, in exchange
for the issuance of an aggregate of 100,000 shares of Class A Common Stock.
The Company has agreed to register these shares under certain circumstances.
See "Description of Securities -- Registration Rights." The Company has
acquired a 25% interest in Wingnut, which specializes in punk and hardcore
music, and has an option to acquire an additional 25% interest in Wingnut
which if not exercised, grants the other shareholder of Wingnut the right to
purchase all of the Company's interest in Wingnut. PAL also has a one-year
exclusive production agreement with Evil Teen, a New York based Independent
Label which specializes in alternative rock artist development. PAL is
currently negotiating with Evil Teen to extend its current agreement.
Releases by Paradigm Records and Evil Teen are distributed by ADA and
releases by Big Deal are distributed by Caroline. The Company intends to
enter into recording agreements with additional artists and acquire interests
in additional Independent Labels, subject to available financing and revenues
from operations. Through Paradigm Records, PAL released two albums in the
fourth quarter of 1996 by two artists, 4th Floor and Xanax-25. PAL also
released two albums in the fourth quarter of 1996 by Pen Pal and Benna Cohen,
artists that have recording agreements with Evil Teen.
The Company has been initially recruiting new and emerging artists from
the alternative rock/pop genre. The Company anticipates that PAL will
diversify into the electronic music genre during 1997. In addition, the
Company may purchase outright or license a finished single or album by an
artist in these or other genres. Once a new or emerging artist is selected,
the Company expects to enter into a contract with the artist to either
produce "demonstration" recordings to permit the Company to determine the
commercial viability of a new artist or record one or two singles or an album
for commercial release with options to record additional albums, at the
Company's discretion, at an agreed upon recording budget per recording or
album. The recording contract will fix advances and royalties to the artist
for each album produced under the contract. In accordance with industry
custom, advances for albums after the initial release would be likely to be
based on a percentage of the artist's net royalties from prior albums, less
the recording budget. Should one of the Company's performing artists achieve
significant sales for its most recently-released album, it is likely that the
Company would renegotiate that artist's contract, granting a higher royalty
rate in return for the artist's agreement to an extension of the recording
contact for additional albums.
It is possible that the Company will be able to sign an established artist
to a recording contract, although the Company is not currently seeking to
enter into a recording contract with any established artists. There can be no
assurance, however, that any such contract could be consummated. In the event
that an established artist enters into a recording contract with the Company,
the Company's operating expenses would most likely be higher than those
currently contemplated. This could result in an exhaustion of the Company's
financing earlier than anticipated, unless offset or exceeded by increased
sales of the established artist's products.
If the Company develops commercially successful recording artists, there
can be no assurance that the Company will be able to maintain its
relationships with such artists even if it has entered into exclusive
recording contracts with them. Furthermore, recording artists occasionally
request releases from their exclusive recording agreement. Among the reasons
that may cause an artist to engage in so-called "label jumping" are
expectations of greater income, advances or promotional support by a
competing label. There can be no assurance that any given artist developed by
the Company will not determine to request a release from his or her agreement
with the Company. Because of the highly personal and creative nature of the
artist's contractual obligations to the Company, it is not feasible to force
an unwilling artist to perform the terms of his or her contract with the
Company. If the Company does release a "label jumping" artist from his or her
contract, it may be able to obtain an "override royalty" as consideration for
the release. Override royalties are customarily paid by the released artist's
new recording company and are based on a percentage of the suggested retail
selling price or wholesale price (depending on the particular label in
question), subject to certain deductions. Such royalties are payable with
respect to a negotiated number of the artist's albums after release from his
or her existing contract.
The Company will seek to contract with its artists on an exclusive basis
for the marketing of their recordings in return for a percentage royalty on
the retail selling price of the recording. The Company will generally
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seek to obtain rights on a worldwide basis. A typical contract for an artist
may provide for a number of albums to be delivered, with advances against
royalties being paid upon delivery of each album, although advances are often
made prior to recording. The Company will generally have an option to take
each album that the artist is contracted to deliver, exercisable within an
agreed period of time, usually a few months following delivery of the
previous album. Normally, if an option is not exercised, the artist has no
obligation to deliver additional albums. Provisions in contracts with
established artists vary considerably and may, for example, require the
Company to release a fixed number of albums and/or contain an option
exercisable by the Company covering more than one album. The Company will
seek to obtain rights to exploit product delivered by the artists for the
life of the product's copyright. Under the contracts, advances are normally
recoupable against royalties payable to the artist. The Company will seek to
recoup a portion of certain marketing and tour support costs, if any, against
artist royalties.
Archive Recordings ("Archive"). This division is focusing on developing a
catalog of classic rock archival recordings to which the Company will have
the exclusive right to own, control or exploit. To date, Archive has acquired
the rights to approximately 2,000 master recordings by way of catalog
acquisitions and related license agreements and has released a live recording
by "Deep Purple" through the Internet. Utilizing the proceeds from this
Offering, the Company intends to acquire rights to additional master
recordings and expects to release between 20 and 30 albums on Archive in
1997, which it anticipates will be distributed by Navarre. Archive will also
attempt to enter into license agreements with the Major Labels in order to
more fully exploit its catalog.
Paradigm Music Productions. To date, the activities of this division have
consisted of two distinct programming initiatives. The first is a joint
venture with Media America pursuant to which the Company has been developing,
producing and distributing a new artist, live concert series called "All
Access" for commercial radio syndication. In addition, the Company has
entered into an agreement with Microsoft pursuant to which the Company is the
exclusive music program provider for OnAir, a show to be broadcast on MSN.
The Company's agreement with Microsoft provides for the Company to book
artists, record them live in concert and obtain radio clearances on college
radio stations in conjunction with Online programming for 13 weeks of OnAir,
pursuant to an agreed upon budget. Artists featured on OnAir, which commenced
broadcasting on February 23, 1997, will be interviewed live Online during the
time of the radio broadcast. Under the terms of the agreement, Microsoft will
fund production costs for 13 weeks of programming and the Company will be
required to secure radio clearances with a minimum number of radio stations.
Microsoft may to terminate the agreement at any time, subject to its
obligation to pay the Company for production costs already incurred. There
can be no assurance that Microsoft will not terminate such agreement early or
that Microsoft will continue to utilize the Company's services in connection
with OnAir after the initial 13-week run.
New Media. This division will focus on alternative distribution channels
such as the Internet for Company and third party music entertainment
products. In January 1997, the Company acquired all of the outstanding shares
of SonicNet, an Online music entertainment network, from Prodigy and
Sunshine, in exchange for $100,000 in cash and the issuance of an aggregate
of 200,000 shares of Class A Common Stock and 100,000 Class A Warrants to
Prodigy and Sunshine. The Company has agreed to register these shares under
certain circumstances. See "Description of Securities -- Registration
Rights." The Company has agreed to provide an aggregate of $2,000,000 in
working capital to SonicNet over the next 12 months, subject to certain
conditions, in order to enable SonicNet to continue operations in the
ordinary course. The emphasis of SonicNet's website is to inform consumers of
new artists and their performances and provide interviews and chats with
artists, product samples and reviews and the option to purchase related
artist music products and merchandise. SonicNet currently utilizes CDNow, a
third-party Online distribution service, to effectuate sales of artist music
products and merchandise. The Company intends to develop its own Online
direct selling capabilities within the next 12-24 months. In February 1997,
the Company entered into a Letter of Intent to acquire the ATN website in
exchange for up to 75,000 shares of the Company's Class A Common Stock and
the obligation to repay up to $220,000 in past due payables. If acquired, the
Company will integrate the ATN website into the operations of SonicNet. There
can be no assurance that such acquisition will be completed.
New Business Development/International. Pursuant to a binding letter of
intent with SuperSound, the Company and SuperSound have agreed to organize a
partnership to develop and market music in the PRC, in exchange for which the
Company has contributed $150,000 and its rights to exploit recordings by "New
Reli-
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gion," a United States artist, in the PRC. SuperSound has advised the Company
that it has acquired rights to PRC recording artist Helen Hong, which rights
SuperSound will contribute to the partnership. There are substantial risks
involved in conducting business in the PRC, including internal political
risks. See "Risk Factors."
MARKETING AND PROMOTION
The traditional and most effective means of promoting recorded music is by
radio air play. Obtaining radio air play for a new release is an extremely
competitive process. The trend by radio stations to focus more on particular
music formats has made it easier for independent producers to target those
stations most likely to air a specific recording. Independent regional
promoters are often hired to gain air play and, in certain markets, they are
quite effective in gaining air play for a release. Public and college radio
stations are useful venues for lesser known artists. Music videos have become
a vital means of promoting artists and records.
Songs that are aired on a major radio station are chosen by the program
director, often in conjunction with a format consultant. Once a recording is
aired, the amount of repeat play it receives depends on listener requests and
feedback, as well as actual sales data. Since listener response and sales
depend in large measure on how often a release is aired, building a
commercial hit depends on an ongoing cycle of air play and sales. Nurturing
this cycle requires constant marketing attention and careful coordination
with advertising, concert schedules and other promotional activities. Other
promotional tools include print advertising, retail promotions and concert
tours. Additionally, getting music video airplay on MTV or VH-1, or other
video stations or programs, or on their niche oriented programs, has
traditionally been and may continue to be essential to the success of certain
recording artists and their records. The Company does not intend, however, to
focus on music videos as a promotional tool due to their high cost of
production.
In addition to traditional marketing and promotion activities, the Company
intends to utilize emerging technologies and non-traditional marketing,
promotional and distribution channels to fully exploit its musical
entertainment products, such as Online programs and sales, interactive
computer applications, interactive and/or enhanced format CD electronic
press-kits, interactive music magazines and advertisements on enhanced format
CD and other formats. The Company intends to utilize such non-traditional
marketing, promotional and distribution channels in order to position itself
to exploit developing trends as they are happening in the marketplace and
consumer interaction from the foregoing media will permit the Company to
develop a sales and marketing database and compatible product lines. In
furtherance of this objective, the Company acquired SonicNet and has entered
into a letter of intent to acquire the ATN website. The Company also intends,
within the next 12-24 months, to establish its own Online distribution
services with direct selling capabilities. See "-- The Company's Divisions."
Any development of these media will be dependent on the acceptability of
these formats for music or combined music and video entertainment, as well as
technological changes which may develop.
The key to finding an audience for new artists is to properly coordinate
all these promotional activities to maximize awareness and exposure. The
Company will, where possible, use its in-house expertise to direct or assist
with the promotional activities with respect to its artists. By coordinating
or providing assistance with these activities, to the extent practicable,
in-house, costs will be further kept under control. The Company currently has
seven employees devoted to sales and marketing activities.
MANUFACTURING AND DISTRIBUTION
The Company currently has no manufacturing or distribution capabilities
other than through its distribution or licensing arrangements. Manufacturing
of the Company's recorded music is done by independent third-parties on a
purchase-order basis. The Company believes that there are a sufficient number
of manufacturing sources available and chooses its manufacturers based on
quality, service and price.
Historically, the strategy of the Major Labels has been to control
distribution channels. Nevertheless, the market shares of independent
distributors, rack jobbers (independent contractors that manage music
department of department stores such as K-Mart and Wal-Mart), mail order
companies, touch-tone 800 number sales, Internet sales, and television sales
have all increased, and this growth, fueled by ongoing changes in the
marketplace, is expected by the Company to continue. Another trend is the
consolidation of retail outlets into large retail chains, however,
specialized distributors can be utilized to sell prerecorded music products
to large retail chains.
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The Company expects to take advantage of traditional distribution channels,
such as specialized distributors, but also expects to take advantage of
interactive, in-home marketing through the Internet, telephone, satellite
relays, or other evolving technologies that the Company believes could have a
significant effect on distribution in the future. However, there is little
agreement as to precisely what this effect will be. The Company believes that
control and ownership of the creative products will be a key factor in the
new market where distribution can be accomplished more quickly and
inexpensively.
Typical distribution for an Independent Label is through either a Major
Label-owned branch system or through independent distributors. The Major
Label-owned distribution companies offer national distribution, consistent
market visibility, accounts receivable and collection administration.
Independent distributors offer similar services, but normally on a much
smaller scale.
The Company currently distributes records released by artists signed
directly to the Company and to Evil Teen through ADA, an independent
distributor owned by Time/Warner, records released by Archive are being
distributed through Navarre and records released by Big Deal are manufactured
and distributed by Caroline. The Company has no distribution facility for its
record labels and, accordingly, is dependent upon maintaining its existing
relationship with its distributors and/or establish and maintaining new
distribution relationships with comparable distributors. There can be no
assurance that the Company can maintain its relationship with Navarre and
Caroline or enter into binding agreements with Navarre or any other
distributors. The termination of such relationships would, absent
establishing a substitute relationship with one or more of the few other
major distributors in the industry, have a material adverse effect on the
Company.
The Company may in the future enter into agreements with one or more
foreign distributors for distribution of its albums outside of the United
States. Such agreements will not be entered into unless the Company believes
that one or more of its albums can be sold profitably in foreign markets or
that such distribution strategically positions the Company for future sales.
Other than the joint-venture with SuperSound, the Company has no present
plans with respect to foreign sales and there is no assurance that the
Company will develop or pursue any such plans in the future.
COPYRIGHTS AND INTELLECTUAL PROPERTY
The Company's prerecorded music business, like that of other companies
involved in prerecorded music, will primarily rest on ownership or control
and exploitation of musical works and sound recordings. The Company's music
entertainment products, including its commercial music, are and will be
protected under applicable domestic and international copyright laws.
Although circumstances vary from case to case, rights and royalties
relating to a particular recording typically operate as follows: When a
recording is made, copyright in that recording vests either in the recording
artists and/or their production companies (and is licensed to the recording
company) or in the record company itself, depending on the terms of the
agreement between them. Similarly, when a musical composition is written,
copyright in the composition vests either in the writer (and is licensed to a
third-party music publishing company) or in a third-party music publishing
company or in a publishing company owned and controlled by the artist. A
public performance of a record will result in money being paid to the writer
and publisher. The rights to reproduce songs on soundcarriers (i.e.,
phonograph records) are obtained by record companies or publishers from the
writer or the publishing company entitled to license such compositions. The
manufacture and sale of a soundcarrier results in mechanical royalties being
payable by the record company to the publisher of the composition, who then
remits a portion of such royalties to the writer or writers of the
composition at previously agreed or statutory rate for the use of the
composition and by the record company to the recording artists for the
manufacture and distribution of the recording. The Company operates in an
industry in which revenues are adversely affected by the unauthorized
reproduction of recordings for commercial sale, commonly referred to as
"piracy," and by home taping for personal use.
Potential publishing revenues may be derived from the Company's ownership
interest in musical compositions, written in whole or in part by the
Company's recording artists or by writers who are signed exclusively to the
Company. The Company anticipates securing a partial ownership position in the
copyright to compositions written by its recording artists or signed writers
where such rights are available and have not been previ-
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ously sold or assigned. Performance rights in compositions owned by the
Company are enforced under agreements the Company and the writer have with
performing rights organizations (American Society of Composers, Authors, and
Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI"), and SESAC, Inc.), which
licenses the public performance of a composition to commercial users of music
such as radio and television broadcasters, restaurants, retailers, etc., and
disburse collected fees based upon the frequency and type of public
performances they identify. Generally, revenues from publishing are generated
in the form of: (1) mechanical royalties, paid by the record company to the
publisher for the mechanical duplication of a particular copyrighted
composition (as distinct from the copying of the artist's performance of that
composition); (2) performance royalties, collected and paid by performing
rights entities such as ASCAP and BMI for the actual public performance of
the composition as represented by radio airplay, Musak, or as a theme or
jingle broadcast in synchronization with a visual image via television; (3)
sub-publishing revenues derived from copyright earnings outside of the United
States and Canada from collection agents for the Company located outside of
the United States and Canada; and (4) licensing fees derived from printed
sheet music, uses in synchronization with images as in video or film scores,
computer games and other software applications, and any other use involving
the composition.
Typically, music publishing agreements with songwriters are "exclusive,"
permitting the Company ownership of the copyrights in all compositions
created by the songwriter, in whole or in part, during the term of the
agreement usually in exchange for the payment of an advance to the songwriter
and, after the recoupment of such advance, the payment of royalties on sales
of soundcarriers embodying any such compositions. In some cases, the Company
may seek to acquire a catalog of compositions previously created by a
songwriter or group of songwriters as a music publishing asset. The can be no
assurance, however, that the Company will be successful in entering into
agreements with any songwriters or acquiring any catalogs or that any
agreements entered into will result in any revenue to the Company.
The Company is engaged in licensing activities involving both the
acquisition of rights to certain master recordings through its Archive
division and compositions for its own projects and the licensing and the
granting of rights to third parties in the master recordings and compositions
it owns and/or controls. The Company, in its capacity as publisher, typically
obtains an ownership or co-ownership interest in all newly-recorded
compositions appearing on albums released by the Company that are written by
the artists performing the compositions. The rights to use all other
compositions appearing on albums or audiovisual works are obtained from the
non-affiliated third-party publishers of those compositions under agreements
that, for albums, are called mechanical licenses, which are often issued
through a central agency, and for audiovisual works are called
synchronization licenses. The mechanical license fee is customarily indexed
to a statutory rate established under the United States Copyright Act, which
currently is $.0695 for a performance of up to five minutes and higher, if
agreed to, or as provided for by statute, for performances of greater length.
Fees for synchronization licenses are typically negotiated on a case-by-case
basis. The Company will issue its own mechanical and synchronization licenses
to third parties when compositions from its own catalog are used by others.
The availability and terms of such cross-licensing arrangements are generally
negotiated on a case-by-case basis.
Should such industry practices change, there can be no assurance that the
Company will be able to obtain licenses from third parties on terms
satisfactory to the Company, and the Company's business, particularly with
respect to compilation products, could be materially adversely affected.
The Company has applied for trademark registration for both Paradigm Music
Entertainment Company and Archive Recordings from the United States Patent
and Trademark Office. Although the Company intends to file trademark
applications for certain of its other trademarks and tradenames, the Company
has not yet obtained a federal registration of any of its trademarks in the
United States and no assurance can be given that such registration will be
granted.
COMPETITION
Although the Company intends to position itself between the Major Labels
and Independent Labels, the Company experiences substantial competition from
both sectors. The music industry is currently dominated by the Major Labels
and their respective subsidiary labels. These competitors are
well-established and have significantly greater financial and other resources
than the Company. They have all been in existence for a substantially longer
period of time than the Company, and enjoy a certain name recognition that
will only accrue to the
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Company over time, if at all. The Company will also be competing with other
significant Independent Labels. These Independent Labels have also been in
existence longer than the Company. Established labels, independent or
otherwise, may offer artists a more established alternative to the Company.
In addition, the Company will experience competition from music publishing
companies, and various media companies, both emerging and established,
seeking to develop interactive and enhanced format music entertainment
products. Due to the Company's relative lack of experience in the business,
its limited financial and other resources and other factors relating to
competition from well-established companies, the Company may not be able to
compete successfully, if at all, with other competitors in the field. The
Company's ability to compete successfully will be largely dependent upon its
ability to build upon and maintain its reputation for quality music products
and to introduce music products which are accepted by consumers.
EMPLOYEES
At March 14, 1997, the Company had 31 full-time employees and 4
consultants. The Company utilizes the services of additional consultants on a
temporary, as-needed basis. None of the Company's employees is currently
covered by a collective bargaining agreement. The Company considers its
employee relations to be good.
PROPERTIES
The Company's executive offices are located in an aggregate of
approximately 7,500 square feet of space in New York, New York pursuant to
two leases which expire May 31, 2001 and provide for a minimum aggregate
annual rental of $142,000 in 1997. The Company believes that its current
facilities will be sufficient for the foreseeable future.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, along with their
respective ages and positions with the Company, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thomas McPartland ...... 38 Chairman of the Board, President and Chief Executive Officer
Louis A. Falcigno(1) ... 59 Vice President and Director
Scott R. Grodnick(1)(2) . 47 Senior Vice President, Chief Financial Officer and Director
Robert B. Meyrowitz(1) . 54 Director and Secretary
Gilbert N. Segel(1)(2) . 65 Director
Frank Barsalona(2) ..... 59 Director
</TABLE>
- - - - ------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Thomas McPartland has served as Chairman of the Board, President and Chief
Executive Officer of the Company since its inception and has had over ten
years experience in the recording and music publishing industries. Prior to
co-founding the Company, from April 1995 he served as Executive Vice
President and a director for the Zomba Group of Companies, North America, one
of the largest privately held worldwide music entertainment companies, having
primary management oversight for, among other things, all record label and
music publishing operations, new business development activity and
acquisitions. Prior thereto, from January 1994 to April 1995, Mr. McPartland
was Senior Vice President, Worldwide Business Development, for the
Bertelsmann Entertainment Group, where he was involved in, among other
things, creating an interactive music television network concept. From
October 1992 to January 1994, Mr. McPartland served as Senior Vice President
of BMG Ventures, responsible for management oversight of a portfolio of small
to mid-sized entertainment companies, including record labels and
distribution companies, acquired by BMG. From October 1985 to October 1992,
Mr. McPartland held positions of increasing responsibility at BMG Music,
culminating with his appointment as Senior Vice President and Deputy General
Counsel in April 1992.
Louis A. Falcigno has been Vice President and a Director of the Company
since its inception. Mr. Falcigno has been the President and sole stockholder
of Momentum Enterprises, a company engaged in the production and promotion of
telecommunication products and events, since 1975. Mr. Falcigno has promoted
over 150 sports and theatrical entertainment shows across the United States,
many of which have been distributed on local, regional and network cable,
closed circuit and network television and pay-per-view television. In
February 1993, Mr. Falcigno produced the first professional championship
boxing matches held in Beijing, China. In 1991, Mr. Falcigno was selected by
Pay Per View Magazine as one of the "12 most influential people in pay per
view." In 1989, Mr. Falcigno entered into an exclusive arrangement with the
Soviet Government to bring Soviet boxers to the United Sates for the first
time to fight professionally. As an entrepreneur in an expanding closed
circuit television industry, Mr. Falcigno has served a diversified group of
100 non-sports related clients. Mr. Falcigno will devote approximately 75% of
his business time to the affairs of the Company.
Scott R. Grodnick joined the Company in January 1996, was appointed Senior
Vice President and Chief Financial Officer of the Company in March 1996 and
was appointed a Director of the Company in February 1997. Prior thereto and
from July 1994, he served as a consultant to a various insurance companies,
including President of First Variable Life Insurance Company from July 1994
to March 1995. From April 1992 until April 1993, he served as President and
Chief Executive Officer of the Integrity Life Insurance Companies
("Integrity"). Prior thereto, and from November 1983, Mr. Grodnick was with
The Equitable, where he served as Vice President and Chief Financial Officer
of Equitable Variable Life Insurance Company from January 1984 to September
1988 and, from 1984 until April 1993, Vice President and Chief Financial
Officer of Integrity.
Robert B. Meyrowitz has been a Director and Secretary of the Company since
its inception. Mr. Meyrowitz is the President and Chief Executive Officer of
Semaphore Entertainment Group, a music and pay-per-view pro-
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gramming production company he founded in 1992, which is the producer of the
"Ultimate Fighting Championship," a series of pay-per-view fighting
competitions. Mr. Meyrowitz has had more than 20 years of experience in both
radio and television. In recent years, he created the Thursday Night Concert
Series, the first weekly concert series produced expressly for pay-per-view,
which has featured such artists as New Kids on the Block and the Who. In the
early 1970's, Mr. Meyrowitz founded DIR Broadcasting and created the King
Biscuit Flower Hour, the longest running nationally syndicated radio series.
The television division of DIR produced numerous music and comedy specials,
including two specials for HBO with Whoopi Goldberg, two specials
spotlighting Bette Midler and an ACE-nominated special for Lifetime
Television featuring Tom and Roseanne Arnold.
Gilbert N. Segel, a director of the Company, is an attorney and certified
public accountant and is currently Chairman and President of Gilbert & Segel
Accountancy Inc., an owner of Financial Equities, Inc., a company with a
small interest in Semaphore Entertainment Group, a pay-per-view company and a
Director of Spatializer Audio Laboratories, Inc., a Nasdaq listed company.
From 1966 to 1985, Mr. Segel was Chairman and Chief Operating Officer of
Segel Rubinstein & Goldman Inc., a business management firm that represented
many musical artists, film stars and corporate entertainment entrepreneurs
and executives. Mr. Segel also served as a director and officer of Vanguard
Electronics Company, a manufacturer of inductive electronic components. Mr.
Segel also currently serves on the Board of Directors of several national
charitable institutions.
Frank Barsalona, a director of the Company, founded the Premier Talent
Agency, a talent and booking agency, over thirty years ago and has served as
its President and Chief Executive Officer since that time. Mr. Barsalona has
been involved with the development and representation of such artists as the
Who, Led Zeppelin, Bob Dylan, Bruce Springsteen, Tom Petty, Bon Jovi and U2.
Mr. Barsalona is also a partner in Precision Media, a company that owns and
operates four radio stations in New England. Mr. Barsalona serves on the
Board of Directors of the T.J. Martell Foundation and is a member of the
Board of Trustees and the Executive Board of the Rock and Roll Hall of Fame.
Directors of the Company are elected to serve for a term of one year,
until the next annual meeting of stockholders and until their successors are
elected and qualified or until their earlier death, resignation or removal.
Pursuant to the authority conferred in the By-Laws of the Company to fix the
number of directors, the Board of Directors has set the number of directors
at six. Officers serve at the discretion of the Board of Directors, subject
to rights, if any, under contracts of employment. See "Employment
Agreements."
The Audit Committee, established in February 1997, consists of three
directors. The Audit Committee reviews with the Company's independent
accountants the scope and timing of the accountants' audit services and any
other services they are asked to perform, their report on the Company's
financial statements following completion of their audit and the Company's
policies and procedures with respect to internal accounting and financial
controls. In addition, the Audit Committee makes annual recommendations to
the Board of Directors for the appointment of independent public accountants
for the ensuing year.
The Compensation Committee, established in February 1997, consists of four
directors. This Committee reviews and recommends to the Board of Directors
the compensation and benefits of all officers of the Company, reviews general
policy matters relating to compensation and benefits of all officers of the
Company, reviews general policy matters relating to compensation and benefits
of employees of the Company and, along with the Board of Directors,
administers the Company's Stock Option Plan.
The Delaware General Corporation Law permits a corporation through its
Certificate of Incorporation to eliminate prospectively the personal
liability of its directors to the corporation or its stockholders for damages
for breach of fiduciary duty of care as a director, with certain exceptions.
The exceptions include acts or omissions in bad faith or which involve
intentional misconduct or knowing violations of law, improper declaration of
dividends, and transactions from which the director personally gained a
financial profit or other advantage to which he was not legally entitled. The
Company's Certificate of Incorporation eliminates personal liability of its
directors to the extent permitted by this statutory provision.
The Company has been advised that it is the position of the Securities and
Exchange Commission that insofar as the foregoing provision may be invoked to
disclaim liability for damages arising under the Securities Act, such
provision is against public policy as expressed in the Securities Act and is
therefore unenforceable.
40
<PAGE>
DIRECTORS' COMPENSATION
Messrs. Barsalona and Segel receive a fee of $25,000 per annum as
compensation for serving on the Company's Board of Directors. In addition,
Messrs. Barsalona and Segel were each issued 8,334 shares of Class A Common
Stock in May 1996 as compensation for serving on the Board. Other directors
of the Company do not receive any fixed compensation for serving on the
Board. Board members will be reimbursed for all reasonable expenses incurred
by them in connection with serving as directors of the Company. The Company
has entered into consulting agreements with each of Messrs. Falcigno and
Meyrowitz. See "Employment Agreements" below.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the
Company for services rendered during the fiscal year ended December 31, 1996
to Thomas McPartland, the Company's Chief Executive Officer and President,
and the one other executive officer of the Company whose total annual salary
exceeded $100,000 during such fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation(1) Long Term Compensation
----------------------------------------- -----------------------------------------------
Securities
Underlying
Other Annual Restricted Options/ All Other
Name and Principal Position Salary Bonus Compensation Stock Awards SARs(#) Compensation
--------------------------- ------------- ------- -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Thomas McPartland(2) ...... $375,000 -0- $12,930(3) -- -- --
President and Chief
Executive Officer
Scott R. Grodnick(4) ...... $123,077(4) -0- -- -- -- --
Senior Vice President
and Chief
Financial Officer
</TABLE>
- - - - ------
(1) The Company commenced operations November 14, 1995. Unless otherwise
indicated, the named executive officers did not receive any annual
compensation, stock options, restricted stock awards, stock appreciation
rights, long-term incentive plan payouts or any perquisites or other
personal benefits, securities or property that exceeded the lesser of
$50,000 or 10% of the salary and bonus for such officer during the fiscal
year ended December 31, 1996.
(2) Mr. McPartland's employment with the Company commenced December 1, 1995.
During the year ended December 31, 1995, he received an aggregate of
$31,250 in salary payments.
(3) Represents automobile lease payments and imputed interest on a loan to
Mr. McPartland from the Company. See "Certain Transactions."
(4) Mr. Grodnick's employment with the Company's commenced in January 1996.
His current annual salary for the fiscal year ending December 31, 1997 is
$250,000.
EMPLOYMENT AGREEMENTS
The Company has entered into a three-year employment agreement terminating
on December 31, 1998 with Thomas McPartland providing for Mr. McPartland to
serve as President, Chief Executive Officer and Chairman of the Board of the
Company for a base annual salary of $375,000. Mr. McPartland's salary may be
increased thereafter at the discretion of the Board of Directors and Mr.
McPartland shall be entitled to bonus compensation based upon the measurement
of performance against reasonable objectives mutually determined by Mr.
41
<PAGE>
McPartland and the Board. If the Company terminates Mr. McPartland's
employment agreement other than for cause (as defined in the Employment
Agreement), Mr. McPartland shall be entitled to receive his base annual
salary for the unexpired term of the agreement, plus benefits and bonus, if
any, along with any salary accrued to the date of his termination.
On November 21, 1995, the Company entered into three-year consulting
agreements with each of Messrs. Falcigno and Meyrowitz which provide for
Messrs. Falcigno and Meyrowitz to provide consulting services to the Company
on a part-time basis for an annual consulting fee of $150,000 each, payable
monthly. In the event either Mr. Falcigno or Mr. Meyrowitz become unable to
perform services to the Company during the term of their respective
agreement, due to absences, temporary or permanent illness, disability,
incapacity or any other reasonable cause, the Company will still be obligated
to make compensation payments under the respective agreements. Upon the death
of either Mr. Falcigno or Mr. Meyrowitz during the term of their respective
agreements, the Company has agreed to make a monthly payment of $12,500 to
their legal representative or surviving spouse for a period of three months,
provided payments shall only be made until November 1, 1998.
The Company has agreed to pay Mr. Grodnick a base annual salary of
$250,000 during the fiscal year ending December 31, 1997. The Company has
agreed with the Underwriter that the salaries of Messrs. McPartland and
Grodnick shall not be increased for a period of 13 months from the closing of
this Offering.
STOCK OPTION PLAN
THE 1996 STOCK OPTION PLAN
In December 1996, the Board of Directors adopted and the Company's
stockholders approved, the 1996 Stock Option Plan (the "Stock Option Plan")
covering 300,000 shares of the Company's Class A Common Stock pursuant to
which employees, officers and directors of, and consultants or advisors to,
the Company and any subsidiary corporations are eligible to receive incentive
stock options ("incentive options") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") and/or options that do
not qualify as incentive options ("non-qualified options"). The Stock Option
Plan, which expires in December 2006, will be administered by the Board of
Directors or a committee of the Board of Directors, provided, however, that
with respect to "officers" and "directors," as such terms are defined for the
purposes of Rule 16b-3 ("Rule 16b-3") promulgated under the Exchange Act,
such committee shall consist of "non-employee" directors as defined in Rule
16b-3, but only if at least two directors meet the criteria of "non-employee"
directors as defined in Rule 16b-3. The purposes of the Stock Option Plan are
to ensure the retention of existing and future executive personnel, key
employees, directors, consultants and advisors who are expected to contribute
to the Company's future growth and success and to provide additional
incentive by permitting such individuals to participate in the ownership of
the Company, and the criteria to be utilized by the Board of Directors or the
committee in granting options pursuant to the Stock Option Plan will be
consistent with these purposes. The Stock Option Plan provides for automatic
grants of options to certain directors in the manner set forth below.
Options granted under the Stock Option Plan may be either incentive
options or non-qualified options. Incentive options granted under the Stock
Option Plan are exercisable for a period of up to 10 years from the date of
grant at an exercise price which is not less than the fair market value of
the Class A Common Stock on the date of the grant, except that the term of an
incentive option granted under the Stock Option Plan to a stockholder owning
more than 10% of the outstanding voting power may not exceed five years and
its exercise price may not be less than 110% of the fair market value of the
Class A Common Stock on the date of the grant. To the extent that the
aggregate fair market value, as of the date of grant, of the shares for which
incentive options become exercisable for the first time by an optionee during
the calendar year exceeds $100,000, the portion of such option which is in
excess of the $100,000 limitation will be treated as a non-qualified option.
Options granted under the Stock Option Plan to officers, directors or
employees of the Company may be exercised only while the optionee is employed
or retained by the Company or within 90 days of the date of termination of
the employment relationship or directorship. However, options which are
exercisable at the time of termination by reason of death or permanent
disability of the optionee may be exercised within 12 months of the date of
termination of the employment relationship or directorship. Upon the exercise
of an option, payment may be made by cash or by any other means that the
Board of Directors or the committee determines. No option may be granted
under the Stock Option Plan after December 2006.
42
<PAGE>
Options may be granted only to such employees, officers and directors of,
and consultants and advisors to, the Company or any subsidiary of the Company
as the Board of Directors or the committee shall select from time to time in
its sole discretion, provided that only employees of the Company or a
subsidiary of the Company shall be eligible to receive incentive options. An
optionee may be granted more than one option under the Stock Option Plan. The
Board of Directors or the committee will, in its discretion, determine
(subject to the terms of the Stock Option Plan) who will be granted options,
the time or times at which options shall be granted, and the number of shares
subject to each option, whether the options are incentive options or
non-qualified options, and the manner in which options may be exercised. In
making such determination, consideration may be given to the value of the
services rendered by the respective individuals, their present and potential
contributions to the success of the Company and its subsidiaries and such
other factors deemed relevant in accomplishing the purpose of the Stock
Option Plan.
The Company has agreed that, during the 18 month period commencing on the
date of this Prospectus, it will not, without the prior written consent of
the Underwriter, grant any options to employees under the Stock Option Plan
that are exercisable at a price below the greater of the price per Unit in
this Offering or the fair market value of the Common Stock on the date of
grant.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has entered into indemnification agreements ("Indemnification
Agreement(s)") with each of its directors and executive officers. Each such
Indemnification Agreement provides that the Company will indemnify the
indemnitee against expenses, including reasonable attorneys' fees, judgments,
penalties, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or
officer. Such indemnification will be available if the indemnitee acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect to any criminal action,
had no reasonable cause to believe his conduct was unlawful. The
Indemnification Agreements also require that the Company indemnify the
director or other party thereto in all cases to the fullest extent permitted
by applicable law. Each Indemnification Agreement permits the director or
officer that is party thereto to bring suit to seek recovery or amounts due
under the Indemnification Agreement and to recover the expenses of such a
suit if he is successful.
The Company's By-Laws provide that the Company shall indemnify its
directors, officers, employees or agents to the full extent permitted by the
laws of the State of Delaware, and the Company shall have the right to
purchase and maintain insurance on behalf of any such person whether or not
the Company would have the power to indemnify such person against the
liability. The Company has purchased a liability insurance policy on behalf
of its directors and officers in the aggregate amount of $1,000,000.
43
<PAGE>
CERTAIN TRANSACTIONS
In connection with the formation of the Company (i) in August 1995, the
Underwriter, Blair & Co. and certain officers, directors and employees of the
Underwriter and Blair & Co. purchased an aggregate of 333,342 shares of Class
A Common Stock at a price of $.03 per share and (ii) in November 1995,
Messrs. McPartland, Falcigno and Meyrowitz purchased 500,001, 250,002 and
250,002 shares of Class B Common Stock, respectively, at a price of $.03 per
share. In May 1996, the Company issued 8,334 shares of Class A Common Stock
to each of its outside directors, Frank Barsalona and Gilbert N. Segel, for
no cash consideration, which stock was valued at $3.00 per share.
D.H. Blair Investment Banking Corp. acted as placement agent in connection
with the 1995 Private Placement and the Bridge Financing for which it
received commissions and a non-accountable expense allowance in the aggregate
amount of $390,000 and $429,000, respectively, and in connection with the
1995 Private Placement, D.H. Blair Investment Banking Corp. and certain
designees received warrants to purchase an aggregate of 350,004 shares of
Class A Common Stock at an exercise price of $3.00 per share. See
"Description of Securities -- Other Warrants" and "Underwriting."
In December 1996, Mr. Falcigno loaned the Company $240,000, which loan was
repaid with interest of $1,907 out of the proceeds of the Bridge Financing in
January 1997.
In December 1995, the Company made a non-interest bearing loan of $50,000
to Mr. McPartland, payable on demand, which loan has not been repaid. During
the year ended December 31, 1996, interest of $5,000 was imputed to Mr.
McPartland and charged as a compensation expense by the Company in connection
with this loan.
Also in connection with the 1995 Private Placement, the Company entered
into an agreement with D.H. Blair Investment Banking Corp. providing for the
payment of a fee to the Underwriter in the event the Underwriter is
responsible for a merger or other acquisition transaction to which the
Company is a party. In February 1997, in connection with the acquisition of
SonicNet by the Company in January 1997, the Company paid a mergers and
acquisition fee to the Underwriter of $56,000.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, certain
information concerning the beneficial ownership of the Company's Common
Stock, by (1) each stockholder known by the Company to own beneficially five
percent or more of the outstanding shares of each class of the Company's
Common Stock, (2) each director, (3) each person named in the Executive
Compensation Table and all executive officers and directors of the Company as
a group, and, with respect to each of the foregoing, (a) their percentage
ownership of each class of the Company's Common Stock before and after
completion of this Offering, and (b) their percentage voting control of all
classes of the Company's Common Stock after completion of this Offering.
<TABLE>
<CAPTION>
Percent of Outstanding Stock
------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage Percentage
of Class A of Class A of Class B of Class E
Common Common Common Common
Number of Stock Stock Number of Stock Number of Stock
Shares of Beneficially Beneficially Shares of Beneficially Shares of Beneficially Percentage
Class A Owned Owned Class B Owned Class E Owned of
Name and Common Before After Common Before and Common Before and Voting
Address of Stock Completion Completion Stock After Stock After Control
Beneficial Beneficially of of Beneficially Completion Beneficially Completion After
Owner (1) Owned(2) Offering Offering Owned(2) of Offering Owned(2) of Offering Offering
- - - - -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas
McPartland . -0- -- -- 500,001(5) 50.0% 250,002 20.4% 26.5%
Louis A.
Falcigno ... -0- -- -- 250,002(6) 25.0% 125,001 10.2% 13.2%
Robert B.
Meyrowitz .. -0- -- -- 250,002(7) 25.0% 125,001 10.2% 13.2%
Scott R.
Grodnick ... -0- -- -- -0- -- -0- -- *
Gilbert N. Segel 8,334 * * -0- -- 4,167 * *
Frank Barsalona 8,334 * * -0- -- 4,167 * *
Terry Sports,
Inc. ....... 83,334(3) 5.2% 2.0% -0- -- 41,667 3.4% 1.2%
Wolfson
Equities ... 145,834(4) 9.1% 3.5% -0- -- 72,918(4) 5.9% 2.1%
All executive
officers and
directors as a
group
(6 persons) . 16,668 * * 1,000,005(8) 100 % 508,338 41.4% 53.0%
</TABLE>
- - - - ------
* Less than one percent.
(1) Unless otherwise noted, the address for each beneficial owner is c/o the
Company.
(2) Securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission. Accordingly, they
may include securities as to which the individual has or shares voting or
investment power or has the right to acquire under outstanding stock
options within 60 days after the date of this table. Except as otherwise
noted, each individual or entity has sole voting and investment power
over the securities listed. Includes each holder's Escrow Shares. See
"Escrow Arrangements" below.
(3) C/O P.O. Box 881296, Steamboat Springs, Colorado 80488. Does not include
25,000 Class A Warrants not exercisable within 60 days of the date
hereof.
(4) C/O One State Street Plaza, New York, New York 10004. Includes 16,667
shares of Class A Common Stock and 8,334 shares of Class E Common Stock
held by Aaron Wolfson, the General Partner of Wolfson Equities.
(5) Includes 283,334 Escrow Shares.
(6) Includes 141,668 Escrow Shares.
(7) Includes 141,668 Escrow Shares.
(8) Includes 566,670 Escrow Shares.
45
<PAGE>
ESCROW ARRANGEMENTS
Class E Shares
In January 1997, the Company declared a dividend payable in shares of
Class E Common Stock ("Class E Shares") to all holders of its Class A and
Class B Common Stock. See "Description of Securities."
The Class E Shares will be automatically converted into Class A Common
Stock, if, and only if, one or more of the following conditions (each, an
"Escrow Condition") is/are met:
(i) the Company's E Share Minimum Pretax Income (as defined below)
amounts to at least $7.5 million for the fiscal year ending on December
31, 1997, 1998 or 1999; or
(ii) the E Share Minimum Pretax Income amounts to at least $10.0
million during fiscal year ending December 31, 2000; or
(iii) the E Share Minimum Pretax Income amounts to at least $12.5
million for the fiscal year ending December 31, 2001; or
(iv) the Bid Price (as defined below) of the Company's Class A Common
Stock averages in excess of $12.50 per share for 30 consecutive business
days during the 18 month period commencing on the date of this Prospectus;
or
(v) the Bid Price of the Company's Class A Common Stock averages in
excess of $16.75 per share for 30 consecutive business days during the 18
month period commencing 18 months from the date of this Prospectus.
The "E Share Minimum Pretax Income" shall mean the Company's net income
before provision for income taxes and exclusive of any other earnings that
are classified as an extraordinary item and any charges to income that may
result from the release of any securities of the Company subject to escrow
arrangements and the conversion of the Class E Shares into Class A Common
Stock, as stated in the Company's financial statements for such fiscal year
upon which independent auditors have given a report. For purposes of
determining whether the above criteria are met at any determination date, the
E Share Minimum Pretax Income amounts set forth above shall be increased at
any determination date by multiplying such E Share Minimum Pretax Income
amounts by a fraction, the numerator of which is the average weighted number
of shares of Common Stock outstanding over the fiscal year for which the
Escrow Condition is satisfied (including Class A and Class E Shares, and
treating as outstanding Common Stock of any class issuable upon conversion of
securities that are outstanding at the determination date and which are
convertible into Common Stock without the payment of additional consideration
("Conversion Shares") and the denominator of which is the sum of (i) the
number of shares of Common Stock (Class A, Class E and Conversion Shares)
which are outstanding (or, with respect to the Conversion Shares, treated as
outstanding as set forth above) on the date of this Prospectus, plus (ii) the
number of shares of Common Stock sold pursuant to this Prospectus. "Bid
Price" shall mean the closing bid price of the Class A Common Stock in the
over-the-counter market as reported by the Nasdaq Stock Market or the closing
bid price of the Class A Common Stock on a national securities exchange if
the Class A Common Stock is listed thereon.
Escrow Shares
In connection with the 1995 Private Placement, certain holders of the
Company's Common Stock placed into escrow an aggregate of 566,670 shares of
Class B Common Stock and 6,000 shares of Class A Common Stock and certain
holders of the Reserved Incentive Shares will be required to place one-third
of such shares into escrow upon their issuance. Such stockholders will
continue to vote the Escrow Shares; however, the Escrow Shares are not
assignable or transferable. The following sets forth the number of Escrow
Shares owned by the executive officers, directors and principal stockholders
of the Company:
Name Number of Shares
------------------ ----------------
Thomas McPartland ................... 283,334
Louis Falcigno ..................... 141,668
Robert Meyrowitz ................... 141,668
46
<PAGE>
The Escrow Shares are subject to the following release and cancellation
provisions:
Fifty percent (50%) of the Escrow Shares shall be released if:
(A) the Company's net income before provision for income taxes and
exclusive of any extraordinary items other than in connection with the
sale of projects and/or programs developed by the Company (as derived from
the Company's financial statements audited by the Company's independent
certified public accountants) (the "Minimum Pretax Income") amounts to at
least (i) $1.7 million during the fiscal year ending December 31, 1997; or
(ii) $2.3 million during the fiscal year ending December 31, 1998; or
(iii) $2.9 million during the fiscal year ending December 1999; or
(B) if the Common Stock is listed and traded on the Nasdaq Stock Market
or a National Stock Exchange, the Bid Price (as defined) of the Company's
Common Stock averages in excess of $9.00 or $12.00 per share for 30
consecutive business days ending on or before December 31, 1997 or 1998,
respectively, provided that all Shares sold in the Private Placement are
freely salable (without volume limitation) by the holders thereof during
such 30 day period; or
(C) if there is a merger of the Company with another company, sale of
substantially all of the assets of the Company or similar extraordinary
transaction (a "Sale of the Company") that results in stockholders
receiving at least $9.00 per share or $12.00 per share, in cash or
marketable securities on or before December 31, 1997 or 1998,
respectively.
The Minimum Pretax Income amounts set forth above assume the release of
the Escrow Shares but shall be increased proportionately, with certain
limitations, in the event additional shares of Common Stock or securities
convertible into, exchangeable for or exercisable into Common Stock are
issued after completion of the 1995 Private Placement. The Minimum Pretax
Income shall be calculated exclusive of any extraordinary items including,
but not limited to, any charge to income resulting from the release of the
Escrow Shares, but shall include the sale of any projects or programs
developed by the Company. The Bid Price amounts set forth above are subject
to adjustment in the event of any stock splits, reverse stock splits or other
similar events.
GENERAL
Any money, securities, rights or property distributed in respect of the
Escrow Shares or the Class E Shares, including any property distributed as
dividends or pursuant to any stock split, merger, recapitalization,
dissolution, or total or partial liquidation of the Company, shall be held in
escrow until release of the Escrow Shares or conversion of the Class E
Shares. If none of the applicable earnings or market price levels set forth
above have been met by March 31, 2002 with respect to the Class E Shares and
March 31, 2000 with respect to the Escrow Shares, as well as any dividends or
other distributions made with respect thereto, will be contributed to the
capital of the Company and the Class E Shares and/or the Escrow Shares, as
well as any dividends or other disbursements made with respect thereto, will
be redeemed by the Company for nominal consideration and cancelled. The
Company expects that the release of the Escrow Shares to, or conversion of
Class E Shares held by, officers, directors, employees and consultants of the
Company will be deemed compensatory and, accordingly, will result in a
substantial charge to reportable earnings, which would equal the fair market
value of such shares on the date of release. Such charge could substantially
increase the loss or reduce or eliminate the Company's net income for
financial reporting purposes for the period(s) during which such shares are,
or become probable of being, released from escrow. Although the amount of
compensation expense recognized by the Company will not affect the Company's
total stockholders' equity, it may have a negative effect on the market price
of the Company's securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note H of Notes to
Paradigm Financial Statements.
The earnings and market price levels set forth above were determined by
negotiation between the Company and the Underwriter and should not be
construed to imply or predict any future earnings by the Company or any
increase in the market price of its securities.
47
<PAGE>
CONCURRENT OFFERING
The registration statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering by the Selling
Securityholders of 1,650,000 Class A Warrants, 1,650,000 Class B Warrants and
3,300,000 shares of Class A Common Stock issuable upon exercise of the Class
A and Class B Warrants. The Selling Securityholder Warrants are being issued
to the Selling Securityholders as of the effective date of the Offering upon
the automatic conversion of all of the Company's outstanding Bridge Warrants.
These Class A Warrants are identical to the Class A Warrants included in the
Units offered hereby. All of the Selling Securityholder Warrants issued upon
conversion of the Bridge Warrants and the Common Stock issuable upon exercise
of such Class A Warrants will be registered, at the Company's expense, under
the Securities Act and are expected to become tradeable on or about the
effective date of the Offering, subject to a contractual restriction that
such Class A Warrants and underlying securities may not be exercised, sold,
transferred or otherwise disposed of for one year after the closing of the
Offering. After the one year period following the closing of the Offering,
the Selling Securityholders may exercise and sell the Common Stock issuable
upon exercise of the Selling Securityholder Warrants without restriction if a
current prospectus relating to such Common Stock is in effect and the
securities are qualified for sale. The Company will not receive any proceeds
from the sale of the Selling Securityholder Warrants. Sales of Selling
Securityholder Warrants issued upon conversion of the Bridge Warrants or the
securities underlying such Class A Warrants or even the potential of such
sales could have an adverse effect on the market prices of the Units, the
Common Stock and the Warrants.
There are no material relationships between any of the Selling
Securityholders and the Company, nor have any such material relationships
existed within the past three years. The Company has been informed by the
Underwriter that there are no agreements between the Underwriter and any
Selling Securityholder regarding the distribution of the Selling
Securityholder Warrants or the underlying securities.
The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the- counter
market or in negotiated transactions, a combination of such methods of sale
or otherwise. Sales may be made at fixed prices which may be changed, at
market prices or in negotiated transactions, a combination of such methods of
sale or otherwise.
Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents
for the Selling Securityholders or to broker-dealers who may purchase shares
as principals and thereafter sell the securities from time to time in the
over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers from whom such broker- dealer may act as agents or to whom they
may sell as principals or otherwise (which compensation as to a particular
broker-dealer may exceed customary commissions).
The Company has agreed not to solicit Warrant exercises other than through
the Underwriter, unless the Underwriter declines to make such solicitation.
Upon any exercise of the Warrants after the first anniversary of the date of
this Prospectus, the Company will pay the Underwriter a fee of 5% of the
aggregate exercise price of the Warrants, if (i) the market price of the
Company's Common Stock on the date the Warrants are exercised is greater than
the then exercise price of the Warrants; (ii) the exercise of the Warrants
was solicited by a member of the NASD; (iii) the Warrants are not held in a
discretionary account; (iv) disclosure of compensation arrangements was made
both at the time of the Offering and at the time of the exercise of the
Warrants; and (v) the solicitation of exercise of the Warrants was not in
violation of Regulation M promulgated under the Exchange Act.
The Commission has recently adopted Regulation M which will replace Rule
10b-6 and certain other rules and regulations under the Exchange Act.
Regulation M will prohibit any person engaged in the distribution of the
Selling Securityholder Warrants from simultaneously engaging in market-making
activities with respect to any securities of the Company during the
applicable "cooling-off" period (one or five business days) prior to the
commencement of such distribution. Accordingly, in the event the Underwriter
or Blair & Co. is engaged in a distribution of the Selling Securityholder
Warrants, neither of such firms will be able to make a market in the
48
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Company's securities during the applicable restrictive period. However,
neither the Underwriter nor Blair & Co. has agreed to nor is either of them
obligated to act as broker-dealer in the sale of the Selling Securityholder
Warrants and the Selling Securityholders may be required, and in the event
Blair & Co. is a market-maker, will likely be required, to sell such
securities through another broker-dealer. In addition, each Selling
Securityholder desiring to sell Warrants will be subject to the applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation Regulation M, which may limit the timing of the
purchases and sales of shares of the Company's securities by such Selling
Securityholder.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the securities might be deemed to be
underwriting discount and commissions under the Securities Act.
DESCRIPTION OF SECURITIES
The following description of the Company's securities does not purport to
be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Certificate of Incorporation and By-laws, the
Warrant Agreement among the Company, the Underwriter and American Stock
Transfer & Trust Company, as warrant agent, pursuant to which the Warrants
will be issued and the Underwriting Agreement between the Company and the
Underwriter, copies of all of which have been filed with the Commission as
Exhibits to the Registration Statement of which this Prospectus is a part.
GENERAL
The Company's authorized capital stock consists of (1) 31,999,900 shares
of Class A Common Stock, $.01 par value per share, (2) 1,000,100 shares of
Class B Common Stock, $.01 par value per share, (3) 2,000,000 shares of Class
E Common Stock, $.01 par value per share and (4) 5,000,000 shares of
Preferred Stock, $.01 par value per share. As of March 1, 1997, there were
1,596,704 outstanding shares of Class A Common Stock (held by 93 holders),
1,000,005 shares of Class B Common Stock (held by three holders), 1,226,716
shares of Class E Common Stock held by 88 holders and no shares of Preferred
Stock.
UNITS
Each Unit consists of one share of Class A Common Stock, one redeemable
Class A Warrant and one redeemable Class B Warrant. Each Class A Warrant
entitles the holder thereof to purchase one share of Class A Common Stock and
one redeemable Class B Warrant. Each Class B Warrant entitles the holder
thereof to purchase one share of Class A Common Stock. The Class A Common
Stock and Warrants comprising the Units are transferable separately
immediately upon issuance.
COMMON STOCK
Class A Common Stock. Holders of Class A Common Stock have the right to
cast one vote for each share held of record on all matters submitted to a
vote of holders of Class A Common Stock, including the election of directors.
The Class A, Class B and Class E Common Stock vote together as a single class
on all matters on which stockholders may vote, except when class voting is
required by applicable law.
Holders of Class A Common Stock are entitled to receive such dividends,
together with the holders of Class B and Class E Common Stock, pro rata based
on the number of shares held, when, as and if declared by the Board of
Directors, from funds legally available therefor, subject to the rights of
holders of any outstanding preferred stock. In the case of dividends or other
distributions payable in stock of the Company, including distributions
pursuant to stock splits or division of stock of the Company, only shares of
Class A Common Stock will be distributed with respect to Class A Common
Stock. In the event of the liquidation, dissolution or winding up of the
affairs of the Company, all assets and funds of the Company remaining after
the payment of all debts and other liabilities, subject to the rights of the
holders of any outstanding preferred stock, shall be distributed, pro rata,
among the holders of the Class A, Class B and Class E Common Stock. Holders
of Class A Common Stock
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are not entitled to preemptive, subscription, cumulative voting or conversion
rights, and there are no redemption or sinking fund provisions applicable to
the Class A Common Stock. All outstanding shares of Class A Common Stock are,
and the shares of Class A Common Stock offered hereby will be when issued,
fully paid and non- assessable.
Class B Common Stock. Each share of Class B Common Stock is entitled to
five votes on all matters on which stockholders may vote, including the
election of directors. The Class A, Class B, and Class E Common Stock vote
together as a single class on all matters on which stockholders may vote,
except when class voting is required by applicable law.
Holders of Class B Common Stock are entitled to participate together with
the holders of Class A and Class E Common Stock, pro rata based on the number
of shares held, in the payment of cash dividends and in the liquidation,
dissolution and winding up of the Company, subject to the rights of holders
of any outstanding preferred stock. In the case of dividends, or other
distributions payable in stock of the Company, including distributions
pursuant to stock splits or divisions of stock of the Company, only shares of
Class A Common Stock shall be distributed with respect to Class B Common
Stock.
Shares of Class B Common Stock are automatically convertible into an
equivalent number of fully paid and non-assessable shares of Class A Common
Stock upon the sale or transfer of such shares by the original record holder
thereof except to another holder of Class B Common Stock. Each share of Class
B Common Stock also is convertible at any time upon the option of the holder
into one share of Class A Common Stock. There are no preemptive,
subscription, redemption, conversion or cumulative voting rights applicable
to the Class B Common Stock.
Class E Common Stock. Each share of Class E Common Stock is entitled to
one vote on all matters on which stockholders may vote, including the
election of directors. The Class A, Class B and Class E Common Stock vote
together as a single class on all matters on which stockholders may vote,
except when class voting is required by applicable law.
Holders of Class E Common Stock are entitled to participate together with
the holders of Class A and Class B Common Stock, pro rata based on the number
of shares held, in the payment of cash dividends and in the liquidation,
dissolution and winding up of the Company, subject to the rights of holders
of any outstanding preferred stock. In the case of dividends, or other
distributions payable in stock of the Company, including distributions
pursuant to stock splits or divisions of stock of the Company, only shares of
Class A Common Stock shall be distributed with respect to Class E Common
Stock.
The Class E Shares will automatically convert, on a share-for-share basis,
into Class A Common Stock in the event the Company attains certain earnings
levels or the market price of the Company's Class A Common Stock achieves
certain targets over the next five years. See "Principal Stockholders --
Escrow Arrangements." Any Class E Shares not previously converted will be
redeemed by the Company for nominal consideration on March 31, 2002 if such
earnings levels or market price targets are not attained.
REDEEMABLE WARRANTS
Class A Warrants. Each Class A Warrant entitles the registered holder to
purchase one share of Class A Common Stock and one Class B Warrant at an
exercise price of $6.50 at any time until 5:00 P.M., New York City time on
the day immediately preceeding the fifth anniversary of the date of this
Prospectus. Commencing one year from the date of this Prospectus, the Class A
Warrants are redeemable by the Company on 30 days' written notice at a
redemption price of $.05 per Class A Warrant if the "closing price" of the
Company's Class A Common Stock for any 30 consecutive trading days ending
within 15 days of the notice of redemption averages in excess of $9.10 per
share. "Closing price" shall mean the closing bid price if listed in the
over-the- counter market on Nasdaq or otherwise or the closing sale price if
listed on the Nasdaq National Market or a national securities exchange. All
Class A Warrants must be redeemed if any are redeemed.
Class B Warrants. Each Class B Warrant entitles the registered holder to
purchase one share of Class A Common Stock at an exercise price of $8.75 at
any time after issuance until 5:00 P.M. New York City Time, on the day
immediately preceeding the fifth anniversary of the date of this Prospectus.
Commencing one year from
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the date of this Prospectus, the Class B Warrants are redeemable by the
Company on 30 days' written notice at a redemption price of $.05 per Class B
Warrant, if the closing price of the Company's Class A Common Stock for any
30 consecutive trading days ending within 15 days of the notice of redemption
averages in excess of $12.25 per share. All Class B Warrants must be redeemed
if any are redeemed.
General. The Class A Warrants and Class B Warrants will be issued pursuant
to a warrant agreement (the "Warrant Agreement") among the Company, the
Underwriter and American Stock Transfer & Trust Company, New York, New York,
as warrant agent, and will be evidenced by warrant certificates in registered
form. The Warrants provide for adjustment of the exercise price and for a
change in the number of shares issuable upon exercise to protect holders
against dilution in the event of a stock dividend, stock split, combination
or reclassification of the Common Stock or upon issuance of shares of Common
Stock at prices lower than the Warrant exercise price then in effect other
than issuances upon exercise of options granted to employees, directors and
consultants to the Company under the Company's stock option plans, other
outstanding warrants on the date of this Prospectus or with respect to the
Unit Purchase Option.
The exercise prices of the Warrants were determined by negotiation between
the Company and the Underwriter and should not be construed to be predictive
of or to imply that any price increases in the Company's securities will
occur.
A Warrant may be exercised upon surrender of the Warrant certificate on or
prior to its expiration date (or earlier redemption date) at the offices of
American Stock Transfer & Trust Company, New York, New York, the warrant
agent, with the form of "Election to Purchase" on the reverse side of the
Warrant certificate completed and executed as indicated, accompanied by
payment of the full exercise price (by certified or bank check payable to the
order of the Company) for the number of shares with respect to which the
Warrant is being exercised. Shares issued upon exercise of Warrants and
payment in accordance with the terms of the Warrants will be fully paid and
non-assessable.
The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Class A Common Stock for issuance upon the
exercise of the Class A Warrants and the Class B Warrants. A Warrant may be
exercised upon surrender of the Warrant certificate on or prior to its
expiration date (or earlier redemption date) at the offices of the Warrant
Agent, with the Subscription Form on the reverse side of the Warrant
certificate completed and executed as indicated, accompanied by payment of
the full exercise price (by certified or bank check payable to the order of
the Company) for the number of shares with respect to which the Warrant is
being exercised. Shares issued upon exercise of Warrants and payment in
accordance with the terms of the Warrants will be fully paid and
non-assessable.
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market value of the Common Stock, with a resulting
dilution in the interest of all other stockholders. So long as the Warrants
are outstanding, the terms on which the Company could obtain additional
capital may be adversely affected. The holders of the Warrants might be
expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain any needed capital by a new offering of
securities on terms more favorable than those provided for by the Warrants.
The Warrants do not confer upon the Warrantholder any voting or other
rights of a stockholder of the Company. Upon notice to the Warrantholders,
the Company has the right to reduce the exercise price or extend the
expiration date of the Warrants.
OTHER WARRANTS
As of the date of this Prospectus, other than the Selling Securityholder
Warrants and the SonicNet Warrants, the Company had outstanding the Blair
Warrants, which entitle the holders thereof to purchase an aggregate of
350,004 shares of Class A Common Stock, 143,979 of which are exercisable
commencing March 1, 1998 and 206,025 of which are immediately exercisable, in
each case through the fifth anniversary of the closing this Offering at an
exercise price of $3.00 per share and which contain antidilution provisions
and demand and "piggy-back" registration rights.
UNIT PURCHASE OPTION
The Company has agreed to grant to the Underwriter, upon the closing of
the Offering, the Unit Purchase Option to purchase up to 260,000 Units. These
Units will, when issued, be identical to the Units offered hereby,
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except that the Class A Warrants and the Class B Warrants included in the
Unit Purchase Option are subject to redemption by the Company, in accordance
with the terms of the Warrant Agreement, at any time only after the Unit
Purchase Option has been exercised and the underlying Warrants are outstanding.
The Unit Purchase Option cannot be transferred, sold, assigned or hypothecated
for two years, except to any officer of the Underwriter or members of the
selling group or their officers. The Unit Purchase Option is exercisable
during the three-year period commencing two years from the date of this
Prospectus at an exercise price of $ per Unit (130% of the initial public
offering price) subject to adjustment in certain events to protect against
dilution. The holders of the Unit Purchase Option have certain demand and
piggyback registration rights. See "Underwriting."
REGISTRATION RIGHTS
In addition to the Selling Securityholder Securities, beginning one year
from the date of this Prospectus, the holders of the Unit Purchase Options
will have demand and piggy-back registration rights relating to such options
and the underlying securities. See "Underwriting." The holders of the Blair
Warrants, issued to the Underwriter and its designees in connection with the
1995 Private Placement, have certain demand and piggy- back registration
rights with respect to the Common Stock into which such warrants are
exercisable. In connection with the acquisition of SonicNet, the Company has
also granted certain piggy-back registration rights, other than in connection
with this Offering, with respect to the 200,000 shares of Class A Common
Stock issued to Prodigy and Sunshine, the former stockholders of SonicNet.
Further, in connection with the acquisition of Big Deal, the Company has
granted certain piggy-back registration rights with respect to the 100,000
shares of Class A Common Stock issued to the former stockholders of Purple
Demon, which rights have been waived in connection with this Offering.
PREFERRED STOCK
The Certificate of Incorporation of the Company authorizes the issuance of
5,000,000 shares of preferred stock, none of which are currently outstanding.
The Board of Directors, within the limitations and restrictions contained in
the Certificate of Incorporation and without further action by the Company's
stockholders, has the authority to issue shares of preferred stock from time
to time in one or more series and to fix the number of shares and the
relative rights, conversion rights, voting rights, and terms of redemption,
liquidation preferences and any other preferences, special rights and
qualifications of any such series. Any issuance of preferred stock could,
under certain circumstances, have the effect of delaying or preventing a
change in control of the Company and may adversely affect the rights of
holders of Common Stock. The Company has no present plans to issue any shares
of preferred stock.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York will serve as
transfer agent for the Common Stock and warrant agent for the Warrants.
CERTAIN STATUTORY AND CHARTER PROVISIONS
Section 203 of the Delaware General Corporation Law provides, in general,
that a stockholder acquiring more than 15% of the outstanding voting shares
of a corporation subject to the statute (an "Interested Stockholder") but
less than 85% of such shares may not engage in certain "Business
Combinations" with the corporation for a period of three years subsequent to
the date on which the stockholder became an Interested Stockholder unless (i)
prior to such date the corporation's Board of Directors approved either the
Business Combination or the transaction in which the stockholder became an
Interested Stockholder or (ii) the Business Combination is approved by the
corporation's Board of Directors and authorized by a vote of at least
two-thirds of the outstanding voting stock of the corporation not owned by
the Interested Stockholder.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder in which
the Interested Stockholder receives or could receive a benefit on other than
a pro rata basis with other stockholders, including mergers, certain asset
sales, certain issuances of additional shares to the Interested Stockholders,
transactions with the corporation which increase the proportionate interest
of the Interested Stockholder or transactions in which the Interested
Stockholder receives certain other benefits.
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These provisions could have the effect of delaying, deferring or
preventing a change of control of the Company. The Company's stockholders, by
adopting an amendment to the Certificate of Incorporation or bylaws of the
Company, may elect not to be governed by Section 203, effective twelve months
after adoption. Neither the Certificate of Incorporation nor the bylaws of
the Company currently excludes the Company from the restrictions imposed by
Section 203.
The General Corporation Law of Delaware permits a corporation through its
Certificate of Incorporation to eliminate the personal liability of its
directors to the corporation or its stockholders for monetary damages for
breach of fiduciary duty of loyalty and care as a director, with certain
exceptions. The exceptions include a breach of the director's duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of law, improper declarations of dividends,
and transactions from which the directors derived an improper personal
benefit. The Company's Certificate of Incorporation exonerates its directors
from monetary liability to the fullest extent permitted by this statutory
provision.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS AND INDEMNIFICATION
The Certificate of Incorporation limits, to the fullest extent now or
hereafter permitted by the Delaware General Corporation law, liability of the
Company's directors to the Company or its stockholders for monetary damages
arising from a breach of their fiduciary duties as directors in certain
circumstances. This provision presently limits a director's liability except
where a director (i) breaches his or her duty of loyalty to the Company or
its stockholders, (ii) fails to act in good faith or engages in intentional
misconduct or a knowing violation of law, (iii) authorizes payment of an
unlawful dividend or stock purchase or redemption or (iv) obtains an improper
personal benefit. This provision does not prevent the Company or its
stockholders from seeking equitable remedies, such as injunctive relief or
recession. If equitable remedies are found not to be available to
stockholders in any particular case, stockholders may not have any effective
remedy against actions taken by directors that constitute negligence or gross
negligence.
The Certificate of Incorporation also authorizes the Company to indemnify
its directors, officers or other persons serving at the request of the
Company against liabilities arising from their services in such capacities to
the fullest extent permitted by law, including payment in advance of a final
disposition of a director's or officer's expenses or attorneys' fees incurred
in defending any action, suit or proceeding, other than in the case of an
action, suit or proceeding brought by the Company on its own behalf against
an officer. Presently, the Delaware General Corporation Law provides that to
be entitled to indemnification an individual have acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the
Company's best interests.
The Company believes that these charter provisions are consistent with
certain provisions of the Delaware General Corporation Law, which are
designed, among other things, to encourage qualified individuals to serve as
directors and officers of Delaware corporations. The Company also believes
these provisions will assist it in maintaining and securing the services of
qualified directors and officers.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding an
aggregate of 4,196,709 shares of Class A Common Stock and 1,000,005 shares
Class B Common Stock (assuming no exercise of the Underwriter's
over-allotment option). In addition, an aggregate of 3,300,000 shares of
Class A Common Stock are issuable pursuant to the 1,650,000 Selling
Securityholder Warrants. Of all such shares, the 2,600,000 shares of Class A
Common Stock included in the Units sold in this Offering (assuming no
exercise of the Underwriter's over- allotment option) will be freely
transferable without restriction under the Securities Act except for any
shares purchased by any person who is or thereby becomes an "affiliate" of
the Company, which shares will be subject to the resale limitations contained
in Rule 144 promulgated under the Securities Act ("Rule 144"). In addition,
the Company may issue up to 333,333 Reserved Incentive Shares in the future
to certain directors, consultants and employees of the Company and has
reserved 300,000 shares of Class A Common Stock for issuance upon exercise of
options that may be granted under the Stock Option Plan. All of the 2,596,709
shares of Common Stock outstanding prior to this Offering are "restricted
securities" as that term is defined under Rule 144. Shares of Class B Common
Stock, are not transferable except to certain permitted transferees. The
Company's Class E Shares and the Escrow Shares are subject to additional
restrictions on transferability.
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In general, under revised Rule 144, which becomes effective May 1, 1997, a
person (or persons whose shares are aggregated), with respect to restricted
securities that satisfy a one-year holding period, may sell within any
three-month period a number of restricted shares which does not exceed the
greater of 1% of the then outstanding shares of such class of securities or
the average weekly trading volume during the four calendar weeks prior to
such sale. Sales under Rule 144 are also subject to certain requirements as
to the manner of sale, notice and the availability of current public
information about the Company. Rule 144 also permits, under certain
circumstances, the sale of shares by a person who is not an affiliate of the
Company, with respect to restricted securities that satisfy a two-year
holding period, without regard to the volume or other resale limitations. For
shares issued in consideration of an unsecured or non-recourse promissory
note, the holding period does not commence until the note is paid in full.
The above is a brief summary of Rule 144 and is not intended to be a complete
description of Rule 144.
The "restricted" shares of Common Stock will be eligible for sale pursuant
to Rule 144 commencing 90 days after the date of this Prospectus. However,
the Company's officers and directors and holders of all of the outstanding
shares of Class B Common Stock have agreed not to sell, assign or transfer
any of their shares of Common Stock, options or warrants for a period of 13
months after the date of this Prospectus without the prior written consent of
the Underwriter and holders of approximately 80% of the outstanding shares of
Class A Common Stock have agreed not to offer, sell or otherwise dispose of
their shares for a period of either 12 months or 13 months after the
consummation of the Offering without the prior written consent of the
Underwriter. In addition, the Company has granted certain registration rights
with respect to certain outstanding warrants and the Unit Purchase Option and
the Units and securities underlying the Unit Purchase Option. See
"Underwriting." Prior to this Offering, there has been no market for any
securities of the Company and the Company is unable to predict the effect
that sales under Rule 144, pursuant to a registered public offering or
otherwise, may have on the then prevailing market price of the Common Stock,
but such sales may have a substantial depressive effect on such market price.
Pursuant to registration rights acquired in the Bridge Financing, the
Company has, concurrently with the Offering, registered for resale on behalf
of the Selling Securityholders, the Selling Securityholder Securities subject
to the contractual restriction that the Selling Securityholders agreed not to
exercise or sell the Selling Securityholder Warrants for a period of one year
for the closing of the Offering.
The Underwriter has demand and "piggy-back" registration rights with
respect to the securities underlying the Unit Purchase Option. See
"Underwriting."
Prior to the Offering, there has been no market for any securities of the
Company, and no predictions can be made of the effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices.
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UNDERWRITING
D.H. Blair Investment Banking Corp., the Underwriter, has agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase the
2,600,000 Units offered hereby from the Company on a "firm commitment" basis,
if any are purchased. It is expected that Blair & Co. will distribute as a
selling group member substantially all of the Units offered hereby. Blair &
Co. is owned by a corporation which is substantially owned by family members
of J. Morton Davis. Mr. Davis is the sole stockholder of the Underwriter.
The Underwriter has advised the Company that it proposes to offer the
Units to the public at the public offering price set forth on the cover page
of this Prospectus and that it may allow to selected dealers who are members
of the National Association of Securities Dealers, Inc., at such prices less
concessions, not in excess of $ per Unit, of which not more than $
per Unit may be reallowed to certain other dealers. After the initial public
offering, the public offering price, concessions and reallowances may be
changed by the Underwriter.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance equal to 3% of the aggregate offering price of the Units offered
hereby (including any Units purchased pursuant to the over- allotment
option), of which $20,000 has been paid.
The Company has granted an option to the Underwriter, exercisable for
30-days from the date of this Prospectus, to purchase up to 390,000
additional Units at the public offering price set forth on the cover page of
this Prospectus, less the underwriting discounts and commissions, solely to
cover over-allotments, if any, made in connection with the sale of the Units
offered hereby.
The Company has agreed to sell to the Underwriter and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 260,000
Units substantially identical to the Units being offered hereby, except that
the Class A Warrants and Class B Warrants included therein are not subject to
redemption by the Company unless on the redemption date, the Unit Purchase
Option has been exercised and the underlying warrants are outstanding. The
Unit Purchase Option will be exercisable during the three-year period
commencing two years from the date of this Prospectus at an exercise price of
per Unit (130% of the public offering price per Unit), subject to
adjustment in certain events to protect against dilution, and are not
transferable for a period of two years from the date of this Prospectus except
to officers of the Underwriter or to members of the selling group. The
Company has agreed to register during the three-year period commencing two
years from the date of this Prospectus, on two separate occasions upon request
of the holder(s) of a majority of the Unit Purchase Option, the securities
issuable upon exercise thereof under the Securities Act, the initial such
registration to be at the Company's expense and the second at the expense of
the holders. The Company has also granted certain "piggy-back" registration
rights to holders of the Unit Purchase Option.
For the life of the Unit Purchase Option, the holders are given, at
nominal cost, the opportunity to profit from a rise in the market price of
the Company's securities with a resulting dilution in the interest of other
stockholders. Further, the holders may be expected to exercise the Unit
Purchase Option at a time when the Company would in all likelihood be able to
obtain equity capital on terms more favorable then those provided in the Unit
Purchase Option.
The Company has entered into a five-year agreement providing for the
payment of a fee to the Underwriter in the event the Underwriter is
responsible for a merger or other acquisition transaction to which the
Company is a party. In connection with the acquisition of SonicNet in January
1997, the Company paid a fee of $56,000 to the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
The Underwriter has informed the Company that it does not expect sales of
the Units offered hereby to be made to discretionary accounts.
The Underwriter has the right to designate one individual for nomination
to the Company's Board of Directors for a period of five years after the
completion of the Offering, although it has not yet selected any such
designee. Such designee may be a director, officer, partner, employee or
affiliate of the Underwriter.
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The Company's officers, directors and holders of Class B Common Stock have
agreed not to publicly sell, assign or transfer any of their shares of Common
Stock (including the shares of Class A Common Stock into which shares of
Class B Common Stock are convertible) for a period of 13 months from the date
of this Prospectus without the prior written consent of the Underwriter and
holders of approximately 80% of the outstanding shares of Class A Common
Stock have agreed not to offer, sell or otherwise dispose of their shares for
a period of either 12 months or 13 months after the consummation of the
Offering without the prior written consent of the Underwriter.
The Company has agreed not to solicit Warrant exercises other than through
the Underwriter, unless the Underwriter declines to make such solicitation.
Upon any exercise of the Warrants after the first anniversary of the date of
this Prospectus, the Company will pay the Underwriter a fee of 5% of the
aggregate exercise price of the Warrants if (i) the market price of the
Company's Class A Common Stock on the date the Warrant is exercised is
greater than the then exercise price of the Warrants; (ii) the exercise of
the Warrant was solicited by a member of the NASD; (iii) the Warrants are not
held in a discretionary account; (iv) disclosure of compensation arrangements
was made both at the time of the Offering and at the time of exercise of the
Warrants; and (v) the solicitation of exercise of the Warrant was not in
violation of Regulation M promulgated under the Exchange Act.
The Commission has recently adopted Regulation M which will replace Rule
10b-6 and certain other rules promulgated under the Exchange Act. Regulation
M may prohibit Blair & Co. from engaging in any market making activities with
regard to the Company's securities for the period from five business days (or
such other applicable period as Regulation M may provide) prior to any
solicitation by the Underwriter of the exercise of Warrants until the later
of the termination of such solicitation activity or the termination (by
waiver or otherwise) of any right that the Underwriter may have to receive a
fee for the exercise of Warrants following such solicitation. As a result,
Blair & Co. may be unable to provide a market for the Company's securities
during certain periods while the Warrants are exercisable.
In November 1995, the Underwriter acted as Placement Agent for the 1995
Private Placement of the Company's Class A Common Stock, for which it
received a fee of $300,000 and a non-accountable expense allowance of
$90,000. In connection with the 1995 Private Placement, the Company granted
to the Underwriter and its designees warrants to purchase an aggregate of
350,004 shares of Common Stock of the Company. Each such warrant entitles the
holder to purchase one share of Common Stock at an exercise price of $3.00 at
any time through the fifth anniversary of the Closing of this Offering,
subject to adjustment in certain events to protect against dilution. The
Underwriter and its designees have certain demand and piggyback registration
rights with respect to such warrants. See "Description of Securities -
Registration Rights." The Underwriter also acted as Placement Agent for the
Bridge Financing in January 1997 for which it received a Placement Agent fee
of $330,000 and a non-accountable expense allowance of $99,000.
The Commission is conducting an investigation concerning various business
activities of the Underwriter and Blair & Co., a selling group member which
will distribute substantially all of the Units offered hereby. The
investigation appears to be broad in scope, involving numerous aspects of the
Underwriter's and Blair & Co.'s compliance with the Federal securities laws
and compliance with the Federal securities laws by issuers who securities
were underwritten by the Underwriter or Blair & Co., or in which the
Underwriter or Blair & Co. made over-the-counter markets, persons associated
with the Underwriter or Blair & Co., such issuers and other persons. The
Company has been advised by the Underwriter that the investigation has been
ongoing since at least 1989 and that it is cooperating with the
investigation. The Underwriter cannot predict whether this investigation will
ever result in any type of formal enforcement action against the Underwriter
or Blair & Co., or, if so, whether any such action might have an adverse
effect on the Underwriter or the securities offered hereby. The Company has
been advised that Blair & Co. will make a market in the securities following
this Offering. An unfavorable resolution of the Commission's investigation
could have the effect of limiting such firm's ability to make a market in the
Company's securities, which could affect the liquidity or price of such
securities.
The Underwriter, an officer of the Underwriter and certain officers,
directors and employees of Blair & Co. own an aggregate of 333,342 shares of
Class A Common Stock and the Blair Warrants to purchase an aggregate of
350,004 shares of Class A Common Stock (143,979 of which are not exercisable
until March 1, 1998), representing beneficial ownership of approximately
28.7% of the outstanding shares of Class A Common Stock
56
<PAGE>
prior to the Offering. In addition, the Underwriter has advised the Company
that notwithstanding such stockholdings, neither it, Blair & Co. nor any
affiliates thereof control the Company, nor are they affiliates of the
Company. Under Rule 2720 of the NASD Conduct Rules, when a member of the
NASD, such as the Underwriter, participates in the public distribution of
securities of a company in which it or its affiliates owns 10% or more of the
outstanding voting securities, and where there is no "bona fide independent
market" for such securities, the public offering price can be no higher than
that recommended by a qualified independent underwriter. The independent
investment banking firm of RAS Securities Corp. ("RAS") has recommended a
maximum initial public offering price of per Unit. Pursuant to Rule 2720
of the NASD Conduct Rules, the Units are being offered at a price no greater
than the maximum recommended by RAS, which firm has informed the Company that
it has performed "due diligence" with respect to information contained in the
Registration Statement of which this prospectus is a part. The NASD and the
Commission have indicated that, in their view, a qualified independent
underwriter, such as RAS, may be deemed to be an underwriter, as the term is
defined in the Securities Act. The Underwriter will pay a fee of $____ to RAS
for its services in connection with recommending the maximum initial public
offering price in this Offering. The Company has agreed to indemnify RAS
against certain liabilities, including liabilities under the Securities Act.
Prior to the Offering, there has been no public market for any of the
securities offered hereby. Accordingly, the public offering price of the
Units offered hereby and the terms of the Warrants have been determined by
negotiation between the Company and the Underwriter and are not necessarily
related to the Company's asset value, net worth or other established criteria
of value. Factors considered in determining such prices and terms, in
addition to prevailing market conditions, include the history of and the
prospects for the industry in which the Company competes, the present state
of the Company's development and its future prospects, an assessment of the
Company's management, the Company's capital structure, demand for similar
securities of comparable companies and such other factors as were deemed
relevant.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York. Certain
legal matters will be passed upon for the Underwriter by Paul, Hastings,
Janofsky & Walker LLP, New York, New York. Bachner, Tally, Polevoy & Misher
LLP represents the Underwriter in other matters.
EXPERTS
The financial statements of Paradigm Music Entertainment Company as of
December 31, 1996 and for each of the periods from November 21, 1995
(inception) through December 31, 1995 and December 31, 1996, the financial
statements of SonicNet, Inc. as of the years ended December 31, 1995 and 1996
and for the period from June 1994 (inception) through December 31, 1996, and
the financial statements of Purple Demon, Inc. as of the years ended December
31, 1995 and 1996, each included in this Prospectus, have been audited by
Janover Rubinroit, LLC, independent auditors, as set forth in their reports
thereon appearing elsewhere herein and are included in reliance upon such
reports given on the authority of that firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company is not a reporting company under the Exchange Act. The Company
has filed a Registration Statement on Form SB-2 under the Securities Act with
the Commission in Washington, D.C. with respect to the Units offered hereby.
This Prospectus, which is part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and
the exhibits thereto. For further information with respect to the Company and
the Units offered hereby, reference is hereby made to the Registration
Statement and such exhibits, which may be inspected without charge at the
office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at 500 West Madison (Suite
1400), Chicago, Illinois 60661. Copies of such material may also be obtained
at prescribed rates from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
are not necessarily complete and in each instance reference
57
<PAGE>
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects
by such reference. In addition, the Commission maintains a website on the
Internet that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission. The address of the Commission's Website is http://www.sec.gov.
Following the Offering, the Company will be subject to the reporting and
other requirements of the Exchange Act and intends to furnish to its
stockholders annual reports containing audited financial statements and may
furnish interim reports as it deems appropriate.
58
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PARADIGM MUSIC ENTERTAINMENT COMPANY Page
------------------------------------------------------------ --------
<S> <C>
Report of Independent Auditors ............................. F-2
Balance Sheet .............................................. F-3
Statements of Operations ................................... F-4
Statements of Stockholders' Equity ......................... F-5
Statements of Cash Flows ................................... F-6
Notes to Financial Statements .............................. F-7
SONICNET, INC.
Report of Independent Auditors ............................. F-14
Balance Sheet .............................................. F-15
Statements of Operations ................................... F-16
Statements of Stockholders' Equity ......................... F-18
Statements of Cash Flows ................................... F-19
Notes to Financial Statements .............................. F-20
PURPLE DEMON, INC.
Report of Independent Auditors ............................. F-24
Balance Sheet .............................................. F-25
Statements of Operations and Retained Earnings (Deficit) ... F-26
Statements of Cash Flows ................................... F-27
Notes to Financial Statements .............................. F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders' of
Paradigm Music Entertainment Company:
We have audited the accompanying balance sheet of Paradigm Music
Entertainment Company (a developmental stage company) as at December 31,
1996, and the related statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1996 and for the period November 14,
1995 (date of inception) through December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paradigm Music
Entertainment Company (a developmental stage company) as of December 31,
1996, and the results of its operations and its cash flows for the year then
ended, and the period November 14, 1995 (date of inception) through December
31, 1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has sustained recurring losses from
operations that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note A. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
JANOVER RUBINROIT, LLC
February 11, 1997
(Except for Note J as to which the date is February 14, 1997)
F-2
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
A S S E T S
------------
Current assets:
Cash ...................................................... $ 125,201
Accounts receivable ....................................... 27,621
Inventories ............................................... 25,431
Other current assets ...................................... 40,894
-------------
Total current assets .................................... 219,147
Fixed assets ................................................ 225,262
Less accumulated depreciation .............................. (43,168)
-------------
182,094
Investments ................................................. 80,000
Notes receivable -- officer/stockholder ..................... 50,000
Deferred registration costs ................................. 60,000
Other assets ................................................ 36,350
-------------
$ 627,591
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 135,254
Accrued expenses and other current liabilities ............. 155,756
Due to officer/stockholder ................................. 240,000
-------------
Total current liabilities ................................ 531,010
Stockholders' equity:
Preferred Stock, $.01 par value -- shares authorized
5,000,000;
none issued
Class A Common Stock, $.01 par value -- shares authorized
31,999,900; issued and outstanding 1,363,371 ........... 13,634
Class B Common Stock, $.01 par value -- shares authorized
1,000,100; issued and outstanding 1,000,005 ............ 10,000
Class E Common Stock, $.01 par value -- shares authorized
2,000,000, issued and outstanding 1,226,716 ............ 12,267
Additional paid-in-capital ................................ 2,591,893
Deficit accumulated during the developmental stage ........ (2,531,213)
-------------
96,581
-------------
$ 627,591
=============
</TABLE>
The foregoing accountants' report and accompanying notes
are an integral part of the financial statements.
F-3
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nov. 14, 1995 Nov. 14, 1995
(date of (date of
inception) inception)
Year ended through through
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1996
--------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Sales, net ....................... $ 31,114 $ -- $ 31,114
Interest income .................. 59,417 7,268 66,685
--------------- ----------------- -----------------
90,531 7,268 97,799
--------------- ----------------- -----------------
Expenses:
Cost of goods sold ............... 12,097 -- 12,097
Advances and recording costs ..... 628,099 10,000 638,099
General and administrative
expenses ...................... 1,551,158 129,017 1,680,175
Selling expenses ................. 298,641 -- 298,641
--------------- ----------------- -----------------
2,489,995 139,017 2,629,012
--------------- ----------------- -----------------
Net loss ........................... $(2,399,464) $ (131,749) $(2,531,213)
=============== ================= =================
Loss per share of common stock ..... $ (1.15) $ (.06) $ (1.21)
--------------- ----------------- -----------------
Weighted average number of
shares outstanding ............... 2,090,707 2,090,707 2,090,707
=============== ================= =================
</TABLE>
The foregoing accountants' report and accompanying notes
are an integral part of the financial statements.
F-4
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
$.01 par value $.01 par value $.01 par value
Class A Common Stock Class B Common Stock Class E Common Stock
------------------------ ------------------------ ----------------------
Number Number Number
of shares par value of shares par value of shares par value
----------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
<C> <C>
Issuance of common stock to
officers and underwriters for
cash in November, 1995 ($.01 per
share) ......................... 1,040,000 $ 10,400 3,000,000 $ 30,000
Issuance of stock for cash in
November 1995 at $1.00 per share
in connection with private
placement, less expense of
$463,656 ....................... 3,000,000 30,000 -- --
Warrants issued in connection
with private placement ......... -- -- -- --
Net loss for the period November
14, 1995 (date of inception)
through December 31, 1995) ..... -- -- -- --
Balance - December 31, 1995 ..... 4,040,000 40,400 3,000,000 30,000
Issuance of Class A Common Stock
to Directors ................... 50,000 500
To give retroactive effect to the
1 for 3 reverse stock split and
Dividend of Class E Common Stock
(Note A) ....................... (2,726,629) (27,266) (1,999,995) (20,000) 1,226,716 $12,267
Net loss for the year ended
December 31, 1996 ..............
----------- --------- ----------- --------- --------- ---------
Balance - December 31, 1996 ..... 1,363,371 $ 13,634 1,000,005 $ 10,000 1,226,716 $12,267
=========== ========= =========== ========= ========= =========
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Deficit
accumulated
Additional in the
paid-in developmental
capital stage Total
--------- --------- -------
<S> <C> <C> <C>
Issuance of common stock to
officers and underwriters for
cash in November, 1995 ($.01 per
share) ......................... $ -- $ -- $ 40,400
Issuance of stock for cash in
November 1995 at $1.00 per share
in connection with private
placement, less expense of
$463,656 ....................... 2,506,344 -- 2,536,344
Warrants issued in connection
with private placement ......... 1,050 -- 1,050
Net loss for the period November
14, 1995 (date of inception)
through December 31, 1995) ..... -- (131,749) (131,749)
Balance - December 31, 1995 ..... 2,507,394 (131,749) 2,446,045
Issuance of Class A Common Stock
to Directors ................... 49,500 50,000
To give retroactive effect to the
1 for 3 reverse stock split and
Dividend of Class E Common Stock
(Note A) ....................... 34,999 -- --
Net loss for the year ended
December 31, 1996 .............. (2,399,464) (2,399,464)
--------- --------- -----------
Balance - December 31, 1996 ..... $2,591,893 $(2,531,213) $ 96,581
========= ========= ==========
</TABLE>
The foregoing accountants' report and accompanying notes
are an integral part of the financial statements.
F-5
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nov. 14, 1995 Nov. 14, 1995
(date of (date of
inception) inception)
Year ended through through
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1996
--------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .......................................... $(2,399,464) $ (131,749) $(2,531,213)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation ................................... 43,168 -- 43,168
Accrued interest ............................... -- (2,950) (2,950)
Changes in assets and liabilities:
Accounts receivable .......................... (27,621) -- (27,621)
Inventories .................................. (25,431) -- (25,431)
Other current assets ......................... (40,894) -- (40,894)
Notes receivable -- officers/stockholders .... -- (50,000) (50,000)
Deferred registration costs .................. (60,000) -- (60,000)
Other assets ................................. (18,550) (17,800) (36,350)
Accrued expenses and other current liabilities 113,575 42,181 155,756
Accounts payable ............................. 135,254 -- 135,254
Due to officer/stockholder ................... 240,000 -- 240,000
--------------- ----------------- -----------------
Net cash used in operating activities ............... (2,039,963) (160,318) (2,200,281)
--------------- ----------------- -----------------
Cash flows from investing activities:
Purchase of treasury note ......................... (493,838) (999,598) (1,493,436)
Purchase of fixed assets .......................... (173,932) (51,330) (225,262)
Proceeds from treasury note ....................... 1,496,386 -- 1,496,386
Investments ....................................... (80,000) -- (80,000)
--------------- ----------------- -----------------
Net cash provided by (used in) investing activities . 748,616 (1,050,928) (302,312)
--------------- ----------------- -----------------
Cash flows from financing activities:
Issuance of Class A Common Stock .................. 50,000 -- 50,000
Issuance of warrants .............................. -- 1,050 1,050
Net proceeds from sale of Common Stock ............ -- 2,576,744 2,576,744
--------------- ----------------- -----------------
Net cash provided by financing activities ........... 50,000 2,577,794 2,627,794
--------------- ----------------- -----------------
Increase (decrease) in cash ......................... (1,241,347) 1,366,548 125,201
Cash -- beginning of period ......................... 1,366,548 -- --
--------------- ----------------- -----------------
Cash -- end of period ............................... $ 125,201 $ 1,366,548 $ 125,201
=============== ================= =================
</TABLE>
The foregoing accountants' report and accompanying notes
are an integral part of the financial statements.
F-6
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - THE COMPANY AND BASIS OF PRESENTATION:
Paradigm Music Entertainment Company (the "Company") a developmental stage
company incorporated in Delaware, was formed to enter the music entertainment
business. The Company's objective is to become a broad based music
entertainment company utilizing traditional and non-traditional marketing and
distribution channels to exploit music entertainment products.
As shown in the accompanying financial statements, the Company has
incurred losses from operations since inception, resulting in a substantial
working capital deficiency and capital deficiency. Such losses are expected
to continue during the Company's development stage. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company is planning an initial public offering of common stock and
warrants which will enable it to continue its development (see Note J). There
is no assurance that the proposed public offering will be successful. The
financial statements do not include any adjustment that might be necessary if
the Company is unable to continue as a going concern.
In January 1997, the Company effected a 1 for 3 reverse stock split and a
stock dividend of Class E Common Stock (see Note J). The financial statements
give retroactive effect to this transaction as if it occurred on November 14,
1995 (date of inception).
(NOTE B) - SIGNIFICANT ACCOUNTING POLICIES:
(1) Property and equipment
Property and equipment are carried at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful life of the assets.
(2) Impairment of long-lived assets
The Company periodically assesses the recoverability of the carrying
amount of long-lived assets, including intangible assets. A loss is
recognized when expected future cash flows (undiscounted and without
interest) are less than the carrying amount of the asset. The impairment loss
is determined as the difference by which the carrying amount of the asset
exceeds its fair value.
(3) Advances
In accordance with FASB Statement No. 50, "Financial Reporting in the
Record and Music Industry," advances to artists and producers are capitalized
as an asset when the current popularity and past performance of the artist or
producer provides a sound basis for estimating the probable future recoupment
of such advances from earnings otherwise payable to the artist or producer.
Any portion of such advances not deemed to be recoupable from future
royalties is expensed at the balance sheet date. All other significant
advances which do not meet the above criteria are fully reserved when paid.
As of December 31, 1996, all advances have been expensed.
(4) Inventories
Inventories are valued at the lower of cost or market determined on the
first in, first out (FIFO) method of accounting. Inventories consist
primarily of finished goods.
(5) Revenue recognition
Net product sales represent revenues derived from sales of records, net of
actual returns, and reserves for estimated future returns. In addition,
estimated unrecoupable costs are included in advances and recording costs.
(6) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-7
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A Developmental Stage Company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE B) - SIGNIFICANT ACCOUNTING POLICIES: - (Continued)
(7) Income Taxes
The Company accounts for income taxes in accordance with statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for income
taxes". Under SFAS No. 109, a deferred tax liability or asset is recognized
for the estimated future tax consequences of temporary differences between
the carrying amounts of assets and liabilities in the financial statements
and their respective tax bases. A valuation allowance has been established to
offset any asset resulting from the tax benefit related to the cumulative net
operating loss due to an inability to determine the probability of future
income to utilize the net operating loss.
(8) Loss per share of common stock
Net loss per share of common stock is based on the weighted average number
of shares outstanding during each period, as modified in accordance with
certain rules of the Securities and Exchange Commission. Accordingly, the
weighted average number of shares outstanding during each period includes
options and warrants issued within twelve months of the Company's initial
public offering using the treasury stock method as if they were outstanding
for all periods, excluding Class A Common Stock and Class B Common Stock in
escrow, and Class E Common Stock not yet converted to Class A Common Stock
because they are anti-dilutive (see Note H).
(9) Concentration of credit risk
The Company maintains cash accounts with balances in excess of the FDIC
insurance limit of $100,000.
(10) Reclassifications
Certain amounts in the year ended December 31, 1995 financial statements
have been reclassified to conform with the year ended December 31, 1996
presentation.
(11) Fair values of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires the Company to disclose
estimated fair values for its financial instruments. The carrying amounts of
cash, other current assets, trade accounts payable, and accrued expenses
approximate fair value because of the short maturity of those instruments.
(12) Investments
Investments in companies which the Company has a 20% to 50% interest are
accounted for by the equity method which records the investment at cost,
adjusted for the Company's proportionate share of their undistributed
earnings or losses.
Investments in marketable equity securities, other than investments
accounted for by the equity method, do not have readily determinable fair
values and are stated at cost, adjusted for impairments, if applicable. All
investments are classified as long-term. Management determines the
appropriate classification of its investments at the time of acquisition and
re-evaluates such determination at each balance sheet date.
(NOTE C) - INVESTMENT:
The Company's investments represent twenty-five percent of the shares of
stock issued by Wingnut Records, Inc., and 10,000 Class A voting shares and
4,000 warrants of DTL Systems, Inc., a private software and database company.
Wingnut Records, Inc. is a small independent label which management believes
has the ability to capture developmental artists early in their careers.
F-8
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A Developmental Stage Company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE D) - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
As at
December 31, Estimated
1996 useful lives
-------------- --------------
Furniture and fixtures ....... $ 40,135 3-7 years
Computer equipment ........... 130,003 3-7 years
Leasehold improvements ....... 55,124 5 years
--------------
225,262
Less accumulated depreciation (43,168)
--------------
$182,094
==============
Property and equipment was not placed in service during 1995, therefore no
depreciation expense was taken for that year.
(NOTE E) - RELATED PARTY TRANSACTIONS:
Included in other assets is a loan to the president/stockholder of the
Company at December 31, 1996. The loan is for $50,000 and is non-interest
bearing.
The Company paid consulting fees of approximately $300,000 and $69,000 to
officers/stockholders of the Company for the year ended December 31, 1996 and
for the period November 14, 1995 (date of inception) through December 31,
1995, respectively.
(NOTE F) - INCOME TAXES (CREDITS):
At December 1996 the Company has available net operating loss
carryforwards of approximately $2,480,000 which expire in 2010.
The principal components of deferred tax assets and the valuation
allowance are as follows:
December 31, December 31,
1996 1995
-------------- --------------
Deferred tax assets:
Net operating loss
carryforwards .............. $ 798,308 $ 44,795
Valuation allowance ........... (798,308) (44,795)
-------------- --------------
Net deferred tax ................ $ -- $ --
============== ==============
The following reconciles the computed income tax credit at the federal
statutory rate to the provision for income taxes:
December 31, December 31,
1996 1995
------------- ------------
Computed tax expense (credit) at federal
statutory rate ............................ (34)% (34)%
State provision less federal benefit ....... (5) (5)
Valuation allowance ........................ 39 39
------------- ------------
$ -- $ --
============= ============
(NOTE G) - COMMITMENTS AND CONTINGENCIES:
Lease
The Company was a lessee at December 31, 1996. The first lease commenced
on December 1, 1995 and terminates on May 31, 2001. An additional lease
commenced on August 1, 1996 and also terminates on May 31,
F-9
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A Developmental Stage Company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE G) - COMMITMENTS AND CONTINGENCIES: - (Continued)
2001. Approximate minimum annual lease commitments for both leases for the
five years ended December 31 are as follows:
1997 $136,000
1998 $142,000
1999 $142,000
2000 $136,000
2001 $ 30,000
Rent expense for the year ended December 31, 1996 and for the period
November 14, 1995 (date of inception) through December 31, 1995 was $61,975
and $5,853, respectively.
(NOTE G) - COMMITMENTS AND CONTINGENCIES:
Employment and consulting agreements
The Company entered into a three-year employment agreement with the
president/stockholder providing for him to serve as Chairman of the Board,
President and Chief Executive Officer at a base annual salary of $375,000.
The Company also entered into two three-year consulting agreements providing
for the payment of an annual consulting fee of $150,000 per agreement to two
stockholders/directors. All agreements commenced November 1995.
(NOTE H) - CAPITALIZATION:
Stockholders' equity
The Company has the authority to issue 40,000,000 shares of Capital Stock
consisting of (i) 31,999,900 shares of Class A Common Stock, $.01 par value,
(ii) 1,000,100 shares of Class B Common Stock, $.01 par value, (iii)
2,000,000 shares of Class E Common Stock, $.01 par value (see Note J), and
(iv) 5,000,000 shares of Preferred Stock, $.01 par value. The Class A Common
Stock and Class B Common Stock are essentially identical, except that the
Class B Common Stock has five votes per share and the Class A Common Stock
has one vote per share.
In November 1995, the Company issued 1,000,027 shares of its Class A
Common Stock at $3.00 per share in a private placement. Proceeds from the
private placement as of December 31, 1995, net of commissions and other
related expenses totaling approximately $464,000, were approximately
$2,536,000.
In connection with the Company's private placement in 1995, an aggregate
of 566,670 shares of Class B Common Stock outstanding and 6,000 shares of
Class A Common Stock are held in escrow. Fifty percent (50%) of the shares
will be released based on obtaining certain net earning levels ranging from
$1,700,000 for 1997 to $2,900,000 through December 1999. These shares will
also be released if the bid price of the Company's Class A Common Stock
averages in excess of $9.00 or $12.00 per share for 30 consecutive business
days ending on or before December 31, 1997 or 1998, respectively, or if there
is a merger or sale that results in stockholders receiving at least $9.00 or
$12.00 per share in cash or marketable securities on or before December 31,
1997 or 1998, respectively. The remaining fifty percent (50%) of the shares
will be released based on net earning levels ranging from $2,100,000 for 1997
to $3,500,000 through December 1999. These shares will also be released if
the bid price of the Company's Common Stock averages in excess of $13.50 or
$19.50 for 30 consecutive business days ending on or before December 31, 1997
or 1998, respectively, or if there is a sale of the Company that results in
stockholders receiving at least $13.50 or $19.50 per share on or before
December 31, 1997 or 1998, respectively.
On March 31, 2000 all Class A and Class B escrow shares still held in
escrow will be forfeited, which shares will then be placed in the Company's
treasury for cancellation thereof as a contribution to capital.
F-10
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A Developmental Stage Company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE H) - CAPITALIZATION: - (Continued)
Included in Class A Common Stock authorized are 333,333 shares reserved
for issuance to certain directors, consultants and employees of the Company
of which 94,000 will be placed in escrow upon issuance. In addition, 350,004
shares of Class A Common Stock and 175,006 shares of Class E Common Stock are
reserved for exercise of the warrants held by the underwriter and its
designees (see Warrants), and 300,000 shares of Class A Common Stock are
reserved for the stock incentive plan (see Note I).
Upon the release of any of the Class B shares held in escrow, and
conversion of the Class E shares (see Note J) held by officers, directors,
and consultants of the Company to Class A shares, the Company will incur a
reportable earnings charge for compensation expense in the amount of the then
fair value of the shares released. Such charge is not deductible for income
tax purposes.
Warrants
As part of the compensation for the private placement, the Company has
warrants outstanding in the amount of $1,050 which permit the underwriter and
its designees to purchase an aggregate of 350,004 shares of Class A Common
Stock at an exercise price of $3 per share. These warrants may be exercised
in whole or in part at any time or from time to time until the earlier of the
fifth anniversary of the closing of an IPO of the Company's securities or
November 21, 2005. Subsequent to December 31, 1996, the Company issued an
additional 1,650,000 and 165,000 Class A warrants as compensation for the
Bridge Notes holders and the underwriter, respectively (see Note J).
(NOTE I) - STOCK OPTION PLAN:
In December 1996, the Company adopted a stock incentive plan which permits
the issuance of options to selected directors and employees of, and
consultants to the Company. The plan reserves 300,000 shares of Class A
Common Stock for grant and provides that the term of each award be determined
by the committee of the Board of Directors (the "Committee") charged with
administering the plan. As of December 31, 1996, no options have been issued
under the plan.
Under the terms of the plan, options are both qualified and non-qualified
and are granted at an exercise price determined by the Committee, which are
not to be less than fair value for qualified options.
(NOTE J) - SUBSEQUENT EVENTS:
Bridge Notes
In January 1997, the Company completed closings on $1,962,500 and
$1,337,500 in Bridge Notes, respectively. The notes bear interest at 10% per
annum and are payable upon the earlier of (i) one year after the date of
issuance, or (ii) the completion of the contemplated public offering.
In connection with the above financing, the Company issued warrants (the
"Bridge Warrants") to purchase an aggregate of 981,250 and 668,750 shares,
respectively, of Class A Common Stock exercisable at $3.00 per share until
completion of the public offering, at which time the terms will be identical
to the Class A warrants included in units expected to be sold in the public
offering. Such Class A warrants are exercisable for a period of five years
from the date upon which the Company commences its initial public offering.
The Company's underwriter acted as placement agent in connection with the
Bridge Notes and received fees of $255,125 and $173,875, respectively, as
well as 165,000 Class A Warrants which have been valued at approximately
$41,000. Such fees and warrants will be capitalized as deferred financing
fees. The Bridge Warrants, which have been valued at $412,500 will be
recorded as debt discount. Debt discount and deferred financing costs are
being amortized over the life of the loan. In addition, the Company incurred
approximately $51,000 in legal expenses in connection with the Bridge Notes
which will also be included in deferred financing fees.
F-11
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A Developmental Stage Company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE J) - SUBSEQUENT EVENTS: - (Continued)
The 165,000 Class A Warrants issued to the underwriter as compensation for
the Bridge Notes will be forfeited in the event that a successful initial
public offering is consummated.
Upon completion of the proposed initial public offering the Bridge Notes
will be repaid and the unamortized balance of debt issuance costs will be
charged to operations.
Proposed public offering
The Company has signed a letter of intent with respect to a proposed
public offering of the Company's securities. There is no assurance that such
offering will be consummated. In connection therewith the Company anticipates
incurring substantial expenses which, if the offering is not consummated,
will be charged to expense.
Acquisition of SonicNet, Inc.
In January 1997, the Company acquired all of the issued and outstanding
capital stock of SonicNet, Inc. ("SonicNet"), a New York-based Internet music
company, from Prodigy Service Corporation and Sunshine Interactive Network,
Inc. (the "Sellers") for a purchase price consisting of 200,000 shares of the
Company's Class A Common Stock, 100,000 Class A Warrants, and $100,000 in
cash. The Company has granted the Sellers certain "piggyback" registration
rights after the proposed public offering. The Company has agreed to provide
SonicNet with up to $2,000,000 in working capital in 1997. Availability of
these funds is contingent upon completion of the proposed public offering.
Due to officer/shareholder
Subsequent to year end the Company repaid the $240,000 with proceeds from
the Bridge Notes.
Reverse stock split and stock dividend
In January 1997, the Company effected a reverse stock split such that
every three shares of Common Stock outstanding was converted to one share of
Common Stock of the same respective class. In connection with this reverse
stock split, the Company paid a dividend of one share of Class E Common Stock
for each two shares of Common Stock or warrants to purchase Common Stock.
This resulted in the issuance of 1,226,716 shares of Class E Common Stock.
Each share of Class E Common Stock will automatically be converted into
one share of Class A Common Stock in the event that the Company obtains
certain minimum pre-tax income ranging from $7,500,000 in 1997 to $12,500,000
through December, 2001. These shares will also be converted if the bid price
of the Company's Class A Common Stock shall average in excess of $12.50 or
$16.75 per share for 30 consecutive business days ending on or before 18
months after the proposed public offering , or 18 to 36 months after the
proposed public offering, respectively. On March 31, 2002 all Class E Shares
not previously converted into Class A Common Stock will be redeemed by the
Company for $0.00001 per share.
Letter of intent
In February 1997, the Company entered into a letter of intent to acquire
the ATN website in exchange for up to 75,000 shares of the Company's Class A
Common Stock and up to $220,000. There can be no assurance that this
acquisition will be completed.
Acquisition of Purple Demon, Inc.
On February 14, 1997, the Company acquired all of the outstanding common
stock of Purple Demon, Inc., in exchange for 100,000 shares of Class A Common
Stock of the Company. 33,333 shares were issued at closing and the remaining
66,667 shares are to be issued on the earlier of 90 days after the proposed
public offering or December 31, 1997.
F-12
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A Developmental Stage Company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE J) - SUBSEQUENT EVENTS: - (Continued)
Investment in Supersound Music Productions, Inc.
Subsequent to year-end the Company transferred $150,000 into the business
account of a partnership formed with Supersound Music Productions, Inc. The
Company's investment represents fifty percent of the partnership. The
partnership was formed to develop and promote artists for the Asian market.
F-13
<PAGE>
To the Stockholders' of
SonicNet, Inc.:
We have audited the accompanying balance sheet of SonicNet, Inc. (a
developmental stage company) as at December 31, 1996, and the related statements
of operations, stockholders' equity and cash flows for the years ended December
31, 1996 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SonicNet, Inc. (a developmental
stage company) as of December 31, 1996, and the results of its operations and
its cash flows for the years ended December 31, 1996 and 1995, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note D to the
financial statements, a substantial portion of the revenues, both earned and
unearned, by the Company were received from its' Former Parent Company, from
which there is no commitment to provide additional funding. Without these
revenues, or alternative financing, there is substantial doubt about its ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
JANOVER RUBINROIT, LLC
February 4, 1997
(Except for Note F as to which the date is February 19, 1997)
F-14
<PAGE>
SONICNET, INC.
(A DEVELOPMENTAL STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash ......................................................... $ 11,308
Accounts and advertising receivables ......................... 55,500
Other current assets ......................................... 12,000
-------------
Total current assets ....................................... 78,808
Fixed assets ................................................... 407,538
Less accumulated depreciation ................................. 208,069
-------------
199,469
Other assets ................................................... 9,600
-------------
$ 287,877
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Leases payable -- current .................................... $ 14,294
Accounts payable, accrued expenses and other current
liabilities ............................................... 103,513
Unearned revenues -- Former Parent Company, current portion .. 300,519
Unearned revenues ............................................ 62,715
-------------
Total current liabilities .................................. 481,041
Unearned revenues -- Former Parent Company ..................... 1,202,078
Leases payable ................................................. 13,455
Stockholders' equity:
Preferred Stock, no par value, net of subscription
receivable -- shares authorized 300; issued and outstanding
56 ........................................................ 225,000
Common Stock, no par value -- shares authorized 700;
issued and outstanding 49 ................................. 45,970
Deficit accumulated during the developmental stage ............. (1,679,667)
-------------
(1,408,697)
-------------
$ 287,877
=============
</TABLE>
The foregoing accountants' report and accompanying notes
are an integral part of the financial statements.
F-15
<PAGE>
SONICNET, INC.
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
June 1994
(date of
inception)
Year ended December 31, through
1996 1995 December 31, 1996
-------------- -------------- -----------------
<S> <C> <C> <C>
Revenues:
Fee income -- Former Parent Company ........... $ 300,519 $ -- $ 300,519
Advertising, commission, and subscription
income ..................................... 53,636 32,360 96,986
Other income .................................. 4,462 -- 4,462
-------------- -------------- -----------------
358,617 32,360 401,967
-------------- -------------- -----------------
Expenses:
Production expenses ........................... 1,361,904 833,183 2,365,696
Marketing expenses ............................ 267,218 278,908 690,872
General and administrative expenses ........... 212,243 301,962 689,710
-------------- -------------- -----------------
1,841,365 1,414,053 3,746,278
-------------- -------------- -----------------
Net loss ........................................ $(1,482,748) $(1,381,693) $(3,344,311)
============== ============== =================
</TABLE>
The foregoing accountants' report and accompanying notes
are an integral part of the financial statements.
F-16
<PAGE>
SONICNET, INC.
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
No par value No par value
Preferred Stock Common Stock
---------------------- --------------------- Deficit
Number Number accumulated in
of of the development
shares Value shares Value stage Total
-------- ---------- -------- --------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance -
December 31, 1994 ..... $ 131,463 $ 131,463
Capital contributed by
LLC Members in 1995 ... 1,099,281 1,099,281
Sale of Preferred Stock 56 $225,000 225,000
Contribution of net LLC
assets ................ 49 $45,970 (45,970)
Loss for the year ended
December 31, 1995 ..... (1,381,693) (1,381,693)
-------- ---------- -------- --------- --------------- --------------
Balance --
December 31, 1995 ..... 56 225,000 49 45,970 (196,919) $ 74,051
Loss for the year ended
December 31, 1996 ..... -- -- -- -- (1,482,748) (1,482,748)
-------- ---------- -------- --------- --------------- --------------
Balance --
December 31, 1996 ..... 56 $225,000 49 $45,970 $(1,679,667) $(1,408,697)
======== ========== ======== ========= =============== ==============
</TABLE>
The foregoing accountants' report and accompanying notes
are an integral part of the financial statements.
F-17
<PAGE>
SONICNET, INC.
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 1994
(date of
inception)
Year ended December 31, through
1996 1995 December 31, 1996
-------------- -------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................... $(1,482,748) $(1,381,693) $(3,344,311)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization ........ 125,693 63,361 208,069
Write-off of trademark ............... -- 4,530 4,530
Changes in assets and liabilities:
Accounts and advertising
receivables ..................... (55,500) -- (55,500)
Other current assets .............. (126) (10,314) (12,000)
Other assets ...................... -- 4,294 2,400
Unearned revenues ................. 1,565,312 -- 1,565,312
Accounts payable .................. (50,097) 125,643 103,514
-------------- -------------- -----------------
Net cash provided by (used in)
operating activities ...................... 102,534 (1,194,179) (1,527,986)
-------------- -------------- -----------------
Cash flows from investing activities:
Purchase of fixed assets ................... (133,763) (114,856) (353,981)
Purchase of intangible asset ............... (12,000) -- (16,530)
-------------- -------------- -----------------
Net cash used in investing activities ....... (145,763) (114,856) (370,511)
-------------- -------------- -----------------
Cash flows from financing activities:
Issuance of preferred stock ............... -- 225,000 225,000
Payment of leases ......................... (7,674) (13,435) (25,809)
Capital contributed by former LLC Members . 1,099,281 1,710,614
Payment to stockholder .................... (52,970) 52,970 --
-------------- -------------- -----------------
Net cash provided by (used in)
financing activities ...................... (60,644) 1,363,816 1,909,805
-------------- -------------- -----------------
Increase (decrease) in cash ................. (103,873) 54,781 11,308
Cash -- beginning of period ................. 115,181 60,400 --
-------------- -------------- -----------------
Cash -- end of period ....................... $ 11,308 $ 115,181 $ 11,308
============== ============== =================
</TABLE>
The foregoing accountants' report and accompanying notes
are an integral part of the financial statements.
F-18
<PAGE>
SONICNET, INC.
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) -- THE COMPANY AND BASIS OF PRESENTATION:
SonicNet, Inc. (the "Company" or "SonicNet") is a developmental stage
company incorporated in Delaware. The Company operates an on-line computer
network focusing on alternative music and culture. Specifically, the Company
operates as an electronic bulletin board available for worldwide access
through the Internet and is also available over national on-line services.
Subsequent to year-end, the Company was sold to Paradigm Music Entertainment
Company, Inc. ("Paradigm") (see Note G).
SonicNet, Inc. is the successor in interests to SonicNet, LLC (the "LLC"),
whose assets were contributed to, and liabilities assumed by, the Company on
December 13, 1995 (see Note D). The LLC began business in June of 1994 and
had recognized cumulative revenues and incurred a net loss of approximately
$43,000 and $1,600,000, respectively, through December 12, 1995. The
financial statements present the operations of SonicNet, Inc. and its
predecessor entities. A reconciliation of assets contributed and liabilities
assumed is as follows:
<TABLE>
<CAPTION>
<S> <C>
Working capital deficit assumed ........................... $(118,087)
Net fixed assets received ................................ 188,079
Long-term liabilities assumed ............................ (24,022)
-------------
Common stock issued ...................................... $ 45,970
=============
</TABLE>
As shown in the accompanying financial statements, the Company has
incurred losses from operations since inception, resulting in a substantial
working capital deficiency and capital deficiency. Such losses are expected
to continue during the Company's development stage. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Paradigm is planning an initial public offering of common stock and warrants
which will enable it to finance SonicNet's continued development. There is no
assurance that the proposed public offering will be successful. The financial
statements do not include any adjustment that might be necessary if the
Company is unable to continue as a going concern.
(NOTE B) -- SIGNIFICANT ACCOUNTING POLICIES:
(1) Cash and cash equivalents
Cash and cash equivalents include cash and any investment with a maturity
of 90 days or less.
(2) Property and equipment
Property and equipment are carried at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful life of the assets.
(3) Impairment of long-lived assets
The Company periodically assesses the recoverability of the carrying
amount of long-lived assets, including intangible assets. A loss is
recognized when expected future cash flows (undiscounted and without
interest) are less than the carrying amount of the asset. The impairment loss
is determined as the difference by which the carrying amount of the asset
exceeds its' fair value.
(4) Revenue recognition
Fees from the Former Parent Company are non-refundable and are being
amortized over the life of the Publishers Area Agreement (see Note D).
Advertising revenues are recognized when an impression is received by the
user. Commission revenues are recognized when cash is received by the
advertiser. In addition, revenues are collected from users who subscribe to
the bulletin board service on a monthly basis.
F-19
<PAGE>
SONICNET, INC.
(A Developmental Stage Company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE B) -- SIGNIFICANT ACCOUNTING POLICIES: - (Continued)
(5) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(6) Income Taxes
The Company accounts for income taxes in accordance with statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for income
taxes". Under SFAS No. 109, a deferred tax liability or asset is recognized
for the estimated future tax consequences of temporary differences between
the carrying amounts of assets and liabilities in the financial statements
and their respective tax bases.
A valuation allowance has been established to offset any asset resulting
from the tax benefit related to the cumulative net operating loss due to an
inability to determine the probability of future income to utilize the net
operating loss.
(7) Income (Loss) per share of common stock
Historical loss per share is not considered relevant as it would differ
materially from proforma loss per share given the changes in the capital
structure of the Company due to it being acquired subsequent to year-end by
Paradigm (see Note G). Accordingly, proforma earnings per share is calculated
using the weighted average number of shares outstanding of Paradigm during
each period includes options and warrants issued within twelve months of
Paradigm's initial public offering using the treasury stock method as if they
were outstanding for all periods, excluding Class A Common Stock and Class B
Common Stock in escrow, and Class E Common Stock not yet converted to Class A
Common Stock.
(8) Fair values of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires the Company to disclose
estimated fair values for its financial instruments. The carrying amounts of
cash, accounts receivable, other current assets, trade accounts payable, and
accrued expenses approximate fair value because of the short maturity of
those instruments.
(NOTE C) -- PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
Estimated useful lives
----------------------
<S> <C> <C>
Furniture and fixtures ............ $ 25,112 5 years
Computer equipment and software ... 279,354 3 years
Equipment held under capital lease 53,558 3-5 years
Leasehold improvements ............ 49,514 7 years
-----------
407,538
Less accumulated depreciation ... (208,069)
-----------
$ 199,469
===========
</TABLE>
(NOTE D) -- RELATED PARTY TRANSACTIONS AND ECONOMIC DEPENDENCY:
In December, 1995, the LLC contributed its net assets to the Company in
exchange for a 46.7% interest in the Company. The Former Parent Company
acquired the remaining 53.3% interest in the Company in exchange for
guaranteed payments on a preferred stock subscription to the Company of
approximately $2,050,000.
F-20
<PAGE>
SONICNET, INC.
(A Developmental Stage Company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE D) -- RELATED PARTY TRANSACTIONS AND ECONOMIC DEPENDENCY: - (Continued)
In January 1996, the subscription agreement was modified with $225,000
representing the equity investment by the Former Parent Company and the
remainder (approximately $1,830,000) to be paid to the Company as advances
against fees during 1996. No additional fees are required or expected from
the Former Parent Company subsequent to December 31, 1996. As per the
Publisher Area Agreement entered into in December, 1995 between the Former
Parent Company and the Company, the Company would receive fees from usage of
the Company's Internet services by members of the Former Parent Company's
on-line service. The Company would also receive fees for new members obtained
by the Former Parent Company's on-line service. The Publishers Area Agreement
expires in December, 2001.
To date, the Company has not received a proper accounting from the Former
Parent Company and has elected to amortize the fee advances over the life of
the agreement. Unamortized fee advances can be found on the balance sheet as
unearned revenues -- Former Parent Company.
The financial statements do not include the compensation an officer,
certain other employees, and overhead, which consists primarily of rent. Such
costs were borne by the Former Parent. Management estimates that an
additional cost of approximately $275,000 will be incurred related to these
expenses.
(NOTE E) -- INCOME TAXES:
At December 1996 the Company has available net operating loss
carryforwards of approximately $2,056,000 which expire in 2010.
The following is the calculation of the net deferred tax at December 31,:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 502,000 $ 197,000
Valuation allowance ............. (502,000) (197,000)
----------- -----------
Net deferred tax ................ $ -- $ --
=========== ===========
</TABLE>
The following reconciles the computed income tax credit at the federal
statutory rate to the provision for income taxes at December 31,:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Computer tax expense (credit) at federal statutory rate ... (34)% (34)%
State provision less federal benefit ...................... (5) (5)
Valuation allowance ....................................... 39 39
--------- ---------
-- % --%
========= =========
</TABLE>
(NOTE F) -- COMMITMENTS AND CONTINGENCIES:
Lease
The Company was a lessee of office space at December 31, 1996. The lease
commenced on April 1, 1996 and terminates on August 31, 1997. The approximate
minimum annual lease commitment for the lease for the year ended December 31,
1997 is $94,000. Rent expense for the year ended December 31, 1996 is
$70,236.
Employment and consulting agreements
The Company has entered into employment agreements with two officers of
the Company. The agreements expire in December 1997 and provide for
cumulative compensation packages to be no less than approximately $275,000
per annum for the remainder of the agreements.
Upon acquiring SonicNet, LLC, the Company entered into a consulting
agreement with one of the shareholders. The agreement expires December 31,
1997 and provides for the compensation to be $30,000 per annum.
F-21
<PAGE>
SONICNET, INC.
(A Developmental Stage Company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE G) -- SUBSEQUENT EVENTS:
Acquisition by Paradigm
In January 1997, Paradigm acquired all of the issued and outstanding
capital stock of SonicNet, Inc. from Prodigy Service Corporation and Sunshine
Interactive Network, Inc. for a purchase price consisting of 200,000 shares
of Paradigm's Class A Common Stock, 100,000 Class A Warrants, and $100,000 in
cash.
Public offering
Paradigm has signed a letter of intent with respect to a proposed public
offering of the Company's securities. There is no assurance that such
offering will be consummated.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders' of
Purple Demon, Inc.:
We have audited the accompanying balance sheet of Purple Demon, Inc. as at
December 31, 1996, and the related statements of operations and retained
earnings (deficit), and cash flows for the years ended December 31, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Purple Demon, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for
the period then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company does not have adequate working capital to
finance operations. Without financing, there is substantial doubt about its
ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
JANOVER RUBINROIT, LLC
March 6, 1997
F-23
<PAGE>
PURPLE DEMON, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
A S S E T S
Current assets:
Cash .......................................................... $ 52
Inventories ..................................................... 30,749
Reserves held by Caroline ....................................... 13,284
Due from related party .......................................... 1,600
-----------
$ 45,685
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable .............................................. $ 24,625
Accounts payable -- related party ............................. 19,225
Note payable .................................................. 50,000
Recoupable amounts due Caroline ............................... 81,094
Royalty payable, royalty reserves, and other accrued expenses . 23,315
-----------
Total current liabilities ................................ 198,259
Stockholder's Equity:
Common stock, no par value; 200 shares authorized and
outstanding ................................................ 200
Deficit ....................................................... (152,774)
-----------
(152,574)
-----------
$ 45,685
===========
</TABLE>
The foregoing accountants' report and accompanying notes
are an integral part of the financial statements.
F-24
<PAGE>
PURPLE DEMON, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C> <C>
Revenues ....................................... $ 108,835 $148,057
Cost of sales .................................. 87,120 91,733
------------ ----------
Gross profit ............................ 21,715 56,324
------------ ----------
Selling expenses ............................... 54,591 55,137
General and administrative expenses ............ 75,417 57,088
------------ ----------
130,008 112,225
------------ ----------
Net loss ....................................... (108,293) (55,901)
Retained earnings (deficit) -- beginning of year (44,481) 11,420
------------ ----------
Deficit -- end of year ......................... $(152,774) $(44,481)
============ ==========
</TABLE>
The foregoing accountants' report and accompanying notes
are an integral part of the financial statements.
F-25
<PAGE>
PURPLE DEMON, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................................. $(108,293) $(55,901)
Adjustments to reconcile net loss to net cash used in operating
activities
Inventories ...................................................... 6,797 (20,239)
Reserves held by Caroline ........................................ 5,317 30,973
Prepaid recording advances ....................................... -- 19,730
Amounts due from affiliate ....................................... (825) (10,000)
Accounts payable ................................................. 26,473 8,367
Recoupable amounts due Caroline .................................. 19,940 29,599
Royalties payable, royalty reserves and other accrued expenses ... 535 (2,553)
----------- -----------
Net cash used in operating activities ......................... (50,056) (24)
Cash flows provided by financing activities:
Notes payable ......................................................... 50,000 --
----------- -----------
Net decrease in cash .................................................... (56) (24)
Cash -- beginning of year ............................................... 108 132
----------- -----------
Cash -- end of year ..................................................... $ 52 $ 108
=========== ===========
</TABLE>
The foregoing accountants' report and accompanying notes
are an integral part of the financial statements.
F-26
<PAGE>
PURPLE DEMON, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) -- THE COMPANY AND BASIS OF PRESENTATION:
Purple Demon, Inc. ("PDI" or the "Company"), was incorporated under the
laws of New York State on June 24, 1993. Operations began on January 1, 1994.
The Company is engaged in the production and distribution of musical
recordings and sells to wholesalers, retailers and the general public via air
mail order. Subsequent to year-end, the Company was sold to Paradigm Music
Entertainment Company, Inc. ("Paradigm") (see Note H).
As shown in the accompanying financial statements, the Company does not
have adequate working capital to finance its operations. This factor raises
substantial doubt about the Company's ability to continue as a going concern.
Paradigm is planning an initial public offering of common stock and warrants
which will enable it to finance PDI's continued development. There is no
assurance that the proposed public offering will be successful. The financial
statements do not include any adjustment that might be necessary if the
Company is unable to continue as a going concern.
(NOTE B) -- SIGNIFICANT ACCOUNTING POLICIES:
(1) Basis of accounting
Assets and liabilities are recorded and revenues and expenses are
recognized on the accrual basis of accounting.
(2) Advances
In accordance with FASB Statement No. 50, "Financial Reporting in the
Record and Music Industry," advances to artists and producers are capitalized
as an asset when the current popularity and past performance of the artist or
producer provides a sound basis for estimating the probable future recoupment
of such advances from earnings otherwise payable to the artist or producer.
Any portion of such advances not deemed to be recoupable from future
royalties is expensed at the balance sheet date. All other significant
advances which do not meet the above criteria are fully reserved when paid.
As of December 31, 1996, all advances have been expensed.
(3) Inventories
Inventories are valued at the lower of cost or market determined on the
first in, first out (FIFO) method of accounting. Inventories consist
primarily of finished goods.
(4) Revenue recognition
Net product sales represent revenues derived from sales of records, net of
actual returns, and reserves for estimated future returns. In addition,
estimated unrecoupable costs are included in cost of sales.
(5) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(6) Income Taxes
No provision has been made for federal income taxes. The Company has
elected to be treated as an S Corporation under the Internal Revenue Code and
under the related section of applicable state tax code. The Company's
stockholders include the operations of the Company in their individual income
tax returns.
(7) Fair values of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires the Company to disclose
estimated fair values for its financial instruments. The carrying amounts of
cash, other current assets, trade accounts payable, and accrued expenses
approximate fair value because of the short maturity of those instruments.
F-27
<PAGE>
PURPLE DEMON, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE B) -- SIGNIFICANT ACCOUNTING POLICIES: - (Continued)
(8) Income (Loss) per share of common stock
Historical loss per share is not considered relevant as it would differ
materially from proforma loss per share given the changes in the capital
structure of the Company due to it being acquired subsequent to year-end by
Paradigm (see Note H). Accordingly, proforma earnings per share is calculated
using the weighted average number of shares outstanding of Paradigm during
each period includes options and warrants issued within twelve months of
Paradigm's initial public offering using the treasury stock method as if they
were outstanding for all periods, excluding Class A Common Stock and Class B
Common Stock in escrow, and Class E Common Stock not yet converted to Class A
Common Stock.
(NOTE C) -- DISTRIBUTION AGREEMENTS:
The Company manufacturers and distributes musical recordings through a
"production and distribution" (P&D) arrangement with Caroline Records, a
major distributor of musical recordings in the United States. Under this
agreement, Caroline manufactures all the Company's product and distributes
the product in the United States. The manufacturing expense incurred by
Caroline is recouped against sales revenue received by Caroline for Purple
Demon titles after calculation of a distribution fee of 25% of net revenues
(gross sales less returns). All Purple Demon P&D sales through Caroline are
subject to a 100% return policy. Consequently, Caroline holds reserves
against returns which are released according to a contractual schedule. These
reserves are carried as current assets of the Company. From time to time, the
Company's sales through Caroline do not equal the total amount of
distribution fees, reserves and manufacturing costs. When this occurs, the
unrecouped amounts are carried as liabilities of the Company.
(NOTE D) -- NOTES PAYABLE:
On July 1, 1996 the Company borrowed $50,000 from a private investor. The
note is due and payable on or before July 1, 1997 and carries an interest
rate of 6% per annum. Interest in the amount of $1,500 has been accrued as of
December 31, 1996.
(NOTE E) -- ARTIST ROYALTY RESERVES:
Because of the uncertainty of retail sales (see Note C) the Company holds
reserves against royalties payable. These royalty reserves are carried as a
liability by the Company until they are contractually released to the payee.
(NOTE F) -- INCOME TAXES:
At December 1996 the Company has available net operating loss
carryforwards of approximately $153,000 which expire in 2010.
The following is the calculation of the net deferred tax at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards .............. $ 36,820 $ 15,124
Valuation allowance ........... (36,820) (15,124)
---------- ----------
Net deferred tax ................ $ -- $ --
========== ==========
</TABLE>
F-28
<PAGE>
PURPLE DEMON, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE F) -- INCOME TAXES: - (Continued)
The following reconciles the computed income tax credit at the federal
statutory rate to the provision for income taxes at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Computed tax expense (credit) at federal statutory rate ............. (34)% (34)%
State provision less federal benefit ................................ (5) (5)
Tax benefit utilized by shareholders due to status as Subchapter S
Corporation for Federal and state taxes ............................ 39 39
--------- ---------
-- % -- %
========= =========
</TABLE>
(NOTE G) -- RELATED PARTY TRANSACTIONS
Office facilities were provided free of charge by a related party. Upon
acquisition by Paradigm, the Company will use Paradigm's facilities.
Certain accounting and tax preparation services were provided by a related
party and are presented as accounts payable - related party on the balance
sheet.
(NOTE H) -- SUBSEQUENT EVENTS:
Acquisition by Paradigm
In February 1997, Paradigm acquired all of the issued and outstanding
capital stock of the Company for a purchase price consisting of 100,000
shares of Paradigm's Class A Common Stock. 33,333 shares were issued upon
closing and the remaining 66,667 shares are to be issued on the earlier of 90
days after the proposed public offering or December 31, 1997.
Proposed public offering
Paradigm has signed a letter of intent with respect to a proposed public
offering of the Company's securities. There is no assurance that such
offering will be consummated.
F-29
<PAGE>
==============================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in
this Prospectus, and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company or by the
Underwriter. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any securities offered hereby by anyone in
any jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so
or to anyone to whom it is unlawful to make such offer, or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that the information herein
contained is correct as of any time subsequent to the date of this
Prospectus.
------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary ........................... 3
Risk Factors ................................. 8
Use of Proceeds .............................. 18
Capitalization ............................... 19
Dividend Policy .............................. 20
Dilution ..................................... 21
Unaudited Pro Forma Condensed Consolidated
Financial Statements ........................ 22
Selected Financial Data ...................... 26
Management's Discussion and Analysis
of Financial Condition and Results of
Operations .................................. 28
Business ..................................... 31
Management ................................... 39
Certain Transactions ......................... 44
Principal Stockholders ....................... 45
Concurrent Offering .......................... 48
Description of Securities .................... 49
Shares Eligible for Future Sale .............. 53
Underwriting ................................. 55
Legal Matters ................................ 57
Experts ...................................... 57
Additional Information ....................... 57
Index to Financial Statements ................ F-1
</TABLE>
------
Until , 1997, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be
required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
==============================================================================
<PAGE>
==============================================================================
2,600,000 UNITS
PARADIGM MUSIC
ENTERTAINMENT COMPANY
CONSISTING OF 2,600,000 SHARES OF
CLASS A COMMON STOCK, 2,600,000
REDEEMABLE CLASS A WARRANTS
AND 2,600,000 REDEEMABLE CLASS B WARRANTS
------
PROSPECTUS
------
D.H. BLAIR
INVESTMENT BANKING CORP.
, 1997
==============================================================================
<PAGE>
Alternate Prospectus Page
1,650,000 REDEEMABLE CLASS A WARRANTS
1,650,000 SHARES OF CLASS A COMMON STOCK AND
1,650,000 REDEEMABLE CLASS B WARRANTS
ISSUABLE UPON EXERCISE OF THE
1,650,000 SHARES OF REDEEMABLE CLASS A WARRANTS
SUBJECT TO COMPLETION, DATED MARCH 21, 1997
PROSPECTUS
PARADIGM MUSIC ENTERTAINMENT COMPANY
This Prospectus relates to 1,650,000 Redeemable Class A Warrants (the
"Class A Warrants") of Paradigm Music Entertainment Company, a Delaware
corporation (the "Company"), issued to 73 investors in connection with a
bridge financing (the "Bridge Financing") by the Company in January 1997, the
1,650,000 shares of Class A Common Stock, $.01 par value ("Class A Common
Stock") and 1,650,000 Redeemable Class B Warrants ("Class B Warrants")
issuable upon the exercise of the Class A Warrants and 1,650,000 shares of
Class A Common Stock issuable upon exercise of such Class B Warrants. The
Class A Warrants and Class B Warrants are referred to herein sometimes
collectively as the "Warrants," the holders of the Warrants are referred to
herein sometimes collectively as the "Selling Securityholders" and the
Warrants held by such Selling Securityholders are referred to herein
collectively as the "Selling Securityholder Warrants." See "Selling
Securityholders and Plan of Distribution." Each Class A Warrant entitles the
holder to purchase, at an exercise price of 6.50, subject to adjustment, one
share of Class A Common Stock and one Class B Warrant, and each Class B
Warrant entitles the holder to purchase, at an exercise price of 8.75,
subject to adjustment, one share of Class A Common Stock. The Warrants are
exercisable at any time after issuance through the fifth anniversary of the
date of this Prospectus. The Warrants are subject to redemption by the
Company for $.05 per Warrant, upon 30 days' written notice, if the average
closing bid price of the Class A Common Stock exceeds 9.10 per share with
respect to the Class A Warrants and 12.25 share with respect to the Class B
Warrants (subject to adjustment in each case) for 30 consecutive business
days ending within 15 days of the date of the notice of redemption. See
"Description of Securities."
The Class A Common Stock and the Class B Common Stock, $.01 par value (the
"Class B Common Stock") of the Company are essentially identical, except that
the Class B Common Stock has five votes per share and the Class A Common
Stock has one vote per share on all matters upon which stockholders may vote.
Upon completion of this Offering, the holders of Class B Common Stock will
control approximately 53% of the total voting power and will therefore be
able to elect all of the Company's directors and control the Company. The
Class B Common Stock is convertible into Class A Common Stock at any time at
the option of the holder and automatically upon any sale or transfer, except
to certain permitted transferees. See "Principal Stockholders" and
"Description of Securities."
The securities offered by the Selling Securityholders by this Prospectus
may be sold from time to time by the Selling Securityholders or by their
transferees. The distribution of the Class A Warrants, Class A Common Stock
and the Class B Warrants offered hereby by the Selling Securityholders may be
effected in one or more transactions that may take place on the
over-the-counter market, including ordinary brokers' transactions, privately
negotiated transactions or through sales to one or more dealers for resale of
such securities as principals, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Securityholders. The Selling
Securityholder Warrants are expected to become tradeable commencing one year
from the date hereof.
The Selling Securityholders, and intermediaries through whom such
securities are sold, may be deemed underwriters within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to
the securities offered, and any profits realized or commissions received may
be deemed underwriting compensation. The Company has agreed to indemnify the
Selling Securityholders against certain liabilities, including liabilities
under the Securities Act.
<PAGE>
The Company will not receive any of the proceeds from the sale of
securities by the Selling Securityholders. In the event the Selling
Securityholder Warrants are exercised, the Company will receive gross
proceeds of $25,162,500. See "Selling Securityholders" and "Plan of
Distribution."
On the date of this Prospectus a registration statement under the
Securities Act with respect to a public offering by the Company (the
"Offering") underwritten by the Underwriter of 2,600,000 each Unit consisting
of one share of Class A Common Stock, one Class A Warrant and one Class B
Warrant, was declared effective by the Securities and Exchange Commission
(the "Commission"). The Company will receive approximately $10,810,000 in net
proceeds from Offering (assuming no exercise of the Underwriter's
over-allotment option) after payment of underwriting discounts and
commissions and estimated expenses of the Offering.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 8.
------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------
The date of this Prospectus is , 1997
<PAGE>
Alternate Prospectus Page
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
An aggregate of up to 1,650,000 Class A Warrants, 1,650,000 shares of
Class A Common Stock and 1,650,000 Class B Warrants issuable upon exercise of
such Class A Warrants and 1,650,000 shares of Class A Common Stock issuable
upon exercise of such Class B Warrants may be offered by investors who
received their Class A Warrants in connection with the Bridge Financing.
The following table set forth certain information with respect to each
Selling Securityholder for whom the Company is registering Securities for
resale to the public. The Company will not receive any of the proceeds from
the sale of such securities. There are no material relationships between any
of the Selling Securityholders and the Company, nor have any such material
relationships existed within the past three years.
<TABLE>
<CAPTION>
Number of Class A Warrants Beneficially
Selling Securityholders Owned and Maximum Number to be Sold(*)
------------------------------------ ---------------------------------------
<S> <C>
Ilesanmi & Patience O. Adesida ..... 25,000
Jeffrey Adwar ...................... 12,500
Biniamine Amoyelle, TTEE Wolfson
Descendent's 1983 Trust ........... 50,000
H. Paulsen Armstrong ............... 25,000
Arthur Asch ........................ 12,500
Donald R. Asch ..................... 6,250
Michael A. Asch .................... 12,500
Marc H. Bell ....................... 25,000
Ronald J. Berk ..................... 25,000
Steven Bloch ....................... 12,500
John & Sharon Bucchignano .......... 6,250
Julian B. Childs ................... 6,250
Tony Ciabattoni .................... 25,000
Lee R. Curtis ...................... 12,500
Steven A. Dawes .................... 50,000
Leonard DeCecchis .................. 12,500
Benjamin S. DeYoung ................ 6,250
Achilles A. Dosio .................. 100,000
Milton I. Drucker, TTEE
The Drucker Group Inc.
Retirement Trust DTD 1/1/95 ....... 12,500
Isaac R. Dweck ..................... 12,500
Jonathan & Irene Elias, Tenants
by the Entirety ................... 25,000
Glenn E. Emig ...................... 12,500
Arthur J. Falcone .................. 25,000
Edward W. Falcone .................. 25,000
Leonard R. Farber .................. 25,000
Donald F. Farley ................... 6,250
Keith A. Finger, O.D. .............. 12,500
Denis Fortin ....................... 50,000
David R. Fried ..................... 12,500
Isaac Gindi ........................ 12,500
Raymond Gindi ...................... 12,500
Samuel V. Goekjian ................. 12,500
Alan J. Golden ..................... 25,000
Harry A. Goldenberg ................ 25,000
Andrew Goldfarb .................... 6,250
Carl W. Grover ..................... 25,000
Hiram Haddad, TTEE for
General Leasing & Management
Corp. Employees Pension Plan &
Trust Dated 12/27/85 .............. 12,500
A-4
<PAGE>
Number of Class A Warrants Beneficially
Selling Securityholders Owned and Maximum Number to be Sold(*)
------------------------------------ ---------------------------------------
Richard G. Hinkle TTEE/
Richard G. Hinkle Revocable
Trust DTD 6/20/94 ................. 37,500
Samuel J. Holtzman and Joseph A.
Holtzman TTEES FBO Samuel J.
Holtzman Trust Amnd Restated 2/8/84 50,000
Howard Kalka ....................... 6,250
Louis & Irene Katz ................. 25,000
Kathleen W. Katzmann ............... 12,500
Gerard J. & Mariann F. Kennell ..... 6,250
Sharon C. Kornreich ................ 25,000
Ernest J. LaFroscia ................ 50,000
Frank G. Lake, III ................. 25,000
Lee A. Levine, TTEE
Levine, Staller, Sklar, Chan &
Brodsky Money Purchase Plan
DTD 06/01/85 ...................... 25,000
Martin L. Madorsky &
Judith Richard .................... 12,500
William R. Maines .................. 25,000
Marshall Manley .................... 50,000
Michael Misiolek ................... 6,250
Richard H. & Louise G. Molke ....... 6,250
Michael & Sandra Moors ............. 25,000
Lloyd A. Moriber, M.D. ............. 25,000
Stephen W. & Louis B. Nagy ......... 12,500
Dennis F. & Claire E. Nardoni ...... 25,000
Richard A. & Elaine M. Nelson ...... 25,000
Sondra D. Nodvin ................... 25,000
Sid Paterson ....................... 25,000
James R. Pinke, M.D. ............... 25,000
Nathan Plafsky ..................... 12,500
Robert P. Rachlin .................. 12,500
Alfred Rattenni, TTEE A-1
Compaction, Inc. Defined
Benefit Plan ...................... 25,000
Marc Roberts ....................... 50,000
Paul & Beverly Silpe ............... 25,000
Phyllis Silverman .................. 50,000
Harvey Sorkin ...................... 25,000
Howard Sorkin ...................... 25,000
Harold Sparks ...................... 12,500
Samuel R. Staggers ................. 25,000
Gershon A. Stern ................... 25,000
Terry Sports ....................... 25,000
Robert D. Zucker ................... 12,500
TOTAL ......................... 1,650,000
</TABLE>
- - - - ------
* Does not include shares of Class A Common Stock issuable upon exercise of
the Class A Warrants and issuable upon exercise of the Class B Warrants
issuable upon exercise of the Class A Warrants. The Selling Secur-
ityholders have agreed not to exercise the Class A Warrants being
registered hereby for a period of one year from the closing of the
Offering.
A-5
<PAGE>
PLAN OF DISTRIBUTION
The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the amount of the Selling Securityholders) in the over-the- counter
market or in negotiated transactions, through the writing of options on the
securities, a combination of such methods of sale or otherwise. Sales may be
made at fixed prices which may be changed, at market prices prevailing at the
time of sale, or at negotiated prices.
The Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents
for the Selling Securityholders or to broker-dealers who may purchase shares
as principals and thereafter sell the securities from time to time in the
over-the-counter market in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker-dealer
may exceed customary commissions).
Each Selling Securityholder has agreed not to exercise, sell, transfer or
otherwise dispose of the Selling Securityholder Warrants for a period of one
year after the closing of the Offering.
The Commission has recently adopted Regulation M which will replace Rule
10b-6 and certain other rules and regulations under the Exchange Act.
Regulation M will prohibit any person engaged in the distribution of the
Selling Securityholder Warrants from simultaneously engaging in market-making
activities with respect to any securities of the Company during the
applicable "cooling-off" period (one or five business days) prior to the
commencement of such distribution. Accordingly, in the event the Underwriter
of the Company's Offering or D.H. Blair & Co. Inc. ("Blair") is engaged in a
distribution of the Selling Securityholder Warrants, neither of such firms
will be able to make a market in the Company's securities during the
applicable restrictive period. However, neither the Underwriter nor Blair
have agreed to nor are either of them obliged to act as broker/dealer in the
sale of the Selling Securityholder Warrants and the Selling Securityholders
may be required, and in the event Blair is a market maker, will likely be
required, to sell such securities through another broker/dealer. In addition,
each Selling Securityholder desiring to sell Warrants will be subject to the
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, Regulation M, which provisions may
limit the timing of the purchases and sales of shares of the Company's
securities by such Selling Securityholders.
The Selling Securityholders and broker-dealers, if any, acting in
connection with such sale might be deemed to be underwriters within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
A-6
<PAGE>
Alternate Page
==============================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in
this Prospectus, and, if given or made, such information or representations
must not be relied upon as having been authorized by the Company or by the
Underwriter. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any securities offered hereby by anyone in
any jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so
or to anyone to whom it is unlawful to make such offer, or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that the information herein
contained is correct as of any time subsequent to the date of this
Prospectus.
------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary ........................
Risk Factors ..............................
Use of Proceeds ...........................
Dividend Policy ...........................
Capitalization ............................
Dilution ..................................
Selected Financial Data ...................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ...............................
Business ..................................
Management ................................
Certain Transactions ......................
Principal Stockholders ....................
Selling Securityholders ...................
Plan of Distribution ......................
Concurrent Public Offering ................
Description of Securities .................
Shares Eligible for Future Sale ...........
Legal Matters .............................
Experts ...................................
Additional Information ....................
Index to Financial Statements ............. F-1
</TABLE>
==============================================================================
<PAGE>
PARADIGM MUSIC
ENTERTAINMENT COMPANY
---------------
------
PROSPECTUS
------
[ ], 1997
==============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law which covers the
indemnification of directors, officers, employees and agents of a corporation
is hereby incorporated herein by reference. Reference is made to Article
Ninth of Registrant's Articles of Incorporation and Article V of Registrant's
By-Laws which provide for indemnification by the Registrant in the manner and
to the full extent permitted by Delaware law.
Reference is also made to Section 8 of the Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this Offering all of which are to be paid by the
Registrant in connection with the issuance and distribution of the securities
being registered are as follows:
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee ....................................... $36,264.47
NASD Filing Fee ............................................ 12,467.28
Nasdaq Listing Fee .........................................
Printing and Engraving Expenses ............................ *
Accounting Fees and Expenses ............................... *
Legal Fees and Expenses .................................... *
Blue Sky Fees and Expenses ................................. *
Underwriter's Expense Allowance ............................ *
Transfer Agent's Fees and Expenses........................... *
Miscellaneous Expenses ..................................... *
------------
$
Total .................................................... *
------------
</TABLE>
- - - - ------
* To be completed by amendment
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth certain information with respect to sales by the
Company of its securities during the past three years giving effect to a
one-for-three reverse stock split effected in January 1997. All such sales
were exempt from registration pursuant to an exemption provided by Section
4(2) of the Securities Act as there was no public offering involved.
From August to November 1995, the Company sold an aggregate of 346,676
shares of its Class A Common Stock and 1,000,005 shares of its Class B Common
Stock to six persons and three persons, respectively, for a purchase price of
$.03 per share.
In November 1995, the Company sold an aggregate of 1,000,027 shares of
Class A Common Stock for a purchase price of $3.00 per share in a private
placement to 58 accredited investors. The Underwriter acted as the Company's
placement agent in connection with this private placement and the Company
issued warrants to purchase an aggregate of 350,004 shares of Class A Common
Stock to the Underwriter and its designees, which are exercisable through the
fifth anniversary of the closing of this Offering at an exercise price of
$3.00 per share.
In May 1996, the Company issued 8,334 shares of Class A Common Stock to
each of its two non-employee directors in exchange for services, which were
valued at $3.00 per share.
In January 1997, the Company declared a dividend to its existing
stockholders and warrantholders of one share of Class E Common Stock for each
two shares of Class A or Class B Common Stock beneficially owned as of such
date.
II-1
<PAGE>
In January 1997 the Company issued 66 Units, each Unit consisting of a
note in the principal amount of $50,000 bearing interest at 10% per annum and
warrants to purchase 25,000 shares of Class A Common Stock at an exercise
price of $3.00 per share (assuming this Offering is not consummated), to 73
accredited investors for an aggregate purchase price of $3,300,000 The Units
were issued pursuant to an exemption from registration provided by Regulation
D promulgated under Section 4(2) of the Securities Act. The Underwriter acted
as the Company's placement agent and, in connection therewith, the Company
paid to the Underwriter a sales commission in the amount of $330,000, a
non-accountable expense allowance in the amount of $99,000 and issued to the
Underwriter warrants to purchase an aggregate of 165,000 shares of Class A
Common Stock, at an exercise price of $3.00 per share, which warrants will be
cancelled upon completion of this Offering and the issuance to the
Underwrwiter of its Unit Purchase Option.
In January 1997, the Company issued an aggregate of 200,000 shares of its
Class A Common Stock and agreed to issue an aggregate of 100,000 Class A
Warrants upon the consummation of this Offering, to two entities in
connection with the acquisition by the Company of 100% of the outstanding
stock of SonicNet, Inc from such entities. In February 1997, the Company
issued an aggregate of 33,333 shares of its Class A Common Stock, and agreed
to issue an additional 66,667 shares of its Class A Common Stock on the
earlier of December 31, 1997 or 90 days from the effective date of this
Registration Statement, to three individuals in connection with the
acquisition by the Company of 100% of the outstanding stock of Purple Demon,
Inc. from such individuals.
Item 27. Exhibits
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant, as amended
3.2 Bylaws of the Registrant
4.1 Form of Unit Purchase Option
4.2 Form of Warrant Agreement among the Registrant, the Underwriter and American Stock Transfer & Trust Company
("American Stock")
4.3 Escrow Agreement dated November 21, 1995 among the Registrant, American Stock and certain stockholders.
4.4(a) Form of warrant to purchase Series A Common Stock dated November 21, 1995
4.4(b) Amendment dated February 1, 1997 to Warrant dated November 21, 1995
4.5 Registration Rights Agreement dated as of January 9, 1997 among the Registrant, Prodigy Services Corporation
("Prodigy") and Sunshine Interactive Network, Inc. ("Sunshine")
4.6 Warrant Agreement dated as of January 9, 1997 among the Registrant, Prodigy, Sunshine and American Stock
5.1 Opinion of Bachner, Tally, Polevoy & Misher LLP*
10.1 1996 Stock Option Plan
10.3 Employment Agreement dated January 30, 1996 between the Registrant and Thomas H. McPartland
10.2 [Reserved]
10.4 Consulting Agreement dated November 21, 1995, between the Registrant and Louis A. Falcigno
10.5 Consulting Agreement dated November 21, 1995 between the Registrant and Robert B. Meyrowitz
10.6(a) Lease for Executive Offices
10.6(b) Lease for Executive Offices
10.7 Form of Indemnification Agreement between the Registrant and its Directors
10.8 Stock Purchase Agreement dated January 9, 1997 among the Registrant, Prodigy Services Corporation and
Sunshine Interactive Network, Inc.
10.9 Stock Purchase Agreement dated as of February 14, 1997 between the Registrant, Purple Demon, Inc., Dean
Brownrout, David Wolin and Charles Pye.
10.10 Letter of Intent dated February 14, 1997 between the Registrant and Michael Goldberg d/b/a "Addicted
to Noise."
11.1 Computation of Earnings Per Common Share
21.1 Subsidiaries of the Registrant.
23.1 Consent of Bachner, Tally, Polevoy & Misher LLP -- Included in Exhibit 5.1*
23.2 Consent of Janover Rubinroit, LLC- Included on Page II-5
24.1 Power of Attorney - Included on Page II-6
</TABLE>
- - - - ------
* To be filed by Amendment
II-2
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
Offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions of its Certificate of
Incorporation and By-Laws, of the Delaware General Corporation Law, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the issuer of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will by governed by the final adjudication of such
issue.
II-3
<PAGE>
CONSENT OF COUNSEL
The consent of Bachner, Tally, Polevoy & Misher LLP will be contained in
its opinion, to be filed as Exhibit 5.1 to the Registration Statement.
II-4
<PAGE>
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form SB-2 of
(i) our report dated February 11, 1997, except for Note J as to which the
date is February 14, 1997, on our audits of the financial statements of
Paradigm Music Entertainment Company as of December 31, 1996 and for each of
the periods from November 21, 1995 (inception) through December 31, 1995 and
December 31, 1996, (ii) our report dated February 4, 1997, except for Note F
as to which the date is February 19, 1997, on our audits of the final
statements of SonicNet, Inc. as of the years ended December 31, 1995 and 1996
and for the period from June 1994 (inception) through December 31, 1996, and
(iii) our report dated March 6, 1997 on our audits of the financial
statements of Purple Demon, Inc. as of the years ended December 31, 1995 and
1996. We also consent to the reference to our firm under the captions
"Selected Financial Data" and "Experts" in the Prospectus.
JANOVER RUBINROIT, LLC
March 21, 1997
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and caused this Registration
Statement or amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
20th day of March 1997.
PARADIGM MUSIC ENTERTAINMENT
COMPANY
By: /s/ Thomas McPartland
--------------------------------
Thomas McPartland, Chairman of
the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under the heading "Signatures" constitutes and appoints each of Thomas
McPartland and Scott R. Grodnick his true and lawful attorney-in-fact and
agent, each with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities to sign any or all
amendments to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-facts and
agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
for all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-facts and agents or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------------------------- ------------------------------------------- ------------------
<S> <C> <C>
/s/ Thomas McPartland Chairman of the Board, President and Chief March 20, 1997
-------------------------- Executive Officer (Principal Executive Officer)
Thomas McPartland
/s/ Scott R. Grodnick Chief Financial Officer and Director (Principal March 20, 1997
-------------------------- Financial and Accounting Officer)
Scott R. Grodnick
/s/ Louis A. Falcigno Vice President and Director March 20, 1997
--------------------------
Louis A. Falcigno
/s/ Robert B. Meyrowitz Director March 20, 1997
--------------------------
Robert B. Meyrowitz
/s/ Gilbert N. Segel Director March 20, 1997
--------------------------
Gilbert N. Segel
/s/ Frank Barsalona Director March 20, 1997
--------------------------
Frank Barsalona
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
Item 27. Exhibits
<TABLE>
<CAPTION>
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Registrant, as amended
3.2 Bylaws of the Registrant
4.1 Form of Unit Purchase Option
4.2 Form of Warrant Agreement among the Registrant, the Underwriter and American Stock Transfer & Trust Company
("American Stock")
4.3 Escrow Agreement dated November 21, 1995 among the Registrant, American Stock and certain stockholders.
4.4(a) Form of warrant to purchase Series A Common Stock dated November 21, 1995
4.4(b) Amendment dated February 1, 1997 to Warrant dated November 21, 1995
4.5 Registration Rights Agreement dated as of January 9, 1997 among the Registrant, Prodigy Services Corporation
("Prodigy") and Sunshine Interactive Network, Inc. ("Sunshine")
4.6 Warrant Agreement dated as of January 9, 1997 among the Registrant, Prodigy, Sunshine and American Stock
5.1 Opinion of Bachner, Tally, Polevoy & Misher LLP*
10.1 1996 Stock Option Plan
10.2 [Reserved]
10.3 Employment Agreement dated January 30, 1996 between the Registrant and Thomas H. McPartland
10.4 Consulting Agreement dated November 21, 1995, between the Registrant and Louis A. Falcigno
10.5 Consulting Agreement dated November 21, 1995 between the Registrant and Robert B. Meyrowitz
10.6(a) Lease for Executive Offices
10.6(b) Lease for Executive Offices
10.7 Form of Indemnification Agreement between the Registrant and its Directors
10.8 Stock Purchase Agreement dated January 9, 1997 among the Registrant, Prodigy Services Corporation and
Sunshine Interactive Network, Inc.
10.9 Stock Purchase Agreement dated as of February 14, 1997 between the Registrant, Purple Demon, Inc., Dean
Brownrout, David Wolin and Charles Pye.
10.10 Letter of Intent dated February 14, 1997 between the Registrant and Michael Goldberg d/b/a "Addicted
to Noise."
11.1 Computation of Earnings Per Common Share
21.1 Subsidiaries of the Registrant.
23.1 Consent of Bachner, Tally, Polevoy & Misher LLP -- Included in Exhibit 5.1*
23.2 Consent of Janover Rubinroit, LLC- Included on Page II-5
24.1 Power of Attorney - Included on Page II-6
</TABLE>
- - - - ------
* To be filed by Amendment
<PAGE>
[_________] Units
(each Unit consisting of (i) one share of
Common Stock, par value $.01 per share; (ii) one redeemable Class A Warrant
to purchase one share of Common Stock
and one redeemable Class B Warrant
and (iii) one redeemable Class B Warrant)
PARADIGM MUSIC ENTERTAINMENT COMPANY
UNDERWRITING AGREEMENT
____________, 1997
D.H. Blair Investment Banking Corp.
44 Wall Street
2nd Floor
New York, New York 10005
PARADIGM MUSIC ENTERTAINMENT COMPANY, a Delaware
corporation (the "Company"), proposes to issue and sell to D.H. Blair Investment
Banking Corp. (the "Underwriter") pursuant to this Underwriting Agreement (the
"Agreement") an aggregate of [_________] Units, each unit being hereinafter
referred to as a "Unit" and consisting of (i) one share of Common Stock, par
value $.01 per share, ("Shares"), (ii) one redeemable Class A warrant ("Class A
Warrants") to purchase one share of Common Stock and one redeemable Class B
warrant ("Class B Warrants") at a price of $6.50 from _______, 1997 to _______,
2002 and (iii) one Class B Warrant. The Class A Warrants and Class B Warrants
are collectively referred to as the "Warrants." The Warrants are subject to
redemption, in certain instances commencing one year from the date of this
Agreement. In addition, the Company proposes to grant to the Underwriter the
option referred to in Section 2(b) to purchase all or any part of an aggregate
of [_______] additional Units. Unless the context otherwise indicates, the term
"Units" shall include the [_______] additional Units referred to above.
The aggregate of [_________] Units to be sold by the
Company, together with all or any part of the [_______] Units which the
Underwriter has the option to purchase, and the Shares and the Warrants
comprising such Units, are herein called the "Units." The Common Stock of the
Company to be outstanding after giving effect to the sale of the Shares is
herein called the "Common Stock." The Shares and Warrants included in the Units
(including the
<PAGE>
Units which the Underwriter has the option to purchase) are herein collectively
called the "Securities."
You have advised the Company that you desire to purchase
the Units. The Company confirms the agreements made by it with respect to the
purchase of the Units by you as follows:
1. Representations and Warranties of the Company. The
Company represents and warrants to, and agrees with, the Underwriter that:
(a) A registration statement (File No.
333-_______) on Form SB-2 relating to the public offering of the Units,
including a form of prospectus subject to completion, copies of which have
heretofore been delivered to you, has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission under the Act and one or more amendments to such registration
statement may have been so filed. After the execution of this Agreement, the
Company will file with the Commission either (i) if such registration statement,
as it may have been amended, has been declared by the Commission to be effective
under the Act, either (A) if the Company relies on Rule 434 under the Act, a
Term Sheet (as hereinafter defined) relating to the Units that shall identify
the Preliminary Prospectus (as hereinafter defined) that it supplements
containing such information as is required or permitted by Rules 434, 430A and
424(b) under the Act or (B) if the Company does not rely on Rule 434 under the
Act a prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been filed, in such
registration statement), with such changes or insertions as are required by Rule
430A under the Act or permitted by Rule 424(b) under the Act and in the case of
either clause (i)(A) or (i)(B) of this sentence, as have been provided to and
approved by the Underwriter prior to the execution of this Agreement, or (ii) if
such registration statement, as it may have been amended, has not been declared
by the Commission to be effective under the Act, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Underwriter prior to the
execution of this Agreement.
As used in this Agreement, the term "Registration
Statement" means such registration statement, as amended at the time when it was
or is declared effective, including all financial schedules and exhibits thereto
and including any information omitted therefrom pursuant to Rule 430A under the
Act and included in the Prospectus (as hereinafter defined); the term
"Preliminary Prospectus" means each prospectus subject to completion filed with
such registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the term
"Prospectus" means (A) if the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Units that is first filed pursuant to Rule 424(b)(7) under
the Act, together with the Preliminary Prospectus identified therein
-2-
<PAGE>
that such Term Sheet supplements; (B) if the Company does not rely on Rule 434
under the Act, the prospectus first filed with the Commission pursuant to Rule
424(b) under the Act or (C) if the Company does not rely on Rule 434 under the
Act and if no prospectus is required to be filed pursuant to said Rule 424(b),
such term means the prospectus included in the Registration Statement; except
that if such registration statement or prospectus is amended or such prospectus
is supplemented, after the effective date of such registration statement and
prior to the Option Closing Date (as hereinafter defined), the terms
"Registration Statement" and "Prospectus" shall include such registration
statement and prospectus as so amended, and the term "Prospectus" shall include
the prospectus as so supplemented, or both, as the case may be; and the term
"Term Sheet" means any term sheet that satisfies the requirements of Rule 434
under the Act. Any reference to the "date" of a Prospectus that includes a Term
Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus. At the time the
Registration Statement becomes effective and at all times subsequent thereto up
to and on the Closing Date (as hereinafter defined) or the Option Closing Date,
as the case may be, (i) the Registration Statement and Prospectus will in all
respects conform to the requirements of the Act and the Rules and Regulations;
and (ii) neither the Registration Statement nor the Prospectus will include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make statements therein not misleading;
provided, however, that the Company makes no representations, warranties or
agreements as to information contained in or omitted from the Registration
Statement or Prospectus in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of the Underwriter
specifically for use in the preparation thereof. It is understood that the
statements set forth in the Prospectus on page [__] with respect to
stabilization, under the heading "Underwriting" and the identity of counsel to
the Underwriter under the heading "Legal Matters" constitute the only
information furnished in writing by or on behalf of the Underwriter for
inclusion in the Registration Statement and Prospectus, as the case may be.
(c) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with full power and authority (corporate and
other) to own its properties and conduct its business as described in the
Prospectus and is duly qualified to do business as a foreign corporation and is
in good standing in all other jurisdictions in which the nature of its business
or the character or location of its properties requires such qualification,
except where failure to so qualify will not materially affect the Company's
business, properties or financial condition.
(d) The authorized, issued and outstanding
capital stock of the Company as of [___________], 1997 is as set forth in the
Prospectus under "Capitalization"; the shares of issued and outstanding capital
stock of the Company set forth thereunder have been duly authorized, validly
issued and are fully paid and non-assessable; except as set forth in the
Prospectus, no options, warrants, or other rights to purchase, agreements or
other
-3-
<PAGE>
obligations to issue, or agreements or other rights to convert any obligation
into, any shares of capital stock of the Company have been granted or entered
into by the Company; and the capital stock conforms to all statements relating
thereto contained in the Registration Statement and Prospectus.
(e) The Units and the Shares are duly authorized,
and when issued and delivered pursuant to this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable and free of preemptive
rights of any security holder of the Company. [Neither the relating to the
registration of any shares of Common Stock, except as described in the
Registration Statement.]
The Warrants have been duly authorized and, when issued
and delivered pursuant to this Agreement, will have been duly executed, issued
and delivered and will constitute valid and legally binding obligations of the
Company enforceable in accordance with their terms and entitled to the benefits
provided by the warrant agreement pursuant to which such Warrants are to be
issued (the "Warrant Agreement"), which will be substantially in the form filed
as an exhibit to the Registration Statement. The shares of Common Stock issuable
upon exercise of the Warrants have been reserved for issuance upon the exercise
of the Warrants and when issued in accordance with the terms of the Warrants and
Warrant Agreement, will be duly and validly authorized, validly issued, fully
paid and non-assessable and free of preemptive rights and no personal liability
will attach to the ownership thereof. The Warrant Agreement has been duly
authorized and, when executed and delivered pursuant to this Agreement, will
have been duly executed and delivered and will constitute the valid and legally
binding obligation of the Company enforceable in accordance with its terms. The
Warrants and the Warrant Agreement conform to the respective descriptions
thereof in the Registration Statement and Prospectus.
The Shares and the Warrants contained in the Unit Purchase
Option have been duly authorized and, when duly issued and delivered, such
Warrants will constitute valid and legally binding obligations of the Company
enforceable in accordance with their terms and entitled to the benefits provided
by the Unit Purchase Option. The Shares included in the Unit Purchase Option
(and the shares of Common Stock issuable upon exercise of such Warrants) when
issued and sold, will be duly authorized, validly issued, fully paid and
non-assessable and free of preemptive rights and no personal liability will
attach to the ownership thereof.
(f) This Agreement, the Unit Purchase Option, the
M/A Agreement, the Consulting Agreement and the Escrow Agreement have been duly
and validly authorized, executed and delivered by the Company. The Company has
full power and lawful authority to authorize, issue and sell the Units to be
sold by it hereunder on the terms and conditions set forth herein, and no
consent, approval, authorization or other order of any governmental authority is
required in connection with such authorization, execution and delivery or with
the authorization, issue and sale of the Units or the Unit Purchase Option,
except such as may be required under the Act or state securities laws.
-4-
<PAGE>
(g) Except as described in the Prospectus, the
Company is not in violation, breach or default of or under, and consummation of
the transactions herein contemplated and the fulfillment of the terms of this
Agreement will not conflict with, or result in a breach or violation of, any of
the terms or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any of the
property or assets of the Company pursuant to the terms of any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company is a party or by which the Company may be bound or to which
any of the property or assets of the Company is subject, nor will such action
result in any violation of the provisions of the articles of incorporation or
the by-laws of the Company, as amended, or any statute or any order, rule or
regulation applicable to the Company of any court or of any regulatory authority
or other governmental body having jurisdiction over the Company.
(h) Subject to the qualifications stated in the
Prospectus, the Company has good and marketable title to all properties and
assets described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to its business; all of the material leases
and subleases under which the Company is the lessor or sublessor of properties
or assets or under which the Company holds properties or assets as lessee or
sublessee as described in the Prospectus are in full force and effect, and,
except as described in the Prospectus, the Company is not in default in any
material respect with respect to any of the terms or provisions of any of such
leases or subleases, and no claim has been asserted by anyone adverse to rights
of the Company as lessor, sublessor, lessee or sublessee under any of the leases
or subleases mentioned above, or affecting or questioning the right of the
Company to continued possession of the leased or subleased premises or assets
under any such lease or sublease except as described or referred to in the
Prospectus; and the Company owns or leases all such properties described in the
Prospectus as are necessary to its operations as now conducted and, except as
otherwise stated in the Prospectus, as proposed to be conducted as set forth in
the Prospectus.
(i) [____________________], who have given their
reports on certain financial statements filed and to be filed with the
Commission as a part of the Registration Statement, which are incorporated in
the Prospectus, are with respect to the Company, independent public accountants
as required by the Act and the Rules and Regulations.
(j) The financial statements, and Schedules
together with related notes, set forth in the Prospectus (or if the Prospectus
is not in existence, the most recent Preliminary Prospectus) or the Registration
Statement present fairly the financial position and results of operations and
changes in cash flow position of the Company on the basis stated in the
Registration Statement, at the respective dates and for the respective periods
to which they apply. Said statements and Schedules and related notes have been
prepared in accordance with generally accepted accounting principles applied on
a basis which is consistent during the periods involved. The information set
forth under the captions "Dilution," "Capitalization," and "Selected
-5-
<PAGE>
Financial Data" in the Prospectus fairly present, on the basis stated in the
Prospectus, the information included therein. The pro forma financial
information filed as part of the Registration Statement or included in the
Prospectus (or such preliminary prospectus) has been prepared in accordance with
the Commission's rules and guidelines with respect to pro forma financial
statements, and includes all adjustments necessary to present fairly the pro
forma financial condition and results of operations at the respective dates and
for the respective periods indicated and all assumptions used in preparing such
pro forma financial statements are reasonable.
(k) Subsequent to the respective dates as of
which information is given in the Registration Statement and Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus), the
Company has not incurred any liabilities or obligations, direct or contingent,
not in the ordinary course of business, or entered into any transaction not in
the ordinary course of business, which is material to the business of the
Company, and there has not been any change in the capital stock of, or any
incurrence of short-term or long-term debt by, the Company or any issuance of
options, warrants or other rights to purchase the capital stock of the Company
or any adverse change or any development involving, so far as the Company can
now reasonably foresee a prospective adverse change in the condition (financial
or other), net worth, results of operations, business, key personnel or
properties of it which would be material to the business or financial condition
of the Company and the Company has not become a party to, and neither the
business nor the property of the Company has become the subject of, any material
litigation whether or not in the ordinary course of business.
(l) Except as set forth in the Prospectus, there
is not now pending or, to the knowledge of the Company, threatened, any action,
suit or proceeding to which the Company is a party before or by any court or
governmental agency or body, which might result in any material adverse change
in the condition (financial or other), business prospects, net worth, or
properties of the Company, nor are there any actions, suits or proceedings
related to environmental matters or related to discrimination on the basis of
age, sex, religion or race; and no labor disputes involving the employees of the
Company exist or are imminent which might be expected to adversely affect the
conduct of the business, property or operations or the financial condition or
results of operations of the Company.
(m) Except as disclosed in the Prospectus, the
Company has filed all necessary federal, state and foreign income and franchise
tax returns and has paid all taxes shown as due thereon; and there is no tax
deficiency which has been or to the knowledge of the Company might be asserted
against the Company.
(n) The Company has all licenses, permits and
other governmental authorizations currently required for the conduct of its
business or the ownership of its properties as described in the Prospectus and
is in all material respects complying therewith and owns or possesses adequate
rights to use all material patents, patent applications, trademarks, copyrights,
service marks, trade-names, trademark registrations, service mark registrations,
copyrights and licenses necessary for the
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conduct of such business and had not received any notice of conflict with the
asserted rights of others in respect thereof. To the best knowledge of the
Company, none of the activities or business of the Company are in violation of,
or cause the Company to violate, any law, rule, regulation or order of the
United States, any state, county or locality, or of any agency or body of the
United States or of any state, county or locality, the violation of which would
have a material adverse impact upon the condition (financial or otherwise),
business, property, prospective results of operations, or net worth of the
Company.
(o) The Company has not, directly or indirectly,
at any time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution in violation of law or (ii) made
any payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the Company
to comply in all material respects with the Foreign Corrupt Practices Act of
1977, as amended.
(p) On the Closing Dates (hereinafter defined)
all transfer or other taxes, (including franchise, capital stock or other tax,
other than income taxes, imposed by any jurisdiction) if any, which are required
to be paid in connection with the sale and transfer of the Units to the
Underwriter hereunder will have been fully paid or provided for by the Company
and all laws imposing such taxes will have been fully complied with.
(q) All contracts and other documents of the
Company which are, under the Rules and Regulations, required to be filed as
exhibits to the Registration Statement have been so filed.
(r) The Company has not taken and will not take,
directly or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Units hereby.
(s) The Company has no subsidiaries.
(t) The Company has not entered into any
agreement pursuant to which any person is entitled either directly or indirectly
to compensation from the Company for services as a finder in connection with the
proposed public offering.
(u) Except as previously disclosed in writing by
the Company to the Underwriter, no officer, director or stockholder of the
Company has any affiliation or association with any member of the National
Association of Securities Dealers Inc. ("NASD").
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<PAGE>
(v) The Company is not, and upon receipt of the
proceeds from the sale of the Units will not be, an "investment company" within
the meaning of the Investment Company Act of 1940, as amended, and the rules and
regulations thereunder.
(w) The Company has not distributed and will not
distribute prior to the First Closing Date any offering material in connection
with the offering and sale of the Units other than the Preliminary Prospectus,
Prospectus, the Registration Statement or the other materials permitted by the
Act, if any.
(x) The conditions for use of Form SB-2, as set
forth in the General Instructions thereto, have been satisfied.
(y) There are no business relationships or
related-party transactions of the nature described in Item 404 of Regulation S-B
involving the Company and any person described in such Item that are required to
be disclosed in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) and that have not been so disclosed.
(z) The Company has complied with all provisions
of Section 517.075 Florida Statutes relating to doing business with the
government of Cuba or with any person or affiliate located in Cuba.
2. Purchase, Delivery and Sale of the Units.
(a) Subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties, and agreements
herein contained, the Company agrees to issue and sell to the Underwriter, and
the Underwriter agrees to buy from the Company at $[_______] per Unit, at the
place and time hereinafter specified, the number of Units set forth in Schedule
A attached hereto (the "First Units"). The First Units shall consist of
[_________] Units to be purchased from the Company.
Delivery of the First Units against payment
therefor shall take place at the offices of D.H. Blair Investment Banking Corp.,
44 Wall Street, 2nd Floor, New York, New York 10005 (or at such other place as
may be designated by agreement between you and the Company) at 10:00 a.m., New
York time, on [__________], 1997, or at such later time and date as you may
designate, such time and date of payment and delivery for the First Units being
herein called the "First Closing Date."
(b) In addition, subject to the terms and
conditions of this Agreement, and upon the basis of the representations,
warranties and agreements herein contained, the Company hereby grants an option
to the Underwriter to purchase all or any part of an aggregate of an additional
[_______] Units at the same price per Unit as the Underwriter shall pay for the
First Units being sold pursuant to the provisions of subsection (a) of this
Section 2 (such additional Units being referred to
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herein as the "Option Units"). This option may be exercised within 45 days after
the effective date of the Registration Statement upon notice by the Underwriter
to the Company advising as to the amount of Option Units as to which the option
is being exercised, the names and denominations in which the certificates for
such Option Units are to be registered and the time and date when such
certificates are to be delivered. Such time and date shall be determined by the
Underwriter but shall not be earlier than four nor later than ten full business
days after the exercise of said option, nor in any event prior to the First
Closing Date, and such time and date is referred to herein as the "Option
Closing Date." Delivery of the Option Units against payment therefor shall take
place at the offices of D.H. Blair Investment Banking Corp., 44 Wall Street, 2nd
Floor, New York, New York 10005. The Option granted hereunder may be exercised
only to cover overallotments in the sale by the Underwriter of First Units
referred to in subsection (a) above. In the event the Company declares or pays a
dividend or distribution on its Common Stock, whether in the form of cash,
shares of Common Stock or any other consideration, prior to the Option Closing
Date, such dividend or distribution shall also be paid on the Option Units on
the Option Closing Date.
(c) The Company will make the certificates for
the securities comprising the Units to be purchased by the Underwriter hereunder
available to you for checking at least two full business days prior to the First
Closing Date or the Option Closing Date (which are collectively referred to
herein as the "Closing Dates"). The certificates shall be in such names and
denominations as you may request, at least two full business days prior to the
Closing Dates. Time shall be of the essence and delivery at the time and place
specified in this Agreement is a further condition to the obligations of the
Underwriter.
Definitive certificates in negotiable form for
the Units to be purchased by the Underwriter hereunder will be delivered by the
Company to you for the accounts of the Underwriter against payment of the
respective purchase prices by the Underwriter, by certified or bank cashier's
checks in New York Clearing House funds, payable to the order of the Company.
In addition, in the event the Underwriter
exercises the option to purchase from the Company all or any portion of the
Option Units pursuant to the provisions of subsection (b) above, payment for
such Units shall be made to or upon the order of the Company by certified or
bank cashier's checks payable in New York Clearing House funds at the offices of
D.H. Blair Investment Banking Corp., 44 Wall Street, 2nd Floor, New York, New
York 10005, at the time and date of delivery of such Units as required by the
provisions of subsection (b) above, against receipt of the certificates for such
Units by the Underwriter registered in such names and in such denominations as
the Underwriter may request.
It is understood that you propose to offer the
Units to be purchased hereunder to the public upon the terms and conditions set
forth in the Registration Statement, after the Registration Statement becomes
effective.
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<PAGE>
3. Covenants of the Company. The Company covenants and
agrees with the Underwriter that:
(a) The Company will use its best efforts to
cause the Registration Statement to become effective as promptly as possible. If
required, the Company will file the Prospectus or any Term Sheet that
constitutes a part thereof and any amendment or supplement thereto with the
Commission in the manner and within the time period required by Rules 434 and
424(b) under the Act. Upon notification from the Commission that the
Registration Statement has become effective, the Company will so advise you and
will not at any time, whether before or after the effective date, file the
Prospectus, Term Sheet or any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been advised
and furnished with a copy or to which you or your counsel shall have objected in
writing or which is not in compliance with the Act and the Rules and
Regulations. At any time prior to the later of (A) the completion by all of the
Underwriter of the distribution of the Units contemplated hereby (but in no
event more than nine months after the date on which the Registration Statement
shall have become or been declared effective) and (B) 25 days after the date on
which the Registration Statement shall have become or been declared effective,
the Company will prepare and file with the Commission, promptly upon your
request, any amendments or supplements to the Registration Statement or
Prospectus which, in your opinion, may be necessary or advisable in connection
with the distribution of the Units.
As soon as the Company is advised thereof, the
Company will advise you, and confirm the advice in writing, of the receipt of
any comments of the Commission, of the effectiveness of any post-effective
amendment to the Registration Statement, of the filing of any supplement to the
Prospectus or any amended Prospectus, of any request made by the Commission for
amendment of the Registration Statement or for supplementing of the Prospectus
or for additional information with respect thereto, of the issuance by the
Commission or any state or regulatory body of any stop order or other order or
threat thereof suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Units for offering in any jurisdiction,
or of the institution of any proceedings for any of such purposes, and will use
its best efforts to prevent the issuance of any such order, and, if issued, to
obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you
copies of each Preliminary Prospectus, and the Company has consented and hereby
consents to the use of such copies for the purposes permitted by the Act. The
Company authorizes the Underwriter and dealers to use the Prospectus in
connection with the sale of the Units for such period as in the opinion of
counsel to the Underwriter the use thereof is required to comply with the
applicable provisions of the Act and the Rules and Regulations. In case of the
happening, at any time within such period as a Prospectus is required under the
Act to be delivered in connection with sales by an underwriter or dealer of any
event of which the Company has knowledge and which materially affects the
Company or the securities of the Company, or which in the opinion of counsel for
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<PAGE>
the Company or counsel for the Underwriter should be set forth in an amendment
of the Registration Statement or a supplement to the Prospectus in order to make
the statements therein not then misleading, in light of the circumstances
existing at the time the Prospectus is required to be delivered to a purchaser
of the Units or in case it shall be necessary to amend or supplement the
Prospectus to comply with law or with the Rules and Regulations, the Company
will notify you promptly and forthwith prepare and furnish to you copies of such
amended Prospectus or of such supplement to be attached to the Prospectus, in
such quantities as you may reasonably request, in order that the Prospectus, as
so amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material facts necessary in order to make the
statements in the Prospectus, in the light of the circumstances under which they
are made, not misleading. The preparation and furnishing of any such amendment
or supplement to the Registration Statement or amended Prospectus or supplement
to be attached to the Prospectus shall be without expense to the Underwriter,
except that in case any Underwriter is required, in connection with the sale of
the Units to deliver a Prospectus nine months or more after the effective date
of the Registration Statement, the Company will upon request of and at the
expense of the Underwriter, amend or supplement the Registration Statement and
Prospectus and furnish the Underwriter with reasonable quantities of
prospectuses complying with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules
and Regulations and the Securities Exchange Act of 1934 and the rules and
regulations thereunder in connection with the offering and issuance of the
Units.
(b) The Company will use its best efforts to
qualify to register the Units for sale under the securities or "blue sky" laws
of such jurisdictions as the Underwriter may designate and will make such
applications and furnish such information as may be required for that purpose
and to comply with such laws, provided the Company shall not be required to
qualify as a foreign corporation or a dealer in securities or to execute a
general consent of service of process in any jurisdiction in any action other
than one arising out of the offering or sale of the Units. The Company will,
from time to time, prepare and file such statements and reports as are or may be
required to continue such qualification in effect for so long a period as the
Underwriter may reasonably request.
(c) If the sale of the Units provided for herein
is not consummated for any reason caused by the Company, the Company shall pay
all costs and expenses incident to the performance of the Company's obligations
hereunder, including but not limited to, all of the expenses itemized in Section
8, including the accountable expenses of the Underwriter.
(d) The Company will use its best efforts to (i)
cause a registration statement under the Securities Exchange Act of 1934 to be
declared effective concurrently with the completion of this offering and will
notify the Underwriter in writing immediately upon the effectiveness of such
registration statement, and (ii) if requested by the Underwriter, to obtain a
listing on the [Pacific
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<PAGE>
Stock Exchange] and to obtain and keep current a listing in the Standard & Poors
or Moody's Industrial OTC Manual.
(e) For so long as the Company is a reporting
company under either Section 12(g) or 15(d) of the Securities Exchange Act of
1934, the Company, at its expense, will furnish to its stockholders an annual
report (including financial statements audited by independent public
accountants), in reasonable detail and at its expense, will furnish to you
during the period ending five (5) years from the date hereof, (i) as soon as
practicable after the end of each fiscal year, a balance sheet of the Company
and any of its subsidiaries as at the end of such fiscal year, together with
statements of income, surplus and cash flow of the Company and any subsidiaries
for such fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent accountants; (ii) as soon as
practicable after the end of each of the first three fiscal quarters of each
fiscal year, consolidated summary financial information of the Company for such
quarter in reasonable detail; (iii) as soon as they are available, a copy of all
reports (financial or other) mailed to security holders; (iv) as soon as they
are available, a copy of all non-confidential reports and financial statements
furnished to or filed with the Commission or any securities exchange or
automated quotation system on which any class of securities of the Company is
listed; and (v) such other information as you may from time to time reasonably
request.
(f) In the event the Company has an active
subsidiary or subsidiaries, such financial statements referred to in subsection
(e) above will be on a consolidated basis to the extent the accounts of the
Company and its subsidiary or subsidiaries are consolidated in reports furnished
to its stockholders generally.
(g) The Company will deliver to you at or before
the First Closing Date two signed copies of the Registration Statement including
all financial statements and exhibits filed therewith, and of all amendments
thereto, and will deliver to the Underwriter such number of conformed copies of
the Registration Statement, including such financial statements but without
exhibits, and of all amendments thereto, as the Underwriter may reasonably
request. The Company will deliver to or upon the order of the Underwriter, from
time to time until the effective date of the Registration Statement, as many
copies of any Preliminary Prospectus filed with the Commission prior to the
effective date of the Registration Statement as the Underwriter may reasonably
request. The Company will deliver to the Underwriter on the effective date of
the Registration Statement and thereafter for so long as a Prospectus is
required to be delivered under the Act, from time to time, as many copies of the
Prospectus, in final form, or as thereafter amended or supplemented, as the
Underwriter may from time to time reasonably request. The Company, not later
than (i) 5:00 p.m., New York City time, on the date of determination of the
public offering price, if such determination occurred at or prior to 12:00 noon,
New York City time, on such date or (ii) 6:00 p.m., New York City time, on the
business day following the date of determination of the public offering price,
if such determination occurred after 12:00 noon, New York City time, on such
date, will deliver to the Underwriter, without charge, as many copies of the
Prospectus and any amendment or
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<PAGE>
supplement thereto as the Underwriter may reasonably request for purposes of
confirming orders that are expected to settle on the First Closing Date.
(h) The Company will make generally available to
its security holders and to the registered holders of its Warrants and deliver
to you as soon as it is practicable to do so but in no event later than 90 days
after the end of twelve months after its current fiscal quarter, an earnings
statement (which need not be audited) covering a period of at least 12
consecutive months beginning after the effective date of the Registration
Statement, which shall satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from
the sale of the Units for the purposes set forth under "Use of Proceeds" in the
Prospectus, and will file such reports with the Commission with respect to the
sale of the Units and the application of the proceeds therefrom as may be
required pursuant to Rule 463 under the Act.
(j) The Company will, promptly upon your request,
prepare and file with the Commission any amendments or supplements to the
Registration Statement, Preliminary Prospectus or Prospectus and take any other
action, which in the reasonable opinion of Paul, Hastings, Janofsky & Walker
LLP, counsel to the Underwriter, may be reasonably necessary or advisable in
connection with the distribution of the Units, and will use its best efforts to
cause the same to become effective as promptly as possible.
(k) The Company will reserve and keep available
that maximum number of its authorized but unissued securities which are issuable
upon exercise of the Unit Purchase Option outstanding from time to time.
(l) For a period of 13 months from the First
Closing Date, no officer, director or stockholder of the Company will directly
or indirectly, offer, sell (including any short sale), grant any option for the
sale of, acquire any option to dispose of, or otherwise dispose of any shares of
Common Stock without the prior written consent of the Underwriter.
(m) During the five year period from the date of
this Agreement, you shall have the right of first refusal (the "Right of First
Refusal") to purchase for your own account or to act as underwriter or agent for
any and all public or private offerings of the securities of the Company, or any
successor to or subsidiary of the Company or other entity in which the Company
has an equity interest, (collectively referred to herein as the "Company") by
the Company (the "Subsequent Company Offering") or any secondary offering of the
Company's securities by the Principal Stockholders (the "Secondary Offering").
Accordingly, if during such period the Company intends to make a Subsequent
Company Offering or the Company receives notification from any of such Principal
Stockholders of its securities of such holder's intention to make a Secondary
Offering, the Company shall notify you in writing of such intention and of the
proposed terms of the offering. The Company
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<PAGE>
shall thereafter promptly furnish you with such information concerning the
business, condition and prospects of the Company as you may reasonably request.
If within thirty (30) business days of the receipt of such notice of intention
and statement of terms you do not accept in writing such offer to act as
underwriter or agent with respect to such offering upon the terms proposed, the
Company and each of the Principal Stockholders shall be free to negotiate terms
with other underwriters with respect to such offering and to effect such
offering on such proposed terms within six months after the end of such 30
business days. Before the Company and/or any of the Principal Stockholders shall
accept any modified proposal from such underwriter, your preferential right
shall be reinstated and the same procedure with respect to such modified
proposal as provided above shall be adopted. The failure by you to exercise your
Right of First Refusal in any particular instance shall not affect in any way
such right with respect to any other Subsequent Company Offering or Secondary
Offering. By execution of this Agreement, each of the Principal Stockholders
agrees to be bound by the terms of this Section 3(m) concerning any proposed
Secondary Offering of the Company's securities.
(n) Prior to completion of this offering, the
Company will make all filings required, including registration under the
Securities Exchange Act of 1934, to obtain the listing of the Units, Common
Stock, and Warrants on the Nasdaq Small Cap Market (or a listing on such other
market or exchange as the Underwriter consent to), and will effect and maintain
such listing for at least five years from the date of this Agreement.
(o) The Company and each of the Principal
Stockholders represents that it or he has not taken and agree that it or he will
not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Units, Shares or the Warrants
or to facilitate the sale or resale of the Securities.
(p) On the Closing Date and simultaneously with
the delivery of the Units, the Company shall execute and deliver to you the Unit
Purchase Option. The Unit Purchase Option will be substantially in the form of
the Unit Purchase Option filed as an Exhibit to the Registration Statement.
(q) Without the prior written consent of the
Underwriter, (i) during the 18 month period commencing on the date of this
Agreement, the Company will not grant options to purchase shares of Common Stock
at an exercise price less than the greater of (x) the initial public offering
price of the Units (without allocating any value to the Warrants) or (y) the
fair market value of the Common Stock on the date of grant; (ii) during the six
month period commencing on the date of this Agreement, grant options to any
current officer of the Company; (iii) during the three year period commencing on
the date of this Agreement, offer or sell any of its securities pursuant to
Regulation S under the Act; (iv) grant registration rights to any person which
are exercisable sooner than 13 months from the First Closing Date; (v) issue any
securities which have per share voting rights greater than the voting rights of
the Shares (or take any corporate action which would have this effect) or (vi)
during
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the 18 month period commencing on the date of this Agreement, enter into
any agreement or arrangement with any investment banking firm other than the
Underwriter relating to investment banking, corporate finance, merger and
acquisition or other similar advisory or consulting services.
(r) _______________ shall be President of the
Company on the Closing Dates. The Company has obtained key person life insurance
on the life of _______________ in an amount of not less than $2 million and will
use its best efforts to maintain such insurance during the five year period
commencing with the First Closing Date unless his employment with the Company is
earlier terminated. In such event, the Company will obtain a comparable policy
on the life of his successor for the balance of the five year period. For a
period of thirteen months from the First Closing Date, the compensation of the
executive officers of the Company shall not be increased from the compensation
levels disclosed in the Prospectus.
(s) On the Closing Date and simultaneously with
the delivery of the Units the Company shall execute and deliver to you an
agreement with you regarding mergers, acquisitions, joint ventures and certain
other forms of transactions, in the form previously delivered to the Company by
you (the "M/A Agreement").
(t) On the Closing Date and simultaneously with
the delivery of the Units, the Company shall execute and deliver to you, and pay
the first annual payment under, a two year consulting agreement in the form
previously delivered to the Company by you (the "Consulting Agreement").
(u) So long as any Warrants are outstanding, the
Company shall use its best efforts to cause post-effective amendments to the
Registration Statement to become effective in compliance with the Act and
without any lapse of time between the effectiveness of any such post-effective
amendments and cause a copy of each Prospectus, as then amended, to be delivered
to each holder of record of a Warrant and to furnish to each Underwriter and
dealer as many copies of each such Prospectus as such Underwriter or dealer may
reasonably request. The Company shall not call for redemption any of the
Warrants unless a registration statement covering the securities underlying the
Warrants has been declared effective by the Commission and remains current at
least until the date fixed for redemption. In addition, for so long as any
Warrant is outstanding, the Company will promptly notify the Underwriter of any
material change in the business, financial condition or prospects of the
Company.
(v) Upon the exercise of any Warrant or Warrants
after [_______, 19__], the Company will pay the Underwriter a fee of 5% of the
aggregate exercise price of the Warrants, of which ____% may be reallowed to the
dealer who solicited the exercise (which may also be the Underwriter) if (i) the
market price of the Company's Common Stock is greater than the exercise price of
the Warrants on the date of exercise; (ii) the exercise of the Warrant was
solicited by a member of the National Association of Securities Dealers, Inc.,
(iii) the Warrant is not held in a discretionary account; (iv) the disclosure of
compensation arrangements has been made in documents provided to customers, both
as part of the original offering and at the
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time of exercise, and (v) the solicitation of the Warrant was not in violation
of Rule 10b-6 promulgated under the Securities Exchange Act of 1934, as amended.
The Company agrees not to solicit the exercise of any Warrants other than
through the Underwriter and will not authorize any other dealer to engage in
such solicitation without the prior written consent of the Underwriter.
(w) For a period of five (5) years from the
Effective Date the Company (i) at its expense, shall cause its regularly engaged
independent certified public accountants to review (but not audit) the Company's
financial statements for each of the first three (3) fiscal quarters prior to
the announcement of quarterly financial information, the filing of the Company's
10-Q quarterly report and the mailing of quarterly financial information to
stockholders and (ii) shall not change its accounting firm without the prior
written consent of the Chairman or the President of the Underwriter.
(x) As promptly as practicable after the Closing
Date, the Company will prepare, at its own expense, hard cover "bound volumes"
relating to the offering, and will distribute at least four of such volumes to
the individuals designated by the Underwriter or counsel to the Underwriter.
(y) For a period of five years from the First
Closing Date (i) the Underwriter shall have the right, but not the obligation,
to designate one director of the Board of Directors of the Company and (ii) the
Company shall engage a public relations firm acceptable to the Underwriter.
(z) The Company shall, for a period of six years
after date of this Agreement, submit which reports to the Secretary of the
Treasury and to stockholders, as the Secretary may require, pursuant to Section
1202 of the Internal Revenue Code, as amended, or regulations promulgated
thereunder, in order for the Company to qualify as a "small business" so that
stockholders may realize special tax treatment with respect to their investment
in the Company.
4. Conditions of Underwriter Obligation. The obligations
of the Underwriter to purchase and pay for the Units which it has agreed to
purchase hereunder, are subject to the accuracy (as of the date hereof, and as
of the Closing Dates) of and compliance with the representations and warranties
of the Company herein, to the performance by the Company of its obligations
hereunder, and to the following conditions:
(a) The Registration Statement shall have become
effective and you shall have received notice thereof not
later than 10:00 A.M., New York time, on the date on which
the amendment to the registration statement originally
filed with respect to the Units or to the Registration
Statement, as the case may be, containing information
regarding the initial public offering price of the Units
has been filed with the Commission, or such later time and
date as shall have been agreed to by the Underwriter; if
required, the Prospectus or any Term Sheet that
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constitutes a part thereof and any amendment or supplement
thereto shall have been filed with the Commission in the
manner and within the time period required by Rule 434 and
424(b) under the Act; on or prior to the Closing Dates no
stop order suspending the effectiveness of the
Registration Statement shall have been issued and no
proceedings for that or a similar purpose shall have been
instituted or shall be pending or, to your knowledge or to
the knowledge of the Company, shall be contemplated by the
Commission; any request on the part of the Commission for
additional information shall have been complied with to
the reasonable satisfaction of Paul, Hastings, Janofsky &
Walker LLP, counsel to the Underwriter ("PHJ&W");
(b) At the First Closing Date, you shall have
received the opinion, together with copies of such opinion
for the Underwriter, dated as of the First Closing Date,
of Bachner, Tally, Polevoy & Misher LLP, counsel for the
Company, in form and substance satisfactory to counsel for
the Underwriter, to the effect that:
(i) the Company has been duly incorporated
and is validly existing as a corporation in good
standing under the laws of the State of Delaware,
with full corporate power and authority to own
its properties and conduct its business as
described in the Registration Statement and
Prospectus and is duly qualified or licensed to
do business as a foreign corporation and is in
good standing in [_____________] and in each
other jurisdiction in which the ownership or
leasing of its properties or conduct of its
business requires such qualification;
(ii) to the best knowledge of such counsel,
(a) the Company has obtained all licenses,
permits and other governmental authorizations
necessary to the conduct of its business as
described in the Prospectus, (b) such licenses,
permits and other governmental authorizations
obtained are in full force and effect, and (c)
the Company is in all material respects complying
therewith;
(iii) the authorized capitalization of the
Company as of [__________}, 1997 is as set forth
under "Capitalization" in the Prospectus; all
shares of the Company's outstanding stock
requiring authorization for issuance by the
Company's board of directors have been duly
authorized, validly issued, are fully paid and
non-assessable and conform to the description
thereof contained in the Prospectus; the
outstanding shares of Common Stock of the Company
have not been issued in violation of the
preemptive rights of any shareholder and the
shareholders of the Company do not have any
preemptive rights or other rights to subscribe
for or to purchase, nor are there any
restrictions upon
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<PAGE>
the voting or transfer of any of the Stock; the
Common Stock, the Warrants, the Unit Purchase
Option and the Warrant Agreement conform to the
respective descriptions thereof contained in the
Prospectus; the Shares have been, and the shares
of Common Stock to be issued upon exercise of the
Warrants and the Unit Purchase Option, upon
issuance in accordance with the terms of such
Warrants, the Warrant Agreement and Unit Purchase
Option have been duly authorized and, when issued
and delivered, will be duly and validly issued,
fully paid, non-assessable, free of preemptive
rights and no personal liability will attach to
the ownership thereof; all prior sales by the
Company of the Company's securities have been
made in compliance with or under an exemption
from registration under the Act and applicable
state securities laws and no shareholders of the
Company have any rescission rights with respect
to Company securities; a sufficient number of
shares of Common Stock has been reserved for
issuance upon exercise of the Warrants and Unit
Purchase Option and to the best of such counsel's
knowledge, neither the filing of the Registration
Statement nor the offering or sale of the Units
as contemplated by this Agreement gives rise to
any registration rights or other rights, other
than those which have been waived or satisfied
for or relating to the registration of any shares
of Common Stock;
(iv) this Agreement, the Unit Purchase
Option, the Warrant Agreement, the M/A Agreement
and the Consulting Agreement have been duly and
validly authorized, executed and delivered by the
Company and, assuming due execution by each other
party hereto or thereto, each constitutes a
legal, valid and binding obligation of the
Company enforceable against the Company in
accordance with its respective terms (except as
such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization,
moratorium or other laws of general application
relating to or affecting enforcement of
creditors' rights and the application of
equitable principles in any action, legal or
equitable, and except as rights to indemnity or
contribution may be limited by applicable law;
(v) the certificates evidencing the shares
of Common Stock are in valid and proper legal
form; the Warrants will be exercisable for shares
of Common Stock of the Company in accordance with
the terms of the Warrants and at the prices
therein provided for; at all times during the
term of the Warrants the shares of Common Stock
of the Company issuable upon exercise of the
Warrants have been duly authorized and reserved
for issuance upon such exercise and such shares,
when issued upon such exercise in accordance with
the terms of the Warrants
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<PAGE>
and at the price provided for, will be
duly and validly issued, fully paid and
non-assessable;
(vi) delivery of certificates for the
Securities underlying the Units, upon payment
therefore by the Underwriter as provided in the
Underwriting Agreement, will transfer valid title
to such Securities to the Underwriter; and, upon
payment for such Securities, the Underwriter will
acquire such Securities free and clear of any
liens;
(vii) such counsel knows of no pending or
threatened legal or governmental proceedings to
which the Company is a party which could
materially adversely affect the business,
property, financial condition or operations of
the Company; or which question the validity of
the Securities, this Agreement, the Warrant
Agreement, the Unit Purchase Option, the M/A
Agreement or the Consulting Agreement, or of any
action taken or to be taken by the Company
pursuant to this Agreement, the Warrant
Agreement, the Unit Purchase Option, the M/A
Agreement or the Consulting Agreement; and no
such proceedings are known to such counsel to be
contemplated against the Company; there are no
governmental proceedings or regulations required
to be described or referred to in the
Registration Statement which are not so described
or referred to;
(viii) the Company is not in violation of or
default under, nor will the execution and
delivery of this Agreement, the Unit Purchase
Option, the Warrant Agreement, the M/A Agreement
or the Consulting Agreement, and the incurrence
of the obligations herein and therein set forth
and the consummation of the transactions herein
or therein contemplated, result in a breach or
violation of, or constitute a default under the
certificate of incorporation or by-laws, in the
performance or observance of any material
obligations, agreement, covenant or condition
contained in any bond, debenture, note or other
evidence of indebtedness or in any contract,
indenture, mortgage, loan agreement, lease, joint
venture or other agreement or instrument to which
the Company is a party or by which it or any of
its properties may be bound or in violation of
any material order, rule, regulation, writ,
injunction, or decree of any government,
governmental instrumentality or court, domestic
or foreign;
(ix) the Registration Statement has become
effective under the Act, and to the best of such
counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement is in
effect, and no proceedings for that purpose have
been instituted or are pending before, or
threatened by, the
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<PAGE>
Commission; the Registration Statement and
the Prospectus (except for the financial
statements and other financial data contained
therein, or omitted therefrom, as to which such
counsel need express no opinion) comply as to
form in all material respects with the applicable
requirements of the Act and the Rules and
Regulations;
(x) such counsel has participated in the
preparation of the Registration Statement and the
Prospectus and nothing has come to the attention
of such counsel to cause such counsel to have
reason to believe that the Registration Statement
or any amendment thereto at the time it became
effective or as of the Closing Dates contained
any untrue statement of a material fact required
to be stated therein or omitted to state any
material fact required to be stated therein or
necessary to make the statements therein not
misleading or that the Prospectus or any
supplement thereto contains any untrue statement
of a material fact or omits to state a material
fact necessary in order to make statements
therein, in light of the circumstances under
which they were made, not misleading (except, in
the case of both the Registration Statement and
any amendment thereto and the Prospectus and any
supplement thereto, for the financial statements,
notes thereto and other financial information and
schedules contained therein, as to which such
counsel need express no opinion);
(xi) all descriptions in the Registration
Statement and the Prospectus, and any amendment
or supplement thereto, of contracts and other
documents are accurate and fairly present the
information required to be shown, and such
counsel is familiar with all contracts and other
documents referred to in the Registration
Statement and the Prospectus and any such
amendment or supplement or filed as exhibits to
the Registration Statement, and such counsel does
not know of any contracts or documents of a
character required to be summarized or described
therein or to be filed as exhibits thereto which
are not so summarized, described or filed;
(xii) no authorization, approval, consent,
or license of any governmental or regulatory
authority or agency is necessary in connection
with the authorization, issuance, transfer, sale
or delivery of the Units by the Company, in
connection with the execution, delivery and
performance of this Agreement by the Company or
in connection with the taking of any action
contemplated herein, or the issuance of the Unit
Purchase Option or the Securities underlying the
Unit Purchase Option, other than registrations or
qualifications of the Units under applicable
state
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<PAGE>
or foreign securities or Blue Sky laws and
registration under the Act;
(xiii) the statements in the Registration
Statement under the captions "Business," "Use of
Proceeds," "Management," and "Description of
Securities" [list subject to further review] have
been reviewed by such counsel and insofar as they
refer to descriptions of agreements, statements
of law, descriptions of statutes, licenses, rules
or regulations or legal conclusions, are correct
in all material respects;
(xiv) the Units, the Common Stock and the
Warrants have been duly authorized for quotation
on the Nasdaq Small Cap Market; and
(xv) to such counsel's knowledge, there are
no business relationships or related-party
transactions of the nature described in Item 404
of Regulation S-B involving the Company, any
Subsidiary and any person described in such Item
that are required to be disclosed in the
Prospectus and which have not been so disclosed.
(c) At the First Closing Date, you shall
have received the opinion, addressed to the Underwriter,
dated as of the First Closing Date, of _______,
intellectual property counsel to the Company, in form and
substance satisfactory to PHJ&W, to the effect that(1):
(i) we have carefully read and analyzed
the material set forth in the Prospectus under
"Risk Factors Licensing Activity," "Risk Factors
- Infringement of Company's Copyrighted
Materials" and Business - Copyrights and
Intellectual Property" and [______________] and,
in our opinion, such material accurately and
adequately discloses the Company's [intellectual
property] position and did not, at the time the
Registration Statement became effective and does
not contain an untrue statement of a material
fact or omit to state a material fact required to
be stated therein or necessary in order to make
the statements therein, in light of the
circumstances under which they were made, not
misleading;
(ii) [the trademark applications, service
mark applications, copyright applications]
referred to in the Prospectus were properly filed
and the [applicable regulatory office] has not
- - - - --------
(1) Will need to define "intellectual property" based on what the Company
currently owns or licenses.
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<PAGE>
taken substantive action with respect thereto;
there has not been any public use or sale by the
Company prior to the filing of any of the
[intellectual property] applications which would
affect their validity and, in such counsel's
opinion, the claims contained in the applications
represent valid intellectual property claims;
such counsel has no reason to believe that
[_________] will not issue with respect thereto
or that the claims contained in the applications
conflict with the rights of others;
(iii) There are no facts which would
preclude the Company from having clear title to
the [intellectual properties] owned by the
Company;
(iv) Neither the Company nor its
subsidiaries has received any notice challenging
the validity or enforceability of any of the
[intellectual property] owned by, or licensed to,
the Company;
(v) The Company does not lack or will not
be unable to obtain any rights or licenses to use
[the intellectual property] necessary to its
business as currently conducted;
(vi) There are no material legal or
governmental proceedings pending or threatened
with respect to any [intellectual property] of
the Company; and
(vii) there have been no claims asserted
against the Company relating to the potential
infringement of or conflict with any
[intellectual property] of others; such counsel
has conducted a search for existing United States
[and other countries if relevant] [intellectual
property] with claims that might cover the
Company's technology [particularly as it relates
to _______] and, in such counsel's opinion, the
Company's technology [or: specific product] does
not infringe any [intellectual property]
[including _______ if particular intellectual
property is an issue.]
Such opinion[s] shall also cover such matters incident to
the transactions contemplated hereby as the Underwriter or counsel for the
Underwriter shall reasonably request. In rendering such opinion, such counsel
may rely upon certificates of any officer of the Company or public officials as
to matters of fact; and may rely as to all matters of law other than the law of
the United States or of the State of [____________] upon opinions of counsel
satisfactory to you, in which case the opinion shall state that they have no
reason to believe that you and they are not entitled to so rely.
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<PAGE>
(c) All corporate proceedings and other legal
matters relating to this Agreement, the Registration Statement, the Prospectus
and other related matters shall be satisfactory to or approved by PHJ&W, counsel
to the Underwriter, and you shall have received from such counsel a signed
opinion, dated as of the First Closing Date, together with copies thereof for
each of the other Underwriter, with respect to the validity of the issuance of
the Units, the form of the Registration Statement and Prospectus (other than the
financial statements and other financial data contained therein), the execution
of this Agreement and other related matters as you may reasonably require. The
Company shall have furnished to counsel for the Underwriter such documents as
they may reasonably request for the purpose of enabling them to render such
opinion.
(d) You shall have received a letter prior to the
effective date of the Registration Statement and again on and as of the First
Closing Date from [____________], independent public accountants for the
Company, substantially in the form approved by you, and including estimates of
the Company's revenues and results of operations for the period ending at the
end of the month immediately preceding the effective date and results of the
comparable period during the prior fiscal year.
(e) At the Closing Dates, (i) the representations
and warranties of the Company contained in this Agreement shall be true and
correct with the same effect as if made on and as of the Closing Dates and the
Company shall have performed all of its obligations hereunder and satisfied all
the conditions on its part to be satisfied at or prior to such Closing Date;
(ii) the Registration Statement and the Prospectus and any amendments or
supplements thereto shall contain all statements which are required to be stated
therein in accordance with the Act and the Rules and Regulations, and shall in
all material respects conform to the requirements thereof, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto shall contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading; (iii) there shall have been, since the
respective dates as of which information is given, no material adverse change,
or any development involving a prospective material adverse change, in the
business, properties, condition (financial or otherwise), results of operations,
capital stock, long-term or short-term debt or general affairs of the Company
from that set forth in the Registration Statement and the Prospectus, except
changes which the Registration Statement and Prospectus indicate might occur
after the effective date of the Registration Statement, and the Company shall
not have incurred any material liabilities or entered into any agreement not in
the ordinary course of business other than as referred to in the Registration
Statement and Prospectus; and (iv) except as set forth in the Prospectus, no
action, suit or proceeding at law or in equity shall be pending or threatened
against the Company which would be required to be set forth in the Registration
Statement, and no proceedings shall be pending or threatened against the Company
before or by any commission, board or administrative agency in the United States
or elsewhere, wherein an unfavorable decision, ruling or finding would
materially and adversely affect the business, property, condition (financial or
otherwise), results of operations or general affairs of the Company, and (v) you
shall have received, at the First Closing Date, a
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<PAGE>
certificate signed by each of the Chairman of the Board or the President and the
principal financial or accounting officer of the Company, dated as of the First
Closing Date, evidencing compliance with the provisions of this subsection (e).
(f) Upon exercise of the option provided for in
Section 2(b) hereof, the obligations of the Underwriter to purchase and pay for
the Option Units referred to therein will be subject (as of the date hereof and
as of the Option Closing Date) to the following additional conditions:
(i) The Registration Statement shall
remain effective at the Option Closing Date, and
no stop order suspending the effectiveness
thereof shall have been issued and no proceedings
for that purpose shall have been instituted or
shall be pending, or, to your knowledge or the
knowledge of the Company, shall be contemplated
by the Commission, and any reasonable request on
the part of the Commission for additional
information shall have been complied with to the
satisfaction of PHJ&W, counsel to the
Underwriter.
(ii) At the Option Closing Date there shall
have been delivered to you the signed opinion of
Bachner, Tally, Polevoy & Misher LLP, counsel for
the Company, dated as of the Option Closing Date,
in form and substance satisfactory to PHJ&W,
counsel to the Underwriter, together with copies
of such opinion for the Underwriter, which
opinion shall be substantially the same in scope
and substance as the opinion furnished to you at
the First Closing Date pursuant to Section 4(b)
hereof, except that such opinion, where
appropriate, shall cover the Option Units.
(iii) At the Option Closing Date there shall
have been delivered to you a certificate of the
Chairman of the Board or the President and the
principal financial or accounting officer of the
Company, dated the Option Closing Date, in form
and substance satisfactory to PHJ&W, counsel to
the Underwriter, substantially the same in scope
and substance as the certificate furnished to you
at the First Closing Date pursuant to Section
4(e) hereof.
(iv) At the Option Closing Date there shall
have been delivered to you a letter in form and
substance satisfactory to you from
[_______________], dated the Option Closing Date
and addressed to the Underwriter confirming the
information in their letter referred to in
Section 4(d) hereof and stating that nothing has
come to their attention during the period from
the ending date of their review referred to in
said letter to a date not more than three
business days prior to the Option Closing Date,
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<PAGE>
which would require any change in said letter if
it were required to be dated the Option Closing
Date.
(v) All proceedings taken at or prior to
the Option Closing Date in connection with the
sale and issuance of the Option Units shall be
satisfactory in form and substance to you and
PHJ&W, counsel to the Underwriter, shall have
been furnished with all such documents,
certificates, and opinions as you may request in
connection with this transaction in order to
evidence the accuracy and completeness of any of
the representations, warranties or statements of
the Company or its compliance with any of the
covenants or conditions contained herein.
(g) No action shall have been taken by the
Commission or the NASD the effect of which would make it improper, at any time
prior to the Closing Date, for members of the NASD to execute transactions (as
principal or agent) in the Units, Common Stock or the Warrants and no
proceedings for the taking of such action shall have been instituted or shall be
pending, or, to the knowledge of the Underwriter or the Company, shall be
contemplated by the Commission or the NASD. The Company represents that at the
date hereof it has no knowledge that any such action is in fact contemplated by
the Commission or the NASD. The Company shall have advised the Underwriter of
any NASD affiliation of any of its officers, directors, stockholders or their
affiliates.
(h) The estimated revenues and earnings of the
Company for the _______ ending _______ 1997 will be greater than those of the
_______ ended ___________, 1996.
(i) If any of the conditions herein provided for
in this Section shall not have been fulfilled as of the date indicated, this
Agreement and all obligations of the Underwriter under this Agreement may be
cancelled at, or at any time prior to, each Closing Date by the Underwriter. Any
such cancellation shall be without liability of the Underwriter to the Company.
5. Conditions of the Obligations of the Company. The
obligation of the Company to sell and deliver the Units is subject to the
condition that at the Closing Dates, no stop orders suspending the effectiveness
of the Registration Statement shall have been issued under the Act or any
proceedings therefor initiated or threatened by the Commission.
If the condition to the obligations of the Company
provided for in this Section have been fulfilled on the First Closing Date but
are not fulfilled after the First Closing Date and prior to the Option Closing
Date, then only the obligation of the Company to sell and deliver the Units on
exercise of the option provided for in Section 2(b) hereof shall be affected.
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<PAGE>
6. Indemnification.
(a) The Company agrees to indemnify and hold
harmless the Underwriter and each person, if any, who controls the Underwriter
within the meaning of the Act against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all reasonable costs of defense and
investigation and all attorneys' fees), to which the Underwriter or such
controlling person may become subject, under the Act or otherwise, and will
reimburse, as incurred, the Underwriter and such controlling persons for any
legal or other expenses reasonably incurred in connection with investigating,
defending against or appearing as a third party witness in connection with any
losses, claims, damages or liabilities, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in (A) the Registration Statement, any Preliminary Prospectus, the Prospectus,
or any amendment or supplement thereto, (B) any blue sky application or other
document executed by the Company specifically for that purpose or based upon
written information furnished by the Company filed in any state or other
jurisdiction in order to qualify any or all of the Units under the securities
laws thereof (any such application, document or information being hereinafter
called a "Blue Sky Application"), or arise out of or are based upon the omission
or alleged omission to state in the Registration Statement, any Preliminary
Prospectus, Prospectus, or any amendment or supplement thereto, or in any Blue
Sky Application, a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that the Company
will not be liable in any such case to the extent, but only to the extent, that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with written information
furnished to the Company by or on behalf of the Underwriter specifically for use
in the preparation of the Registration Statement or any such amendment or
supplement thereof or any such Blue Sky Application or any such preliminary
Prospectus or the Prospectus or any such amendment or supplement thereto. This
indemnity will be in addition to any liability which the Company may otherwise
have.
(b) The Underwriter will indemnify and hold
harmless the Company, each of its directors, each nominee (if any) for director
named in the Prospectus, each of its officers who have signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of the Act, against any losses, claims, damages or liabilities (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees) to which the Company or any
such director, nominee, officer or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to
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<PAGE>
make the statements therein not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto
(i) in reliance upon and in conformity with written information furnished to the
Company by the Underwriter specifically for use in the preparation thereof and
(ii) relates to the transactions effected by the Underwriter in connection with
the offer and sale of the Units contemplated hereby. This indemnity agreement
will be in addition to any liability which the Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified
party under this Section of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section, notify in writing the indemnifying party
of the commencement thereof; but the omission so to notify the indemnifying
party will not relieve it from any liability which it may have to any
indemnified party otherwise than under this Section. In case any such action is
brought against any indemnified party, and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
in, and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, subject to the
provisions herein stated, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided
that if the indemnified party is the Underwriter or a person who controls the
Underwriter within the meaning of the Act, the fees and expenses of such counsel
shall be at the expense of the indemnifying party if (i) the employment of such
counsel has been specifically authorized in writing by the indemnifying party or
(ii) the named parties to any such action (including any impleaded parties)
include both the Underwriter or such controlling person and the indemnifying
party and in the judgment of the Underwriter, it is advisable for the
Underwriter or controlling persons to be represented by separate counsel (in
which case the indemnifying party shall not have the right to assume the defense
of such action on behalf of the Underwriter or such controlling person, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys for the Underwriter and controlling persons, which
firm shall be designated in writing by the Underwriter). No settlement of any
action against an indemnified party shall be made without the consent of the
indemnifying party, which shall not be unreasonably withheld in light of all
factors of importance to such indemnifying party.
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<PAGE>
7. Contribution.
In order to provide for just and equitable contribution
under the Act in any case in which (i) the Underwriter makes claim for
indemnification pursuant to Section 6 hereof but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case, notwithstanding the fact
that the express provisions of Section 6 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of the
Underwriter, then the Company and each person who controls the Company, in the
aggregate, and the Underwriter shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (which shall, for all
purposes of this Agreement, include, but not be limited to, all reasonable costs
of defense and investigation and all reasonable attorneys' fees) in either such
case (after contribution from others) in such proportions that the Underwriter
is only responsible for that portion of such losses, claims, damages or
liabilities represented by the percentage that the underwriting discount per
Unit appearing on the cover page of the Prospectus bears to the public offering
price appearing thereon, and the Company shall be responsible for the remaining
portion, provided, however, that (a) if such allocation is not permitted by
applicable law then the relative fault of the Company and the Underwriter and
controlling persons, in the aggregate, in connection with the statements or
omissions which resulted in such damages and other relevant equitable
considerations shall also be considered. The relative fault shall be determined
by reference to, among other things, whether in the case of an untrue statement
of a material fact or the omission to state a material fact, such statement or
omission relates to information supplied by the Company or the Underwriter and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission. The Company and the
Underwriter agree that it would not be just and equitable if the respective
obligations of the Company and the Underwriter to contribute pursuant to this
Section 7 were to be determined by pro rata or per capita allocation of the
aggregate damages or by any other method of allocation that does not take
account of the equitable considerations referred to in the first sentence of
this Section 7 and (b) that the contribution of the Underwriter shall not be in
excess of its proportionate share of the portion of such losses, claims, damages
or liabilities for which the Underwriter is responsible. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. As used in this paragraph, the word "Company"
includes any officer, director, or person who controls the Company within the
meaning of Section 15 of the Act. If the full amount of the contribution
specified in this paragraph is not permitted by law, then the Underwriter and
each person who controls the Underwriter shall be entitled to contribution from
the Company, its officers, directors and controlling persons to the full extent
permitted by law. The foregoing contribution agreement shall in no way affect
the contribution liabilities of any persons having liability under Section 11 of
the Act other than the Company and the Underwriter. No contribution shall be
requested with regard to the settlement of any matter from any party who did not
consent to the
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<PAGE>
settlement; provided, however, that such consent shall not be unreasonably
withheld in light of all factors of importance to such party.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes
effective or the sale of the Units to the Underwriter is consummated, the
Company will pay all costs and expenses incident to the performance of this
Agreement by the Company including, but not limited to, the fees and expenses of
counsel to the Company (which fees shall not exceed [$_________]) and of the
Company's accountants; the costs and expenses incident to the preparation,
printing, filing and distribution under the Act of the Registration Statement
(including the financial statements therein and all amendments and exhibits
thereto), Preliminary Prospectus and the Prospectus, as amended or supplemented,
or the Term Sheet, the fee of the NASD in connection with the filing required by
the NASD relating to the offering of the Units contemplated hereby; all
expenses, including reasonable fees and disbursements of counsel to the
Underwriter, in connection with the qualification of the Units under the state
securities or blue sky laws which the Underwriter shall designate; the cost of
printing and furnishing to the Underwriter copies of the Registration Statement,
each Preliminary Prospectus, the Prospectus, this Agreement, Selling Agreement,
Underwriter' Questionnaire, Underwriter' Power of Attorney and the Blue Sky
Memorandum, any fees relating to the listing of the Units, Common Stock and
Warrants on the Nasdaq Small Cap Market or any other securities exchange, the
cost of printing the certificates representing the securities comprising the
Units, the fees of the transfer agent and warrant agent the cost of publication
of at least three "tombstones" of the offering (at least one of which shall be
in national business newspaper and one of which shall be in a major New York
newspaper) and the cost of preparing at least four hard cover "bound volumes"
relating to the offering, in accordance with the Underwriter' request. The
Company shall pay any and all taxes (including any transfer, franchise, capital
stock or other tax imposed by any jurisdiction) on sales to the Underwriter
hereunder. The Company will also pay all costs and expenses incident to the
furnishing of any amended Prospectus or of any supplement to be attached to the
Prospectus as called for in Section 3(a) of this Agreement except as otherwise
set forth in said Section.
(b) In addition to the foregoing expenses the
Company shall at the First Closing Date pay to the Underwriter, a
non-accountable expense allowance of [$_______] of which [$_______] has been
paid. In the event the overallotment option is exercised, the Company shall pay
to the Underwriter at the Option Closing Date an additional amount equal to 3%
of the gross proceeds received upon exercise of the overallotment option. In the
event the transactions contemplated hereby are not consummated by reason of any
action by the Underwriter (except if such prevention is based upon a breach by
the Company of any covenant, representation or warranty contained herein or
because any other condition to the Underwriter' obligations hereunder required
to be fulfilled by the Company is not fulfilled) the Company shall be liable for
the accountable expenses of the Underwriter, including legal fees up to a
maximum of [$_______]. In the event the transactions contemplated hereby are not
consummated by reason of any action of the Company or because of a breach by the
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<PAGE>
Company of any covenant, representation or warranty herein, the Company shall be
liable for the accountable expenses of the Underwriter, including legal fees, up
to a maximum of [$_______].
(c) No person is entitled either directly or
indirectly to compensation from the Company, from the Underwriter or from any
other person for services as a finder in connection with the proposed offering,
and the Company agrees to indemnify and hold harmless the Underwriter and the
other Underwriter, against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all costs of defense and investigation and all attorneys' fees), to
which the Underwriter or person may become subject insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon the claim of any person (other than an employee of the party
claiming indemnity) or entity that he or it is entitled to a finder's fee in
connection with the proposed offering by reason of such person's or entity's
influence or prior contact with the indemnifying party.
9. Substitution of Underwriter. [INTENTIONALLY OMITTED]
10. Effective Date.
The Agreement shall become effective upon its execution
except that you may, at your option, delay its effectiveness until 11:00 A.M.,
New York time on the first full business day following the effective date of the
Registration Statement, or at such earlier time after the effective date of the
Registration Statement as you in your discretion shall first commence the
initial public offering by the Underwriter of any of the Units. The time of the
initial public offering shall mean the time of release by you of the first
newspaper advertisement with respect to the Units, or the time when the Units
are first generally offered by you to dealers by letter or telegram, whichever
shall first occur. This Agreement may be terminated by you at any time before it
becomes effective as provided above, except that Sections 3(c), 6, 7, 8, 13, 14,
15 and 16 shall remain in effect notwithstanding such termination.
11. Termination.
(a) This Agreement, except for Sections 3(c), 6,
7, 8, 13, 14, 15 and 16 hereof, may be terminated at any time prior to the First
Closing Date, and the option referred to in Section 2(b) hereof, if exercised,
may be cancelled at any time prior to the Option Closing Date, by you if in your
judgment it is impracticable to offer for sale or to enforce contracts made by
the Underwriter for the resale of the Units agreed to be purchased hereunder by
reason of (i) the Company having sustained a material loss, whether or not
insured, by reason of fire, earthquake, flood, accident or other calamity, or
from any labor dispute or court or government action, order or decree; (ii)
trading in securities on the New York Stock Exchange, the American Stock
Exchange, the Nasdaq SmallCap Market or the Nasdaq National Market having been
suspended or limited; (iii) material governmental restrictions having been
imposed on
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<PAGE>
trading in securities generally (not in force and effect on the date hereof);
(iv) a banking moratorium having been declared by federal or New York state
authorities; (v) an outbreak of international hostilities or other national or
international calamity or crisis or change in economic or political conditions
having occurred; (vi) a pending or threatened legal or governmental proceeding
or action relating generally to the Company's business, or a notification having
been received by the Company of the threat of any such proceeding or action,
which could materially adversely affect the Company; (vii) except as
contemplated by the Prospectus, the Company is merged or consolidated into or
acquired by another company or group or there exists a binding legal commitment
for the foregoing or any other material change of ownership or control occurs;
(viii) the passage by the Congress of the United States or by any state
legislative body or federal or state agency or other authority of any act, rule
or regulation, measure, or the adoption of any orders, rules or regulations by
any governmental body or any authoritative accounting institute or board, or any
governmental executive, which is reasonably believed likely by the Underwriter
to have a material impact on the business, financial condition or financial
statements of the Company or the market for the securities offered pursuant to
the Prospectus; (ix) any adverse change in the financial or securities markets
beyond normal market fluctuations having occurred since the date of this
Agreement, or (x) any material adverse change having occurred, since the
respective dates of which information is given in the Registration Statement and
Prospectus, in the earnings, business prospects or general condition of the
Company, financial or otherwise, whether or not arising in the ordinary course
of business.
(b) If you elect to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this Section 11
or in Section 10, the Company shall be promptly notified by you, by telephone or
telegram, confirmed by letter.
12. Unit Purchase Option.
At or before the First Closing Date, the Company will sell
to the Underwriter, or its designees for a consideration of [$____________], and
upon the terms and conditions set forth in the form of Unit Purchase Option
annexed as an exhibit to the Registration Statement, a Unit Purchase Option to
purchase an aggregate of [300,000] Units. In the event of conflict in the terms
of this Agreement and the Unit Purchase Option, the language of the Unit
Purchase Option shall control.
13. Representations, Warranties and Agreements to Survive
Delivery.
The respective indemnities, agreements, representations,
warranties and other statements of the Company or its Principal Stockholders,
where appropriate, and the undertakings set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of the Underwriter, the Company or any of its officers or
directors or any controlling person and will survive delivery of and payment of
the Units and the termination of this Agreement.
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14. Notice.
Any communications specifically required hereunder to be
in writing, if sent to the Underwriter, will be mailed, delivered and confirmed
to it at D.H. Blair Investment Banking Corp., 44 Wall Street, 2nd Floor, New
York, New York 10005, with a copy sent to Paul, Hastings, Janofsky & Walker LLP,
399 Park Avenue, New York, New York 10022, or if sent to the Company, will be
mailed, delivered and confirmed to it at Bachner, Tally, Polevoy & Misher LLP,
380 Madison Avenue, New York, New York 10017.
15. Parties in Interest.
The Agreement herein set forth is made solely for the
benefit of the Underwriter, the Company and, to the extent expressed, the
Principal Stockholders, any person controlling the Company or the Underwriter,
and directors of the Company, nominees for directors (if any) named in the
Prospectus, its officers who have signed the Registration Statement, and their
respective executors, administrators, successors, assigns and no other person
shall acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser, as such purchaser,
from the Underwriter of the Units.
16. Applicable Law.
This Agreement will be governed by, and construed in
accordance with, the laws of the State of New York applicable to agreements made
and to be entirely performed within New York.
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<PAGE>
If the foregoing is in accordance with your understanding
of our agreement, kindly sign and return this agreement, whereupon it will
become a binding agreement between the Company and the Underwriter in accordance
with its terms.
Very truly yours,
PARADIGM MUSIC ENTERTAINMENT
COMPANY
By: __________________________
Name:
Title:
The foregoing Underwriting Agreement is hereby confirmed
and accepted as of the date first above written.
D.H. BLAIR INVESTMENT BANKING
CORP.
By: ______________________________
Name:
Title:
We hereby agree to be bound by the provisions of Sections
3(l), (m), and (o) and 13 hereof.
________________________________
________________________________
________________________________
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SCHEDULE A
================================================================================
Underwriter Number of First Units Number of Option Units
to be Purchased to be Purchased
- - - - --------------------------------------------------------------------------------
D.H. Blair Investment [_________] [_______]
Banking Corp.
================================================================================
<PAGE>
SECOND RESTATED
CERTIFICATE OF INCORPORATION
OF
PARADIGM MUSIC ENTERTAINMENT CO.
(Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware)
Paradigm Music Entertainment Co. (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware (the "General Corporation Law"), hereby certifies as follows:
FIRST: The Certificate of Incorporation of the Corporation was
originally filed under the name Paradigm Records, Inc. with the Secretary of
State of Delaware on August 17, 1995. A Restated Certificate of Incorporation
was filed under the name Paradigm Music Entertainment Co. with the Secretary of
State of Delaware on November 14, 1995.
SECOND: This Second Restated Certificate of Incorporation restates and
integrates and amends the Certificate of Incorporation of the Corporation. It
was duly adopted in accordance with the provisions of Section 242 and 245 of the
General Corporation Law, and was approved by written consent of the stockholders
of the Corporation given in accordance with the provisions of Section 228 of the
General Corporation Law (prompt notice of such action having being given to
those stockholders who did not consent in writing).
THIRD: The text of the Second Restated Certificate of Incorporation of
the Corporation, as amended and restated herein, shall at the effective time of
this Second Restated Certificate of Incorporation, read as follows:
ARTICLE ONE
NAME
The name of the Corporation is PARADIGM MUSIC ENTERTAINMENT
COMPANY.
ARTICLE TWO
REGISTERED OFFICE
The address of the Corporation's registered office in the
State of Delaware is c/o Corporation Service Company, 1013 Centre Road,
Wilmington, Delaware 19805-1297, County of New Castle. The name of the
registered agent at such address is Corporation Service Company.
<PAGE>
ARTICLE THREE
PURPOSES
The nature of the business or purposes to be conducted or
promoted of the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
ARTICLE FOUR
CAPITAL STOCK
(A) Authorized Shares. The aggregate number of shares which
the Corporation shall have authority to issue is Forty Million (40,000,000)
shares, consisting of (i) Thirty One Million Nine Hundred Ninety Nine Thousand
Nine Hundred (31,999,900) shares of Class A Common Stock, $.01 par value per
share ("Class A Common Stock"); (ii) One Million One Hundred (1,000,100) shares
of Class B Common Stock, $.01 par value per share ("Class B Common Stock");
(iii) Two Million (2,000,000 ) shares of Class E Common Stock, $.01 par value
per share ("Class E Common Stock"); and (iv) Five Million (5,000,000) shares of
preferred stock, $.01 par value per share.
(B) Reverse Stock Split. As of December 10, 1996 ("Reverse
Split Date"), each three shares of Class A Common Stock and Class B Common Stock
then issued and outstanding was, without any further action on the part of the
Corporation or any stockholder, automatically changed and reclassified into one
share of Class A Common Stock or Class B Common Stock, as the case may be, and
from and after the Reverse Split Date each certificate which theretofore
represented any four shares of the then issued and outstanding Class A Common
Stock or Class B Common Stock shall automatically be deemed to represent one
share of Class A Common Stock or Class B Common Stock, as the case may be (the
"Reverse Stock Split").
(C) Fractional Interests. No fractional shares of Common Stock
shall be issued in connection with the Reverse Stock Split and any fractional
interest shall be rounded to the next highest whole share.
(D) Designations, Preferences, etc. The designations,
preferences, powers and rights, and the qualifications, limitations and
restrictions thereof, of the capital stock of the Corporation shall be as set
forth in ARTICLE FIVE and ARTICLE SIX below.
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<PAGE>
ARTICLE FIVE
COMMON STOCK
(A) General. The designations, preferences, limitations and
relative rights of the Class A Common Stock, the Class B Common Stock and the
Class E Common Stock shall be in all respect identical, except as stated in this
Certificate of Incorporation or as otherwise required by law.
(B) Voting Rights.
(1) At each meeting of stockholders of the
Corporation and upon each proposal presented at such meeting, every holder of
Class A Common Stock and Class E Common Stock shall be entitled to one vote in
person or by proxy for each share of Class A Common Stock and Class E Common
Stock standing in his or her name on the stock transfer records of the
Corporation and every holder of Class B Common Stock shall be entitled to five
votes in person or by proxy for each shares of Class B Common Stock standing in
his or her name on the stock transfer records of the Corporation.
(2) Except as provided in this Paragraph (B) or
Paragraphs (G) and (H) of this ARTICLE FIVE or as may be otherwise required by
law, the holders of Class A Common Stock, Class B Common Stock and Class E
Common Stock shall vote together as a single class with respect to all matters.
(3) Except as may be otherwise required by law or
stated in any Preferred Stock Designation (as defined in ARTICLE SIX), the
holders of Class A Common Stock, Class B Common Stock and Class E Common Stock
shall have the exclusive right to vote for the election of directors and for all
other purposes, each holder of the Class A Common Stock, Class B Common Stock
and Class E Common Stock being entitled to vote as provided in this Paragraph
(B) of this ARTICLE FIVE.
(C) Dividends and Distributions. Except as provided in
paragraph (H) of this ARTICLE FIVE, and subject to the rights of the holders of
Preferred Stock, and subject to any other provisions of this Certificate of
Incorporation, as it may be amended from time to time, holders of Class A Common
Stock, Class B Common Stock and Class E Common Stock shall be entitled to
receive such dividends and other distributions in cash, in property or in shares
of the Corporation as may be declared thereon by the Board of Directors from
time to time out of assets or funds of the Corporation legally available
therefor; provided, however, that no cash, property or share dividend or
distribution may be declared or paid on the outstanding shares of either the
Class A Common Stock, the Class B Common Stock or the Class E Common Stock
unless an identical per share dividend or distribution is simultaneously
declared and paid on the outstanding shares of the other such class of stock;
provided, further, however, that a dividend of shares may be declared and paid
in Class A Common Stock to holders of Class A Common Stock, Class B Common Stock
and Class E Common Stock if the number of shares paid per share to holders of
Class A Common Stock, to holders of Class B Common Stock and to holders of Class
E Common Stock shall be the
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same. If the Corporation shall in any manner subdivide, combine or reclassify
the outstanding shares of Class A Common Stock, Class B Common Stock or Class E
Common Stock, the outstanding shares of the other such class shall be
subdivided, combined or reclassified proportionally in the same manner and on
the same basis as the outstanding shares of Class A Common Stock, Class B Common
Stock or Class E Common Stock, as the case may be, have been subdivided,
combined or reclassified. A dividend in shares of Class A Common Stock may be
paid to the holders of shares of any other class of the Corporation.
(D) Common Stock Subject to Priorities of Preferred Stock. The
Class A Common Stock, Class B Common Stock and Class E Common Stock are subject
to all the powers, rights, privileges, preferences and priorities of the
Preferred Stock as may be stated in this Certificate of Incorporation and in any
Preferred Stock Designation.
(E) Liquidation Rights. Upon liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, and after the
holders, if any, of the Preferred Stock of each series shall have been paid in
full the amounts to which they respectively shall be entitled, or a sum
sufficient for such payment in full shall have been set aside, the remaining net
assets of the Corporation shall be distributed pro rate on a share for share
basis to the holders of the Class A Common Stock, Class B Common Stock and Class
E Common Stock, to the exclusion of the holders of the Preferred Stock.
(F) No Conversion of Class A Common Stock. The shares of Class
A Common Stock are not convertible into or exchangeable for shares of Class B
Common Stock or any other shares or securities of the Corporation.
(G) Conversion of Class B Common Stock.
(1) Optional Conversion. Each record holder of Class
B Common Stock is entitled, at any time or from time to time, to convert any or
all of the shares of such holder's Class B Common Stock into fully paid and
non-assessable shares of Class A Common Stock for no additional consideration,
at the ratio of one share of Class A Common Stock for each share of Class B
Common Stock.
(2) Optional Conversion Procedures.
(a) Each conversion of shares pursuant to Paragraph
(G)(1) of this ARTICLE FIVE hereof shall be effected by the surrender of the
certificate or certificates representing the shares to be converted at the
principal office of the Corporation at any time during normal business hours,
together with a written notice by the holder stating the number of shares that
such holder desires to convert. Such conversion shall be deemed to have been
effected as of the close of business on the date on which such certificate or
certificates have been surrendered, and at such time, the rights of any such
holder with respect to the converted shares of such holder will cease and the
person or persons in whose name or names the certificate or certificates for
shares are to be issued upon such conversion will be deemed to have become the
holder or holders of record of such shares represented thereby.
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<PAGE>
(b) Promptly after such surrender, the Corporation
will issue and deliver in accordance with the surrendering holder's instructions
the certificate or certificates for the Class A Common Stock issuable upon such
conversion and a conversion and a certificate representing any Class B Common
Stock which was represented by the certificate or certificates delivered to the
Corporation in connection with such conversion, but which was not converted.
(3) Automatic Conversion. Each share of Class B Common Stock
shall (subject to receipt of any and all necessary approvals) convert
automatically into one fully paid and non-assessable share of Class A Common
Stock upon its sale, gift or other transfer or upon the death of the original
holder of a share or shares of Class B Common Stock.
(4) Issuance Costs. The issuance of certificates upon
conversion of shares pursuant hereto will be made without charge to the holder
or holders of such shares for any issuance tax (except stock transfer tax) in
respect thereof or other costs incurred by the Corporation in connection
therewith.
(5) Reservation of Shares. Solely for the purpose of issuance
upon conversion of such shares as herein provided, the Corporation shall at all
times reserve and keep available out of its authorized but unissued shares of
Class A Common Stock such number of shares of Class A Common Stock as are then
issuable upon the conversion of all outstanding shares of Class B Common Stock.
The Corporation covenants that all shares of Class A Common Stock so issuable
shall, when so issued, be duly and validly issued, fully paid and
non-assessable, and free from liens and charges with respect to such issue. The
Corporation will take all such action as may be necessary to assure that all
such shares of Class A Common Stock may be so issued without violation of any
applicable law or regulation, or of any requirements of any national securities
exchange upon which the Class A Common Stock may be listed. The Corporation will
not take any action that results in any adjustment of the conversion ratio if
the total number of shares of Class A Common Stock issued and issuable after
such action upon conversion of the Class B Common Stock would exceed the total
number of Class A Common Stock then authorized by the Restated Certificate of
Incorporation, as amended.
(G) Reissuance of Shares. Any shares of Class B Common Stock that are
converted into shares of Class A Common Stock as provided herein shall be
retired and cancelled and shall not be reissued.
(H) Class E Common Stock
(1) In General. The Class E Common Stock shall have all of the
same rights as the Class A Common Stock and Class B Common Stock, except as
specifically provided herein. On liquidation of the Corporation each outstanding
share of Class E Common Stock shall have the same rights as a share of Class A
Common Stock. Whenever any Class E Common Stock is outstanding, any other
corporate action, including but not limited to any declaration of dividends
(whether in cash, property or securities),
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<PAGE>
distribution, repurchase, split or reverse split, reorganization,
recapitalization, merger or consolidation, shall also affect equally all shares
of Class A Common Stock, Class B Common Stock and Class E Common Stock, except
that any transaction that results or would result in the holders of Class E
Common Stock holding cash, new securities or other property (referred to herein
as the "Class E Distribution Proceeds") shall be effected in such a fashion that
the cash, new securities or other property issuable with respect to each share
of Class E Common Stock shall be held in trust by the Corporation or by such
other person as it may appoint. Such trust shall terminate at the Determination
Date (as defined below). During the period prior to the Determination Date, the
Class E Common Stock itself (in addition to the Class E Distribution Proceeds)
shall remain subject to the Escrow Conditions (as defined below), so that the
disposition of the Class E Common Stock and corresponding Class E Distribution
Proceeds shall be subject to the same Escrow Conditions. Any earnings of the
cash, new securities or other property held in such trust shall be added to the
corpus thereof, all of which shall be distributed promptly after the
Determination Date, to the holders of Class E Common Stock as of the
Determination Date, in proportion to their holdings of Class E Common Stock,
except that if none of the Escrow Conditions (as defined below) shall have been
satisfied on or before the Determination Date, then such corpus shall revert to
the Corporation.
(2) Determination Date. The Determination Date shall be the
earlier to occur of (i) the date any of the Escrow Conditions are satisfied, or
(ii) March 31, 2002.
(3) Escrow Conditions.
The Escrow Conditions for the Class E Common Stock
shall be:
(a) that the Corporation's "Minimum Pretax Income"
(as defined below) shall have equalled or exceeded $7,500,000 (adjusted
as set forth below) for the fiscal year ending on December 31, 1997,
1998 or 1999;
(b) that the Corporation's Minimum Pretax Income
shall have equalled or exceeded $10,000,000 (adjusted as set forth
below) for the fiscal year ending December 31, 2000;
(c) that the Corporation's Minimum Pretax Income
shall have equalled or exceeded $12,500,000 (adjusted as set forth
below) for the fiscal year ending December 31, 2001;
(d) that the "Bid Price" (as defined below) of the
Class A Common Stock, when averaged over any 30 consecutive business
days all of which are less than 18 months after the "Effective Date"
(as defined below), shall have equalled or exceeded $12.50 per share,
subject to adjustment in the event of any reverse stock splits or other
similar events; or
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<PAGE>
(e) that the Bid Price of the Class A Common Stock,
when averaged over any 30 consecutive business days all of which are
more than 18 and less than 36 months after the Effective Date, shall
have equalled or exceeded $16.75 per share (subject to adjustment in
the event of any reverse stock splits or other similar events).
(4) Definitions.
(a) "Minimum Pretax Income" shall mean the
Corporation's net income before provision for income taxes and exclusive of any
other earning that are classified as an extraordinary item and any charges to
income that may result from the release of any securities of the Corporation
subject to escrow arrangements and the conversion of the Class E Common Stock
into Class A Common Stock, as stated in the Corporation's financial statements
for such fiscal year upon which independent auditors have given a report. For
purposes of determining whether the above criteria are met at any Determination
Date, the Minimum Pretax Income amounts set forth above shall be increased at
any Determination Date by multiplying such Minimum Pretax Income amounts by a
fraction, the numerator of which is the average weighted number of shares of
Common Stock outstanding over the fiscal year for which the Escrow Condition is
satisfied (including Class A and Class E Common Stock, and treating as
outstanding common stock of any class issuable upon conversion of securities
that are outstanding at the Determination Date and which are convertible into
common stock without the payment of additional consideration ("Conversion
Shares")) and the denominator of which is the sum of (i) the number of shares of
Common Stock (Class A, Class E and Conversion Shares) which are outstanding (or,
with respect to the Conversion Shares, treated as outstanding as set forth
above) at the Effective Date, plus (ii) the number of shares of Common Stock
sold under the "Registration Statement," as defined below.
(b) The "Registration Statement" shall mean that
certain registration statement filed by the Corporation under the Securities Act
of 1933, as amended, which is the first registration statement so filed by the
Corporation with the United States Securities and Exchange Commission.
(c) The "Effective Date" shall mean the date on which
the Registration Statement become effective within the meaning of Section 8 of
the Securities Act of 1933, as amended.
(d) "Bid Price" shall mean the closing bid price of
the Class A Common Stock in the over-the-counter market as reported by the
Nasdaq Stock Market or the closing bid price of the Class A Common Stock on a
national securities exchange if the Class A Common Stock is listed thereon.
(5) Conversion.
(a) If on the Determination Date, any of the Escrow
Conditions shall have been satisfied, then each share of Class E Common Stock
shall be
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<PAGE>
converted into one share of Class A Common Stock, and if on the Determination
Date none of the Escrow Conditions shall have been satisfied, then the Class E
Common Stock remaining in escrow shall be redeemed by the Corporation at a price
per share of $.00001 and cancelled without further obligation to the holder
thereof. From and after the Determination Date the rights of the holders of
Class E Common Stock shall be limited to the following: (i) in the event that
any of the Escrow Conditions were satisfied at the Determination Date, the right
to receive a certificate representing the number of shares of Class A Common
Stock into which such Class E Common Stock was converted, and otherwise to the
rights of a holder of such shares of Class A Common Stock; or (ii) in the event
that none of the Escrow Conditions were satisfied at the Determination Date, no
further right with respect to the Class E Common Stock, which is thereby
cancelled, or with respect to any other property or securities previously issued
with respect thereto.
(b) Solely for the purpose of issuance upon
conversion of the Class E Common Stock as herein provided, the Corporation
shall, at all times, reserve and keep available out of its authorized but
unissued shares of Class A Common Stock such number of shares of Class A Common
Stock as are then issuable upon the conversion of all outstanding shares of
Class E Common Stock.
(6) No Transfer. No person holding shares of Class E Common
Stock of record may transfer such shares, except by testamentary disposition or
by operation of law, and any purported transfer other than as permitted by the
preceding clause shall be ineffective, null and void.
(7) Registration. Shares of Class E Common Stock shall be
registered in the names of the beneficial owners thereof and not in "street" or
"nominee" name. For this purpose, a "beneficial owner" of any shares of Class E
Common Stock shall mean a person who, or any entity which, possesses the power,
either singly or jointly, to direct the voting or disposition of such shares.
The Corporation shall note on the certificates for shares of Class E Common
Stock the restrictions on transfer and registration.
ARTICLE SIX
PREFERRED STOCK
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors of the Corporation is hereby expressly authorized
to provide, by resolution or resolutions duly adopted by it prior to issuance,
for the creation of each such series and to fix the designation and the powers,
preferences, rights, qualifications, limitations and restrictions relating to
the shares of each such series (the "Preferred Stock Designation"). The
authority of the Board of Directors with respect to each series of Preferred
Stock shall include, but not be limited to, determining the following:
(a) the designation of such series, the number of shares to
constitute such series and the stated value if different from the par
value thereof;
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<PAGE>
(b) whether the shares of such series shall have voting
rights, in addition to any voting rights provided by law, and, if so,
the terms of such voting rights, which may be general or limited;
(c) the dividends, if any, payable on such series, whether any
such dividends shall be cumulative, and, if so, from what dates, the
conditions and dates upon which such dividends shall be payable, and
the preference or relation which such dividends shall bear to the
dividends payable on any shares of stock of any other class or any
other series of Preferred Stock;
(d) whether the shares of such series shall be subject to
redemption by the Corporation, and, if so, the times, prices and other
conditions of such redemption;
(e) the amount or amounts payable upon shares of such series
upon, and the rights of the holders of such series in, the voluntary or
involuntary liquidation, dissolution or winding up, or upon any
distribution of the assets, of the Corporation;
(f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and
the manner in which any such retirement or sinking fund shall be
applied to the purchase or redemption of the shares of such series for
retirement or other corporate purposes and the terms and provisions
relating to the operation thereof;
(g) whether the shares of such series shall be convertible
into, or exchangeable for, shares of stock of any other class or any
other series of Preferred Stock or any other securities and, if so, the
price or prices or the rate or rates of conversion or exchange and the
method, if any, of adjusting the same, and any other terms and
conditions of conversion or exchange;
(h) the limitations and restrictions, if any, to be effective
while any shares of such series are outstanding upon the payment of
dividends or the making of other distributions on, and upon the
purchase, redemption or other acquisition by the Corporation of, the
Common Stock or shares of stock of any other class or any other series
of Preferred Stock;
(i) the conditions or restrictions, if any, upon the creation
of indebtedness of the Corporation or upon the issue of any additional
stock, including additional shares of such series or of any other
series of Preferred Stock or of any other class; and
(j) any other powers, preferences and relative, participating,
optional and other special rights, and any qualifications, limitations
and restrictions, thereof.
The powers, preferences and relative, participating, optional
and other special rights of each series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other series at any time outstanding.
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All shares of any one series of Preferred Stock shall be identical in all
respects with all other shares of such series, except that shares of any one
series issued at different times may differ as to the dates from which dividends
thereof shall be cumulative.
ARTICLE SEVEN
LIMITATION OF LIABILITY OF DIRECTORS
No director of the Corporation shall be personally liable to
the Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that nothing contained in this
ARTICLE SEVEN shall eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware or (iv) for any transaction from which
the director derived an improper personal benefit.
If the General Corporation Law of the State of Delaware is
hereafter amended to authorize the further elimination or limitation of the
liability of a director, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the General
Corporation Law of the State of Delaware, as so amended.
This ARTICLE SEVEN may not be amended or modified to increase
the liability of a director, or repealed, except upon the affirmative vote of
the holders of 75% or more of the outstanding shares of Common Stock. Not such
amendment, modification, or repeal shall apply to or have any effect on the
liability or alleged liability of any director of the Corporation for or with
respect to any acts or omissions of such director occurring prior to such
amendment, modification, or repeal.
ARTICLE EIGHT
INDEMNIFICATION
The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the same
may be amended from time to time, indemnify and reimburse all persons whom it
may indemnify and reimburse pursuant thereto. The indemnification provided for
herein shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any By-Law of the Corporation, agreement,
vote of stockholders or disinterested directors, or otherwise.
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ARTICLE NINE
AMENDMENTS
The Corporation reserves the right to amend or repeal any
provisions contained in this Restated Certificate of Incorporation at any time
in the manner now or hereafter prescribed in this Restated Certificate of
Incorporation and by the laws of the State of Delaware, and all rights herein
conferred upon stockholders are granted subject to such reservation.
****************
IN WITNESS WHEREOF, said Board of Directors of Paradigm Music
Entertainment Company has caused this Certificate to be signed by its Chairman
and attested by its Assistant Secretary this 6th day of January, 1997.
By: s/ Thomas McPartland
----------------------------------------
Thomas McPartland, Chairman and
Chief Executive Officer
By: s/ Scott R. Grodnick
---------------------------------------
Scott R. Grodnick, Assistant Secretary
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BY-LAWS OF
(A Delaware Corporation)
PARADIGM MUSIC ENTERTAINMENT CO.
ARTICLE 1
Meetings of Stockholders
Section 1. Annual Meeting. The annual meeting of the stockholders of
Paradigm Music Entertainment Co. (hereinafter called the "Corporation") for the
election of directors and for the transaction of such other business as may come
before the meeting shall be held on such date and time as shall be designated by
the Board or Chairman of the Board or the President, or at such other date and
time as the Board shall designate.
Section 2. Special Meeting. Special meetings of the stockholders,
unless otherwise prescribed by statute, may be called at any time by the Board
or the Chairman of the Board or the President. The Board of Directors shall call
a special meeting of the stockholders when requested in writing by stockholders
holding not less than 25% of the combined voting power of the then outstanding
stock of the Corporation entitled to vote; such written request shall state the
object of the meeting proposed to be held.
Section 3. Notice of Meetings. Notice of the place, date and time of the
holding of each annual and special meeting of the stockholders and, in the case
of a special meeting, the purpose or purposes thereof shall be given personally
or by mail in a postage prepaid envelope to
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each stockholder entitled to vote at such meeting, not less than ten (10) nor
more than sixty (60) days before the date of such meeting, and, if mailed, it
shall be directed to such stockholder at his address as it appears on the
records of the Corporation, unless he shall have filed with the Secretary of the
Corporation a written request that notices to him be mailed to some other
address, in which case it shall be directed to him at some other address. If
mailed, such notice shall be deemed to be delivered when deposited in United
States mail so addressed with postage thereon prepaid. Notice of any meeting of
stockholders shall not be required to be given to any stockholder who shall
attend such meeting in person or by proxy and shall not, at the beginning of
such meeting, object to the transaction of any business because the meeting is
not lawfully called or convened, or who shall, either before or after the
meeting, submit a signed waiver of notice, in person or by proxy. Unless the
Board shall fix after the adjournment a new record date for an adjourned
meeting, notice of such adjourned meeting need not be given if the time and
place to which the meeting shall be adjourned were announced at the meeting at
which the adjournment is taken. At the adjourned meeting the Corporation may
transact any business which might have been transacted at the original meeting.
If the adjournment is for more than thirty days, or if after the adjournment a
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
Section 4. Place of Meetings. Meetings of the stockholders may be held
at such place, within or without the State of Delaware, as the Board or other
officer calling the same shall specify in the notice of such meeting, or in a
duly executed waiver of notice thereof.
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Section 5. Quorum. At all meetings of the stockholders the holders of a
majority of the votes of the shares of stock of the Corporation issued and
outstanding and entitled to vote shall be present in person or by proxy to
constitute a quorum for the transaction of any business, except when
stockholders are required to vote by class, in which event a majority of the
issued and outstanding shares of the appropriate class shall be present in
person or by proxy, or except as otherwise provided by statute or in the
Certificate of Incorporation. In the absence of a quorum, the holders of a
majority of the votes of the shares of stock present in person or by proxy and
entitled to vote, or if no stockholder entitled to vote is present, then any
officer of the Corporation may adjourn the meeting from time to time. At any
such adjourned meeting at which a quorum may be present any business may be
transacted which might have been transacted at the meeting as originally called.
Section 6. Organization. At each meeting of the stockholders the
Chairman of the Board, or in his absence or inability to act, the President, or
in the absence or inability to act of the Chairman of the Board and the
President, a Vice President, or in the absence of all the foregoing, any person
chosen by a majority of those stockholders present, shall act as chairman of the
meeting. The Secretary, or, in his absence or inability to act, the Assistant
Secretary or any person appointed by the chairman of the meeting, shall act as
secretary of the meeting and keep the minutes thereof.
Section 7. Order of Business. The order of business at all meetings of
the stockholders shall be as determined by the chairman of the meeting.
Section 8. Voting. Except as otherwise provided by statute, the
Certificate of Incorporation, or any certificate duly filed in the office of the
Department of State of Delaware,
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each holder of record of shares of stock of the Corporation having voting power
shall be entitled at each meeting of the stockholders to one vote for every
share of such stock standing in his name on the record of stockholders of the
Corporation on the date fixed by the Board as the record date for the
determination of the stockholders who shall be entitled to notice of and to vote
at such meeting; or if such record date shall not have been so fixed, then at
the close of business on the day next preceding the day on which the meeting is
held; or each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him by a proxy signed by such
stockholder or his attorney-in-fact. Any such proxy shall be delivered to the
secretary of such meeting at or prior to the time designated in the order of
business for so delivering such proxies. No proxy shall be valid after the
expiration of three years from the date thereof, unless otherwise provided in
the proxy. Every proxy shall be revocable at the pleasure of the stockholder
executing it, except in those cases where an irrevocable proxy is permitted by
law. Except as otherwise provided by statute, these By-Laws, or the Certificate
of Incorporation, any corporate action to be taken by vote of the stockholders
shall be authorized by a majority of the total votes, or when stockholders are
required to vote by class by a majority of the votes of the appropriate class,
cast at a meeting of stockholders by the holders of shares present in person or
represented by proxy and entitled to vote on such action. Unless required by
statute, or determined by the chairman of the meeting to be advisable, the vote
on any question need not be by written ballot. On a vote by written ballot, each
ballot shall be signed by the stockholder voting, or by his proxy, if there be
such proxy, and shall state the number of shares voted.
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Section 9. List of Stockholders. The officer who has charge of the
stock ledger of the Corporation, or the transfer agent of the Corporation's
stock, if there be one then acting, shall prepare and make, at least ten days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, at the place where the meeting is to be
held, or at the office of the transfer agent. The list shall also be produced
and kept at the time and place of the meeting during the whole time thereof, and
may be inspected by any stockholder who is present.
Section 10. Inspectors. The Board may, in advance of any meeting of
stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting may, and on the
request of any stockholder entitled to vote thereat shall, appoint inspectors.
Each inspector, before entering upon the discharge of his duties, shall take and
sign an oath faithfully to execute the duties of inspector at such meeting with
strict impartiality and according to the best of his ability. The inspectors
shall determine the number of shares outstanding and the voting power of each,
the number of shares represented at the meeting, the existence of a quorum, the
validity and effect of proxies, and shall receive votes, ballots or consents,
hear and determine all challenges and questions arising in connection with the
right to vote, count and tabulate all votes, ballots or consents, determine the
result, and do such acts as
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are proper to conduct the election or vote with fairness to all stockholders. On
request of the chairman of the meeting or any stockholder entitled to vote
thereat, the inspectors shall make a report in writing of any challenge, request
or matter determined by them and shall execute a certificate of any fact found
by them. No director or candidate for the office of director shall act as
inspector of an election of directors. Inspectors need not be stockholders.
Section 11. Consent of Stockholders in Lieu of Meeting.
Unless otherwise provided in the Certificate of Incorporation,
any action required by Subchapter VII of the General Corporation Law, to be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted and shall be
delivered to the corporation by delivery to its registered office in this State,
its principal place of business, or an officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to a corporation's registered office shall be by hand or
by certified or registered mail, return receipt requested.
ARTICLE II
Board of Directors
Section 1. General Powers. The business and affairs of the Corporation
shall be managed by the Board. The Board may exercise all such authority and
powers of the
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Corporation and do all such lawful acts and things as are not by statute or the
Certificate of Incorporation or by these By-Laws directed or required to be
exercised or done by the stockholders.
Section 2. Number, Qualifications, Election and Term of Office. The
number of directors of the Corporation shall be fixed from time to time by the
vote of a majority of the entire Board then in office and the number thereof may
thereafter by like vote be increased or decreased to such greater or lesser
number (not less than three) as may be so provided, subject to the provisions of
Section 11 of this Article II. All of the directors shall be of full age and
need not be stockholders. Except as otherwise provided by statute or these
By-Laws, the directors shall be elected at the annual meeting of the
stockholders for the election of directors at which a quorum is present, and the
persons receiving a plurality of the votes cast at such meeting shall be
elected. Each director shall hold office until the next annual meeting of the
stockholders and until his successor shall have been duly elected and qualified,
or until his death, or until he shall have resigned, or have been removed, as
hereinafter provided in these By-Laws, or as otherwise provided by statute or
the Certificate of Incorporation.
Section 3. Place of Meetings. Meetings of the Board may be held at such
place, within or without the State of Delaware, as the Board may from time to
time determine or as shall be specified in the notice or waiver of notice of
such meeting.
Section 4. Annual Meeting. The Board shall meet for the purpose of
organization, the election of officers and the transaction of other business, as
soon as practicable after each annual meeting of the stockholders, on the same
day and at the same place where such annual meeting shall be held. Notice of
such meeting need not be given. Such meeting may be held at
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any other time or place (within or without the State of Delaware) which shall be
specified in a notice thereof given as hereinafter provided in Section 7 of this
Article II.
Section 5. Regular Meetings. Regular meetings of the Board shall be
held at such time and place as the Board may from time to time determine. If any
day fixed for a regular meeting shall be a legal holiday at the place where the
meeting is to be held, then the meeting which would otherwise be held on that
day shall be held at the same hour on the next succeeding business day. Notice
of regular meetings of the Board need not be given except as otherwise required
by statute or these By-Laws.
Section 6. Special Meetings. Special meetings of the Board may be called
by two or more directors of the Corporation or by the Chairman of the Board or
the President.
Section 7. Notice of Meetings. Notice of each special meeting of the
Board (and of each regular meeting for which notice shall be required) shall be
given by the Secretary as hereinafter provided in this Section 7, in which
notice shall be stated the time and place (within or without the State of
Delaware) of the meeting. Notice of each such meeting shall be delivered to each
director either personally or by telephone, telegraph, cable or wireless, at
least twenty-four hours before the time at which such meeting is to be held or
by first-class mail, postage prepaid, addressed to him at his residence, or
usual place of business, at least three days before the day on which such
meeting is to be held. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail. Notice of any such meeting need not be
given to any director who shall, either before or after the meeting, submit a
signed waiver of notice or who shall attend such meeting without protesting,
prior to or at its commencement, the
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lack of notice to him. Except as otherwise specifically required by these
By-Laws, a notice or waiver of notice of any regular or special meeting need not
state the purposes of such meeting.
Section 8. Quorum and Manner of Acting. A majority of the entire Board
shall be present in person at any meeting of the Board in order to constitute a
quorum for the transaction of business at such meeting, and, except as otherwise
expressly required by statute or the Certificate of Incorporation, the act of a
majority of the directors present at any meeting at which a quorum is present
shall be the act of the Board. Any one or more members of the Board or any
committee thereof may participate in a meeting of the Board or such committee by
means of a conference telephone or similar communications equipment allowing all
participants in the meeting to hear each other at the same time and
participation by such means shall constitute presence in person at a meeting. In
the absence of a quorum at any meeting of the Board, a majority of the directors
present thereat, or if no director be present, the Secretary, may adjourn such
meeting to another time and place, or such meeting, unless it be the annual
meeting of the Board, need not be held. At any adjourned meeting at which a
quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called. Except as provided in Article
III of these By-Laws, the directors shall act only as a Board and the individual
directors shall have no power as such.
Section 9. Organization. At each meeting of the Board, the Chairman of
the Board (or, in his absence or inability to act, the President, or, in his
absence or inability to act, another director chosen by a majority of the
directors present) shall act as chairman of the meeting and preside thereat. The
Secretary (or, in his absence or inability to act, any person appointed by the
chairman) shall act as secretary of the meeting and keep the minutes thereof.
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Section 10. Resignations. Any director of the Corporation may resign at
any time by giving written notice of his resignation to the Board or Chairman of
the Board or the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Section 11. Vacancies. Vacancies, including newly created
directorships, may be filled by a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or resignations
shall become effective, and each director so chosen shall hold office as
provided in this Section for the filling of other vacancies.
Section 12. Removal of Directors. Except as otherwise provided in the
Certificate of Incorporation or in these By-Laws, any director may be removed,
either with or without cause, at any time, by the affirmative vote of a majority
of the votes of the issued and outstanding shares of stock entitled to vote for
the election of the stockholders called and held for that purpose, or by a
majority vote of the Board of Directors at a meeting called for such purpose,
and the vacancy in the Board caused by any such removal may be filled by such
stockholders or directors, as the case may be, at such meeting, and if the
stockholders shall fail to fill such vacancy, such vacancy shall be filled in
the manner as provided by these By-Laws.
Section 13. Compensation. The Board shall have authority to fix the
compensation, including fees and reimbursement of expenses, of directors for
services to the Corporation in any
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capacity, provided no such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 14. Action by the Board. To the extent permitted under the laws
of the State of Delaware, any action required or permitted to be taken at any
meeting of the Board or of any committee thereof may be taken without a meeting
if all members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of the
proceedings of the Board or committee.
ARTICLE III
Executive and Other Committees
Section 1. Executive and Other Committees. The Board may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of two or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
Committee. Any such committee, to the extent provided in the resolution, shall
have and may exercise the powers of the Board in the management of the business
and affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers which may require it; provided, however, that in the
absence or disqualification of any member of such committee or committees, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board to act at the meeting in the place of any such
absent or disqualified member. Each committee shall keep
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minutes of its proceedings and shall report such minutes to the Board when
required. All such proceedings shall be subject to revision or alteration by the
Board, provided, however, that third parties shall not be prejudiced by such
revision or alteration.
Section 2. General. A majority of any committee may determine its
action and fix the time and place of its meetings, unless the Board shall
otherwise provide. Notice of such meetings shall be given to each member of the
committee in the manner provided for in Article II, Section 7. The Board shall
have the power at any time to fill vacancies in, to change the membership of, or
to dissolve any such committee. Nothing herein shall be deemed to prevent the
Board from appointing one or more committees consisting in whole or in part of
persons who are directors of the Corporation; provided, however, that no such
committee shall have or may exercise any authority of the Board.
ARTICLE IV
Officers
Section 1. Number and Qualifications. The officers of the Corporation
shall include the Chairman of the Board, the President, one or more Vice
Presidents (one or more of whom may be designated Executive Vice President or
Senior Vice President), the Treasurer, and the Secretary. Any two or more
offices may be held by the same person. Such officers shall be elected from time
to time by the Board, each to hold office until the meeting of the Board
following the next annual meeting of the stockholders, or until his successor
shall have been duly elected and shall have qualified, or until his death, or
until he shall have resigned, or have been removed, as hereinafter provided in
these By-Laws. The Board may from time to time elect a
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Vice Chairman of the Board, and the Board may from time to time elect, or the
Chairman of the Board, or the President may appoint, such other officers
(including one or more Assistant Vice Presidents, Assistant Secretaries, and
Assistant Treasurers), as may be necessary or desirable for the business of the
Corporation. Such other officers and agents shall have such duties and shall
hold their offices for such terms as may be prescribed by the Board or by the
appointing authority.
Section 2. Resignation. Any officer of the Corporation may resign at
any time by giving written notice of his resignation to the Board, the Chairman
of the Board, the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Section 3. Removal. Any officer or agent of the Corporation may be
removed, either with or without cause, at any time, by the vote of the majority
of the entire Board at any meeting of the Board or, except in the case of an
officer or agent elected or appointed by the Board, by the Chairman of the Board
or the President. Such removal shall be without prejudice to the contractual
rights, if any, of the person so removed.
Section 4. Vacancies. A vacancy in any office, whether arising from
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
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Section 5. a. The Chairman of the Board. The Chairman of the Board, if
one be elected, shall, if present, preside at each meeting of the stockholders
and of the Board and shall be an ex officio member of all committees of the
Board. He shall perform all duties incident to the office of Chairman of the
Board and such other duties as may from time to time be assigned to him by the
Board.
b. The Vice Chairman of the Board. The Vice Chairman of the
Board, if one be elected, shall have such powers and perform all such duties as
from time to time may be assigned to him by the Board or the Chairman of the
Board and, unless otherwise provided by the Board, shall in the case of the
absence or inability to act of the Chairman of the Board, perform the duties of
the Chairman of the Board and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the Chairman of the Board.
Section 6. The President. The President shall be the chief operating
and executive officer of the Corporation and shall have general and active
supervision and direction over the business and affairs of the Corporation and
over its several officers, subject, however, to the direction of the Chairman of
the Board and the control of the Board. If no Chairman of the Board is elected,
or at the request of the Chairman of the Board, or in the case of his absence or
inability to act, unless there be a Vice Chairman of the Board so designated to
act, the President shall perform the duties of the Chairman of the Board and
when so acting shall have all the powers of, and be subject to all the
restrictions upon, the Chairman of the Board. He shall perform all duties
incident to the office of President and such other duties as from time to time
may be assigned to him by the Board or the Chairman of the Board.
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Section 7. Vice Presidents. Each Executive Vice President, each Senior
Vice President and each Vice President shall have such powers and perform all
such duties as from time to time may be assigned to him by the Board, the
Chairman of the Board, or the President. They shall, in the order of their
seniority, have the power and may perform the duties of the Chairman of the
Board and the President.
Section 8. The Treasurer. The Treasurer shall be the chief financial
officer of the Corporation and shall exercise general supervision over the
receipt, custody and disbursement of Corporate funds. He shall have such further
powers and duties as may be conferred upon him from time to time by the
President or the Board of Directors. He shall perform the duties of controller
if no one is elected to that office.
Section 9. The Secretary. The Secretary shall
(a) keep or cause to be kept in one or more books provided
for the purpose, the minutes of all meetings of the Board, the
committees of the Board and the stockholders;
(b) see that all notices are duly given in accordance with
the provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the
Corporation and affix and attest the seal to all stock
certificates of the Corporation (unless the seal be a facsimile,
as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation
under its seal;
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(d) see that the books, reports, statements, certificates
and other documents and records required by law to be kept and
filed are properly kept and filed, and
(e) in general, perform all the duties incident to the
office of Secretary and such other duties as from time to time
may be assigned to him by the Board, the Chairman of the Board,
or the President.
Section 10. Officer's Bonds or Other Security. If required by the
Board, any officer of the Corporation shall give a bond or other security for
the faithful performance of his duties, in such amount and with such surety or
sureties as the Board may require.
Section 11. Compensation. The compensation of the officers of the
Corporation for their services as such officers shall be fixed from time to time
by the Board, provided, however, that the Board may delegate to the Chairman of
the Board or the President the power to fix the compensation of officers and
agents appointed by the Chairman of the Board or the President, as the case may
be. An officer of the Corporation shall not be prevented from receiving
compensation by reason of the fact that he is also a director of the
Corporation, but any such officer who shall also be a director shall not have
any vote in the determination of the amount of compensation paid to him.
ARTICLE V
Indemnification
The Corporation shall, to the fullest extent permitted by the
laws of the state of incorporation, indemnify any and all persons whom it shall
have power to indemnify against any
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and all of the costs, expenses, liabilities or other matters incurred by them by
reason of having been officers or directors of the Corporation, any subsidiary
of the Corporation or of any other corporation for which he acted as officer or
director at the request of the Corporation.
ARTICLE VI
Contracts, Checks, Drafts, Bank Account, etc.
Section 1. Execution of Contracts. Except as otherwise required by
statute, the Certificate of Incorporation or these By-Laws, any contracts or
other instruments may be executed and delivered in the name and on behalf of the
Corporation by such officer or officers (including any assistant officer) of the
Corporation as the Board may from time to time direct. Such authority may be
general or confined to specific instances as the Board may determine. Unless
authorized by the Board or expressly permitted by these By-Laws, an officer or
agent or employee shall not have any power or authority to bind the Corporation
by any contract or engagement or to pledge its credit or to render it
pecuniarily liable for any purpose or to any amount.
Section 2. Loans. Unless the Board shall otherwise determine, either
(a) the Chairman of the Board, the Vice Chairman of the Board or the President,
singly, or (b) a Vice President, together with the Treasurer, may effect loans
and advances at any time for the Corporation or guarantee any loans and advances
to any subsidiary of the Corporation, from any bank, trust company or other
institution, or from any firm, corporation or individual, and for such loans and
advances may make, execute and deliver promissory notes, bonds or other
certificates or evidences of indebtedness of the Corporation, or guarantee of
indebtedness of subsidiaries of
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<PAGE>
the Corporation, but no officer or officers shall mortgage, pledge, hypothecate
or transfer any securities or other property of the Corporation, except when
authorized by the Board.
Section 3. Check, Drafts, etc. All checks, drafts, bills of exchange or
other orders for the payment of money out of the funds of the Corporation, and
all notes or other evidences of indebtedness of the Corporation, shall be signed
in the name and on behalf of the Corporation by such persons and in such manner
as shall from time to time be authorized by the Board.
Section 4. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board may from time
to time designate or as may be designated by any officer or officers of the
Corporation to whom such power of designation may from time to time be delegated
by the Board. For the purpose of deposit and for the purpose of collection for
the account of the Corporation, checks, drafts and other orders for the payment
of money which are payable to the order of the Corporation may be endorsed,
assigned and delivered by any officer or agent of the Corporation, or in such
manner as the Board may determine by resolution.
Section 5. General and Special Bank Accounts. The Board may from time
to time authorize the opening and keeping of general and special bank accounts
with such banks, trust companies or other depositories as the Board may
designate or as may be designated by any officer or officers of the Corporation
to whom such power of designation may from time to time be delegated by the
Board. The Board may make such special rules and regulations with respect to
such bank accounts, not inconsistent with the provisions of these By-Laws, as it
may deem expedient.
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<PAGE>
Section 6. Proxies in Respect of Securities of Other Corporations.
Unless otherwise provided by resolution adopted by the Board of Directors, the
Chairman of the Board, the President, or a Vice President may from time to time
appoint an attorney or attorneys or agent or agents, of the Corporation, in the
name and on behalf of the Corporation to cast the votes which the Corporation
may be entitled to cast as the holder of stock or other securities in any other
corporation, any of whose stock or other securities may be held by the
Corporation, at meetings of the holders of the stock or other securities of such
other corporation, or to consent in writing, in the name of the Corporation as
such holder, to any action by such other corporation, and may instruct the
person or persons so appointed as to the manner of casting such votes or giving
such consent, and may execute or cause to be executed in the name and on behalf
of the Corporation and under its corporate seal, or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the premises.
ARTICLE VII
Shares, Etc.
Section 1. Stock Certificates. Each holder of shares of stock of the
Corporation shall be entitled to have a certificate, in such form as shall be
approved by the Board, certifying the number of shares of the Corporation owned
by him. The certificates representing shares of stock shall be signed in the
name of the Corporation by the Chairman of the Board or the President or a Vice
President and by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer and sealed with the seal of the Corporation (which seal may
be a facsimile, engraved or printed); provided, however, that where any such
certificate is countersigned by a transfer
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<PAGE>
agent other than the Corporation or its employee, or is registered by a
registrar other than the Corporation or one of its employees, the signature of
the officers of the Corporation upon such certificates may be facsimiles,
engraved or printed. In case any officer who shall have signed or whose
facsimile signature has been placed upon such certificates shall have ceased to
be such officer before such certificates shall be issued, they may nevertheless
be issued by the Corporation with the same effect as if such officer were still
in office at the date of their issue.
Section 2. Books of Account and Record of Shareholders. The books and
records of the Corporation may be kept at such places within or without the
state of incorporation as the Board of Directors may from time to time
determine. The stock record books and the blank stock certificate books shall be
kept by the Secretary or by any other officer or agent designated by the Board
of Directors.
Section 3. Transfer of Shares. Transfers of shares of stock of the
Corporation shall be made on the stock records of the Corporation only upon
authorization by the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary or
with a transfer agent or transfer clerk, and on surrender of the certificate or
certificates for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation may hold any such stockholder of
record liable for calls and assessments and the Corporation shall not be bound
to recognize any equitable or legal
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<PAGE>
claim to or interest in any such share or shares on the part of any other person
whether or not it shall have express or other notice thereof. Whenever any
transfers of shares shall be made for collateral security and not absolutely,
and both the transferor and transferee request the Corporation to do so, such
fact shall be stated in the entry of the transfer.
Section 4. Regulations. The Board may make such additional rules and
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents or one or more transfer clerks and one
or more registrars and may require all certificates for shares of stock to bear
the signature or signatures of any of them.
Section 5. Lost, Destroyed or Mutilated Certificates. The holder of any
certificate representing shares of stock of the Corporation shall immediately
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it which the owner thereof shall
allege to have been lost, stolen, or destroyed or which shall have been
mutilated, and the Board may, in its discretion, require such owner or his legal
representative to give the Corporation a bond in such sum, limited or unlimited,
and in such form and with such surety or sureties as the Board in its absolute
discretion shall determine, to indemnify the Corporation against any claim that
may be made against it on account of the alleged loss, theft, or destruction of
any such certificate, or the issuance of a new certificate. Anything herein to
the contrary notwithstanding, the Board, in its absolute discretion, may refuse
to issue any such new certificate, except pursuant to legal proceedings under
the laws of the State of Delaware.
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<PAGE>
Section 6. Fixing of Record Date. In order that the Corporation may
determine the stockholders entitled to notice of, or to vote at, any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board may fix, in advance, a
record date, which shall not be more than sixty nor less than ten days before
the date of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of, or to vote at, a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board may fix a new record date for the adjourned meeting.
ARTICLE VIII
Offices
Section 1. Principal or Registered Office. The principal registered
office of the Corporation shall be at such place as may be specified in the
Certificate of Incorporation of the Corporation or other certificate filed
pursuant to law, or if none be so specified, at such place as may from time to
time be fixed by the Board.
Section 2. Other Offices. The Corporation also may have an office or
offices other than said principal or registered office, at such place or places
either within or without the State of Delaware.
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<PAGE>
ARTICLE IX
Fiscal Year
The fiscal year of the Corporation shall begin as of January
1st and end as of December 31st.
ARTICLE X
Seal
The Board shall provide a corporate seal which shall contain
the name of the Corporation, the words "Corporate Seal" and the year and State
of Delaware.
ARTICLE XI
Amendments
Section 1. Shareholders. These By-Laws may be amended or repealed, or
new By-Laws may be adopted, at any annual or special meeting of the
stockholders, by a majority of the total votes of the stockholders or when
stockholders are required to vote by class by a majority of the appropriate
class, in person or represented by proxy and entitled to vote on such action;
provided, however, that the notice of such meeting shall have been given as
provided in these By-Laws, which notice shall mention that amendment or repeal
of these By-Laws, or the adoption of new By-Laws, is one of the purposes of such
meeting.
Section 2. Board of Directors. These By-Laws may also be amended or
repealed or new By-Laws may be adopted, by the Board at any meeting thereof;
provided, however, that notice of such meeting shall have been given as provided
in these By-Laws, which notice shall
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<PAGE>
mention that amendment or repeal of the By-Laws, or the adoption of new By-Laws,
is one of the purposes of such meetings. By-Laws adopted by the Board may be
amended or repealed by the stockholders as provided in Section 1 of this Article
XI.
ARTICLE XII
Miscellaneous
Section 1. Interested Directors. No contract or other transaction
between the Corporation and any other corporation shall be affected and
invalidated by the fact that any one or more of the Directors of the Corporation
is or are interested in or is a Director or officer or are Directors or officers
of such other corporation, and any Director or Directors, individually or
jointly, may be a party or parties to or may be interested in any contract or
transaction of the Corporation or in which the Corporation is interested; and no
contract, act or transaction of the Corporation with any person or persons, firm
or corporation shall be affected or invalidated by the fact that any Director or
Directors of the Corporation is a party or are parties to or interested in such
contract, act or transaction, or in any way connected with such person or
persons, firms or associations, and each and every person who may become a
Director of the Corporation is hereby relieved from any liability that might
otherwise exist from contracting with the Corporation for the benefit of
himself, any firm, association or corporation in which he may be in any way
interested.
Section 2. Ratification. Any transaction questioned in any
stockholders' derivative suit on the grounds of lack of authority, defective or
irregular execution, adverse interest of director, officer or stockholder,
nondisclosure, miscomputation, or the application of improper
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<PAGE>
principles or practices of accounting, may be ratified before or after judgment,
by the Board of Directors or by the stockholders in case less than a quorum of
Directors are qualified, and, if so ratified, shall have the same force and
effect as if the questioned transaction had been originally duly authorized, and
said ratification shall be binding upon the Corporation and its stockholders,
and shall constitute a bar to any claim or execution of any judgment in respect
of such questioned transaction.
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<PAGE>
Option to Purchase
________Units
PARADIGM MUSIC ENTERTAINMENT COMPANY
Unit Purchase Option
Dated: ___________, 1997.
THIS CERTIFIES THAT _________________________ (herein
sometimes called the "Holder") is entitled to purchase from PARADIGM MUSIC
ENTERTAINMENT COMPANY, a Delaware corporation (hereinafter called the
"Company"), at the prices and during the periods as hereinafter specified, up to
_______ (_______) Units ("Units"), each Unit consisting of one share of the
Company's Class A Common Stock, $.01 par value, as now constituted ("Class A
Common Stock"), one Class A warrant ("Class A Warrants") and one Class B warrant
("Class B Warrants"). Each Class A Warrant is exercisable to purchase one share
of Class A Common Stock and one Class B Warrant at an exercise price of $6.50
from _______, 1998 to _______ , 2002, and each Class B Warrant is exercisable to
purchase one share of Class A Common Stock at an exercise price of $8.75 until
_______, 2002. The Class A Warrants and Class B Warrants are herein collectively
referred to as the "Warrants."
The Units have been registered under a Registration
Statement on Form SB-2, (File No. 333-_______) declared effective by the
Securities and Exchange Commission on _______, 1997 (the "Registration
Statement"). This Option, together with options of like tenor, constituting in
the aggregate options (the "Options") to purchase ________ Units, subject to
adjustment in accordance with Section 8 of this Option (the "Option Units"), was
originally issued pursuant to an underwriting agreement between the Company and
D.H. BLAIR INVESTMENT BANKING CORP., as underwriter (the "Underwriter") in
connection with a public offering (the "Offering") of 2,600,000 Units (the
"Public Units") through the Underwriter, in consideration of $_______ received
for the Options.
Except as specifically otherwise provided herein, the
Class A Common Stock and the Warrants issued pursuant to the option herein
granted (the "Option") shall bear the same terms and conditions as described
under the caption "Description of Securities" in the Registration Statement, and
the Warrants shall be governed by the terms of the Warrant Agreement dated as of
_______, 1997 executed in connection with such public offering (the "Warrant
Agreement"), except that (i) the Holder shall have registration rights under the
Securities Act of 1933, as amended (the "Act"), for the Option, the Class A
Common Stock and the Warrants included in the Option Units, and the shares of
Class A Common Stock underlying the Warrants, as more fully described in Section
6 of this Option and (ii) the Warrants issuable upon exercise of the Option will
<PAGE>
not be subject to redemption by the Company. The Company will list the Class A
Common Stock underlying this Option and, at the Holder's request the Warrants,
on the Nasdaq Small Cap Market or such other exchange or market as the Class A
Common Stock or the Warrants included in the Public options (the "Public
Warrants") may then be listed or quoted. In the event of any extension of the
expiration date or reduction of the exercise price of the Public Warrants, the
same changes to the Warrants included in the Option Units shall be
simultaneously effected.
1. The rights represented by this Option shall be
exercised at the prices, subject to adjustment in accordance with Section 8 of
this Option (the "Exercise Price"), and during the periods as follows:
(a) During the period from _______, 1997
to _______, 1999 inclusive, the Holder shall have
no right to purchase any Option Units hereunder,
except that in the event of any merger,
consolidation or sale of all or substantially all
the capital stock or assets of the Company or in
the case of any statutory exchange of securities
with another corporation (including any exchange
effected in connection with a merger of another
corporation into the Company) subsequent to
_______, 1997, the Holder shall have the right to
exercise this Option and the Warrants included
herein at such time and receive the kind and
amount of shares of stock and other securities
and property (including cash) which a holder of
the number of shares of Class A Common Stock
underlying this Option and the Warrants included
in this Option would have owned or been entitled
to receive had this Option been exercised
immediately prior thereto.
(b) Between _______, 1999 and _______,
2002 inclusive, the Holder shall have the option
to purchase Option Units hereunder at a price of
$_______ per Unit.
(c) After _________, 2002 the Holder
shall have no right to purchase any Units
hereunder.
2. (a) The rights represented by this Option may be
exercised at any time within the period above specified, in whole or in part, by
(i) the surrender of this Option (with the purchase form at the end hereof
properly executed) at the principal executive office of the Company (or such
other office or agency of the Company as it may designate by notice in writing
to the Holder at the address of the Holder appearing on the books of the
Company); and (ii) payment to the Company of the exercise price then in effect
for the number of Option Units specified in the above-mentioned purchase form
together with applicable stock transfer taxes, if any. This Option shall be
deemed to have been exercised, in whole or in part to the extent specified,
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<PAGE>
immediately prior to the close of business on the date this Option is
surrendered and payment is made in accordance with the foregoing provisions of
this Section 2, and the person or persons in whose name or names the
certificates for shares of Class A Common Stock and Warrants shall be issuable
upon such exercise shall become the holder or holders of record of such Class A
Common Stock and Warrants at that time and date. The certificates for the Class
A Common Stock and Warrants so purchased shall be delivered to the Holder as
soon as practicable but not later than ten (10) days after the rights
represented by this Option shall have been so exercised.
(b) At any time during the period above
specified, during which this Option may be exercised, the Holder may, at its
option, exchange this Option, in whole or in part (an "Option Exchange"), into
the number of Option Units determined in accordance with this Section (b), by
surrendering this Option at the principal office of the Company or at the office
of its stock transfer agent, accompanied by a notice stating such Holder's
intent to effect such exchange, the number of Option Units into which this
Option is to be exchanged and the date on which the Holder requests that such
Option Exchange occur (the "Notice of Exchange"). The Option Exchange shall take
place on the date specified in the Notice of Exchange or, if later, the date the
Notice of Exchange is received by the Company (the "Exchange Date").
Certificates for the shares of Class A Common Stock and Warrants issuable upon
such Option Exchange and, if applicable, a new Option of like tenor evidencing
the balance of the Option Units remaining subject to this Option, shall be
issued as of the Exchange Date and delivered to the Holder within seven (7) days
following the Exchange Date. In connection with any Option Exchange, this Option
shall represent the right to subscribe for and acquire the number of Option
Units (rounded to the next highest integer) equal to (x) the number of Option
Units specified by the Holder in its Notice of Exchange up to the maximum number
of Option Units subject to this option (the "Total Number") less (y) the number
of Option Units equal to the quotient obtained by dividing (A) the product of
the Total Number and the existing Exercise Price by (B) the Fair Market Value.
"Fair Market Value" shall mean first, if there is a trading market as indicated
in Subsection (i) below for the Units, such Fair Market Value of the Units and
if there is no such trading market in the Units, then Fair Market Value shall
have the meaning indicated in Subsections (ii) through (v) below for the
aggregate value of all shares of Class A Common Stock and Warrants which
comprise a Unit:
(i) If the Units are listed on a national
securities exchange or listed or admitted to unlisted
trading privileges on such exchange or listed for trading
on the Nasdaq National Market or the Nasdaq Small Cap
Market, the Fair Market Value shall be the average of the
last reported sale prices or the average of the means of
the last reported bid and asked prices, respectively, of
the Units on such exchange or market for the twenty (20)
business days ending on the last business day prior to the
Exchange Date; or
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<PAGE>
(ii) If the Class A Common Stock or Warrants are
listed on a national securities exchange or admitted to
unlisted trading privileges on such exchange or listed for
trading on the Nasdaq National Market or the Nasdaq Small
Cap Market, the Fair Market Value shall be the average of
the last reported sale prices or the average of the means
of the last reported bid and asked prices, respectively,
of Class A Common Stock or Warrants, respectively, on such
exchange or market for the twenty (20) business days
ending on the last business day prior to the Exchange
Date; or
(iii) If the Class A Common Stock or Warrants are
not so listed or admitted to unlisted trading privileges,
the Fair Market Value shall be the average of the means of
the last reported bid and asked prices of the Class A
Common Stock or Warrants, respectively, for the twenty
(20) business days ending on the last business day prior
to the Exchange Date; or
(iv) If the Class A Common Stock is not so listed
or admitted to unlisted trading privileges and bid and
asked prices are not so reported, the Fair Market Value
shall be an amount, not less than book value thereof as at
the end of the most recent fiscal year of the Company
ending prior to the Exchange Date, determined in such
reasonable manner as may be prescribed by the Board of
Directors of the Company; or
(v) If the Warrants are not so listed or admitted
to unlisted trading privileges, and bid and asked prices
are not so reported for Warrants, then Fair Market Value
for the Warrants shall be an amount equal to the
difference between (i) the Fair Market Value of the shares
of Class A Common Stock and Warrants which may be received
upon the exercise of the Warrants, as determined herein,
and (ii) [the Warrant Exercise Price].
3. Neither this Option nor the underlying securities shall
be transferred, sold, assigned, or hypothecated for a period of two years
commencing from the date hereof except that they may be transferred to
successors of the Holder, and may be assigned in whole or in part to any person
who is an officer of the Holder, any member participating in the selling group
relating to the Offering or any officer of such selling group member. Any such
assignment shall be effected by the Holder (i) executing the form of assignment
at the end hereof and (ii) surrendering this Option for cancellation at the
office or agency of the Company referred to in Section 2 hereof, accompanied by
a certificate (signed by an officer of the Holder if the Holder is a
corporation), stating that each transferee is a permitted transferee under this
Section 3 hereof; whereupon the Company shall issue, in the name or names
specified by the Holder (including the Holder) a new Option or Options of like
tenor and representing in the aggregate rights to purchase the same number of
Option Units as are purchasable hereunder.
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<PAGE>
4. The Company covenants and agrees that all shares of
Class A Common Stock which may be issued as part of the Option Units purchased
hereunder and the Class A Common Stock which may be issued upon exercise of the
Warrants will, upon issuance, be duly and validly issued, fully paid and
nonassessable and no personal liability will attach to the holder thereof. The
Company further covenants and agrees that during the periods within which this
Option may be exercised, the Company will at all times have authorized and
reserved a sufficient number of shares of its Class A Common Stock to provide
for the exercise of this Option and that it will have authorized and reserved a
sufficient number of shares of Class A Common Stock for issuance upon exercise
of the Warrants included in the Option Units.
5. This Option shall not entitle the Holder to any voting
rights or any other rights, or subject to the Holder to any liabilities, as a
stockholder of the Company.
6. (a) The Company shall advise the Holder or its
transferee, whether the Holder holds the Option or has exercised the Option and
holds Option Units or any of the securities underlying the Option Units, by
written notice at least four weeks prior to the filing of any post-effective
amendment to the Registration Statement or of any new registration statement or
post-effective amendment thereto under the Act covering any securities of the
Company, for its own account or for the account of others, and will for a period
of seven years from the effective date of the Registration Statement, upon the
request of the Holder, include in any such post-effective amendment or
registration statement, such information as may be required to permit a public
offering of the Option, all or any of the Option Units, the Class A Common Stock
or Warrants included in the Option Units or the Class A Common Stock issuable
upon the exercise of the Warrants (the "Registrable Securities"); provided,
however, the right of any Holder to include its Registrable Securities in any
such post-effective amendment or registration statement may be waived by the
written consent of D.H. Blair Investment Banking Corp., D.H. Blair & Co. Inc. or
J. Morton Davis.
(b) If any 50% holder (as defined below) [or D.H.
Blair Investment Banking Corp., if applicable] shall give notice to the Company
at any time to the effect that such holder desires to register under the Act
this Option, the Option Units or any of the underlying securities contained in
the Option Units under such circumstances that a public distribution (within the
meaning of the Act) of any such securities will be involved then the Company
will promptly, but no later than two weeks after receipt of such notice, file a
post-effective amendment to the current Registration Statement or a new
registration statement on Form S-1 or such other form as the holder requests
pursuant to the Act, to the end that the Option, the Option Units and/or any of
the securities underlying the Option Units may be publicly sold under the Act as
promptly as practicable thereafter and the Company will use its best efforts to
cause such registration to become and remain effective (including the taking of
such steps as are necessary to obtain the removal of any stop order); provided,
that such holder shall furnish the Company with appropriate information in
connection therewith as the Company may reasonably request in writing. The 50%
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<PAGE>
holder [or D.H. Blair Investment Banking Corp., if applicable] may, at its
option, request the filing of a post-effective amendment to the current
Registration Statement or a new registration statement under the Act on two
occasions during the three year period beginning two years from the effective
date of the Registration Statement. The Holder may, at its option request the
registration of the Option and/or any of the securities underlying the Option in
a registration statement made by the Company as contemplated by Section 6(a) or
in connection with a request made pursuant to this Section 6(b) prior to
acquisition of the Option Units issuable upon exercise of the Option and even
though the Holder has not given notice of exercise of the Option. The 50% holder
[or D.H. Blair Investment Banking Corp., if applicable] may, at its option,
request such post-effective amendment or new registration statement during the
described period with respect to the Option, the Option Units as a unit, or
separately as to the Class A Common Stock and/or Warrants included in the Option
Units and/or the Class A Common Stock issuable upon the exercise of the
Warrants, and such registration rights may be exercised by the 50% holder [or
D.H. Blair Investment Banking Corp., if applicable] prior to or subsequent to
the exercise of the Option.
Within ten days after receiving any such notice pursuant
to this Section 6(b), the Company shall give notice to the other holders of the
Options, advising that the Company is proceeding with such post-effective
amendment or registration statement and offering to include therein the
securities underlying the Options of the other holders, provided that they shall
furnish the Company with such appropriate information (relating to the
intentions of such holders) in connection therewith as the Company shall
reasonably request in writing. In the event the registration statement is not
filed within the period specified herein and in the event the registration
statement is not declared effective under the Act prior to ________, 2002, then,
at the holders' request, the Company shall purchase the Options from the holder
for a per option price equal to the difference between (i) the Fair Market Value
of the Class A Common Stock on the date of notice multiplied by the number of
shares of Class A Common Stock issuable upon exercise of the Option and the
underlying Warrants and (ii) the average per share purchase price of the Option
and each share of Class A Common Stock underlying the Option. All costs and
expenses of the post-effective amendment or new registration statement under
this paragraph 6(b) shall be borne by the Company, except that the holders shall
bear the fees of their own counsel and any underwriting discounts or commissions
applicable to any of the securities sold by them. If the Company determines to
include securities to be sold by it in any registration statement originally
requested pursuant to this Section 6(b), such registration shall instead be
deemed to have been a registration under Section 6(a) and not under this Section
6(b).
The Company will maintain such registration statement or
post-effective amendment current under the Act for a period of at least six
months (and for up to an additional three months if requested by the Holder)
from the effective date thereof.
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<PAGE>
(c) The term "50% holder" as used in this Section
6 shall mean the holder of at least 50% of the Class A Common Stock and the
Warrants underlying the Options (considered in the aggregate) and shall include
any owner or combination of owners of such securities, which ownership shall be
calculated by determining the number of shares of Class A Common Stock held by
such owner or owners as well as the number of shares then issuable upon exercise
of the Warrants.
(d) Whenever pursuant to Section 6 a registration
statement relating to any Registrable Securities is filed under the Act, amended
or supplemented, the Company shall (i) supply prospectuses and such other
documents as the Holder may request in order to facilitate the public sale or
other disposition of the Registrable Securities, (ii) use its best efforts to
register and qualify any of the Registrable Securities for sale in such states
as such Holder designates, (iii) furnish indemnification in the manner provided
in Section 7 hereof, (iv) notify each Holder of Registrable Securities at any
time when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect, contains
an untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and, at the request of any such Holder, prepare and furnish to such
Holder a reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not included an
untrue statement of a material fact or omit to state material fact required to
be stated therein or necessary to make the statements therein not misleading and
(v) do any and all other acts and things which may be necessary or desirable to
enable such Holders to consummate the public sale or other disposition of the
Registrable Securities, The Holder shall furnish appropriate information in
connection therewith and indemnification as set forth in Section 7.
(e) The Company shall not permit the inclusion of
any securities other than the Registrable Securities to be included in any
registration statement filed pursuant to Section 6(b) hereof without the prior
written consent of the 50% holder [or D.H. Blair Investment Banking Corp., if
applicable].
(f) The Company shall furnish to each Holder
participating in the offering and to each underwriter, if any, a signed
counterpart, addressed to such Holder or underwriter, of (i) an opinion of
counsel to the Company, dated the effective date of such registration statement
(or, if such registration includes an underwritten public offering, an opinion
dated the date of the closing under the underwriting agreement), and (ii) if
such registration includes an underwritten public offering, a "cold comfort"
letter dated the effective date of such registration statement and dated the
date of the closing under the underwriting agreement signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
-7-
<PAGE>
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(g) The Company shall deliver promptly to each
Holder participating in the offering requesting the correspondence and memoranda
described below and to the managing underwriter copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonable
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. ("NASD"). Such investigation shall
include access to non-confidential books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable times
as any such Holder shall reasonably request.
7. (a) Whenever pursuant to Section 6 a registration
statement (as amended or supplemented) relating to the Registrable Securities is
filed under the Act, the Company will indemnify and hold harmless each holder of
the Registrable Securities covered by such registration statement, amendment or
supplement (such holder being hereinafter called the "Distributing Holder"), and
each person, if any, who controls (within the meaning of the Act) the
Distributing Holder, and each underwriter (within the meaning of the Act) of
such securities and each person, if any, who controls (within the meaning of the
Act) any such underwriter, against any losses, claims, damages or liabilities,
joint or several, to which the Distributing Holder, any such controlling person
or any such underwriter may become subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any such registration statement or any
preliminary prospectus or final prospectus constituting a part thereof or any
amendment or supplement thereto, or arise out of or are based upon the omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading; and will reimburse the Distributing
Holder and each such controlling person and underwriter for any legal or other
expenses reasonably incurred by the Distributing Holder or such controlling
person or underwriter in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in said
registration statement, said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder specifically for use in the
preparation thereof.
-8-
<PAGE>
(b) If requested by the Company prior to the
filing of any registration statement covering the Registrable Securities, each
Distributing Holder will agree, severally but not jointly, to indemnify and hold
harmless the Company against any losses, claims, damages or liabilities to which
the Company may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities arise out of or are based upon any untrue
or alleged untrue statement of any material fact contained in said registration
statement, said preliminary prospectus, said final prospectus, or said amendment
or supplement, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in said registration
statement, said preliminary prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder specifically for use in the preparation
thereof; except that the maximum amount which may be recovered from the
Distributing Holder pursuant to this Section 7 or otherwise shall be limited to
the amount of net proceeds received by the Distributing Holder from the sale of
the Registrable Securities.
(c) Promptly after receipt by an indemnified
party under this Section 7 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against any
indemnifying party, give the indemnifying party notice of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section 7.
(d) In case any such action is brought against
any indemnified party, and it notifies an indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified to assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
(8) In addition to the provisions of Section 1(a) of this
Option, the Exercise Price in effect at any time and the number and kind of
securities purchasable upon the exercise of the Options shall be subject to
adjustment from time to time upon the happening of certain events as follows:
-9-
<PAGE>
(a) In case the Company shall (i) declare a
dividend or make a distribution on its outstanding shares
of Class A Common Stock in shares of Class A Common Stock,
(ii) subdivide or reclassify its outstanding shares of
Class A Common Stock into a greater number of shares, or
(iii) combine or reclassify its outstanding shares of
Class A Common Stock into a smaller number of shares, the
Exercise Price in effect at the time of the record date
for such dividend or distribution or of the effective date
of such subdivision, combination or reclassification shall
be adjusted so that it shall equal the price determined by
multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of
Class A Common Stock outstanding after giving effect to
such action, and the numerator of which shall be the
number of shares of Class A Common Stock outstanding
immediately prior to such action. Such adjustment shall be
made successively whenever any event listed above shall
occur.
(b) Whenever the Exercise Price payable upon
exercise of each Option is adjusted pursuant to Subsection
(a) above, (i) the number of shares of Class A Common
Stock included in an Option Unit shall simultaneously be
adjusted by multiplying the number of shares of Class A
Common Stock included in Option Unit immediately prior to
such adjustment by the Exercise Price in effect
immediately prior to such adjustment and dividing the
product so obtained by the Exercise Price, as adjusted and
(ii) the number of shares of Class A Common Stock or other
securities issuable upon exercise of the Warrants included
in the Option Units and the exercise price of such
Warrants shall be adjusted in accordance with the
applicable terms of the Warrant Agreement.
(c) No adjustment in the Exercise Price shall be
required unless such adjustment would require an increase
or decrease of at least five cents ($0.05) in such price;
provided, however, that any adjustments which by reason of
this Subsection (c) are not required to be made shall be
carried forward and taken into account in any subsequent
adjustment required to be made hereunder. All calculations
under this Section 8 shall be made to the nearest cent or
to the nearest one-hundredth of a share, as the case may
be. Anything in this Section 8 to the contrary
notwithstanding, the Company shall be entitled, but shall
not be required, to make such changes in the Exercise
Price, in addition to those required by this Section 8, as
it shall determine, in its sole discretion, to be
advisable in order that any dividend or distribution in
shares of Class A Common Stock, or any subdivision,
reclassification or combination of Class A Common Stock,
hereafter made by the Company shall not result in any
Federal Income tax liability to the holders of Class A
Common Stock or securities convertible into Class A Common
Stock (including Warrants issuable upon exercise of this
Option).
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<PAGE>
(d) Whenever the Exercise Price is adjusted, as
herein provided, the Company shall promptly but no later
than 10 days after any request for such an adjustment by
the Holder, cause a notice setting forth the adjusted
Exercise Price and adjusted number of Option Units
issuable upon exercise of each Option and, if requested,
information describing the transactions giving rise to
such adjustments, to be mailed to the Holders, at the
address set forth herein, and shall cause a certified copy
thereof to be mailed to its transfer agent, if any. The
Company may retain a firm of independent certified public
accountants selected by the Board of Directors (who may be
the regular accountants employed by the Company) to make
any computation required by this Section 8, and a
certificate signed by such firm shall be conclusive
evidence of the correctness of such adjustment.
(e) In the event that at any time, as a result of
an adjustment made pursuant to Subsection (a) above, the
Holder of this Option thereafter shall become entitled to
receive any shares of the Company, other than Class A
Common Stock, thereafter the number of such other shares
so receivable upon exercise of this Option shall be
subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the
provisions with respect to the Class A Common Stock
contained in Subsections (a) through (d), inclusive above.
(f) In case any event shall occur as to which the
other provisions of this Section 8 or Section 1(a) hereof
are not strictly applicable but as to which the failure to
make any adjustment would not fairly protect the purchase
rights represented by this Option in accordance with the
essential intent and principles hereof then, in each such
case, the Holders of Options representing the right to
purchase a majority of the Option Units may appoint a firm
of independent public accountants reasonably acceptable to
the Company, which shall give their opinion as to the
adjustment, if any, on a basis consistent with the
essential intent and principles established herein,
necessary to preserve the purchase rights represented by
the Options. Upon receipt of such opinion, the Company
will promptly mail a copy thereof to the Holder of this
Option and shall make the adjustments described therein.
The fees and expenses of such independent public
accountants shall be borne by the Company.
9. This Agreement shall be governed by and in accordance
with the laws of the State of New York, without giving effect to the principles
of conflicts of law thereof.
-11-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Option
to be signed by its duly authorized officers under its corporate seal, and this
Option to be dated ____________, 1997.
PARADIGM MUSIC ENTERTAINMENT
COMPANY
By:
---------------------------------------
Name:
Title:
(Corporate Seal)
Attest:
- - - - ----------------------------
-12-
<PAGE>
PURCHASE FORM
-------------
(To be signed only upon exercise of option)
The undersigned, the holder of the foregoing Option,
hereby irrevocably elects to exercise the purchase rights represented by such
Option for, and to purchase thereunder, _______ Units of PARADIGM MUSIC
ENTERTAINMENT COMPANY (the "Company"), each Unit consisting of one share of
Class A Common Stock, $.01 par value, of the Company, one Class A Warrant to
purchase one share of Class A Common Stock and one Class B Warrant, and one
Class B Warrant and herewith makes payment of $_________ thereof
Dated: , 19 .
------------- --
Instructions for Registration of Stock
and Warrants
-----------------------------
Print Name
------------------------------
Address
------------------------------
Signature
<PAGE>
OPTION EXCHANGE
---------------
The undersigned, pursuant to the provisions of the
foregoing Option, hereby elects to exchange its Option for _________ Units of
PARADIGM MUSIC ENTERTAINMENT COMPANY (the "Company"), each Unit consisting of
one share of Class A Common Stock, $.01 par value, of the Company, one Class A
Warrant to purchase one share of Class A Common Stock and one Class B Warrant,
and one Class B Warrant, pursuant to the Option Exchange provisions of the
Option.
Dated: , 19 .
------------- --
-----------------------------------
Print Name
----------------------------------
Address
----------------------------------
Signature
<PAGE>
TRANSFER FORM
-------------
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns,
and transfers unto the right to purchase Units represented by the foregoing
Option to the extent of Units , and appoints _____________ attorney to transfer
such rights on the books of PARADIGM MUSIC ENTERTAINMENT COMPANY, with full
power of substitution in the premises.
Dated: , 19 .
------------- --
[HOLDER]
By:
--------------------------
-----------------------------
Address
In the presence of:
<PAGE>
WARRANT AGREEMENT
AGREEMENT, dated as of this ____ day of ___________, 1997,
by and among PARADIGM MUSIC ENTERTAINMENT COMPANY, a Delaware corporation (the
"Company"), AMERICAN STOCK TRANSFER & TRUST COMPANY, as Warrant Agent (the
"Warrant Agent"), and D.H. BLAIR INVESTMENT BANKING CORP., a New York
corporation (the "Underwriter").
W I T N E S S E T H
WHEREAS, in connection with a public offering of up to
2,600,000 units ("Units"), each unit consisting of one (1) share of the
Company's Class A Common Stock, $.01 par value (the "Class A Common Stock"), one
(1) redeemable Class A Warrant ("Class A Warrants") and one (1) redeemable Class
B Warrant ("Class B Warrants") pursuant to an underwriting agreement (the
"Underwriting Agreement") dated _______________, 1997 between the Company and
the Underwriter and the issuance to the Underwriter or its designees of Unit
Purchase Options to purchase an aggregate of ________ additional Units, to be
dated as of __________, 1997 (the "Unit Purchase Options"), the Company may
issue up to ______ Class A Warrants and ____________ Class B Warrants (the Class
A Warrants and Class B Warrants may be collectively referred to as "Warrants");
and
WHEREAS, each Class A Warrant initially entitles the
Registered Holder thereof to purchase one (1) share of Class A Common Stock and
one (1) Class B Warrant, and accordingly, the Company may issue up to an
additional _______ Class B Warrants; and
WHEREAS, each Class B Warrant initially entitles the
Registered Holder thereof to purchase one (1) share of Class A Common Stock; and
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in connection
with the issuance, registration, transfer exchange and redemption of the
Warrants, the issuance of certificates representing the Warrants, the exercise
of the Warrants, and the rights of the Registered Holders thereof;
NOW THEREFORE, in consideration of the premises and the
mutual agreements hereinafter set forth and for the purpose of defining the
terms and provisions of the Warrants and the certificates representing the
Warrants and the respective rights and obligations thereunder of the Company,
the holders of certificates representing the Warrants and the Warrant Agent, the
parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following
terms shall have the following meanings, unless the context shall otherwise
require:
<PAGE>
(a) "Aggregate Per Share Price" shall mean the Purchase
Price per share multiplied by the number of shares of Common Stock purchasable
upon the exercise of a Warrant.
(b) "Class A Aggregate Per Share Price" shall mean $6.50.
(c) "Class B Aggregate Per Share Price" shall mean $8.75.
(d) "Common Stock" shall mean stock of the Company of any
class, whether now or hereafter authorized, which has the right to participate
in the distribution of earnings and assets of the Company without limit as to
amount or percentage, which at the date hereof consists of (i) ______ shares of
Class A Common Stock, $.___ par value, (ii) ______ shares of Class B Common
Stock, $.01 par value and (iii) ______ shares of Class E Common Stock, $.01 par
value.
(e) "Corporate Office" shall mean the office of the
Warrant Agent (or its successor) at which at any particular time its principal
business shall be administered, which office is located at the date hereof at
________.
(f) "Exercise Date" shall mean, as to any Warrant, the
date on which the Warrant Agent shall have received both (a) the Warrant
Certificate representing such Warrant, with the exercise form thereon duly
executed by the Registered Holder thereof or his attorney duly authorized in
writing, and (b) payment in cash, or by official bank or certified check made
payable to the Company, of an amount in lawful money of the United States of
America equal to the applicable Purchase Price.
(g) "Initial Warrant Exercise Date" shall mean as to each
Class A Warrant and Class B Warrant __________, 1997.
(h) "Market Price" shall mean shall mean (i) the average
closing bid price of the Common Stock, for thirty (30) consecutive business days
ending on the Calculation Date as reported by Nasdaq, if the Common Stock is
traded on the Nasdaq SmallCap Market, or (ii) the average last reported sale
price of the Common Stock, for thirty (30) consecutive business days ending on
the Calculation Date, as reported by the primary exchange on which the Common
Stock is traded, if the Common Stock is traded on a national securities
exchange, or by Nasdaq, if the Common Stock is traded on the Nasdaq National
Market.
(i) "Purchase Price" shall mean the purchase price to be
paid upon exercise of each Class A Warrant or Class B Warrant in accordance with
the terms hereof, which price shall be $6.50 as to the Class A Warrants and
$8.75 as to the Class B Warrants, subject to adjustment from time to time
pursuant to the provisions of Section 9 hereof, and subject to the Company's
right to reduce the Purchase Price upon notice to all Registered Holders of
Warrants.
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<PAGE>
(j) "Redemption Price" shall mean the price at which the
Company may, at its option in accordance with the terms hereof, redeem the Class
A Warrants and/or Class B Warrants, which price shall be $0.05 per Warrant.
(k) "Registered Holder" shall mean as to any Warrant and
as of any particular date, the person in whose name the certificate representing
the Warrant shall be registered on that date on the books maintained by the
Warrant Agent pursuant to Section 6.
(l) "Transfer Agent" shall mean AMERICAN STOCK TRANSFER &
TRUST COMPANY, as the Company's transfer agent, or its authorized successor, as
such.
(m) "Warrant Expiration Date" shall mean 5:00 P.M. (New
York time) on _________, 2002 (subject to extension as provided herein and in
Section 9(e) or, with respect to Warrants which are outstanding as of the
applicable Redemption Date (as defined in Section 8) and specifically excluding
Warrants issuable upon exercise of Unit Purchase Options if the Unit Purchase
Options have not been exercised, the Redemption Date, whichever is earlier;
provided that if such date shall in the State of New York be a holiday or a day
on which banks are authorized or required to close, then 5:00 P.M. (New York
time) on the next following day which in the State of New York is not a holiday
or a day on which banks are authorized or required to close. Upon notice to all
Registered Holders, the Company shall have the right to extend the Warrant
Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) A Class A Warrant initially shall entitle the
Registered Holder of the Warrant Certificate representing such Warrant to
purchase one share of Class A Common Stock and one Class B Warrant upon the
exercise thereof, in accordance with the terms hereof, subject to modification
and adjustment as provided in Section 9.
(b) A Class B Warrant initially shall entitle the
Registered Holder of the Warrant Certificate representing such Warrant to
purchase one share of Class A Common Stock upon the exercise thereof, in
accordance with the terms hereof, subject to modification and adjustment as
provided in Section 9.
(c) The Class A Warrants and Class B Warrants included in
the offering of Units will be detachable and separately transferable immediately
from the shares of Common Stock constituting part of such Units. The Class B
Warrants will also be detachable and separately transferable immediately from
the shares of Common Stock issued upon exercise of the Class A Warrants.
-3-
<PAGE>
(d) Upon execution of this Agreement, Warrant Certificates
representing the number of Class A Warrants and Class B Warrants sold pursuant
to the Underwriting Agreement shall be executed by the Company and delivered to
the Warrant Agent. Upon written order of the Company signed by its President or
Chairman or a Vice President and by its Secretary or an Assistant Secretary, the
Warrant Certificates shall be countersigned, issued and delivered by the Warrant
Agent as part of the Units.
(e) From time to time, up to the Warrant Expiration Date,
the Transfer Agent shall countersign and deliver stock certificates in required
whole number denominations representing up to an aggregate of __________ shares
of Common Stock, subject to adjustment as described herein, upon the exercise of
Warrants in accordance with this Agreement.
(f) From time to time, up to the Warrant Expiration Date,
the Warrant Agent shall countersign and deliver Warrant Certificates in required
whole number denominations to the persons entitled thereto in connection with
any transfer or exchange permitted under this Agreement; provided that no
Warrant Certificates shall be issued except (i) those initially issued
hereunder, (ii) those issued on or after the Initial Warrant Exercise Date, upon
the exercise of fewer than all Warrants represented by any Warrant Certificate,
to evidence any unexercised Warrants held by the exercising Registered Holder,
(iii) those issued upon any transfer or exchange pursuant to Section 6; (iv)
those issued in replacement of lost, stolen, destroyed or mutilated Warrant
Certificates pursuant to Section 7; (v) those issued pursuant to the Unit
Purchase Option; (vi) at the option of the Company, in such form as may be
approved by the its Board of Directors, to reflect any adjustment or change in
the Purchase Price, the number of shares of Class A Common Stock purchasable
upon exercise of the Warrants or the Target Price(s) therefor made pursuant to
Section 8 hereof; and (vii) those Class B Warrants issued upon exercise of Class
A Warrants.
(g) Pursuant to the terms of the Unit Purchase Options,
the Underwriter or its designees may purchase up to ____ Units, which include up
to ______ Class A Warrants and _____ Class B Warrants. Notwithstanding anything
to the contrary contained herein, the Warrants underlying the Unit Purchase
Option shall not be subject to redemption by the Company except under the terms
and conditions set forth in the Unit Purchase Options.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the
form annexed hereto as Exhibit A as to the Class A Warrants and Exhibit B as to
the Class B Warrants (the provisions of which are hereby incorporated herein)
and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed or
engraved thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
law
-4-
<PAGE>
or with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which the Class A Warrants or Class B
Warrants may be listed, or to conform to usage or to the requirements of Section
2(d). The Warrant Certificates shall be dated the date of issuance thereof
(whether upon initial issuance, transfer, exchange or in lieu of mutilated,
lost, stolen, or destroyed Warrant Certificates) and issued in registered form.
Warrant Certificates shall be numbered serially with the letters AW on Class A
Warrants of all denominations and the letters BW on Class B Warrants of all
denominations.
(b) Warrant Certificates shall be executed on behalf of
the Company by its Chairman of the Board, President or any Vice President and by
its Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of the
Company's seal. Warrant Certificates shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned. In
case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be an officer of the Company or to hold the
particular office referenced in the Warrant Certificate before the date of
issuance of the Warrant Certificates or before countersignature by the Warrant
Agent and issue and delivery thereof, such Warrant Certificates may nevertheless
be countersigned by the Warrant Agent, issued and delivered with the same force
and effect as though the person who signed such Warrant Certificates had not
ceased to be an officer of the Company or to hold such office. After
countersignature by the Warrant Agent, Warrant Certificates shall be delivered
by the Warrant Agent to the Registered Holder without further action by the
Company, except as otherwise provided by Section 4(a) hereof.
SECTION 4. Exercise.
(a) Each Warrant may be exercised by the Registered Holder
thereof at any time on or after the Initial Warrant Exercise Date, but not after
the Warrant Expiration Date, upon the terms and subject to the conditions set
forth herein and in the applicable Warrant Certificate. A Warrant shall be
deemed to have been exercised immediately prior to the close of business on the
Exercise Date and the person entitled to receive the securities deliverable upon
such exercise shall be treated for all purposes as the holder of those
securities upon the exercise of the Warrant as of the close of business on the
Exercise Date. As soon as practicable on or after the Exercise Date, the Warrant
Agent shall deposit the proceeds received from the exercise of a Warrant and
shall notify the Company in writing of the exercise of the Warrants. Promptly
following, and in any event within five days after the date of such notice from
the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to
be issued and delivered by the Transfer Agent, to the person or persons entitled
to receive the same, a certificate or certificates for the securities
deliverable upon such exercise, (plus a Warrant Certificate for any remaining
unexercised Warrants of the Registered Holder) unless prior to the date of
issuance of such certificates the
-5-
<PAGE>
Company shall instruct the Warrant Agent to refrain from causing such issuance
of certificates pending clearance of checks received in payment of the Purchase
Price pursuant to such Warrants. Notwithstanding the foregoing, in the case of
payment made in the form of a check drawn on an account of the Underwriter or
such other investment banks and brokerage houses as the Company shall approve in
writing to the Warrant Agent, certificates shall immediately be issued without
prior notice to the Company or any delay. Upon the exercise of any Warrant and
clearance of the funds received, the Warrant Agent shall promptly remit the
payment received for the Warrant (the "Warrant Proceeds") to the Company or as
the Company may direct in writing, subject to the provisions of Sections 4(b)
and 4(c) hereof.
(b) If, at the Exercise Date in respect of the exercise of
any Warrant after ____________, 1998, (i) the market price of the Company's
Class A Common Stock is greater than the then Purchase Price of the Warrant,
(ii) the exercise of the Warrant was solicited by a member of the National
Association of Securities Dealers, Inc. ("NASD") as designated in writing on the
Warrant Certificate Subscription Form, (iii) the Warrant was not held in a
discretionary account, (iv) disclosure of compensation arrangements was made
both at the time of the original offering and at the time of exercise; and (v)
the solicitation of the exercise of the Warrant was not in violation of
Regulation M (as such regulation or any successor regulation may be in effect as
of such time of exercise) promulgated under the Securities Exchange Act of 1934,
then the Warrant Agent, simultaneously with the distribution of the Warrant
Proceeds to the Company shall, on behalf of the Company, pay from the Warrant
Proceeds, a fee of 5% (the "Exercise Fee") of the Purchase Price to the
Underwriter (of which a portion may be reallowed by the Underwriter to the
dealer who solicited the exercise, which may also be the Underwriter or D.H.
Blair & Co., Inc.). In the event the Exercise Fee is not received within five
days of the date on which the Company receives Warrant Proceeds, then the
Exercise Fee shall begin accruing interest at an annual rate of prime plus four
percent (4%), payable by the Company to the Underwriter at the time the
Underwriter receives the Exercise Fee. Within five days after exercise the
Warrant Agent shall send to the Underwriter a copy of the reverse side of each
Warrant exercised. The Underwriter shall reimburse the Warrant Agent, upon
request, for its reasonable expenses relating to compliance with this section
4(b). The Company shall pay all fees and expenses including all blue sky fees
and expenses and all out-of-pocket expenses of the Underwriter, including legal
fees, in connection with the solicitation, redemption or exchange of the
Warrants. In addition, the Underwriter and the Company may at any time during
business hours, examine the records of the Warrant Agent, including its ledger
of original Warrant Certificates returned to the Warrant Agent upon exercise of
Warrants. The provisions of this paragraph may not be modified, amended or
deleted without the prior written consent of the Underwriter.
(c) In order to enforce the provisions of Section 4(b)
above, in the event there is any dispute or question as to the amount or payment
of the
-6-
<PAGE>
Exercise Fee, the Warrant Agent is hereby expressly authorized to withhold
payment to the Company of the Warrant Proceeds unless and until the Company
establishes an escrow account for the purpose of depositing the entire amount of
the Exercise Fee, which amount will be deducted from the net Warrant Proceeds to
be paid to the Company. The funds placed in the escrow account may not be
released to the Company without a written agreement from the Underwriter that
the required Exercise Fee has been received by the Underwriter.
SECTION 5. Reservation of Shares; Listing; Payment of
Taxes; etc.
(a) The Company covenants that it will at all times
reserve and keep available out of its authorized Class A Common Stock, solely
for the purpose of issue upon exercise of Warrants, such number of shares of
Class A Common Stock as shall then be issuable upon the exercise of all
outstanding Warrants. The Company covenants that all shares of Class A Common
Stock which shall be issuable upon exercise of the Warrants shall, at the time
of delivery, be duly and validly issued, fully paid, nonassessable and free from
all taxes, liens and charges with respect to the issue thereof, (other than
those which the Company shall promptly pay or discharge) and that upon issuance
such shares shall be listed on each national securities exchange, on which the
other shares of outstanding Common Stock of the Company are then listed or shall
be eligible for inclusion in the Nasdaq National Market or the Nasdaq SmallCap
Market if the other shares of outstanding Common Stock of the Company are so
included.
(b) The Company covenants that if any securities to be
reserved for the purpose of exercise of Warrants hereunder require registration
with, or approval of, any governmental authority under any federal securities
law before such securities may be validly issued or delivered upon such
exercise, then the Company will in good faith and as expeditiously as reasonably
possible, endeavor to secure such registration or approval. The Company will use
reasonable efforts to obtain appropriate approvals or registrations under state
"blue sky" securities laws. With respect to any such securities, however,
Warrants may not be exercised by, or shares of Class A Common Stock issued to,
any Registered Holder in any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or
similar taxes and other governmental charges that may be imposed with respect to
the issuance of Warrants, or the issuance or delivery of any shares or Class B
Warrants upon exercise of the Class A Warrants, or the issuance or delivery of
any shares upon exercise of the Class B Warrants; provided, however, that if the
shares of Class A Common Stock or Class B Warrants, as the case may be, are to
be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
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(d) The Warrant Agent is hereby irrevocably authorized to
requisition the Company's Transfer Agent from time to time for certificates
representing shares of Class A Common Stock issuable upon exercise of the
Warrants, and the Company will authorize the Transfer Agent to comply with all
such proper requisitions. The Company will file with the Warrant Agent a
statement setting forth the name and address of the Transfer Agent of the
Company for shares of Class A Common Stock issuable upon exercise of the
Warrants.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other
Warrant Certificates representing an equal aggregate number of Warrants of the
same class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and
upon satisfaction of the terms and provisions hereof, the Company shall execute
and the Warrant Agent shall countersign, issue and deliver in exchange therefor
the Warrant Certificate or Certificates which the Registered Holder making the
exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in
which, subject to such reasonable regulations as it may prescribe, it shall
register Warrant Certificates and the transfer thereof in accordance with its
regular practice. Upon due presentment for registration of transfer of any
Warrant Certificate at such office, the Company shall execute and the Warrant
Agent shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form on
the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed by the Warrant Agent
for any exchange or registration of transfer of Warrant Certificates. In
addition, the Company may require payment by such holder of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
therewith.
(e) All Warrant Certificates surrendered for exercise or
for exchange in case of mutilated Warrant Certificates shall be promptly
cancelled by the Warrant Agent and thereafter retained by the Warrant Agent
until termination of this Agreement or resignation as Warrant Agent, or, with
the prior written consent of the Underwriter, disposed of or destroyed, at the
direction of the Company.
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(f) Prior to due presentment for registration of transfer
thereof, the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof and of each
Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary. The Warrants, which are being publicly offered in Units
with shares of Common Stock pursuant to the Underwriting Agreement, will be
immediately detachable from the Common Stock and transferable separately
therefrom.
SECTION 7. Loss or Mutilation. Upon receipt by the Company
and the Warrant Agent of evidence satisfactory to them of the ownership of and
loss, theft, destruction or mutilation of any Warrant Certificate and (in case
of loss, theft or destruction) of indemnity satisfactory to them, and (in the
case of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall (in the absence of notice to the Company
and/or Warrant Agent that the Warrant Certificate has been acquired by a bona
fide purchaser) countersign and deliver to the Registered Holder in lieu thereof
a new Warrant Certificate of like tenor representing an equal aggregate number
of Class A Warrants or Class B Warrants. Applicants for a substitute Warrant
Certificate shall comply with such other reasonable regulations and pay such
other reasonable charges as the Warrant Agent may prescribe.
SECTION 8. Redemption.
(a) Subject to the provisions of paragraph 2(g) hereof, on
not less than thirty (30) days notice given at any time after ___________, 1998,
(the "Redemption Notice"), to Registered Holders of the Warrants being redeemed
at any time after ____________, 1998, the Warrants may be redeemed, at the
option of the Company, at the Redemption Price per Warrant, provided the Market
Price shall exceed $9.10 with respect to the Class A Warrants and $12.25 with
respect to the Class B Warrants (the "Target Prices"), subject to adjustment as
set forth in Section 8(f), below. All Warrants of a class must be redeemed if
any of that class are redeemed, provided that the Warrants underlying the Unit
Purchase Option may not be redeemed by the Company. For purposes of this Section
8, the Calculation Date shall mean a date within 15 days of the mailing of the
Redemption Notice. The date fixed for redemption of the Warrants is referred to
herein as the "Redemption Date." During the first fifty-four (54) months of this
Agreement, the Class B Warrant Redemption Date may not be earlier than six
months after the Class A Warrant Redemption Date.
(b) If the conditions set forth in Section 8(a) are met,
and the Company desires to exercise its right to redeem the Warrants, it shall
request the Underwriter to mail a Redemption Notice to each of the Registered
Holders of the Warrants to be redeemed, first class, postage prepaid, not later
than the thirtieth day before the Redemption Date, at their last address as
shall appear on
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the records maintained pursuant to Section 6(b). Any notice mailed in the manner
provided herein shall be conclusively presumed to have been duly given whether
or not the Registered Holder receives such notice.
(c) The Redemption Notice shall specify (i) the redemption
price, (ii) the Redemption Date, (iii) the place where the Warrant Certificates
shall be delivered and the redemption price paid, (iv) that the Underwriter will
assist each Registered Holder of a Warrant in connection with the exercise
thereof and (v) that the right to exercise the Warrant shall terminate at 5:00
P.M. (New York time) on the business day immediately preceding the Redemption
Date. No failure to mail such notice nor any defect therein or in the mailing
thereof shall affect the validity of the proceedings for such redemption except
as to a Registered Holder (a) to whom notice was not mailed or (b) whose notice
was defective. An affidavit of the Warrant Agent or of the Secretary or an
Assistant Secretary of the Underwriter or the Company that notice of redemption
has been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
(d) Any right to exercise a Warrant shall terminate at
5:00 P.M. (New York time) on the business day immediately preceding the
Redemption Date. On and after the Redemption Date, Registered Holders of the
Warrants shall have no further rights except to receive, upon surrender of the
Warrant, the Redemption Price.
(e) From and after the Redemption Date, the Company shall,
at the place specified in the Redemption Notice, upon presentation and surrender
to the Company by or on behalf of the Registered Holder thereof of one or more
Warrant Certificates evidencing Warrants to be redeemed, deliver or cause to be
delivered to or upon the written order of such Registered Holder a sum in cash
equal to the Redemption Price of each such Warrant. From and after the
Redemption Date and upon the deposit or setting aside by the Company of a sum
sufficient to redeem all the Warrants called for redemption, such Warrants shall
expire and become void and all rights hereunder and under the Warrant
Certificates, except the right to receive payment of the Redemption Price, shall
cease.
(f) If the shares of the Company's Common Stock are
subdivided or combined into a greater or smaller number of shares of Common
Stock, the Target Prices shall be proportionally adjusted by the ratio which the
total number of shares of Common Stock outstanding immediately prior to such
event bears to the total number of shares of Common Stock to be outstanding
immediately after such event.
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SECTION 9. Adjustment of Exercise Price and Number of
Shares of Common Stock or Warrants.
(a) Subject to the exceptions referred to in Section 9(g)
below, in the event the Company shall, at any time or from time to time after
the date hereof, sell any shares of Common Stock for a consideration per share
less than the Market Price on the date of the sale or issue any shares of Common
Stock as a stock dividend to the holders of Common Stock, or subdivide or
combine the outstanding shares of Common Stock into a greater or lesser number
of shares (any such sale, issuance, subdivision or combination being herein
called a "Change of Shares"), then, and thereafter upon each further Change of
Shares, the Purchase Price in effect immediately prior to such Change of Shares
shall be changed to a price (including any applicable fraction of a cent)
determined by multiplying the Purchase Price in effect immediately prior thereto
by a fraction, the numerator of which shall be the sum of the number of shares
of Common Stock outstanding immediately prior to the issuance of such additional
shares and the number of shares of Common Stock which the aggregate
consideration received (determined as provided in subsection 9(f)(F) below) for
the issuance of such additional shares would purchase at the Market Price and
the denominator of which shall be the sum of the number of shares of Common
Stock outstanding immediately after the issuance of such additional shares. Such
adjustment shall be made successively whenever such an issuance is made. For
purposes of this Section 9, the Calculation Date shall mean the date of the
sale, issuance, modification or other transaction referred to in this Section 9.
Upon each adjustment of the Purchase Price pursuant to
this Section 9, the total number of shares of Common Stock purchasable upon the
exercise of each Class A Warrant or the total number of shares of Common Stock
purchasable upon exercise of each Class B Warrant, as applicable, shall (subject
to the provisions contained in Section 9(b) hereof) be such number of shares
(calculated to the nearest one-hundredth; provided, however, that in no event
shall the Class A Aggregate Per Share Price or the Class B Aggregate Per Share
Price as applicable, increase as a result of such rounding calculation)
purchasable at the Purchase Price in effect immediately prior to such adjustment
multiplied by a fraction, the numerator of which shall be the Purchase Price in
effect immediately prior to such adjustment and the denominator of which shall
be the Purchase Price in effect immediately after such adjustment.
(b) The Company may elect, upon any adjustment of the
Purchase Price hereunder, to adjust the number of Class A Warrants or Class B
Warrants outstanding, in lieu of the adjustment in the number of shares of
Common Stock purchasable upon the exercise of each Warrant as hereinabove
provided, so that each Class A Warrant outstanding after such adjustment shall
represent the right to purchase one share of Common Stock and one Class B
Warrant, and each Class B Warrant outstanding after such adjustment shall
represent the right to purchase one share of Common Stock. Each Warrant held of
record prior to such adjustment of the number of Warrants shall become that
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number of Warrants (calculated to the nearest tenth) determined by multiplying
the number one by a fraction, the numerator of which shall be the Purchase Price
in effect immediately prior to such adjustment and the denominator of which
shall be the Purchase Price in effect immediately after such adjustment. Upon
each adjustment of the number of Warrants pursuant to this Section 9, the
Company shall, as promptly as practicable, cause to be distributed to each
Registered Holder of Warrant Certificates on the date of such adjustment Warrant
Certificates evidencing, subject to Section 10 hereof, the number of additional
Warrants to which such Holder shall be entitled as a result of such adjustment
or, at the option of the Company, cause to be distributed to such Holder in
substitution and replacement for the Warrant Certificates held by him prior to
the date of adjustment (and upon surrender thereof, if required by the Company)
new Warrant Certificates evidencing the number of Warrants to which such Holder
shall be entitled after such adjustment.
(c) In case of any reclassification, capital
reorganization or other change of outstanding shares of Common Stock, or in case
of any consolidation or merger of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock), or in
case of any sale or conveyance to another corporation of the property of the
Company as, or substantially as, an entirety (other than a sale/leaseback,
mortgage or other financing transaction), the Company shall cause effective
provision to be made so that each holder of a Warrant then outstanding shall
have the right thereafter, by exercising such Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock that might have been purchased upon exercise of such Warrant
immediately prior to such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance. Any such provision shall
include provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 9. The Company shall
not effect any such consolidation, merger or sale unless prior to or
simultaneously with the consummation thereof the successor (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing assets or other appropriate corporation or entity shall assume, by
written instrument executed and delivered to the Warrant Agent, the obligation
to deliver to the holder of each Warrant such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holders may be
entitled to purchase and the other obligations of the Company under this
Agreement. The foregoing provisions shall similarly apply to successive
reclassifications, capital reorganizations and other changes of outstanding
shares of Common Stock and to successive consolidations, mergers, sales or
conveyances.
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(d) Irrespective of any adjustments or changes in the
Purchase Price or the number of shares of Common Stock purchasable upon exercise
of the Warrants, the Warrant Certificates theretofore and thereafter issued
shall, unless the Company shall exercise its option to issue new Warrant
Certificates pursuant to Section 2(f) hereof, continue to express the Purchase
Price per share, the number of shares purchasable thereunder and the Redemption
Price therefor as the Purchase Price per share, and the number of shares
purchasable and the Redemption Price therefor were expressed in the Warrant
Certificates when the same were originally issued.
(e) After each adjustment of the Purchase Price pursuant
to this Section 9, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant after such adjustment and, if the
Company shall have elected to adjust the number of Warrants, the number of
Warrants to which the Registered Holder of each Warrant shall then be entitled,
and the adjustment in Redemption Price resulting therefrom, and (iii) a
statement showing in detail the method of calculation and the facts upon which
such adjustment or readjustment is based, including a statement of (a) the
consideration received or to be received by the Company for any securities
issued or sold or deemed to have been issued, (b) the number of shares of Common
Stock outstanding or deemed to be outstanding, and (c) the Purchase Price in
effect immediately prior to such issue or sale and as adjusted and readjusted
(if required by Section 9) on account thereof. The Company will promptly file
such certificate with the Warrant Agent and furnish a copy thereof to be sent no
later than thirty (30) days after the adjustment by ordinary first class mail to
the Underwriter and to each Registered Holder of Warrants at his last address as
it shall appear on the registry books of the Warrant Agent. No failure to mail
such notice nor any defect therein or in the mailing thereof shall affect the
validity thereof except as to the holder to whom the Company failed to mail such
notice, or except as to the holder whose notice was defective. If such mailing
is not made within such 30-day period the Warrant Expiration Date shall be
extended by the period of time equal to the period commencing on the 31st day
and expires on the date such mailing is effectuated. The Company will, upon the
written request at any time of the Underwriter, furnish to the Underwriter a
report by Janover Rubinroit, LLC, or other independent public accountants of
recognized national standing (which may be the regular auditors of the Company)
selected by the Company to verify such computation and setting forth such
adjustment or readjustment and showing in detail the method of calculation and
the facts upon which such adjustment or readjustment is based. The Company will
also keep copies of all such certificates and reports at its principal office.
(f) For purposes of Section 9(a) and 9(b) hereof, the
following provisions (A) to (G) shall also be applicable:
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(A) The number of shares of Common Stock
outstanding at any given time shall include shares of
Common Stock owned or held by or for the account of the
Company and the sale or issuance of such treasury shares
or the distribution of any such treasury shares shall not
be considered a Change of Shares for purposes of said
sections.
(B) No adjustment of the Purchase Price shall be
made unless such adjustment would require an increase or
decrease of at least $.05 in the Purchase Price; provided
that any adjustments which by reason of this clause (B)
are not required to be made shall be carried forward and
shall be made at the time of and together with the next
subsequent adjustment which, together with any
adjustment(s) so carried forward, shall require an
increase or decrease of at least $.05 in the Purchase
Price then in effect hereunder.
(C) In case of (1) the sale by the Company for
cash (or as a component of a unit being sold for cash) of
any rights or warrants to subscribe for or purchase, or
any options for the purchase of, Common Stock or any
securities convertible into or exchangeable for Common
Stock without the payment of any further consideration
other than cash, if any (such securities convertible,
exercisable or exchangeable into Common Stock being herein
called "Convertible Securities"), or (2) the issuance by
the Company, without the receipt by the Company of any
consideration therefor, of any rights or warrants to
subscribe for or purchase, or any options for the purchase
of, Common Stock or Convertible Securities, in each case,
if (and only if) the consideration payable to the Company
upon the exercise of such rights, warrants or options
shall consist of cash, whether or not such rights,
warrants or options, or the right to convert or exchange
such Convertible Securities, are immediately exercisable,
and the price per share for which Common Stock is issuable
upon the exercise of such rights, warrants or options or
upon the conversion or exchange of such Convertible
Securities (determined by dividing (x) the minimum
aggregate consideration payable to the Company upon the
exercise of such rights, warrants or options, plus the
consideration, if any, received by the Company for the
issuance or sale of such rights, warrants or options,
plus, in the case of such Convertible Securities, the
minimum aggregate amount of additional consideration,
other than such Convertible Securities, payable upon the
conversion or exchange thereof, by (y) the total maximum
number of shares of Common Stock issuable upon the
exercise of such rights, warrants or options or upon the
conversion or exchange of such Convertible Securities
issuable upon the exercise of such rights, warrants or
options) is less than the Market Price on the Calculation
Date, then
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the total maximum number of shares of Common Stock
issuable upon the exercise of such rights, warrants or
options or upon the conversion or exchange of such
Convertible Securities (as of the date of the issuance or
sale of such rights, warrants or options) shall be deemed
to be outstanding shares of Common Stock for purposes of
Sections 9(a) and 9(b) hereof and shall be deemed to have
been sold for cash in an amount equal to such price per
share.
(D) In case of the sale by the Company for cash
of any Convertible Securities, whether or not the right of
conversion or exchange thereunder is immediately
exercisable, and the price per share for which Common
Stock is issuable upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the
total amount of consideration received by the Company for
the sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any,
other than such Convertible Securities, payable upon the
conversion or exchange thereof, by (y) the total maximum
number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities) is
less than the Market Price on the Calculation Date, then
the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of such
Convertible Securities (as of the date of the sale of such
Convertible Securities) shall be deemed to be outstanding
shares of Common Stock for purposes of Sections 9(a) and
9(b) hereof and shall be deemed to have been sold for cash
in an amount equal to such price per share.
(E) In case the Company shall modify the rights
of conversion, exchange or exercise of any of the
securities referred to in (C) or (D) above or any other
securities of the Company convertible, exchangeable or
exercisable for shares of Common Stock, for any reason
other than an event that would require adjustment to
prevent dilution, so that the consideration per share
received by the Company after such modification is less
than the Market Price on the Calculation Date, the
Purchase Price to be in effect after such modification
shall be determined by multiplying the Purchase Price in
effect immediately prior to such event by a fraction, of
which the numerator shall be the number of shares of
Common Stock outstanding on the date prior to the
modification plus the number of shares of Common Stock
which the aggregate consideration receivable by the
Company for the securities affected by the modification
would purchase at the Market Price and of which the
denominator shall be the number of shares of Common Stock
outstanding on such date plus the number of shares of
Common Stock to be issued upon conversion, exchange or
exercise of the modified securities at the modified rate.
Such adjustment shall become effective as of the date upon
which such modification
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shall take effect. On the expiration of any such right,
warrant or option or the termination of any such right to
convert or exchange any such Convertible Securities
referred to in Paragraph (C) or (D) above, the Purchase
Price then in effect hereunder shall forthwith be
readjusted to such Purchase Price as would have obtained
(a) had the adjustments made upon the issuance or sale of
such rights, warrants, options or Convertible Securities
been made upon the basis of the issuance of only the
number of shares of Common Stock theretofore actually
delivered (and the total consideration received therefor)
upon the exercise of such rights, warrants or options or
upon the conversion or exchange of such Convertible
Securities and (b) had adjustments been made on the basis
of the Purchase Price as adjusted under clause (a) for all
transactions (which would have affected such adjusted
Purchase Price) made after the issuance or sale of such
rights, warrants, options or Convertible Securities.
(F) In case of the sale for cash of any shares of
Common Stock, any Convertible Securities, any rights or
warrants to subscribe for or purchase, or any options for
the purchase of, Common Stock or Convertible Securities,
the consideration received by the Company therefore shall
be deemed to be the gross sales price therefor without
deducting therefrom any expense paid or incurred by the
Company or any underwriting discounts or commissions or
concessions paid or allowed by the Company in connection
therewith.
(G) In case any event shall occur as to which the
provisions of Section 9 are not strictly applicable but
the failure to make any adjustment would not fairly
protect the purchase rights represented by the Warrants in
accordance with the essential intent and principles of
Section 9, then, in each such case, the Board of Directors
of the Company shall in good faith by resolution provide
for the adjustment, if any, on a basis consistent with the
essential intent and principles established in Section 9,
necessary to preserve, without dilution, the purchase
rights represented by the Warrants. The Company will
promptly make the adjustments described therein.
(g) No adjustment to the Purchase Price of the Warrants or
to the number of shares of Common Stock purchasable upon the exercise of each
Warrant will be made, however,
(i) upon the exercise of any of the options
presently outstanding under the Company's Stock Option
Plan (the "Plan") for officers, directors and certain
other key personnel of the Company; or
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(ii) upon the issuance or exercise of any other
securities which may hereafter be granted or exercised
under the Plan or under any other employee benefit plan of
the Company approved by the Company's stockholders; or
(iii) upon the sale or exercise of the Warrants,
including without limitation the sale or exercise of any
of the Warrants comprising the Unit Purchase Option or
upon the sale or exercise of the Unit Purchase Option; or
(iv) upon the sale of any shares of Common Stock
and/or Convertible Securities in a firm commitment
underwritten public offering, including, without
limitation, shares sold upon the exercise of any
overallotment option granted to the underwriters in
connection with such offering; or
(v) upon the sale by the Company of any shares of
Common Stock and/or Convertible Securities in a private
placement for which the Underwriter is the Placement
Agent; or
(vi) upon the issuance or sale of Common Stock or
Convertible Securities upon the exercise of any rights or
warrants to subscribe for or purchase, or any options for
the purchase of, Common Stock or Convertible Securities,
whether or not such rights, warrants or options were
outstanding on the date of the original sale of the
Warrants or were thereafter issued or sold; or
(vii) upon the issuance or sale of Common Stock
upon conversion or exchange of any Convertible Securities,
whether or not any adjustment in the Purchase Price was
made or required to be made upon the issuance or sale of
such Convertible Securities and whether or not such
Convertible Securities were outstanding on the date of the
original sale of the Warrants or were thereafter issued or
sold.
(h) As used in this Section 9, the term "Common Stock"
shall mean and include the Company's Common Stock authorized on the date of the
original issue of the Units and shall also include any capital stock of any
class of the Company thereafter authorized which shall not be limited to a fixed
sum or percentage in respect of the rights of the holders thereof to participate
in dividends and in the distribution of assets upon the voluntary liquidation,
dissolution or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include only shares of such class
designated in the Company's Certificate of Incorporation as Common Stock on the
date of the original issue of the Units or (i), in the case of any
reclassification, change, consolidation, merger, sale or conveyance of the
character referred to in Section 9(c) hereof, the stock, securities or property
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provided for in such section or (ii), in the case of any reclassification or
change in the outstanding shares of Common Stock issuable upon exercise of the
Warrants as a result of a subdivision or combination or consisting of a change
in par value, or from par value to no par value, or from no par value to par
value, such shares of Common Stock as so reclassified or changed.
(i) Any determination as to whether an adjustment in the
Purchase Price in effect hereunder is required pursuant to Section 9, or as to
the amount of any such adjustment, if required, shall be binding upon the
holders of the Warrants and the Company if made in good faith by the Board of
Directors of the Company.
(j) If and whenever the Company shall grant to the holders
of Common Stock, as such, rights or warrants to subscribe for or to purchase, or
any options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant or option to purchase Common
Stock, the Company shall concurrently therewith grant to each Registered Holder
as of the record date for such transaction of the Warrants then outstanding, the
rights, warrants or options to which each Registered Holder would have been
entitled if, on the record date used to determine the stockholders entitled to
the rights, warrants or options being granted by the Company, the Registered
Holder were the holder of record of the number of whole shares of Common Stock
then issuable upon exercise (assuming, for purposes of this Section 9(j), that
exercise of Warrants is permissible during periods prior to the Initial Warrant
Exercise Date) of his Warrants. Such grant by the Company to the holders of the
Warrants shall be in lieu of any adjustment which otherwise might be called for
pursuant to this Section 9.
SECTION 10. Fractional Warrants and Fractional Shares.
(a) If the number of shares of Common Stock purchasable
upon the exercise of each Warrant is adjusted pursuant to Section 9 hereof, the
Company nevertheless shall not be required to issue fractions of shares, upon
exercise of the Warrants or otherwise, or to distribute certificates that
evidence fractional shares. With respect to any fraction of a share called for
upon the exercise of any Warrant, the Company shall pay to the Holder an amount
in cash equal to such fraction multiplied by the current market value of such
fractional share, determined as follows:
(1) If the Common Stock is listed on a national
securities exchange or admitted to unlisted trading
privileges on such exchange or is traded on the Nasdaq
National Market, the current market value shall be the
last reported sale price of the Common Stock on such
exchange or market on the last business day prior to the
date of exercise of this Warrant or if no such sale is
made on
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such day, the average of the closing bid and asked prices
for such day on such exchange or market; or
(2) If the Common Stock is not listed or admitted
to unlisted trading privileges on a national securities
exchange or is not traded on the Nasdaq National Market,
the current market value shall be the mean of the last
reported bid and asked prices reported by the Nasdaq
SmallCap Market or, if not traded thereon, by the National
Quotation Bureau, Inc. on the last business day prior to
the date of the exercise of this Warrant; or
(3) If the Common Stock is not so listed or
admitted to unlisted trading privileges and bid and asked
prices are not so reported, the current market value shall
be an amount determined in such reasonable manner as may
be prescribed by the Board of Directors of the Company.
SECTION 11. Warrant Holders Not Deemed Stockholders. No
holder of Warrants shall, as such, be entitled to vote or to receive dividends
or be deemed the holder of Common Stock that may at any time be issuable upon
exercise of such Warrants for any purpose whatsoever, nor shall anything
contained herein be construed to confer upon the holder of Warrants, as such,
any of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action (whether
upon any recapitalization, issue or reclassification of stock, change of par
value or change of stock to no par value, consolidation, merger or conveyance or
otherwise), or to receive notice of meetings, or to receive dividends or
subscription rights, until such holder shall have exercised such Warrants and
been issued shares of Common Stock in accordance with the provisions hereof.
SECTION 12. Rights of Action. All rights of action with
respect to this Agreement are vested in the respective Registered Holders of the
Warrants, and any Registered Holder of a Warrant, without consent of the Warrant
Agent or of the holder of any other Warrant, may, in his own behalf and for his
own benefit, enforce against the Company his right to exercise his Warrants for
the purchase of shares of Common Stock in the manner provided in the Warrant
Certificate and this Agreement.
SECTION 13. Agreement of Warrant Holders. Every holder of
a Warrant, by his acceptance thereof, consents and agrees with the Company, the
Warrant Agent and every other holder of a Warrant that:
(a) The Warrants are transferable only on the registry
books of the Warrant Agent by the Registered Holder thereof in person or by his
attorney duly authorized in writing and only if the Warrant Certificates
representing such Warrants are surrendered at the office of the Warrant Agent,
duly endorsed or
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<PAGE>
accompanied by a proper instrument of transfer satisfactory to the Warrant Agent
and the Company in their sole discretion, together with payment of any
applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat
the person in whose name the Warrant Certificate is registered as the holder and
as the absolute, true and lawful owner of the Warrants represented thereby for
all purposes, and neither the Company nor the Warrant Agent shall be affected by
any notice or knowledge to the contrary, except as otherwise expressly provided
in Section 7 hereof.
SECTION 14. Cancellation of Warrant Certificates. If the
Company shall purchase or acquire any Warrant or Warrants, the Warrant
Certificate or Warrant Certificates evidencing the same shall thereupon be
delivered to the Warrant Agent and cancelled by it and retired. The Warrant
Agent shall also cancel the Warrant Certificate or Warrant Certificates
following exercise of any or all of the Warrants represented thereby or
delivered to it for transfer or exchange.
SECTION 15. Concerning the Warrant Agent. The Warrant
Agent acts hereunder as agent and in a ministerial capacity for the Company, and
its duties shall be determined solely by the provisions hereof. The Warrant
Agent shall not, by issuing and delivering Warrant Certificates or by any other
act hereunder be deemed to make any representations as to the validity, value or
authorization of the Warrant Certificates or the Warrants represented thereby or
of any securities or other property delivered upon exercise of any Warrant or
whether any stock issued upon exercise of any Warrant is fully paid and
nonassessable.
The Warrant Agent shall not at any time be under
any duty or responsibility to any holder of Warrant Certificates to make or
cause to be made any adjustment of the Purchase Price or the Redemption Price
provided in this Agreement, or to determine whether any fact exists which may
require any such adjustments, or with respect to the nature or extent of any
such adjustment, when made, or with respect to the method employed in making the
same. It shall not (i) be liable for any recital or statement of facts contained
herein or for any action taken, suffered or omitted by it in reliance on any
Warrant Certificate or other document or instrument believed by it in good faith
to be genuine and to have been signed or presented by the proper party or
parties, (ii) be responsible for any failure on the part of the Company to
comply with any of its covenants and obligations contained in this Agreement or
in any Warrant Certificate, or (iii) be liable for any act or omission in
connection with this Agreement except for its own negligence or wilful
misconduct.
The Warrant Agent may at any time consult with
counsel satisfactory to it (who may be counsel for the Company) and shall incur
no
-20-
<PAGE>
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request,
direction, order or demand of the Company shall be sufficiently evidenced by an
instrument signed by the Chairman of the Board, President, any Vice President,
its Secretary, or Assistant Secretary, (unless other evidence in respect thereof
is herein specifically prescribed). The Warrant Agent shall not be liable for
any action taken, suffered or omitted by it in accordance with such notice,
statement, instruction, request, direction, order or demand believed by it to be
genuine.
The Company agrees to pay the Warrant Agent
reasonable compensation for its services hereunder and to reimburse it for its
reasonable expenses hereunder; it further agrees to indemnify the Warrant Agent
and save it harmless against any and all losses, expenses and liabilities,
including judgments, costs and counsel fees, for anything done or omitted by the
Warrant Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's negligence
or wilful misconduct.
The Warrant Agent may resign its duties and be
discharged from all further duties and liabilities hereunder (except liabilities
arising as a result of the Warrant Agent's own negligence or wilful misconduct),
after giving 30 days' prior written notice to the Company. At least 15 days
prior to the date such resignation is to become effective, the Warrant Agent
shall cause a copy of such notice of resignation to be mailed to the Registered
Holder of each Warrant Certificate at the Company's expense. Upon such
resignation, or any inability of the Warrant Agent to act as such hereunder, the
Company shall appoint a new warrant agent in writing. If the Company shall fail
to make such appointment within a period of 15 days after it has been notified
in writing of such resignation by the resigning Warrant Agent, then the
Registered Holder of any Warrant Certificate may apply to any court of competent
jurisdiction for the appointment of a new warrant agent. Any new warrant agent,
whether appointed by the Company or by such a court, shall be a bank or trust
company having a capital and surplus, as shown by its last published report to
its stockholders, of not less than $10,000,000 or a stock transfer company that
is a registered transfer agent under the Securities Exchange Act of 1934. After
acceptance in writing of such appointment by the new warrant agent is received
by the Company, such new warrant agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named herein as
the Warrant Agent, without any further assurance, conveyance, act or deed; but
if for any reason it shall be necessary or expedient to execute and deliver any
further assurance, conveyance, act or deed, the same shall be done at the
expense of the Company and shall be legally and validly executed and delivered
by the resigning Warrant Agent. Not later than the effective date of any such
appointment the Company shall file notice thereof with the resigning Warrant
-21-
<PAGE>
Agent and shall forthwith cause a copy of such notice to be mailed to the
Registered Holder of each Warrant Certificate.
Any corporation into which the Warrant Agent or
any new warrant agent may be converted or merged or any corporation resulting
from any consolidation to which the Warrant Agent or any new warrant agent shall
be a party or any corporation succeeding to the trust business of the Warrant
Agent shall be a successor warrant agent under this Agreement without any
further act, provided that such corporation is eligible for appointment as
successor to the Warrant Agent under the provisions of the preceding paragraph.
Any such successor warrant agent shall promptly cause notice of its succession
as warrant agent to be mailed to the Company and to the Registered Holder of
each Warrant Certificate.
The Warrant Agent, its subsidiaries and
affiliates, and any of its or their officers or directors, may buy and hold or
sell Warrants or other securities of the Company and otherwise deal with the
Company in the same manner and to the same extent and with like effects as
though it were not Warrant Agent. Nothing herein shall preclude the Warrant
Agent from acting in any other capacity for the Company or for any other legal
entity.
SECTION 16. Modification of Agreement. Subject to the
provisions of Section 4(b), the parties hereto and the Company may by
supplemental agreement make any changes or corrections in this Agreement (i)
that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or manifest mistake or error herein
contained; (ii) to reflect an increase in the number of Class A or Class B
Warrants which are to be governed by this Agreement resulting from (a) a
subsequent public offering of Company securities which includes Class A or Class
B Warrants or (b) a subsequent private placement of Company securities which
includes Class A or Class B Warrants, in either case having the same terms and
conditions as the Class A or Class B Warrants, respectively, originally covered
by or subsequently added to this Agreement under this Section 16, provided,
however, that in the case of a private placement, the amendment to this
Agreement will be effective only at such time as the resale of such Warrants, as
well as the securities underlying such Warrants is covered by an effective
registration statement under the Act; or (iii) that they may deem necessary or
desirable and which shall not adversely affect the interests of the holders of
Warrant Certificates; provided, however, that this Agreement shall not otherwise
be modified, supplemented or altered in any respect except with the consent in
writing of the Registered Holders of Warrant Certificates representing not less
than 50% of the Warrants then outstanding; and provided, further, that no change
in the number or nature of the securities purchasable upon the exercise of any
Warrant, or the Purchase Price therefor, or the acceleration of the Warrant
Expiration Date, shall be made without the consent in writing of the Registered
Holder of the Warrant Certificate representing such Warrant, other than such
changes as are specifically
-22-
<PAGE>
prescribed by this Agreement as originally executed or are made in compliance
with applicable law.
SECTION 17. Notices. All notices, requests, consents and
other communications hereunder shall be in writing and shall be deemed to have
been made when delivered or mailed first class registered or certified mail,
postage prepaid as follows: if to the Registered Holder of a Warrant
Certificate, at the address of such holder as shown on the registry books
maintained by the Warrant Agent; if to the Company, at 67 Irving Place North,
New York, New York 10003, attention: Thomas McPartland, or at such other address
as may have been furnished to the Warrant Agent in writing by the Company; if to
the Warrant Agent, at its Corporate Office; if to the Underwriter, at D.H. Blair
Investment Banking Corp., 44 Wall Street, New York, New York 10005.
SECTION 18. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
without reference to principles of conflict of laws.
SECTION 19. Binding Effect. This Agreement shall be
binding upon and inure to the benefit of the Company and, the Warrant Agent and
their respective successors and assigns, and the holders from time to time of
Warrant Certificates . Nothing in this Agreement is intended or shall be
construed to confer upon any other person any right, remedy or claim, in equity
or at law, or to impose upon any other person any duty, liability or obligation.
SECTION 20. Termination. This Agreement shall terminate at
the close of business on the earlier of the Warrant Expiration Date or the date
upon which all Warrants (including the warrants issuable upon exercise of the
Unit Purchase Options) have been exercised, except that the Warrant Agent shall
account to the Company for cash held by it and the provisions of Section 15
hereof shall survive such termination.
-23-
<PAGE>
SECTION 21. Counterparts. This Agreement may be executed
in several counterparts, which taken together shall constitute a single
document.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first above written.
PARADIGM MUSIC ENTERTAINMENT
COMPANY
By: ______________________________
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By: ______________________________
Authorized Officer
D.H. BLAIR INVESTMENT BANKING CORP.
By: ______________________________
Authorized Officer
-24-
<PAGE>
EXHIBIT A
[FORM OF FACE OF CLASS A WARRANT CERTIFICATE]
No. AW _______ Class A Warrants
VOID AFTER __________, 2002
CLASS A WARRANT CERTIFICATE FOR PURCHASE
OF COMMON STOCK AND REDEEMABLE CLASS B WARRANTS
PARADIGM MUSIC ENTERTAINMENT COMPANY
This certifies that FOR VALUE RECEIVED __________________
or registered assigns (the "Registered Holder") is the owner of the number of
Class A Warrants ("Class A Warrants") specified above. Each Class A Warrant
represented hereby initially entitles the Registered Holder to purchase, subject
to the terms and conditions set forth in this Warrant Certificate and the
Warrant Agreement (as hereinafter defined), one fully paid and nonassessable
share of Class A Common Stock, $.01 value ("Common Stock"), of PARADIGM MUSIC
ENTERTAINMENT COMPANY, a Delaware corporation (the "Company"), and one Class B
Warrant of the Company at any time between ____________, 1997 and the Expiration
Date (as hereinafter defined), upon the presentation and surrender of this
Warrant Certificate with the Subscription Form on the reverse hereof duly
executed, at the corporate office of AMERICAN STOCK TRANSFER & TRUST COMPANY, as
Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$6.50 for each Warrant (the "Purchase Price") in lawful money of the United
States of America in cash or by official bank or certified check made payable to
_________________.
This Warrant Certificate and each Class A Warrant
represented hereby are issued pursuant to and are subject in all respects to the
terms and conditions set forth in the Warrant Agreement (the "Warrant
Agreement"), dated ______________, 1997 by and among the Company, the Warrant
Agent and D.H. Blair Investment Banking Corp.
In the event of certain contingencies provided for in the
Warrant Agreement, the Purchase Price or the number of shares of Common Stock
and Class B Warrants subject to purchase upon the exercise of each Class A
Warrant represented hereby are subject to modification or adjustment.
Each Class A Warrant represented hereby is exercisable at
the option of the Registered Holder, but no fractional shares of Common Stock
will
A-1
<PAGE>
be issued. In the case of the exercise of less than all the Class A Warrants
represented hereby, the Company shall cancel this Warrant Certificate upon the
surrender hereof and shall execute and deliver a new Warrant Certificate or
Warrant Certificates of like tenor, which the Warrant Agent shall countersign,
for the balance of such Class A Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York
time) on _________________, 2002 or such earlier date as the Class A Warrants
shall be redeemed(1). If such date shall in the State of New York be a holiday
or a day on which banks are authorized to close, then the Expiration Date shall
mean 5:00 P.M. (New York time) the next following day which in the State of New
York is not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any
securities pursuant to the exercise of the Class A Warrants represented hereby
unless a registration statement under the Securities Act of 1933, as amended,
with respect to such securities is effective. The Company has covenanted and
agreed that it will file a registration statement and will use its best efforts
to cause the same to become effective and to keep such registration statement
current while any of the Class A Warrants are outstanding. The Class A Warrants
represented hereby shall not be exercisable by a Registered Holder in any state
where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the
surrender hereof by the Registered Holder at the corporate office of the Warrant
Agent, for a new Warrant Certificate or Warrant Certificates of like tenor
representing an equal aggregate number of Class A Warrants, each of such new
Warrant Certificates to represent such number of Class A Warrants as shall be
designated by such Registered Holder at the time of such surrender. Upon due
presentment with a $_____________ transfer fee per certificate in addition to
any tax or other governmental charge imposed in connection therewith, for
registration of transfer of this Class A Warrant Certificate at such office, a
new Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Class A Warrants will be issued to the transferee in exchange
therefor, subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Class A Warrant represented
hereby, the Registered Holder shall not be entitled to any rights of a
stockholder of the Company, including, without limitation, the right to vote or
to receive dividends or other distributions, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided in the
Warrant Agreement.
The Class A Warrants represented hereby may be redeemed at
the option of the Company, at a redemption price of $.05 per Class A Warrant at
any
- - - - --------
(1) Not applicable for Warrant under the Unit Purchase Option.
A-2
<PAGE>
time after __________, 1998, provided the Market Price (as defined in the
Warrant Agreement) for the Common Stock shall exceed $9.10 per share. Notice of
redemption shall be given not later than the thirtieth day before the date fixed
for redemption, all as provided in the Warrant Agreement. On and after the date
fixed for redemption, the Registered Holder shall have no rights with respect to
the Class A Warrants represented hereby except to receive the $.05 per Class A
Warrant upon surrender of this Warrant Certificate.(2)
Prior to due presentment for registration of transfer
hereof, the Company and the Warrant Agent may deem and treat the Registered
Holder as the absolute owner hereof and of each Class A Warrant represented
hereby (notwithstanding any notations of ownership or writing hereon made by
anyone other than a duly authorized officer of the Company or the Warrant Agent)
for all purposes and shall not be affected by any notice to the contrary.
The Company has agreed to pay a fee of 5% of the Purchase
Price upon certain conditions as specified in the Warrant Agreement upon the
exercise of the Class A Warrants represented hereby.
This Warrant Certificate shall be governed by and
construed in accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned
by the Warrant Agent.
- - - - --------
(2) Not applicable for Warrant under the Unit Purchase Option.
A-3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or in facsimile, by two of its
officers thereunto duly authorized and a facsimile of its corporate seal to be
imprinted hereon.
PARADIGM MUSIC ENTERTAINMENT
COMPANY
By:__________________________________
Name:
Title:
Dated:_________
[seal]
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By:___________________________
Authorized Officer
A-4
<PAGE>
[FORM OF REVERSE OF WARRANT CERTIFICATE]
TRANSFER FEE: $_______ PER CERTIFICATE ISSUED
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably
elects to exercise _______ Class A Warrants represented by this Warrant
Certificate, and to purchase the securities issuable upon the exercise of such
Class A Warrants, and requests that certificates for such securities shall be
issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
___________________________
___________________________
___________________________
___________________________
[please print or type name and address]
and be delivered to
___________________________
___________________________
___________________________
___________________________
[please print or type name and address]
and if such number of Class A Warrants shall not be all the Class A Warrants
evidenced by this Warrant Certificate, that a new Class A Warrant Certificate
for the balance of such Class A Warrants be registered in the name of, and
delivered to, the Registered Holder at the address stated below.
The undersigned represents that the exercise of the Class
A Warrants evidenced hereby was solicited by a member of the National
A-5
<PAGE>
Association of Securities Dealers, Inc. If not solicited by an NASD member,
please write "unsolicited" in the space below. Unless otherwise indicated by
listing the name of another NASD member firm, it will be assumed that the
exercise was solicited by D.H. Blair Investment Banking Corp. or D.H. Blair &
Co., Inc.
____________________________________
(Name of NASD Member)
Dated:_________________________ X
____________________________________
____________________________________
Address
____________________________________
Taxpayer Identification Number
____________________________________
Signature Guaranteed
____________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
A-6
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, __________________ hereby sells, assigns and transfers
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
OF TRANSFEREE
___________________________
___________________________
___________________________
___________________________
[please print or type name and address]
_________________ of the Class A Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
____________________________________ Attorney to transfer this Warrant
Certificate on the books of the Company, with full power of substitution in the
premises.
Dated:________________ X ______________________________
Signature Guaranteed
______________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
A-7
<PAGE>
EXHIBIT B
[FORM OF FACE OF CLASS B WARRANT CERTIFICATE]
No. BW ____ Class B Warrants
VOID AFTER _____________, 2002
CLASS B WARRANT CERTIFICATE FOR
PURCHASE OF COMMON STOCK
PARADIGM MUSIC ENTERTAINMENT COMPANY
This certifies that FOR VALUE RECEIVED __________________
or registered assigns (the "Registered Holder") is the owner of the number of
Class B Warrants specified above. Each Class B Warrant represented hereby
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Warrant Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Class A Common
Stock, $.01 par value ("Common Stock"), of PARADIGM MUSIC ENTERTAINMENT COMPANY,
a Delaware corporation (the "Company") between ____________, 1997 and the
Expiration Date (as hereinafter defined), upon the presentation and surrender of
this Warrant Certificate with the Subscription Form on the reverse hereof duly
executed, at the corporate office of AMERICAN STOCK TRANSFER & TRUST COMPANY, as
Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$8.75 for each Warrant (the "Purchase Price") in lawful money of the United
States of America in cash or by official bank or certified check made payable to
_________________.
This Warrant Certificate and each Class A Warrant
represented hereby are issued pursuant to and are subject in all respects to the
terms and conditions set forth in the Warrant Agreement (the "Warrant
Agreement"), dated ______________, 1997 by and among the Company, the Warrant
Agent and D.H. Blair Investment Banking Corp.
In the event of certain contingencies provided for in the
Warrant Agreement, the Purchase Price or the number of shares of Common Stock
subject to purchase upon the exercise of each Class B Warrant represented hereby
are subject to modification or adjustment.
Each Class B Warrant represented hereby is exercisable at
the option of the Registered Holder, but no fractional shares of Common Stock
will be issued. In the case of the exercise of less than all the Class B
Warrants represented hereby, the Company shall cancel this Warrant Certificate
upon the
B-1
<PAGE>
surrender hereof and shall execute and deliver a new Warrant Certificate or
Warrant Certificates of like tenor, which the Warrant Agent shall countersign,
for the balance of such Class B Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York
time) on _______________, 2002 or such earlier date as the Class B Warrants
shall be redeemed.(3) If such date shall in the State of New York be a holiday
or a day on which banks are authorized to close, then the Expiration Date shall
mean 5:00 P.M. (New York time) the next following day which in the State of New
York is not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any
securities pursuant to the exercise of the Class B Warrants represented hereby
unless a registration statement under the Securities Act of 1933, as amended,
with respect to such securities is effective. The Company has covenanted and
agreed that it will file a registration statement and will use its best efforts
to cause the same to become effective and to keep such registration statement
current while any of the Class B Warrants are outstanding. The Class B Warrants
represented hereby shall not be exercisable by a Registered Holder in any state
where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the
surrender hereof by the Registered Holder at the corporate office of the Warrant
Agent, for a new Warrant Certificate or Warrant Certificates of like tenor
representing an equal aggregate number of Class B Warrants, each of such new
Warrant Certificates to represent such number of Class B Warrants as shall be
designated by such Registered Holder at the time of such surrender. Upon due
presentment with any applicable transfer fee in addition to any tax or other
governmental charge imposed in connection therewith, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Class B
Warrants will be issued to the transferee in exchange therefor, subject to the
limitations provided in the Warrant Agreement.
Prior to the exercise of any Class B Warrant represented
hereby, the Registered Holder shall not be entitled to any rights of a
stockholder of the Company, including, without limitation, the right to vote or
to receive dividends or other distributions, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided in the
Warrant Agreement.
The Class B Warrants represented hereby may be redeemed at
the option of the Company, at a redemption price of $.05 per Class B Warrant at
any time after _____________, 1998, provided the Market Price (as defined in the
Warrant Agreement) for the Common Stock shall exceed $12.25 per share.
- - - - --------
(3) Not applicable for Warrant under the Unit Purchase Option.
B-2
<PAGE>
Notice of redemption shall be given not later than the thirtieth day before the
date fixed for redemption, all as provided in the Warrant Agreement. On and
after the date fixed for redemption, the Registered Holder shall have no rights
with respect to the Class B Warrants represented hereby except to receive the
$.05 per Class B Warrant upon surrender of this Warrant Certificate.(4)
Prior to due presentment for registration of transfer
hereof, the Company and the Warrant Agent may deem and treat the Registered
Holder as the absolute owner hereof and of each Class B Warrant represented
hereby (notwithstanding any notations of ownership or writing hereon made by
anyone other than a duly authorized officer of the Company or the Warrant Agent)
for all purposes and shall not be affected by any notice to the contrary.
The Company has agreed to pay a fee of 5% of the Purchase
Price upon certain conditions as specified in the Warrant Agreement upon the
exercise of the Class B Warrants represented hereby.
This Warrant Certificate shall be governed by and
construed in accordance with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned
by the Warrant Agent.
- - - - --------
(4) Not applicable for Warrant under the Unit Purchase Option.
B-3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or in facsimile, by two of its
officers thereunto duly authorized and a facsimile of its corporate seal to be
imprinted hereon.
PARADIGM MUSIC ENTERTAINMENT
COMPANY
By:__________________________________
Name:
Title:
Dated:__________
[seal]
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By:___________________________
Authorized Officer
B-4
<PAGE>
[FORM OF REVERSE OF WARRANT CERTIFICATE]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably
elects to exercise Class B Warrants represented by this Warrant Certificate, and
to purchase the securities issuable upon the exercise of such Class B Warrants,
and requests that certificates for such securities shall be issued in the name
of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
___________________________
___________________________
___________________________
___________________________
[please print or type name and address]
and be delivered to
___________________________
___________________________
___________________________
___________________________
[please print or type name and address]
and if such number of Class B Warrants shall not be all the Class B Warrants
evidenced by this Warrant Certificate, that a new Warrant Certificate for the
balance of such Class B Warrants be registered in the name of, and delivered to,
the Registered Holder at the address stated below.
The undersigned represents that the exercise of the Class
B Warrants evidenced hereby was solicited by a member of the National
B-5
<PAGE>
Association of Securities Dealers, Inc. If not solicited by an NASD member,
please write "unsolicited" in the space below. Unless otherwise indicated by
listing the name of another NASD member firm, it will be assumed that the
exercise was solicited by D.H. Blair Investment Banking Corp.
____________________________________
(Name of NASD Member)
Dated:________________________ X
____________________________________
____________________________________
Address
____________________________________
Taxpayer Identification Number
____________________________________
Signature Guaranteed
____________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
B-6
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, _____________________________ hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
OF TRANSFEREE
___________________________
___________________________
___________________________
___________________________
[please print or type name and address]
______________ of the Class B Warrants represented by this Warrant Certificate,
and hereby irrevocably constitutes and appoints________________________________
___________________________________________ Attorney to transfer this Warrant
Certificate on the books of the Company, with full power of substitution in the
premises.
Dated: _______________________ X
Signature Guaranteed
____________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
B-7
<PAGE>
STOCK
ESCROW AGREEMENT
AGREEMENT, dated as of the 21st day of November, 1995, by and
among American Stock Transfer & Trust Company, a New York corporation
(hereinafter referred to as the "Escrow Agent"), Paradigm Music Entertainment
Co., a Delaware corporation (the "Company"), and the stockholders of the Company
who have executed this agreement and certain future stockholders of the Company
who will execute this agreement (hereinafter collectively called the
"Stockholders").
WHEREAS, the Company contemplates a private offering ("Private
Placement") of Units ("Units"), each Unit consisting of one share of its Class A
Common Stock, par value $.01 per share (the "Class A Common Stock") through D.H.
Blair Investment Banking Corp. as Placement Agent ("Blair") pursuant to a
Private Placement Memorandum dated October 6, 1995 (the "Memorandum"); and
WHEREAS, in connection with the Private Placement, the
Stockholders have agreed to deposit in escrow an aggregate of 1,700,000 shares
of Class B Common Stock, $.01 par value (the "Class B Common Stock") and 300,000
shares of Class A Common Stock, $.01 par value (the "Class A Common Stock," and,
together, the "Common Stock"), upon the terms and conditions set forth herein.
In consideration of the mutual covenants and promises herein
contained, the parties hereto agree as follows:
<PAGE>
1. The Stockholders and the Company hereby appoint American
Stock Transfer & Trust Company as Escrow Agent and agree that the Stockholders
will, prior to the First Closing (as hereinafter defined) of the Private
Placement deliver to the Escrow Agent to hold in accordance with the provisions
hereof, certificates representing an aggregate of 1,700,000 shares of Class B
Common Stock and 18,000 shares of Class A Common Stock owned of record by the
Stockholders in the respective amounts set forth on Exhibit A hereto and, from
time to time thereafter, an aggregate of 282,000 additional shares of Class A
Common Stock will be delivered to the Escrow Agent to be held in accordance with
the provisions hereof (all of which shall be referred to herein as the "Escrow
Shares"), together with stock powers executed in blank. The Escrow Agent, by its
execution and delivery of this Agreement hereby acknowledges receipt of the
Escrow Shares and accepts its appointment as Escrow Agent to hold the Escrow
Shares in escrow, upon the terms, provisions and conditions hereof.
2. This Agreement shall become effective upon the date on
which a minimum of Forty (40) Units are sold pursuant to the Term Sheet (the
"First Closing") and shall continue in effect until the earlier of (i) the date
specified in paragraph 4(e) hereof or (ii) the distribution by the Escrow Agent
of all of the Escrow Shares in accordance with the terms hereof (the
"Termination Date"). The period of time from the First Closing until the
Termination Date is referred to herein as the "Escrow Period."
3. During the Escrow Period, the Escrow Agent shall receive
all of the money, securities, rights or property distributed in respect of the
Escrow Shares then held in escrow, including any such property distributed as
dividends or pursuant to any stock split,
-2-
<PAGE>
merger, recapitalization, dissolution, or total or partial liquidation of the
Company, such property to be held and distributed as herein provided and
hereinafter referred to collectively as the "Escrow Property."
4. (a) The Escrow Shares are subject to release to the
Stockholders only in the event the conditions set forth herein are met. The
Escrow Agent, upon notice to such effect from the Company as provided in
paragraph 5 hereof, shall deliver the appropriate number of Escrow Shares,
together with stock powers executed in blank, and the Escrow Property deposited
in escrow with respect to such Escrow Shares, to the respective Stockholders,
if, and only if, one of the following conditions is met:
(i) Fifty Percent (50%) of the Escrow Shares and Escrow
Property related to such Escrow Shares will be released in the
event that:
(A) the Company's net income before provision for
income taxes and exclusive of any extraordinary
earnings, other than in connection with the sale of
entertainment projects and/or programs developed by
the Company, or charges which would result from the
release of Escrow Shares (all as audited by the
Company's independent public accountants) (the
"Minimum Pretax Income") equals or exceeds $1.7
million for the fiscal year ending December 31,
1997; or
(B) the Minimum Pretax Income equals or exceeds $2.3
million for the fiscal year ending December 31,
1998; or
(C) the Minimum Pretax Income equals or exceeds $2.9
million for the fiscal year ending December 31,
1999; or
(D) the Bid Price (as defined herein) of the Company's
Common Stock shall average in excess of $3.00 per
share for any 30 consecutive business days during
the period ending on or before December 31, 1997,
provided all
-3-
<PAGE>
shares sold pursuant to the Memorandum are freely
salable (without volume limitation) by the holders
thereof during such 30 day period; or
(E) the Bid Price (as defined herein) of the Company's
Common Stock shall average in excess of $4.00 per
share for any 30 consecutive business days during
the period ending on or before December 31, 1998,
provided all shares sold pursuant to the Memorandum
are freely salable (without volume limitation) by
the holders thereof during such 30 day period; or
(F) if there is a merger of the Company with another
company, a sale of substantially all of the assets
of the Company or similar extraordinary transaction
(a "Sale of the Company") that results in
stockholders receiving at least $2.00 per share in
cash or marketable securities on or before December
31, 1996; or
(G) if there is a Sale of the Company that results in
stockholders receiving at least $3.00 per share in
cash or marketable securities on or before December
31, 1997; or
(H) if there is a Sale of the Company that results in
stockholders receiving at least $4.00 per share in
cash or marketable securities on or before December
31, 1998.
(ii) The remaining Escrow Shares and the Escrow Property
related to such Escrow Shares will be released in the event
that:
(A) the Minimum Pretax Income equals or exceeds $2.1
million for the fiscal year ending December 31,
1997; or
(B) the Minimum Pretax Income equals or exceeds $2.8
million for the fiscal year ending December 31,
1998; or
(C) the Minimum Pretax Income equals or exceeds $3.5
million for the fiscal year ending December 31,
1999; or
(D) the Bid Price of the Company's Common Stock shall
average in excess of $4.50 for any 30 consecutive
business days during the period ending on or before
December 31, 1997, provided that all shares sold
pursuant to the
-4-
<PAGE>
Memorandum are freely salable (without volume
limitation) by the holders thereof during such 30
day period; or
(E) the Bid Price of the Company's Common Stock shall
average in excess of $6.50 for any 30 consecutive
business days during the period ending on or before
December 31, 1998, provided that all shares sold
pursuant to the Memorandum are freely salable
(without volume limitation) by the holders thereof
during such 30 day period;
(F) if there is a Sale of the Company that results in
stockholders receiving at least $3.00 per share in
cash or marketable securities on or before December
31, 1996; or
(G) if there is a Sale of the Company that results in
stockholders receiving at least $4.50 per share in
cash or marketable securities on or before December
31, 1997; or
(H) if there is a Sale of the Company that results in
stockholders receiving at least $6.50 per share in
cash or marketable securities on or before December
31, 1998.
(b) As used in this Section 4, the term "Bid Price" shall be
subject to adjustments in the event of any stock dividend, stock distribution,
stock split or other similar event and shall mean:
(1) If the principal market for the Common Stock is a
national securities exchange or the Nasdaq National
Market, the closing sales price of the Common Stock as
reported by such exchange or market, or on a
consolidated tape reflecting transactions on such
exchange or market; or
(2) if the principal market for the Common Stock is not a
national securities exchange or the Nasdaq National
Market and the Common Stock is quoted on the Nasdaq
SmallCap Market, the closing bid price of the Common
Stock as quoted on the Nasdaq SmallCap Market; or
-5-
<PAGE>
(3) if the principal market for the Common Stock is not a
national securities exchange or the Nasdaq National
Market and the Common Stock is not quoted on the
Nasdaq Smallcap Market, the closing bid for the Common
Stock as reported by the National Quotation Bureau,
Inc. ("NQB") or at least two market makers in the
Common Stock if quotations are not available from NQB
but are available from market makers.
(c) The determination of Minimum Pretax Income shall be
calculated exclusive of any charges to income incurred by the Company in
connection with the release from escrow of the Escrow Shares and any Escrow
Property in respect thereof pursuant to the provisions of this paragraph 4, but
shall reflect the sale of any entertainment projects and/or programs developed
by the Company.
(d) The Minimum Pretax Income amounts set forth in
subparagraph (a) above shall be increased during each fiscal year during the
Escrow Period to reflect the issuance of any additional securities after the
final closing of the Private Placement, excluding (i) up to 1,000,000 shares of
Class A Common Stock reserved for issuance to certain directors, consultants and
employees of the Company (the "Additional Class A Shares"), 300,000 of which
shares shall be deposited in escrow pursuant to this Agreement (all as described
in the Memorandum) and (ii) any shares of Class A Common Stock issued to Blair
or its designees pursuant to the Placement Agent's Warrants (as defined in the
Memorandum), but including any shares of Common Stock that may be issued upon
the exercise of any other options or warrants hereafter granted by the Company
which, in the aggregate, do not exceed five percent (5%) of the then outstanding
shares of Common Stock, including Escrow Shares in accordance with the following
formula: The Minimum Pretax Income shall be increased during each fiscal year to
an Adjusted Minimum Pretax Income calculated by multiplying the applicable
Minimum Pretax
-6-
<PAGE>
Income amount by a fraction, the numerator of which shall be the weighted
average number of shares of Common Stock outstanding during the fiscal year for
which the determination is being made including the Escrow Shares and any shares
of Common Stock issuable upon conversion of any outstanding securities but
excluding shares of Common Stock issuable upon exercise of the Share Purchase
Options (as defined in the Memorandum) issued to Blair and the denominator of
which shall be the sum of (x) the number of shares of Common Stock outstanding
prior to the First Closing and the Additional Class A Shares (including the
Escrow Shares), plus (y) the number of shares of Class A Common Stock sold
pursuant to the Memorandum.
(e) If the Escrow Agent has not received the notice provided
for in Paragraph 5 hereof and delivered all of the Escrow Shares and related
Escrow Property in accordance with the provisions of this Paragraph 4 on or
prior to March 31, 2000, the Escrow Agent shall deliver the certificates
representing all or the remaining Escrow Shares, together with stock powers
executed in blank, and any related Escrow Property to the Company to be placed
in the Company's treasury for cancellation thereof as a contribution to capital.
After such date, the Stockholders shall have no further rights as a stockholder
of the Company with respect to any of the cancelled Escrow Shares.
5. Upon the occurrence or satisfaction of any of the events or
conditions specified in Paragraph 4 hereof, the Company shall promptly give
appropriate notice to the Escrow Agent, Blair (and if the transfer agent of the
Company's Common Stock is different from the Escrow Agent, such transfer agent)
and present such documentation as is reasonably required by the Escrow Agent to
evidence the satisfaction of such conditions.
-7-
<PAGE>
6. It is understood and agreed by the parties to this
Agreement as follows:
(a) The Escrow Agent is not and shall not be deemed to be a
trustee for any party for any purpose and is merely acting as a depository and
in a ministerial capacity hereunder with the limited duties herein prescribed.
(b) The Escrow Agent does not have and shall not be deemed
to have any responsibility in respect of any instruction, certificate or notice
delivered to it or of the Escrow Shares or any related Escrow Property other
than faithfully to carry out the obligations undertaken in this Agreement and to
follow the directions in such instruction or notice provided in accordance with
the terms hereof.
(c) The Escrow Agent is not and shall not be deemed to be
liable for any action taken or omitted by it in good faith and may rely upon,
and act in accordance with, the advice of its counsel without liability on its
part for any action taken or omitted in accordance with such advice. In any
event, its liability hereunder shall be limited to liability for gross
negligence, willful misconduct or bad faith on its part.
(d) The Escrow Agent may conclusively rely upon and act in
accordance with any certificate, instruction, notice, letter, telegram,
cablegram or other written instrument delivered on behalf of the Company
believed by it to be genuine and to have been signed by the proper party or
parties.
(e) The Company agrees (i) to pay the Escrow Agent's
reasonable fees and to reimburse it for its reasonable expenses including
attorney's fees incurred in connection with duties hereunder and (ii) to save
harmless, indemnify and defend the Escrow Agent for, from and against any loss,
damage, liability, judgment, cost and expense whatsoever, including
-8-
<PAGE>
counsel fees, suffered or incurred by it by reason of, or on account of, any
misrepresentation made to it or its status or activities as Escrow Agent under
this Agreement except for any loss, damage, liability, judgment, cost or expense
resulting from gross negligence, willful misconduct or bad faith on the part of
the Escrow Agent. The obligation of the Escrow Agent to deliver the Escrow
Shares to either the Stockholders or the Company shall be subject to the prior
satisfaction upon demand from the Escrow Agent, of the Company's obligations to
so save harmless, indemnify and defend the Escrow Agent and to reimburse the
Escrow Agent or otherwise pay its fees and expenses hereunder.
(f) The Escrow Agent shall not be required to defend any
legal proceeding which may be instituted against it in respect of the subject
matter of this Agreement unless requested to do so by the Stockholders and
indemnified to the Escrow Agent's satisfaction against the cost and expense of
such defense by the party requesting such defense. If any such legal proceeding
is instituted against it, the Escrow Agent agrees promptly to given notice of
such proceeding to the Stockholders and the Company. The Escrow Agent shall not
be required to institute legal proceedings of any kind.
(g) The Escrow Agent shall not, by act, delay, omission or
otherwise, be deemed to have waived any right or remedy it may have either under
this Agreement or generally, unless such waiver be in writing, and no waiver
shall be valid unless it is in writing, signed by the Escrow Agent, and only to
the extent expressly therein set forth. A waiver by the Escrow Agent under the
term of this Agreement shall not be construed as a bar to, or waiver of, the
same or any other such right or remedy which it would otherwise have on any
other occasion.
-9-
<PAGE>
(h) The Escrow Agent may resign as such hereunder by giving
30 days written notice thereof to the Stockholders and the Company. Within 20
days after receipt of such notice, the Stockholders and the Company shall
furnish to the Escrow Agent written instructions for the release of the Escrow
Shares and any related Escrow Property (if such shares and property, if any,
have not yet been released pursuant to Paragraph 4 hereof) to a substitute
Escrow Agent which (whether designated by written instructions from the
Stockholders and the Company jointly or in the absence thereof by instructions
from a court of competent jurisdiction to the Escrow Agent) shall be a bank or
trust company organized and doing business under the laws of the United States
or any state thereof. Such substitute Escrow Agent shall thereafter hold any
Escrow Shares and any related Escrow Property received by it pursuant to the
terms of this Agreement and otherwise act hereunder as if it were the Escrow
Agent originally named herein. The Escrow Agent's duties and responsibilities
hereunder shall terminate upon the release of all shares then held in escrow
according to such written instruction or upon such delivery as herein provided.
This Agreement shall not otherwise be assignable by the Escrow Agent without the
prior written consent of the Company.
7. The Stockholders shall have the sole power to vote the
Escrow Shares and any securities deposited in escrow under this Agreement while
they are being held pursuant to this Agreement.
8. (a) Each of the Stockholders agrees that during the term of
this Agreement he will not sell, transfer, hypothecate, negotiate, pledge,
assign, encumber or otherwise dispose of any or all of the Escrow Shares set
forth opposite his name on Exhibit A hereto, unless and until the Company shall
have given the notice as provided in Paragraph 5.
-10-
<PAGE>
This restriction shall not be applicable to transfers upon death, by operation
of law, to family members of the Stockholders or to any trust for the benefit of
the Stockholders, provided that such transferees agree to be bound by the
provisions of this Agreement.
(b) The Stockholders will take any action necessary or
appropriate, including the execution of any further documents or agreements, in
order to effectuate the transfer of the Escrow Shares to the Company if required
pursuant to the provisions of this Agreement.
9. Each of the certificates representing the Escrow Shares
will bear legends to the following effect, as well as any other legends required
by applicable law:
(a) "The sale, transfer, hypothecation, negotiation, pledge,
assignment, encumbrance or other disposition of the shares
evidenced by this certificate are restricted by and are
subject to all of the terms, conditions and provisions of
a certain Escrow Agreement entered into among D.H. Blair
Investment Banking Corp., Paradigm Music Entertainment Co.
and its Stockholders, dated as of November __, 1995, a
copy of which may be obtained from the Secretary of
Paradigm Music Entertainment Co. No transfer, sale or
other disposition of these shares may be made unless
specific conditions of such agreement are satisfied.
(b) "The shares evidenced by this certificate have not been
registered under the Securities Act of 1933, as amended.
No transfer, sale or other disposition of these shares may
be made unless a registration statement with respect to
these shares has become effective under said act, or the
Company is furnished with an opinion of counsel
satisfactory in form and substance to it that such
registration is not required."
-11-
<PAGE>
Upon execution of this Agreement, the Company shall direct the
transfer agent for the Company to place stop transfer orders with respect to the
Escrow Shares and to maintain such orders in effect until the transfer agent and
Blair shall have received written notice from the Company as provided in
Paragraph 5.
10. Each notice, instruction or other certificate required or
permitted by the terms hereof shall be in writing and shall be communicated by
personal delivery, fax or registered or certified mail, return receipt
requested, to the parties hereto at the addresses set forth below, or at such
other address as any of them may designate by notice to each of the others:
(i) If to the Company, to:
Paradigm Music Entertainment Co.
(ii) If to the Stockholders to their respective addresses
as set forth on Exhibit A hereto.
(iii) If to the Escrow Agent, to:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(iv) If to Blair, to:
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 10005
Att: Martin A. Bell, Esq.
Fax: 212-514-7837
All notices, instructions or certificates given hereunder shall be effective
upon receipt by the receiving party.
A copy of all communications sent to the Company, the
Stockholders or the Escrow Agent shall be sent by ordinary mail to Bachner,
Tally, Polevoy & Misher LLP,
-12-
<PAGE>
380 Madison Avenue, New York, NY 10017, Attention: Sheldon E. Misher, Esq. A
copy of all communications sent to Blair shall be sent by ordinary mail to
Singer, Beinenstock, Zamansky, Ogele & Selengut LLP, 40 Exchange Place, New
York, New York 10005, Attention: David Selengut, Esq. A copy of all
communications sent to Robert B. Meyrowitz shall be sent by ordinary mail to
Simon, Meyrowitz, Meyrowitz and Schlussell, 470 Park Avenue South, New York, New
York 10016, Attention: David H. Meyrowitz, Esq.
11. This Agreement may not be modified, altered or amended in
any material respect or cancelled or terminated except with the prior written
consent of Blair and with the prior consent of the holders of a majority of the
outstanding shares of Common Stock of the Company, other than shares held by the
Stockholders.
12. This Agreement shall be governed by and construed in
accordance with the laws of New York and shall be binding upon and inure to the
benefit of all parties hereto and their respective successors in interest and
assigns.
13. This Agreement may be executed in several counterparts,
which taken together shall constitute a single instrument.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers on the day and year
first above written.
PARADIGM MUSIC ENTERTAINMENT CO.
By: /s/ Thomas McPartland
---------------------------------------
Thomas McPartland, Chairman
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By: /s/
----------------------------------------
Authorized Officer
<TABLE>
<CAPTION>
STOCKHOLDERS
<S> <C>
/s/ Thomas McPartland
- - - - ------------------------------------ ------------------------------------
Thomas McPartland
/s/ Louis Falcigno
- - - - ------------------------------------ ------------------------------------
Louis Falcigno
/s/ Robert Meyrowitz
- - - - ------------------------------------ ------------------------------------
Robert Meyrowitz
- - - - ------------------------------------ ------------------------------------
Marc Roberts
- - - - ------------------------------------ ------------------------------------
- - - - ------------------------------------ ------------------------------------
</TABLE>
-14-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers on the day and year
first above written.
PARADIGM MUSIC ENTERTAINMENT CO.
By:
---------------------------------------
Thomas McPartland, Chairman
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By:
----------------------------------------
Authorized Officer
<TABLE>
<CAPTION>
STOCKHOLDERS
<S> <C>
- - - - ------------------------------------ ------------------------------------
Thomas McPartland
- - - - ------------------------------------ ------------------------------------
Louis Falcigno
- - - - ------------------------------------ ------------------------------------
Robert Meyrowitz
/s/ Marc Roberts
- - - - ------------------------------------ ------------------------------------
Marc Roberts
- - - - ------------------------------------ ------------------------------------
- - - - ------------------------------------ ------------------------------------
</TABLE>
-14-
<PAGE>
EXHIBIT A
STOCKHOLDERS' LIST
<TABLE>
<CAPTION>
Name and Address Stock
of Stockholder (1) Certificate Nos. Number of Escrow Shares
- - - - -------------------- ---------------- -----------------------
<S> <C> <C> <C>
Thomas McPartland B2 & B3 425,000 425,000
145 Glenlawn Avenue Class B Class B
Sea Cliff, New York 11579
Louis A. Falcigno B5 & B6 212,500 212,500
130 Barrow Street Class B Class B
New York, New York 10014
Robert Meyrowitz B8 & B9 212,500 212,500
32 East 57th Street Class B Class B
New York, New York 10022
Marc Roberts A63 & A64 9,000 9,000
33 Freeman Street Class A Class A
West Orange, New Jersey 07052
</TABLE>
-15-
<PAGE>
WARRANT TO PURCHASE COMMON STOCK
OF
PARADIGM MUSIC ENTERTAINMENT CO.
This is to Certify That, FOR VALUE RECEIVED, D.H. Blair
Investment Banking Corp., or assigns ("Holder"), is entitled to purchase,
subject to the provisions of this Warrant, from Paradigm Music Entertainment
Co., a Delaware corporation ("Company"), one hundred and five thousand (105,000)
fully paid, validly issued and nonassessable shares of Class A Common Stock, par
value $.01 per share, of the Company ("Common Stock") at a price of $1.00 per
share at any time or from time to time during the period from November 21, 1995
to the Termination Date (as defined below), but not later than 5:00 p.m. New
York City Time, on the Termination Date. The number of shares of Common Stock to
be received upon the exercise of this Warrant and the price to be paid for each
share of Common Stock may be adjusted from time to time as hereinafter set
forth. The shares of Common Stock deliverable upon such exercise, and as
adjusted from time to time, are hereinafter sometimes referred to as "Warrant
Shares" and the exercise price of a share of Common Stock in effect at any time
and as adjusted from time to time is hereinafter sometimes referred to as the
"Exercise Price". The Common Stock and the Company's Class B Common Stock are
referred to collectively herein as "Common Stock." This Warrant, together with
warrants of like tenor, constituting in the aggregate warrants (the "Warrants")
to purchase 105,000 shares of Common Stock, was originally issued pursuant to an
agency agreement between the Company and D.H. Blair Investment Banking Corp.
("Blair"), in connection with a private placement (the "Offering") through Blair
of 3,000,000 shares of Common Stock, in consideration of $105.00 received for
the Warrants.
(a) EXERCISE OF WARRANT.
(1) This Warrant may be exercised in whole or in part at
any time or from time to time on or after November 21, 1995 and until the
earlier of (i) the fifth anniversary of the closing of an initial public
offering of the Company's securities ("IPO") or (ii) November 21, 2005
(the"Termination Date"), subject to the provisions of Section (j)(2) hereof;
provided, however, that (i) if either such day is a day on which banking
institutions in the State of New York are authorized by law to close, then on
the next succeeding day which shall not be such a day, and (ii) in the event of
any merger, consolidation or sale of substantially all the assets of the Company
as an entirety, resulting in any distribution to the Company's stockholders,
prior to the Termination Date, the Holder shall have the right to exercise this
Warrant commencing at such time through the Termination Date into the kind and
amount of shares of stock and other securities and property (including cash)
receivable by a holder of the number of shares of Common Stock into which this
Warrant might have been exercisable immediately prior thereto. The period from
November 21, 1995 through the Termination Date is referred to herein as the
"Exercise Period." This Warrant may be exercised by presentation and surrender
hereof to the Company at its principal office, or at the office of its stock
transfer agent, if any, with the Purchase Form annexed hereto duly executed and
accompanied by payment of the Exercise Price
1
<PAGE>
for the number of Warrant Shares specified in such form. As soon as practicable
after each such exercise of the warrants, but not later than ten (10) days from
the date of such exercise, the Company shall issue and deliver to the Holder a
certificates or certificate for the Warrant Shares issuable upon such exercise,
registered in the name of the Holder or its designee. If this Warrant should be
exercised in part only, the Company shall, upon surrender of this Warrant for
cancellation, execute and deliver a new Warrant evidencing the rights of the
Holder thereof to purchase the balance of the Warrant Shares purchasable
thereunder. Upon receipt by the Company of this Warrant at its office, or by the
stock transfer agent of the Company at its office, in proper form for exercise
and applicable payment, the Holder shall be deemed to be the holder of record of
the shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock shall not then be physically delivered
to the Holder.
(2) At any time during the Exercise Period, the Holder
may, at its option, exchange this Warrant, in whole or in part (a "Warrant
Exchange"), into the number of Warrant Shares determined in accordance with this
Section (a)(2), by surrendering this Warrant at the principal office of the
Company or at the office of its stock transfer agent, accompanied by a notice
stating such Holder's intent to effect such exchange, the number of Warrant
Shares to be exchanged and the date on which the Holder requests that such
Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall
take place on the date specified in the Notice of Exchange or, if later, the
date the Notice of Exchange is received by the Company (the "Exchange Date").
Certificates for the shares issuable upon such Warrant Exchange and, if
applicable, a new warrant of like tenor evidencing the balance of the shares
remaining subject to this Warrant, shall be issued as of the Exchange Date and
delivered to the Holder within ten (10) days following the Exchange Date. In
connection with any Warrant Exchange, this Warrant shall represent the right to
subscribe for and acquire the number of Warrant Shares (rounded to the next
highest integer) equal to (i) the number of Warrant Shares specified by the
Holder in its Notice of Exchange (the "Total Number") less (ii) the number of
Warrant Shares equal to the quotient obtained by dividing (A) the product of the
Total Number and the existing Exercise Price by (B) the current market value of
a share of Common Stock. Current market value shall have the meaning set forth
Section (c) below, except that for purposes hereof, the date of exercise, as
used in such Section (c), shall mean the Exchange Date.
(b) RESERVATION OF SHARES. The Company shall at all times
reserve for issuance and/or delivery upon exercise of this Warrant such number
of shares of its Common Stock as shall be required for issuance and delivery
upon exercise of the Warrants.
(c) FRACTIONAL SHARES. No fractional shares or script
representing fractional shares shall be issued upon the exercise of this
Warrant. With respect to any fraction of a share called for upon any exercise
hereof, the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by the current market value of a share, determined as
follows:
(1) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such
exchange or listed for trading
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on The Nasdaq Stock Market, Inc. ("Nasdaq"), the current
market value shall be the average of the last reported sale
prices of the Common Stock or the average of the means of the
last reported bid and asked prices for the Common Stock,
respectively, on such exchange or system for the ten (10)
business days prior to the date of exercise of this Warrant;
(2) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current market value shall be
the average of the means of the last reported bid and asked
prices of the Common Stock reported by the National Quotation
Bureau, Inc. for the ten (10) business days prior to the date
of the exercise of this Warrant; or
(3) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not
so reported, the current market value shall be an amount, not
less than book value thereof as at the end of the most recent
fiscal year of the Company ending prior to the date of the
exercise of the Warrant, determined in such reasonable manner
as may be prescribed by the Board of Directors of the Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This
Warrant is exchangeable, without expense, at the option of the Holder, upon
presentation and surrender hereof to the Company or at the office of its stock
transfer agent, if any, for other warrants of different denominations entitling
the holder thereof to purchase in the aggregate the same number of shares of
Common Stock purchasable hereunder. Upon surrender of this Warrant to the
Company at its principal office or at the office of its stock transfer agent, if
any, with the Assignment Form annexed hereto duly executed and funds sufficient
to pay any transfer tax, the Company shall, without charge, execute and deliver
a new Warrant in the name of the assignee named in such instrument of assignment
and this Warrant shall promptly be canceled. This Warrant may be divided or
combined with other warrants which carry the same rights upon presentation
hereof at the principal office of the Company or at the office of its stock
transfer agent, if any, together with a written notice specifying the names and
denominations in which new Warrants are to be issued and signed by the Holder
hereof. The term "Warrant" as used herein includes any Warrants into which this
Warrant may be divided or exchanged. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Warrant, if mutilated, the Company will execute and deliver a new Warrant of
like tenor and date. Any such new Warrant executed and delivered shall
constitute an additional contractual obligation on the part of the Company,
whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at
any time enforceable by anyone.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue
hereof, be entitled to any rights of a shareholder in the Company, either at law
or equity, and the rights of the Holder are limited to those expressed in the
Warrant and are not enforceable against the Company except to the extent set
forth herein.
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<PAGE>
(f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at
any time and the number and kind of securities purchasable upon the exercise of
the Warrants shall be subject to adjustment from time to time upon the happening
of certain events as follows:
(1) In case the Company shall (i) declare a dividend or
make a distribution on its outstanding shares of Common Stock
in shares of Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock into a greater number of
shares, or (iii) combine or reclassify its outstanding shares
of Common Stock into a smaller number of shares, the Exercise
Price in effect at the time of the record date for such
dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be adjusted
so that it shall equal the price determined by multiplying the
Exercise Price by a fraction, the denominator of which shall
be the number of shares of Common Stock outstanding after
giving effect to such action, and the numerator of which shall
be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be
made successively whenever any event listed above shall occur.
(2) In case the Company shall fix a record date for the
issuance of rights or warrants to all holders of its Common
Stock entitling them to subscribe for or purchase shares of
Common Stock (or securities convertible into Common Stock) at
a price (the "Subscription Price") (or having a conversion
price per share) less than the current market price of the
Common Stock (as defined in Subsection (8) below) on the
record date mentioned below, or less than the Exercise Price
on such record date the Exercise Price shall be adjusted so
that the same shall equal the lower of (i) the price
determined by multiplying the Exercise Price in effect
immediately prior to the date of such issuance by a fraction,
the numerator of which shall be the sum of the number of
shares of Common Stock outstanding on the record date
mentioned below and the number of additional shares of Common
Stock which the aggregate offering price of the total number
of shares of Common Stock so offered (or the aggregate
conversion price of the convertible securities so offered)
would purchase at such current market price per share of the
Common Stock, and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding on such
record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the
convertible securities so offered are convertible) or (ii) in
the event the Subscription Price is equal to or higher than
the current market price but is less than the Exercise Price,
the price determined by multiplying the Exercise Price in
effect immediately prior to the date of issuance by a
fraction, the numerator of which shall be the sum of the
number of shares outstanding on the record date mentioned
below and the number of additional shares of Common Stock
which the aggregate offering price of the total number of
shares of Common Stock so offered (or the aggregate conversion
price of the convertible securities so offered) would purchase
at the Exercise Price in effect immediately prior to the date
of such issuance, and the denominator of which shall be the
sum of the
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<PAGE>
number of shares of Common Stock outstanding on the record
date mentioned below and the number of additional shares of
Common Stock offered for subscription or purchase (or into
which the convertible securities so offered are convertible).
Such adjustment shall be made successively whenever such
rights or warrants are issued and shall become effective
immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and
to the extent that shares of Common Stock are not delivered
(or securities convertible into Common Stock are not
delivered) after the expiration of such rights or warrants the
Exercise Price shall be readjusted to the Exercise Price which
would then be in effect had the adjustments made upon the
issuance of such rights or warrants been made upon the basis
of delivery of only the number of shares of Common Stock (or
securities convertible into Common Stock) actually delivered.
(3) In case the Company shall hereafter distribute to the
holders of its Common Stock evidences of its indebtedness or
assets (excluding cash dividends or distributions and
dividends or distributions referred to in Subsection (1)
above) or subscription rights or warrants (excluding those
referred to in Subsection (2) above), then in each such case
the Exercise Price in effect thereafter shall be determined by
multiplying the Exercise Price in effect immediately prior
thereto by a fraction, the numerator of which shall be the
total number of shares of Common Stock outstanding multiplied
by the current market price per share of Common Stock (as
defined in Subsection (8) below), less the fair market value
(as determined by the Company's Board of Directors) of said
assets or evidences of indebtedness so distributed or of such
rights or warrants, and the denominator of which shall be the
total number of shares of Common Stock outstanding multiplied
by such current market price per share of Common Stock. Such
adjustment shall be made successively whenever such a record
date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately
after the record date for the determination of shareholders
entitled to receive such distribution.
(4) In case the Company shall issue shares of its Common
Stock [excluding shares issued (i) in any of the transactions
described in Subsection (1) above, (ii) upon exercise of
options granted to the Company's employees under a plan or
plans adopted by the Company's Board of Directors and approved
by its shareholders, if such shares would otherwise be
included in this Subsection (4), (but only to the extent that
the aggregate number of shares excluded hereby and issued
after the date hereof, shall not exceed 5% of the Company's
Common Stock outstanding at the time of any issuance), (iii)
to employees, directors and consultants of the Company (up to
an aggregate of 1,000,000 shares) as described in the Private
Placement Memorandum dated October 6, 1995 relating to the
Offering, (iv) upon exercise of this Warrant, (v) to
shareholders of any corporation which merges into the Company
in proportion to their stock holdings of such corporation
immediately prior to such merger, upon such merger, or (vi)
issued in
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<PAGE>
a bona fide public offering pursuant to a firm commitment
underwriting, but only if no adjustment is required pursuant
to any other specific subsection of this Section (f) (without
regard to Subsection (9) below) with respect to the
transaction giving rise to such rights] for a consideration
per share (the "Offering Price") less than the current market
price per share [as defined in Subsection (8) below] on the
date the Company fixes the offering price of such additional
shares or less than the Exercise Price, the Exercise Price
shall be adjusted immediately thereafter so that it shall
equal the lower of (i) the price determined by multiplying the
Exercise Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior
to the issuance of such additional shares and the number of
shares of Common Stock which the aggregate consideration
received [determined as provided in Subsection (7) below] for
the issuance of such additional shares would purchase at such
current market price per share of Common Stock, and the
denominator of which shall be the number of shares of Common
Stock outstanding immediately after the issuance of such
additional shares or (ii) in the event the Offering Price is
equal to or higher than the current market price per share but
less than the Exercise Price, the price determined by
multiplying the Exercise Price in effect immediately prior to
the date of issuance by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares
and the number of shares of Common Stock which the aggregate
consideration received [determined as provided in subsection
(7) below] for the issuance of such additional shares would
purchase at the Exercise Price in effect immediately prior to
the date of such issuance, and the denominator of which shall
be the number of shares of Common Stock outstanding
immediately after the issuance of such additional shares. Such
adjustment shall be made successively whenever such an
issuance is made.
(5) In case the Company shall issue any securities
convertible into or exchangeable for its Common Stock
[excluding securities issued in transactions described in
Subsections (2) and (3) above] for a consideration per share
of Common Stock (the "Conversion Price") initially deliverable
upon conversion or exchange of such securities [determined as
provided in Subsection (7) below] less than the current market
price per share [as defined in Subsection (8) below] in effect
immediately prior to the issuance of such securities, or less
than the Exercise Price, the Exercise Price shall be adjusted
immediately thereafter so that it shall equal the lower of (i)
the price determined by multiplying the Exercise Price in
effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of the number of shares of Common
Stock outstanding immediately prior to the issuance of such
securities and the number of shares of Common Stock which the
aggregate consideration received [determined as provided in
Subsection (7) below] for such securities would purchase at
such current market price per share of Common Stock, and the
denominator of which shall be the sum of the number of shares
of Common Stock outstanding immediately prior to such issuance
and the maximum number of shares of
6
<PAGE>
Common Stock of the Company deliverable upon conversion of or
in exchange for such securities at the initial conversion or
exchange price or rate or (ii) in the event the Conversion
Price is equal to or higher than the current market price per
share but less than the Exercise Price, the price determined
by multiplying the Exercise Price in effect immediately prior
to the date of issuance by a fraction, the numerator of which
shall be the sum of the number of shares outstanding
immediately prior to the issuance of such securities and the
number of shares of Common Stock which the aggregate
consideration received [determined as provided in subsection
(7) below] for such securities would purchase at the Exercise
Price in effect immediately prior to the date of such
issuance, and the denominator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior
to the issuance of such securities and the maximum number of
shares of Common Stock of the Company deliverable upon
conversion of or in exchange for such securities at the
initial conversion or exchange price or rate. Such adjustment
shall be made successively whenever such an issuance is made.
(6) Whenever the Exercise Price payable upon exercise of
each Warrant is adjusted pursuant to Subsections (1), (2),
(3), (4) and (5) above, the number of Shares purchasable upon
exercise of this Warrant shall simultaneously be adjusted by
multiplying the number of Shares initially issuable upon
exercise of this Warrant by the Exercise Price in effect on
the date hereof and dividing the product so obtained by the
Exercise Price, as adjusted.
(7) For purposes of any computation respecting
consideration received pursuant to Subsections (4) and (5)
above, the following shall apply:
(A) in the case of the issuance of shares of Common
Stock for cash, the consideration shall be the amount of
such cash, provided that in no case shall any deduction be
made for any commissions, discounts or other expenses
incurred by the Company for any underwriting of the issue
or otherwise in connection therewith;
(B) in the case of the issuance of shares of Common
Stock for a consideration in whole or in part other than
cash, the consideration other than cash shall be deemed to
be the fair market value thereof as determined in good
faith by the Board of Directors of the Company
(irrespective of the accounting treatment thereof), whose
determination shall be conclusive; and
(C) in the case of the issuance of securities
convertible into or exchangeable for shares of Common
Stock, the aggregate consideration received therefor shall
be deemed to be the consideration received by the Company
for the issuance of such securities plus the additional
minimum consideration, if any, to be received by the
Company upon the conversion
7
<PAGE>
or exchange thereof [the consideration in each case to be
determined in the same manner as provided in clauses (A)
and (B) of this Subsection (7)].
(8) For the purpose of any computation under Subsections
(2), (3), (4) and (5) above, the current market price per
share of Common Stock at any date shall be deemed to be the
lower of (i) the average of the daily closing prices for 30
consecutive business days before such date or (ii) the closing
price on the business day immediately preceding such date. The
closing price for each day shall be the last sale price
regular way or, in case no such reported sale takes place on
such day, the average of the last reported bid and asked
prices regular way, in either case on the principal national
securities "change on which the Common Stock is admitted to
trading or listed, or if not listed or admitted to trading on
such exchange, the average of the highest reported bid and
lowest reported asked prices as reported by Nasdaq, or other
similar organization if Nasdaq is no longer reporting such
information, or if not so available, the fair market price as
determined by the Board of Directors.
(9) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease
of at least five cents ($0.05) in such price; provided,
however, that any adjustments which by reason of this
Subsection (9) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment
required to be made hereunder. All calculations under this
Section (f) shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. Anything
in this Section (f) to the contrary notwithstanding, the
Company shall be entitled, but shall not be required, to make
such changes in the Exercise Price, in addition to those
required by this Section (f), as it shall determine, in its
sole discretion, to be advisable in order that any dividend or
distribution in shares of Common Stock, or any subdivision,
reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal Income tax
liability to the holders of Common Stock or securities
convertible into Common Stock (including Warrants).
(10) Whenever the Exercise Price is adjusted, as herein
provided, the Company shall promptly but no later than 10 days
after any request for such an adjustment by the Holder, cause
a notice setting forth the adjusted Exercise Price and
adjusted number of Shares issuable upon exercise of each
Warrant, and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to
the Holders at their last addresses appearing in the Warrant
Register, and shall cause a certified copy thereof to be
mailed to its transfer agent, if any. In the event the Company
does not provide the Holder with such notice and information
within ten (10) days of a request by the Holder, then
notwithstanding the provisions of this Section (f), the
Exercise Price shall be immediately adjusted to equal the
lowest Offering Price, Subscription Price or Conversion Price,
as applicable, since the date of this Warrant, and the number
of shares issuable upon exercise of this Warrant shall be
adjusted accordingly. The
8
<PAGE>
Company may retain a firm of independent certified public
accountants selected by the Board of Directors (who may be the
regular accountants employed by the Company) to make any
computation required by this Section (f), and a certificate
signed by such firm shall be conclusive evidence of the
correctness of such adjustment.
(11) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (1) above, the Holder
of this Warrant thereafter shall become entitled to receive
any shares of the Company, other than Common Stock, thereafter
the number of such other shares so receivable upon exercise of
this Warrant shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Common Stock contained
in Subsections (1) to (9), inclusive above.
(12) Irrespective of any adjustments in the Exercise Price
or the number or kind of shares purchasable upon exercise of
this Warrant, Warrants theretofore or thereafter issued may
continue to express the same price and number and kind of
shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall
be adjusted as required by the provisions of the foregoing Section, the Company
shall forthwith file in the custody of its Secretary or an Assistant Secretary
at its principal office and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Exercise Price determined as herein provided,
setting forth in reasonable detail the facts requiring such adjustment,
including a statement of the number of additional shares of Common Stock, if
any, and such other facts as shall be necessary to show the reason for and the
manner of computing such adjustment. Each such officer's certificate shall be
made available at all reasonable times for inspection by the holder or any
holder of a Warrant executed and delivered pursuant to Section (a) and the
Company shall, forthwith after each such adjustment, mail a copy by certified
mail of such certificate to the Holder or any such holder.
(h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall
be outstanding, (i) if the Company shall pay any dividend or make any
distribution upon the Common Stock or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any share of any
class or any other rights or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then in any such case, the Company shall cause
to be mailed by certified mail to the Holder, at least fifteen days prior the
date specified in (x) or (y) below, as the case may be, a notice containing a
brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or
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<PAGE>
rights, or (y) such reclassification, reorganization, consolidation, merger,
conveyance, lease, dissolution, liquidation or winding up is to take place and
the date, if any is to be fixed, as of which the holders of Common Stock or
other securities shall receive cash or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Holder shall have the right thereafter by exercising this Warrant at any time
prior to the expiration of the Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
which might have been purchased upon exercise of this Warrant immediately prior
to such reclassification, change, consolidation, merger, sale or conveyance. Any
such provision shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section (i) shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances. In
the event that in connection with any such capital reorganization or
reclassification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for a security of the Company other than Common
Stock, any such issue shall be treated as an issue of Common Stock covered by
the provisions of Subsection (1) of Section (f) hereof
(j) REGISTRATION UNDER THE SECURITIES ACT OF 1933.
(1) The Company shall advise the Holder of this Warrant or
of the Warrant Shares or any then holder of Warrants or
Warrant Shares (such persons being collectively referred to
herein as "holders") by written notice at least thirty days
prior to the filing of any registration statement or
post-effective amendment thereto under the Securities Act of
1933 (the "Act") covering securities of the Company and will
for a period of seven years, commencing one year from the
effective date of a registration statement relating to an IPO
(the "Registration Period"), upon the request of any such
holder, include in any such registration statement such
information as may be required to permit a public offering of
the Warrants or the Warrant Shares. The Company shall supply
prospectuses and other documents as the Holder may request in
order to facilitate the public sale or other disposition of
the Warrants or Warrant Shares, qualify the Warrants and the
Warrant Shares for sale in such states as any such holder
designates and do any
10
<PAGE>
and all other acts and things which may be necessary or
desirable to enable such Holders to consummate the public sale
or other disposition of the Warrants or Warrant Shares, and
furnish indemnification in the manner as set forth in
Subsection (3)(C) of this Section (j). Such holders shall
furnish information and indemnification as set forth in
Subsection (3)(C) of this Section (j), except that the maximum
amount which may be recovered from the Holder shall be limited
to. the amount of proceeds received by the Holder from the
sale of the Warrants or Warrant Shares.
(2) If D.H. Blair Investment Banking Corp., D.H. Blair &
Co., Inc. or J. Morton Davis (the "Requesting Holder") shall
give notice to the Company at any time during the Registration
Period to the effect that such holder contemplates (i) the
transfer of all or any part of his or its Warrants and/or
Warrant Shares, or (ii) the exercise and/or conversion of all
or any part of his or its Warrants and the transfer of all or
any part of the Warrants and/or Warrant Shares under such
circumstances that a public offering (within the meaning of
the Act) of Warrants and/or Warrant Shares will be involved,
and desires to register under the Act, the Warrants and/or the
Warrant Shares, then the Company shall, within four weeks
after receipt of such notice, file a registration statement
pursuant to the Act, to the end that the Warrants and/or
Warrant Shares may be sold under the Act as promptly as
practicable thereafter and the Company will use its best
efforts to cause such registration to become effective and
continue to be effective (current) (including the taking of
such steps as are necessary to obtain the removal of any stop
order) until the holder has advised that all of the Warrants
and/or Warrant Shares have been sold; provided that such
holder shall furnish the Company with appropriate information
(relating to the intentions of such holders) in connection
therewith as the Company shall reasonably request in writing.
In the event the registration statement is not declared
effective under the Act prior to the Termination Date, the
Company shall extend the expiration date of the Warrants to a
date not less than 90 days after the effective date of such
registration statement. The Requesting Holder may, at its
option, request the registration of the Warrants and/or
Warrant Shares in a registration statement made by the Company
as contemplated by Subsection (1) of this Section (j) or in
connection with a request made pursuant to Subsection (2) of
this Section (j) prior to the acquisition of the Warrant
Shares upon exercise of the Warrants and even though the
Requesting Holder has not given notice of exercise of the
Warrants. If the Company determines to include securities to
be sold by it in any registration statement originally
requested pursuant to this Subsection (2) of this Section (j),
such registration shall instead be deemed to have been a
registration under Subsection (1) of this Section (j) and not
under Subsection (2) of this Subsection (j). The Requesting
Holder may thereafter at its option, exercise the Warrants at
any time or from time to time subsequent to the effectiveness
under the Act of the registration statement in which the
Warrant Shares were included. The rights provided in this
Subsection (2) of this Section (j) may be exercised on two
occasions.
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<PAGE>
(3) The following provision of this Section (j) shall also
be applicable:
(A) Within ten days after receiving any such notice
pursuant to Subsection (2) of this Section (j), the Company
shall give notice to the other holders of Warrants and Warrant
Shares, advising that the Company is proceeding with such
registration statement and offering to include therein
Warrants and/or Warrant Shares of such other holders, provided
that they shall furnish the Company with such appropriate
information (relating to the intentions of such holders) in
connection therewith as the Company shall reasonably request
in writing. Following the effective date of such registration,
the Company shall upon the request of any owner of Warrants
and/or Warrant Shares forthwith supply such a number of
prospectuses meeting the requirements of the Act, as shall be
requested by such owner to permit such holder to make a public
offering of all Warrants and/or Warrant Shares from time to
time offered or sold to such holder, provided that such holder
shall from time to time furnish the Company with such
appropriate information (relating to the intentions of such
holder) in connection therewith as the Company shall request
in writing. The Company shall also use its best efforts to
qualify the Warrant Shares for sale in such states as such
majority holder shall designate.
(B) The Company shall bear the entire cost and expense
of any registration of securities initiated by it under
Subsection (1) of this Section (j) notwithstanding that
Warrants and/or Warrant Shares subject to this Warrant may be
included in any such registration. The Company shall also
comply with one request for registration made by the
Requesting Holder pursuant to Subsection (2) of this Section
(j) at its own expense and without charge to any holder of any
Warrants and/or Warrant Shares; and the Company shall comply
with one additional request made by the Requesting Holder
pursuant to Subsection (2) of this Section (j) (and not deemed
to be pursuant to Subsection (1) of this Section (j) at the
sole expense of such Requesting Holder. Any holder whose
Warrants and/ or Warrant Shares are included in any such
registration statement pursuant to this Section (j) shall,
however, bear the fees of his own counsel and any registration
fees, transfer taxes or underwriting discounts or commissions
applicable to the Warrant Shares sold by him pursuant thereto.
(C) The Company shall indemnify and hold harmless each
such holder and each underwriter, within the meaning of the
Act, who may purchase from or sell for any such holder any
Warrants and/or Warrant Shares from and against any and all
losses, claims, damages and liabilities caused by any untrue
statement or alleged untrue statement of a material fact
contained in the Registration Statement or any post-effective
amendment thereto or any registration statement under the Act
or any prospectus included therein required to be filed or
furnished by reason of
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<PAGE>
this Section (j) or caused by any omission or alleged omission
to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities
are caused by any such untrue statement or alleged untrue
statement or omission or alleged omission based upon
information furnished or required to be furnished in writing
to the Company by such holder or underwriter expressly for use
therein, which indemnification shall include each person, if
any, who controls any such underwriter within the meaning of
such Act provided, however, that the Company will not be
liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or
alleged omission made in said registration statement, said
preliminary prospectus, said final prospectus or said
amendment or supplement in reliance upon and in conformity
with written information furnished by such Holder or any other
Holder, specifically for use in the preparation thereof.
(D) Neither the giving of any notice by any such
Requesting Holder nor the making of any request for
prospectuses shall impose any upon such Requesting Holder or
owner making such request any obligation to sell any Warrants
and/or Warrant Shares, or exercise any Warrants.
The Company's agreements with respect to Warrants or Warrant
Shares in this Section (j) shall continue in effect regardless of the exercise
and surrender of this Warrant.
PARADIGM MUSIC ENTERTAINMENT CO.
-----------------------------------------------
Thomas McPartland, President
[SEAL]
Dated: November 21, 1995
Attest:
- - - - ------------------------------
Robert B. Meyrowitz, Secretary
13
<PAGE>
PURCHASE FORM
Dated:______________________
The undersigned hereby irrevocably elects to exercise the
within Warrant to the extent of purchasing ______ shares of Class A Common Stock
and hereby makes payment of ___ in payment of the actual exercise price thereof
--------
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name ______________________________________
(Please typewrite or print in block letters)
Address ____________________________________
Signature __________________________________
ASSIGNMENT FORM
FOR VALUE RECEIVED, ________________________ hereby sells,
assigns and transfers unto
Name _______________________________________
(Please typewrite or print in block letters)
Address ____________________________________
the right to purchase Class A Common Stock represented by this Warrant to the
extent of ___ shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint _______ Attorney, to transfer the same on the
books of the Company with full power of substitution in the premises.
Date ______________________________________
Signature __________________________________
14
<PAGE>
AMENDMENT TO WARRANTS
DATED NOVEMBER 21, 1995
AMENDMENT dated as of February 1, 1997 (the "Amendment") to the
Warrants dated November 21, 1995 (the "Warrants") originally issued to Martin A.
Bell, Esther Stahler and Ruki Renov by Paradigm Music Entertainment Company
(the "Company"), in connection with a private offering of shares of the
Company's Class A Common Stock, $.01 par value, through D.H. Blair Investment
Banking Corp. All terms used in this Amendment, unless otherwise defined herein,
shall have such meaning as ascribed to them in the Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties intending to be legally bound,
hereby agree as follows:
1. Amendment to Warrants. The Warrants shall be amended as follows:
(a) The date "March 1, 1998" shall replace the date "November
21, 1995" in the fifth line of the first paragraph on Page 1 of the
Warrants.
(b) The first two sentences of Section (a)(1) on Page 1 of the
Warrants shall be deleted in its entirety and replaced with the
following two sentences:
"(a) EXERCISE OF WARRANT.
(1) This Warrant may be exercised in whole or in part at any
time or from time to time on or after March 1, 1998 and until the earlier of (i)
the fifth anniversary of the closing of an initial public offering of the
Company's securities ("IPO") or (ii) November 21, 2005 (the"Termination Date"),
subject to the provisions of Section (j)(2) hereof; provided, however, that (i)
if either such day is a day on which banking institutions in the State of New
York are authorized by law to close, then on the next succeeding day which shall
not be such a day, and (ii) in the event of any merger, consolidation or sale of
substantially all the assets of the Company as an entirety, resulting in any
distribution to the Company's stockholders, prior to the Termination Date, the
Holder shall have the right to exercise this Warrant commencing at such time
through the Termination Date into the kind and amount of shares of stock and
other securities and property (including cash) receivable by a holder of the
number of shares of Common Stock into which this Warrant might have been
exercisable immediately prior thereto. The period from March 1, 1998 through the
Termination Date is referred to herein as the "Exercise Period."
2. Full Force and Effect. Except as provided herein, all other terms
and provisions of the Warrants shall remain in full force and effect.
1
<PAGE>
3. Counterparts. This Amendment may be executed in one or more
counterparts, which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
PARADIGM MUSIC ENTERTAINMENT
COMPANY
By:
--------------------------------
-----------------------------------
Martin A. Bell
-----------------------------------
Esther Stahler
-----------------------------------
Ruki Renov
2
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT, dated as of January 9, 1997 by and
among PARADIGM MUSIC ENTERTAINMENT COMPANY, a Delaware corporation (the
"Company"), and PRODIGY SERVICES CORPORATION, a Delaware corporation ("Prodigy")
and SUNSHINE INTERACTIVE NETWORK, INC., a Delaware corporation ("Sunshine" and,
together with Prodigy, the "Holders").
RECITALS
WHEREAS, pursuant to a Stock Purchase Agreement dated as of
the date hereof, the Company is issuing to the Holders an aggregate of two
hundred thousand (200,000) shares (the "Shares") of its Class A Common Stock,
par value $0.01 per share ("Class A Common Stock") and Warrants (the "Warrants")
to purchase 100,000 shares of Class A Common Stock; and
WHEREAS, this Agreement sets forth the terms and conditions on
which the Company has agreed to grant certain registration rights to the Holders
with respect to the Shares and the Warrants.
NOW, THEREFORE, in consideration of the foregoing, of the
mutual promises and covenants herein contained and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Company hereby agrees with the Holders, severally and not jointly, as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the
following meanings:
"Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banks are authorized or required to be closed in New
York, New York; provided, however, that any determination of a Business Day
relating to a securities exchange shall mean a Business Day on which such
exchange is open for trading.
"Commission" shall mean the Securities and Exchange Commission
(or a successor thereto).
"Company" shall have the meaning given to such term in the
Preamble.
<PAGE>
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Person" shall mean and include any natural person, company,
partnership, joint venture, Company, business trust or unincorporated
organization.
"Piggyback Registration" shall have the meaning given to such
term in Section 2.1(a).
"Prospectus" means the Prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement with respect
to the terms of the offering of any portion of the Registrable Securities
covered by such Registration Statement and all other amendments and supplements
to the Prospectus, including post-effective amendments, and all material
incorporated by reference in such Prospectus.
"Registrable Securities" means the Shares, the Warrants, the
Class A Warrants into which the Warrants may be converted pursuant to the terms
of Section 9 of the Warrant Agreement ("Class A Warrants"), any warrants issued
upon exercise of the Class A Warrants ("Class B Warrants"), and any shares of
Class A Common Stock issued or issuable upon exercise of the Warrants, the Class
A Warrants or the Class B Warrants; provided that such securities shall cease to
be Registrable Securities at such time as (a) they have been effectively
registered and publicly sold under the Securities Act, (b) they are distributed
to the public pursuant to Rule 144 (or any similar rule then in force) under the
Securities Act or (c) they have otherwise been transferred and a new certificate
therefor not bearing a restrictive legend and not subject to any stop transfer
order has been delivered by or on behalf of the Company and no other restriction
on transfer exists. References to the "Registrable Securities" herein include
any other securities issued as a dividend or other distribution on or as a
result of a subdivision, combination or reclassification of any Registrable
Securities.
"Registration Statement" means any registration statement of
the Company filed pursuant to the Securities Act and which covers any of the
Registrable Securities, including the Prospectus, amendments and supplements to
such Registration Statement, including post-effective amendments, and all
exhibits and all material incorporated by reference in such Registration
Statement.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Warrant Agreement" means the Warrant Agreement dated as of
the date hereof among the Company, American Stock Transfer & Trust Company, as
Warrant Agent, and the Holders, pursuant to which the Warrants are being issued.
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<PAGE>
ARTICLE II
PIGGYBACK REGISTRATION RIGHTS
2.1 Registration Rights.
(a) Right to Include Registrable Securities. Whenever the
Company proposes to register any of its equity securities under the Securities
Act on Form S-1, S-2, S-3 or any similar form then in effect, whether or not for
its own account, other than in connection with the initial public offering by
the Company of its equity securities and any registration of securities
(including stock purchase warrants and securities underlying any such warrants)
issued in connection therewith, the Company shall give written notice thereof to
each holder of Registrable Securities as soon as practicable (but in any event
at least 30 days before such fil ing), offering such holder the opportunity to
register on such registration statement such number of Registrable Securities as
such holder may request in writing, subject to the provisions of Section 2.1(b),
not later than 20 days after the date of the giving of such notice (a "Piggyback
Registration"). Upon receipt by the Company of any such request, the Company
shall use reasonable efforts to, or in the case of an underwritten offering, to
cause the managing underwriter or underwriters to, include such Registrable
Securities in such registration statement (or in a separate registration
statement concurrently filed) and to cause such Registration Statement to become
effective with respect to such Registrable Securities in accordance with
applicable law. If the Company's registration is to be effected pursuant to an
underwritten offering, Registrable Securities registered pursuant to this
Section 2.1 shall be distributed in accordance with such offering.
Notwithstanding the foregoing, if at any time after giving written notice of its
intention to register its equity securities and before the effectiveness of the
Registration Statement filed in connection with such registration, the Company
determines for any reason either not to effect such registration or to delay
such registration, the Company may, at its election, by delivery of written
notice to each holder of Registrable Securities (A) in the case of a
determination not to effect registration, relieve itself of its obligation to
register the Registrable Securities in connection with such registration or (B)
in the case of a determination to delay registration, delay the registration of
such Registrable Securities for the same period as the delay in the registration
of such other equity securities. Each holder of Registrable Securities
requesting inclusion in a registration pursuant to this Section 2.1 may, at any
time before the effective date of the Registration Statement relating to such
registration, revoke such request by delivering written notice of such
revocation to the Company (which notice shall be effective only upon receipt by
the Company, notwithstanding the provisions of Section 4.2); provided, however,
that if the Company, in consultation with its financial and legal advisors,
determines that such revocation would materially delay the registration or
otherwise require a recirculation of the prospectus contained in the
registration statement, then such holder shall have no right to so revoke its
request.
(b) Priority in Piggyback Registration. (i) If any of the
Registrable Securities to be included in a Piggyback Registration are to be sold
in one or more underwritten offerings and the managing underwriter or
underwriters advise the Company that the total amount of
-3-
<PAGE>
securities requested to be included in such offering would exceed the maximum
amount of securities which can be marketed in an orderly manner in such offering
within a price range acceptable to the Company and without otherwise adversely
affecting such offering (the "Underwriters Maximum Number"), then the Company
will so notify all holders of Registrable Securities requesting inclusion in
such registration and will be required to include in such registration, to the
extent of the Underwriters Maximum Number: first, any equity securities that the
Company proposes to sell for its own account (including any overallotment
option); second, if the underwritten offering is a secondary offering on behalf
of holders of the Company's equity securities other than Registrable Securities,
the equity securities requested to be included therein by those holders; and
third, the Registrable Securities requested by holders of Registrable Securities
to be included in such registration and any equity securities requested to be
included in such registration by other holders of such securities (other than
those specified under second above, if applicable), allocated pro rata among all
such holders on the basis of the number of Registrable Securities and other
equity securities requested to be included therein by each such holder (without
regard as to whether such securities are Registrable Securities or other equity
securities).
(ii) If any of the Registrable Securities to be
included in a Piggyback Registration are to be sold in a non-underwritten
offering, but the Company, after consultation with its regular investment
bankers or with another investment banking firm of nationally recognized
standing (including a regional firm of recognized standing), reasonably
determines the amount of equity securities (including Registrable Securities) to
be included in such registration exceeds the amount of equity securities that
can be sold within a price range acceptable to the Company or the initiating
holders (in the case of a secondary offering) and without otherwise adversely
affecting such offering (and notifies all holders of Registrable Securities
requesting inclusion in such registration of such determination) (the "Company
Maximum Number"), then the Company will be required to include in such
registration, to the extent of the Company Maximum Number, Registrable
Securities and other equity securities in accordance with the priorities set
forth in Section 2.1(b)(i) above.
(c) Selection of Underwriters. If any Piggyback Registration
is in the form of an underwritten offering, the managing underwriter or
underwriters and any additional investment bankers and managers to be used in
connection with such registration shall be selected by the Company (subject to
any separate agreement with the holders on behalf of which a secondary
underwritten offering is being made).
(d) Compliance with Underwriting Requirements. Notwithstanding
anything herein to the contrary, no holder of Registrable Securities may
participate in any underwritten registration hereunder unless such holder (i)
agrees to sell its Registrable Securities on the same terms and conditions
provided in any underwriting arrangements approved by the Persons entitled
hereunder to approve such arrangement and (ii) accurately completes and executes
in a timely manner all questionnaires, powers of attorney, indemnities, custody
agreements, underwriting agreements and other documents required under the terms
of such underwriting arrangements.
-4-
<PAGE>
2.2 Holdback Agreement. Each holder of Registrable Securities
for which Piggyback Registration rights are available (or would be available but
for application of Section 2.1(b)) pursuant to Section 2.1 agrees not to effect
any sale or distribution of Registrable Securities, including a private sale or
a sale pursuant to Rule 144 or 144A (or any similar provision then in force)
under the Securities Act, during the 14-day period prior to, and during the
90-day period (or such other period as may be requested by the managing
underwriter of such underwritten offering but not to exceed 180 days) beginning
on, the effective date of such Registration Statement, except as part of such
underwritten offering or as otherwise permitted by the managing underwriter.
2.3 Registration Procedures.
(a) In connection with the Company's registration obligations
pursuant to Section 2.1, the Company will endeavor to effect the registration of
such Registrable Securities in accordance with the intended method or methods of
disposition thereof as quickly as practicable in accordance with applicable laws
and regulations. In connection with any such obligations, the Company:
(i) before filing a Registration Statement or
Prospectus or any amendments or supplements thereto, including
documents incorporated by reference after the initial filing of any
Registration Statement, will furnish to holders of Registrable
Securities requesting inclusion in such registration, their counsel and
the underwriters, if any, drafts of all such documents substantially as
proposed to be filed sufficiently in advance of filing to provide them
with a reasonable opportunity to review such documents and comment
thereon;
(ii) will notify the selling holders of Registrable
Securities, their counsel and the managing underwriter or underwriters,
if any, as soon as possible (x) when the Prospectus or any Prospectus
supplement or post-effective amendment has been filed, and, with
respect to any Registration Statement or post-effective amendment
thereto, when the same has become effective, and (y) of the happening
of any event as a result of which (A) the Registration Statement
contains an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (B) the Prospectus included in such
Registration Statement (as then in effect) includes an untrue statement
of a material fact or omits to state a material fact necessary in order
to make the statements therein in light of the circumstances under
which they were made, not misleading, (C) there is a stop order or
other suspension of effectiveness of the registration or (D) there is a
suspension of the qualification of the Registrable Securities for sale
in any jurisdiction or the initiation or threatening (in writing) of
any proceeding for such purpose;
(iii) upon the occurrence of any event contemplated
by clauses (A) and (B) of Section 2.3(a)(ii), will promptly prepare a
supplement or post-effective amendment to the Registration Statement or
related Prospectus or any document
-5-
<PAGE>
incorporated therein by reference or file any other required document
so that (A) such Registration Statement will 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 therein not
misleading, or (B) as thereafter delivered to the purchasers of the
Registrable Securities being sold thereunder, such Prospectus will not
include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein in
light of the circumstances under which they were made, not misleading;
(iv) will deliver to each selling holder of
Registrable Securities, their counsel and the underwriters, if any,
without charge, at least one signed copy of the Registration Statement
and such number of conformed copies thereof and such number of copies
of the Prospectus or Prospectuses (including each preliminary
Prospectus) and any amendment or supplement thereto as such Persons may
reasonably request and as promptly as practicable after the filing with
the Commission of any document which is incorporated by reference into
a Registration Statement, a copy of such document. The Company hereby
consents to the use of the Prospectus and any amendment or supplement
thereto by each of the selling holders and each of the managing
underwriters, if any, in connection with the offering and the sale of
the Registrable Securities covered by the Prospectus or any amendment
or supplement thereto; and
(v) will cooperate with the selling holders of
Registrable Securities and the managing underwriter or underwriters, if
any, to facilitate the timely preparation and delivery of certificates
(not bearing any restrictive legends, other than any legends indicating
that the holder thereof is an affiliate of the Company) representing
securities to be sold under the Registration Statement and enable such
securities to be in such denominations or amounts, as the case may be,
and registered in such names as the managing underwriter or
underwriters, if any, or such selling holders of Registrable Securities
may request.
(b) Each holder of Registrable Securities as to which any
registration is being effected shall furnish promptly to the Company such
information regarding such holder and the distribution of such securities as the
Company may from time to time reasonably request in writing.
(c) Each holder of Registrable Securities included in such
Registration Statement agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 2.3(a)(ii), such
holder will forthwith discontinue offering and disposition of any Registrable
Securities covered by such Registration Statement or Prospectus until such
holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 2.3(a)(iii), or until it is advised in writing by the
Company that the use of the applicable Prospectus may be resumed, and has
received copies of any additional or supplemental filings which are incorporated
by reference in such Prospectus and, if so directed by the Company, such holder
will, or will request the managing underwriter or underwriters, if any, to,
deliver to the Company (at the Company's expense) all copies, other than
permanent file
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<PAGE>
copies then in such holder's possession, of the Prospectus covering such
Registrable Securities current at the time of receipt of such notice.
2.4 Registration Expenses. Except as specified in the
following sentence, the Company shall bear all fees, costs and expenses in
connection with the Company's performance of or compliance with its registration
obligations for Piggyback Registrations pursuant to Section 2.1, including
without limitation all registration, filing, and NASD fees, printing expenses,
fees and disbursements of counsel and accountants for the Company, and all legal
fees and disbursements and other expenses of complying with state securities or
blue sky laws of any jurisdictions in which the securities to be offered are to
be registered and qualified (except as provided in 2(a) above). Underwriting
discounts and commissions and brokerage fees applicable to sales of the
Registrable Securities and fees and disbursements of counsel and accountants for
the selling holders of Registrable Securities and any other expenses incurred by
the selling holders of Registrable Securities not expressly included above shall
be borne by such selling holders.
ARTICLE III
INDEMNIFICATION
3.1 Indemnification by Company. The Company will indemnify and
hold harmless each holder of Registrable Securities which are included in a
registration statement pursuant to the provisions of Article I hereof, its
directors and officers, and any underwriter (as defined in the Act) for such
holder and each Person, if any, who controls such holder or such underwriter
within the meaning of the Act, from and against, and will reimburse such holder
and each such underwriter and controlling Person with respect to, any and all
loss, damage, liability, cost and expense to which such holder or any such
underwriter or controlling Person may become subject under the Act or otherwise,
insofar as such losses, damages, liabilities, costs or expenses are caused by
any untrue statement or alleged untrue statement of any material fact contained
in such registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, damage, liability, cost or expenses arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by such holder, such underwriter
or such controlling Person in writing specifically for use in the preparation
thereof.
3.2 Indemnification by Holders. Each holder of Registrable
Securities included in a registration pursuant to the provisions of Article I
hereof will indemnify and hold harmless the Company, its directors and officers,
any controlling Person and any underwriter from and against, and will reimburse
the Company, its directors and officers, any controlling Person and any
underwriter with respect to, any and all loss, damage, liability, cost or
expense to
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<PAGE>
which the Company or any controlling Person and/or any underwriter may become
subject under the Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue statement or alleged
untrue statement of any material fact contained in such registration statement,
any prospectus contained therein or any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was so
made in reliance upon and in strict conformity with written information
furnished by or on behalf of such holder specifically for use in the preparation
thereof.
3.3 Indemnification Procedures. Promptly after receipt by an
indemnified party pursuant to the provisions of Section 3.1 or 3.2 of notice of
the commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of said Section
3.1 or 3.2, promptly notify the indemnifying party of the commencement thereof;
but the omission to so notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than
hereunder unless such failure to notify results in insufficient time being
available to permit the indemnifying party or its counsel to effectively defend
any such claim and to make a timely response thereto and thereby prejudice the
indemnifying party's ability to defend such claim. In case such action is
brought against any indemnified party and it notifies the indemnifying party of
the commencement thereof, the indemnifying party shall have the right to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, provided, however, if the
defendants in any action include both the indemnified party and the indemnifying
party and the indemnified party shall have reasonably concluded that there may
be legal defenses available to it and/or other indemnified parties which are
different from or in addition to those available to the indemnified party, or if
there is a conflict of interest which would prevent counsel for the indemnifying
party from also representing the indemnified party, the indemnified party or
parties have the right to select separate counsel to participate in the defense
of such action on behalf of such indemnified party or parties. After notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party pursuant to the provisions of said Section 2.1 or 2.2 for any
legal or other expense subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation, unless (i) the indemnified party shall have employed counsel in
accordance with the provisions of the preceding sentence, (ii) the indemnifying
party shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after the notice of the
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party.
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<PAGE>
3.4 Underwritten Offerings. Notwithstanding any of the
foregoing, if, in connection with an underwritten public offering of Registrable
Securities, the Company, the Holders and the underwriter(s) enter into an
underwriting or purchase agreement relating to such offering which contains
provisions covering indemnification and contribution among the parties, the
indemnification and contribution provisions of this Article III shall be deemed
inoperative for purposes of such offering.
ARTICLE IV
MISCELLANEOUS
4.1 Rule 144. From and after the date the Company has filed a
registration statement pursuant to the requirements of the Securities Act
relating to any class of its equity securities, it will file in a timely manner
all reports required to be filed by it pursuant to the Securities Act and the
Exchange Act and will take such further action as any holder of Registrable
Securities may reasonably request in order that such holder may effect sales of
Common Stock pursuant to Rule 144 (or any similar provision then in force) under
the Securities Act. The Company will furnish to any holder of Registrable
Securities such information as such holder may reasonably request to the extent
required from time to time to enable such holder to sell Registrable Securities
without registration under the Securities Act within the limitation of the
exemptions provided by (i) Rule 144 under the Securities Act, as such Rule may
be amended from time to time, or (ii) any similar rule or regulation hereafter
adopted by the Commission. Notwithstanding the foregoing, the Company reserves
the right at any time to deregister any class of its equity securities under
Section 12 of the Exchange Act or suspend its duty to file reports with respect
to any class of its securities pursuant to Section 15(d) of the Exchange Act if
it is then permitted to do so pursuant to the Exchange Act and the rules and
regulations thereunder.
4.2 Notices. All notices, demands and requests of any kind to
be delivered to any party hereto in connection with this Agreement shall be in
writing (i) delivered personally, (ii) sent by nationally-recognized overnight
courier, (iii) sent by first class, registered or certified mail, return receipt
requested or (iv) sent by facsimile, in each case to such party at its address
as follows:
(a) if to the Company, to:
Paradigm Music Entertainment Company
67 Irving Place North
New York, New York 10003
Attention: President
Telephone: (212) 387-7700
Telecopier: (212) 387-8171
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<PAGE>
with a copy to:
Bachner, Tally, Polevoy & Misher LLP
380 Madison Avenue
New York, New York 10017-5729
Telephone: (212) 687-7000
Telecopier: (212) 682-5729
Attn: Roger E. Berg, Esq.
(b) if to Prodigy, to:
Prodigy Services Corporation
445 Hamilton Avenue
White Plains, New York 10061
Attention: General Counsel
Telephone: (312) 828-2345
Telecopier:
with a copy to:
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103
Attention: Vincent J. McGill, Esq.
Telephone: (212) 841-0566
Telecopier: (212) 262-5152
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<PAGE>
(c) if to Sunshine, to:
Sunshine Interactive Network, Inc.
740 Broadway
2nd Floor
New York, New York 10002
Attention: Chief Financial Officer
Telephone:
Telecopier:
with a copy to:
Rudolph & Beer
432 Park Avenue South
2nd Floor
New York, New York 10016
Attention: Jedidiah O. Alpert, Esq.
Any notice, demand or request so delivered shall constitute valid notice under
this Agreement and shall be deemed to have been received (i) on the day of
actual delivery in the case of personal delivery, (ii) on the next Business Day
after the date when sent in the case of delivery by nationally-recognized
overnight courier, (iii) on the fifth Business Day after the date of deposit in
the U.S. mail in the case of mailing or (iv) upon receipt in the case of a
facsimile transmission. Any party hereto may from time to time by notice in
writing served upon the other as aforesaid designate a different mailing address
or a different Person to which all such notices, demands or requests thereafter
are to be addressed.
4.3 Amendments and Waivers. Any provision of this Agreement
may be amended or waived, but only pursuant to a written agreement signed by the
Company and the Holders.
4.4 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Company, each Holder and their respective successors
and assigns.
4.5 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 agreement.
4.6 Governing Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of New York applicable to
agreements made and to be performed therein.
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<PAGE>
4.7 Headings. Article, section and paragraph headings in this
Agreement have been inserted for convenience of reference only and shall not
affect the construction of, or be taken into consideration in interpreting, this
Agreement.
* * * *
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their authorized officers, all as
of the date and year first above written.
PARADIGM MUSIC ENTERAINMENT
COMPANY
By:__________________________
Name: Thomas McPartland
Title: President
PRODIGY SERVICES CORPORATION
By:__________________________
Name:
Title:
SUNSHINE INTERACTIVE NETWORK, INC.
By:__________________________
Name:
Title:
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<PAGE>
WARRANT AGREEMENT
AGREEMENT, dated as of this 9th day of January 1997, by and
among PARADIGM MUSIC ENTERTAINMENT COMPANY, a Delaware corporation (the
"Company"), AMERICAN STOCK TRANSFER & TRUST COMPANY, as warrant agent (the
"Warrant Agent"), and PRODIGY SERVICES CORPORATION, a Delaware corporation
("Prodigy") and SUNSHINE INTERACTIVE NETWORK, INC., a Delaware corporation
("Sunshine" and, together with Prodigy, the "Holders").
W I T N E S S E T H
WHEREAS, pursuant to a Stock Purchase Agreement dated as of
the date hereof, the Company has agreed to issue to the Holders an aggregate of
100,000 common stock purchase warrants ("Warrants"), each Warrant exercisable to
purchase one share of the Company's Class A Common Stock, $.01 par value ("Class
A Common Stock"); and
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in connection
with the issuance, registration, transfer, exchange and redemption of the
Warrants, the issuance of certificates representing the Warrants, the exercise
of the Warrants, and the rights of the holders thereof;
NOW THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
SECTION 1. Definitions. As used herein, the following terms
shall have the following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean stock of the Company of any
class, whether now or hereafter authorized, which has the right to participate
in the distributions of earnings and assets of the Company without limit as to
amount or percentage, which at the date hereof consists of 21,999,900,000
authorized shares of Class A Common Stock, $.01 par value, (ii) 1,000,100
authorized shares of Class B Common Stock, $.01 par value, and (iii) 2,000,000
authorized shares of Class E Common Stock, $.01 par value.
(b) "Corporate Office" shall mean the office of the Warrant
Agent (or its successor) at which at any particular time its principal business
shall be administered, which office is located at the date hereof at 40 Wall
Street, New York, New York.
<PAGE>
(c) "Exercise Date" shall mean, as to any Warrant, the date on
which the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (b)
payment in cash, or by official bank or certified check made payable to the
Company, of an amount in lawful money of the United States of America equal to
the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean January 13,
1998.
(e) "Purchase Price" shall mean the purchase price to be paid
upon exercise of each Warrant in accordance with the terms hereof, which price
shall be $3.00 per share subject to (i) adjustment from time to time pursuant to
the provisions of Section 8 hereof or (ii) conversion of the Warrants pursuant
to the provisions of Section 9 hereof, and subject to the Company's right to
reduce the Purchase Price upon notice to all warrantholders.
(f) "Registered Holder" shall mean the person in whose name
any certificate representing Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(g) "Transfer Agent" shall mean American Stock Transfer &
Trust Company, as the Company's transfer agent, or its authorized successor, as
such.
(h) "Warrant Expiration Date" shall mean 5:00 P.M. (New York
time) on January 13, 2000; provided that if such date shall in the State of New
York be a holiday or a day on which banks are authorized to close, then 5:00
P.M. (New York time) on the next following day which in the State of New York is
not a holiday or a day on which banks are authorized to close. Upon notice to
all warrantholders the Company shall have the right to extend the Warrant
Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) A Warrant shall initially entitle the Registered Holder of
the Warrant Certificate representing such Warrant to purchase one share of
Common Stock upon the exercise thereof, in accordance with the terms hereof,
subject to modification and adjustment as provided in Section 8.
(b) From time to time, up to the Warrant Expiration Date, the
Transfer Agent shall execute and deliver stock certificates in required whole
number denominations representing up to an aggregate of 100,000 shares of Class
A Common Stock, subject to adjustment as described herein, upon the exercise of
Warrants in accordance with this Agreement.
(c) From time to time, up to the Warrant Expiration Date, the
Warrant Agent shall execute and deliver Warrant Certificates in required whole
number denominations to the persons entitled thereto in connection with any
transfer or exchange permitted under this
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<PAGE>
Agreement; provided that no Warrant Certificates shall be issued except (i)
those initially issued hereunder, (ii) those issued on or after the Initial
Warrant Exercise Date, upon the exercise of fewer than all Warrants represented
by any Warrant Certificate, to evidence any unexercised Warrants held by the
exercising Registered Holder, (iii) those issued upon any transfer or exchange
pursuant to Section 6; (iv) those issued in replacement of lost, stolen,
destroyed or mutilated Warrant Certificates pursuant to Section 7; and (v) at
the option of the Company, in such form as may be approved by the its Board of
Directors, to reflect (a) any adjustment or change in the Purchase Price or the
number of shares of Common Stock purchasable upon exercise of the Warrants, made
pursuant to Section 8 hereof and (b) other modifications approved by
Warrantholders in accordance with Section 16 hereof.
(d) In the event of an initial public offering of the
Company's securities, the provisions of Section 9 hereof will govern in certain
circumstances described therein.
SECTION 3. Form and Execution of Warrant Certificates. (a) The
Warrant Certificates shall be substantially in the form annexed hereto as
Exhibit A (the provisions of which are hereby incorporated herein) and may have
such letters, numbers or other marks of identification or designation and such
legends, summaries or endorsements printed, lithographed, engraved or typed
thereon as the Company may deem appropriate and as are not inconsistent with the
provisions of this Agreement, or as may be required to comply with any law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Warrants may be listed, or to conform to
usage. The Warrant Certificates shall be dated the date of issuance thereof
(whether upon initial issuance, transfer, exchange or in lieu of mutilated,
lost, stolen, or destroyed Warrant Certificates) and issued in registered form.
Warrants shall be numbered serially with the letters WS.
(b) Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, President or any Vice President and by its
Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of the
Company's seal. In case any officer of the Company who shall have signed any of
the Warrant Certificates shall cease to be such officer of the Company before
the date of issuance of the Warrant Certificates and issue and delivery thereof,
such Warrant Certificates may nevertheless be issued and delivered with the same
force and effect as though the person who signed such Warrant Certificates had
not ceased to be such officer of the Company. After execution by the Company,
Warrant Certificates shall be delivered by the Warrant Agent to the Registered
Holder.
SECTION 4. Exercise. Each Warrant may be exercised by the
Registered Holder thereof at any time on or after the Initial Exercise Date, but
not after the Warrant Expiration Date, upon the terms and subject to the
conditions set forth herein and in the applicable Warrant Certificate. A Warrant
shall be deemed to have been exercised immediately prior to the close of
business on the Exercise Date and the person entitled to receive the securities
deliverable upon such exercise shall be treated for all purposes as the holder
upon exercise thereof as of the close of business on the Exercise Date. As soon
as practicable on or
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<PAGE>
after the Exercise Date the Warrant Agent shall deposit the proceeds received
from the exercise of a Warrant, and promptly after clearance of checks received
in payment of the Purchase Price pursuant to such Warrants, cause to be issued
and delivered by the Transfer Agent, to the person or persons entitled to
receive the same, a certificate or certificates for the securities deliverable
upon such exercise, (plus a certificate for any remaining unexercised Warrants
of the Registered Holder). Notwithstanding the foregoing, in the case of payment
made in the form of a check drawn on an account of such investment banks and
brokerage houses as the Company shall approve, certificates shall immediately be
issued without any delay. Upon the exercise of any Warrant and clearance of the
funds received, the Warrant Agent shall promptly remit the payment received for
the Warrant to the Company or as the Company may direct in writing.
SECTION 5. Reservation of Shares; Listing; Payment of Taxes;
etc. (a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company covenants
that all shares of Common Stock which shall be issuable upon exercise of the
Warrants and payment of the Purchase Price shall, at the time of delivery, be
duly and validly issued, fully paid, nonassessable and free from all taxes,
liens and charges with respect to the issue thereof (other than those which the
Company shall promptly pay or discharge).
(b) The Company will use reasonable efforts to obtain
appropriate approvals or registrations under state "blue sky" securities laws
with respect to the exercise of the Warrants; provided, however, that the
Company shall not be obligated to file any general consent to service of process
or qualify as a foreign corporation in any jurisdiction. With respect to any
such securities laws, however, Warrants may not be exercised by, or shares of
Common Stock issued to, any Registered Holder in any state in which such
exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance, or delivery of any shares upon exercise
of the Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized to
requisition the Company's Transfer Agent from time to time for certificates
representing shares of Common Stock required upon exercise of the Warrants, and
the Company will authorize the Transfer Agent to comply with all such proper
requisitions.
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<PAGE>
SECTION 6. Exchange and Registration of Transfer.
Subject to the restrictions on transfer contained in the
Warrant Certificates and the Subscription Agreements between the Company and the
purchasers of Units:
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and
upon satisfaction of the terms and provisions hereof, the Company shall execute,
and the Warrant Agent shall countersign, issue and deliver in exchange therefor
the Warrant Certificate or Certificates which the Registered Holder making the
exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with its regular
practice. Upon due presentment for registration of transfer of any Warrant
Certificate at its office, the Company shall execute and the Warrant Agent shall
issue and deliver to the transferee or transferees a new Warrant Certificate or
Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription form on
the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company, duly executed by the Registered Holder or his attorney-in-fact duly
authorized in writing.
(d) The Company may require payment by such holder of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange in case of mutilated Warrant Certificates shall be promptly cancelled
by the Warrant Agent and thereafter retained by the Warrant Agent until
termination of this Agreement or resignation of the Warrant Agent, or disposed
of or destroyed, at the direction of the Company.
(f) Prior to due presentment for registration of transfer
thereof, the Company and the Warrant Agent may deem and treat the Registered
Holder of any Warrant Certificate as the absolute owner thereof and of each
Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and
the Warrant Agent of evidence satisfactory to them of the ownership of and loss,
theft, destruction or mutilation of any Warrant Certificate and (in case of
loss, theft or destruction) of indemnity
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<PAGE>
satisfactory to them, and (in the case of mutilation) upon surrender and
cancellation thereof, the Company shall execute and the Warrant Agent shall (in
the absence of notice to the Company and/or Warrant Agent that the Warrant
Certificate has been acquired by a bonafide purchaser) countersign and deliver
to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor
representing an equal aggregate number of Warrants. Applicants for a substitute
Warrant Certificate shall comply with such other reasonable regulations and pay
such other reasonable charges as the Warrant Agent may prescribe.
SECTION 8. Adjustment of Purchase Price and Number of Shares
of Class A Common Stock or Warrants.
(a) Subject to the exceptions referred to in Section 8(g)
below, in the event the Company shall, at any time or from time to time after
the date hereof, sell any shares of Common Stock for a consideration per share
less than the current fair market value per share of the Common Stock on the
date of the sale or issue any shares of Common Stock as a stock dividend to the
holders of Common Stock, or subdivide or combine the outstanding shares of
Common Stock into a greater or lesser number of shares (any such sale, issuance,
subdivision or combination being herein called a "Change of Shares"), then, and
thereafter upon each further Change of Shares, the Purchase Price in effect
immediately prior to such Change of Shares shall be changed to a price
(including any applicable fraction of a cent) determined by multiplying the
Purchase Price in effect immediately prior thereto by a fraction, the numerator
of which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional shares and the number of
shares of Common Stock which the aggregate consideration received (determined as
provided in subsection 8(f)(F) below), if any, for the issuance of such
additional shares would purchase at such current market price per share of
Common Stock, and the denominator of which shall be the sum of the number of
shares of Common Stock outstanding immediately after the issuance of such
additional shares. Such adjustment shall be made successively whenever such an
issuance is made.
Upon each adjustment of the Purchase Price pursuant to
this Section 8, the total number of shares of Common Stock purchasable upon the
exercise of each Warrant shall (subject to the provisions contained in Section
8(b) hereof) be such number of shares (calculated to the nearest tenth)
purchasable at the Purchase Price immediately prior to such adjustment
multiplied by a fraction, the numerator of which shall be the Purchase Price in
effect immediately prior to such adjustment and the denominator of which shall
be the Purchase Price in effect immediately after such adjustment.
(b) The Company may elect, upon any adjustment of the Purchase
Price hereunder, to adjust the number of Warrants outstanding, in lieu of the
adjustment in the number of shares of Common Stock purchasable upon the exercise
of each Warrant as hereinabove provided, so that each Warrant outstanding after
such adjustment shall represent the right to purchase one share of Common Stock.
Each Warrant held of record prior to such adjustment of the number of Warrants
shall become that number of Warrants (calculated to the nearest tenth)
determined by multiplying the number one by a fraction, the numerator of which
shall be the
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<PAGE>
Purchase Price in effect immediately prior to such adjustment and the
denominator of which shall be the Purchase Price in effect immediately after
such adjustment. Upon each adjustment of the number of Warrants pursuant to this
Section 8, the Company shall, as promptly as practicable, cause to be
distributed to each Registered Holder of Warrant Certificates on the date of
such adjustment Warrant Certificates evidencing, subject to Section 10 hereof,
the number of additional Warrants to which such Holder shall be entitled as a
result of such adjustment or, at the option of the Company, cause to be
distributed to such Holder in substitution and replacement for the Warrant
Certificates held by him prior to the date of adjustment (and upon surrender
thereof, if required by the Company) new Warrant Certificates evidencing the
number of Warrants to which such Holder shall be entitled after such adjustment.
(c) In case of any reclassification, capital reorganization or
other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock), or in
case of any sale or conveyance to another corporation of the property of the
Company as, or substantially as, an entirety (other than a sale/leaseback,
mortgage or other financing transaction), the Company shall cause effective
provision to be made so that each holder of a Warrant then outstanding shall
have the right thereafter, by exercising such Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock that might have been purchased upon exercise of such Warrant
immediately prior to such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance. Any such provision shall
include provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 8. The foregoing
provisions shall similarly apply to successive reclassifications, capital
reorganizations and other changes of outstanding shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
(d) Irrespective of any adjustments or changes in the Purchase
Price or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(c) hereof, continue to express the Purchase Price per
share and the number of shares purchasable thereunder as the Purchase Price per
share, and the number of shares purchasable were expressed in the Warrant
Certificates when the same were originally issued.
(e) After each adjustment of the Purchase Price pursuant to
this Section 8, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant after such adjustment, and, if the
Company shall have elected to adjust the number of Warrants, the number of
Warrants to which the registered
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<PAGE>
holder of each Warrant shall then be entitled, and the adjustment in Redemption
Price resulting therefrom, and (iii) a brief statement of the facts accounting
for such adjustment. The Company will promptly file such certificate with the
Warrant Agent and cause a brief summary thereof to be sent by ordinary first
class mail to each registered holder of Warrants at his last address as it shall
appear on the registry books of the Warrant Agent. No failure to mail such
notice nor any defect therein or in the mailing thereof shall affect the
validity thereof except as to the holder to whom the Company failed to mail such
notice, or except as to the holder whose notice was defective. The affidavit of
an officer of the Warrant Agent or the Secretary or an Assistant Secretary of
the Company that such notice has been mailed shall, in the absence of fraud, be
prima facie evidence of the facts stated therein.
(f) For purposes of Section 8(a) and 8(b) hereof, the
following provisions (A) to (F) shall also be applicable:
(A) The number of shares of Common Stock outstanding
at any given time shall include shares of Common Stock
owned or held by or for the account of the Company and the
sale or issuance of such treasury shares or the
distribution of any such treasury shares shall not be
considered a Change of Shares for purposes of said
sections.
(B) No adjustment of the Purchase Price shall be made
unless such adjustment would require an increase or
decrease of at least $.10 in such price; provided that any
adjustments which by reason of this clause (B) are not
required to be made shall be carried forward and shall be
made at the time of and together with the next subsequent
adjustment which, together with any adjustment(s) so
carried forward, shall require an increase or decrease of
at least $.10 in the Purchase Price then in effect
hereunder.
(C) In case of (1) the sale by the Company for cash of
any rights or warrants to subscribe for or purchase, or
any options for the purchase of, Common Stock or any
securities convertible into or exchangeable for Common
Stock without the payment of any further consideration
other than cash, if any (such convertible or exchangeable
securities being herein called "Convertible Securities"),
or (2) the issuance by the Company, without the receipt by
the Company of any consideration therefor, of any rights
or warrants to subscribe for or purchase, or any options
for the purchase of, Common Stock or Convertible
Securities, in each case, if (and only if) the
consideration payable to the Company upon the exercise of
such rights, warrants or options shall consist of cash,
whether or not such rights, warrants or options, or the
right to convert or exchange such Convertible Securities,
are immediately exercisable, and the price per share for
which Common Stock is issuable upon the exercise of such
rights, warrants or options or upon the conversion or
exchange of such Convertible Securities (determined by
dividing (x) the minimum aggregate consideration payable
to the Company upon the exercise of such rights, warrants
or options, plus the
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<PAGE>
consideration received by the Company for the issuance
or sale of such rights, warrants or options, plus, in the
case of such Convertible Securities, the minimum aggregate
amount of additional consideration, if any, other than
such Convertible Securities, payable upon the conversion
or exchange thereof, by (y) the total maximum number of
shares of Common Stock issuable upon the exercise of such
rights, warrants or options or upon the conversion or
exchange of such Convertible Securities issuable upon the
exercise of such rights, warrants or options) is less than
the Market Price of the Common Stock on the date of the
issuance or sale of such rights, warrants or options, then
the total maximum number of shares of Common Stock
issuable upon the exercise of such rights, warrants or
options or upon the conversion or exchange of such
Convertible Securities (as of the date of the issuance or
sale of such rights, warrants or options) shall be deemed
to be outstanding shares of Common Stock for purposes of
Sections 8(a) and 8(b) hereof and shall be deemed to have
been sold for cash in an amount equal to such price per
share.
(D) In case of the sale by the Company for cash of
any Convertible Securities, whether or not the right of
conversion or exchange thereunder is immediately
exercisable, and the price per share for which Common
Stock is issuable upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the
total amount of consideration received by the Company for
the sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any,
other than such Convertible Securities, payable upon the
conversion or exchange thereof, by (y) the total maximum
number of shares of Common Stock issuable upon the
conversion or exchange of such convertible Securities) is
less than the Market Price of the Common Stock on the date
of the sale of such Convertible Securities, then the total
maximum number of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities (as
of the date of the sale of such Convertible Securities)
shall be deemed to be outstanding shares of Common Stock
for purposes of Sections 8(a) and 8(b) hereof and shall be
deemed to have been sold for cash in an amount equal to
such price per share.
(E) If the exercise or purchase price provided for in
any right, warrant or option referred to in (C) above, or
the rate at which any Convertible Securities referred to
in (C) or (D) above are convertible into or exchangeable
for Common Stock, shall change at any time (other than
under or by reason of provisions designed to protect
against dilution), the Purchase Price then in effect
hereunder shall forthwith be readjusted to such Purchase
Price as would have obtained (1) had the adjustments made
upon the issuance or sale of such rights, warrants,
options or Convertible Securities been made upon the basis
of the issuance of only the number of shares of Common
Stock theretofore actually delivered (and the total
consideration received therefor) upon the exercise of such
rights, warrants or options or upon the conversion or
exchange of such Convertible
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<PAGE>
Securities, (2) had adjustments been made on the basis of
the Purchase Price as adjusted under clause (1) for all
transactions (which would have affected such adjusted
Purchase Price) made after the issuance or sale of such
rights, warrants, options or Convertible Securities, and
(3) had any such rights, warrants, options or Convertible
Securities then still outstanding been originally issued
or sold at the time of such change. On the expiration of
any such right, warrant or option or the termination of
any such right to convert or exchange any such Convertible
Securities, the Purchase Price then in effect hereunder
shall forthwith be readjusted to such Purchase Price as
would have obtained (a) had the adjustments made upon the
issuance or sale of such rights, warrants, options or
Convertible Securities been made upon the basis of the
issuance of only the number of shares of Common Stock
theretofore actually delivered (and the total
consideration received therefor) upon the exercise of such
rights, warrants or options or upon the conversion or
exchange of such Convertible Securities and (b) had
adjustments been made on the basis of the Purchase Price
as adjusted under clause (a) for all transactions (which
would have affected such adjusted Purchase Price) made
after the issuance or sale of such rights, warrants,
options or Convertible Securities.
(F) In case of the sale for cash of any shares of
Common Stock, any Convertible Securities, any rights or
warrants to subscribe for or purchase, or any options for
the purchase of, Common Stock or Convertible Securities,
the consideration received by the Company therefore shall
be deemed to be the gross sales price therefor without
deducting therefrom any expense paid or incurred by the
Company or any underwriting discounts or commissions or
concessions paid or allowed by the Company in connection
therewith.
(g) No adjustment to the Purchase Price of the Warrants or
to the number of shares of Common Stock purchasable upon
the exercise of each Warrant will be made, however,
(i) upon the exercise of any of the options presently
outstanding under the Company's Stock Option Plan (the
"Plan") for officers, directors and certain other key
personnel of the Company; or
(ii) upon the grant or exercise of any other options
which may hereafter be granted or exercised under the Plan
or under any other employee benefit plan of the Company;
or
(iii) upon the sale or exercise of the Warrants or any
other Warrants issued by the Company; or
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<PAGE>
(iv) upon the sale or exercise of the stock purchase
warrants issued and to be issued in connection with the
Company's private placement of Units being conducted
contemporaneously with execution and delivery of this Warrant
Agreement; or
(v) upon the issuance of any shares of Common Stock or
warrants sold to the public or the underwriter in the
Company's initial public offering, or upon exercise of
warrants comprising or underlying any Units sold in the
Company's initial public offering, including any shares or
warrants underlying the underwriter's warrants or unit
purchase option; or
(vi) upon the issuance or sale of Common Stock or
Convertible Securities upon the exercise of any rights or
warrants to subscribe for or purchase, or any options for the
purchase of, Common Stock or Convertible Securities, whether
or not such rights, warrants or options were outstanding on
the date of the original sale of the Warrants or were
thereafter issued or sold; or
(vii) upon the issuance or sale of Common Stock upon
conversion or exchange of any Convertible Securities, whether
or not any adjustment in the Purchase Price was made or
required to be made upon the issuance or sale of such
Convertible Securities and whether or not such Convertible
Securities were outstanding on the date of the original sale
of the Warrants or were thereafter issued or sold; or
(viii) upon any amendment to or change in the terms of any
rights or warrants to subscribe for or purchase, or options
for the purchase of, Common Stock or Convertible Securities or
in the terms of any Convertible Securities, including, but not
limited to, any extension of any expiration date of any such
right, warrant or option, any change in any exercise or
purchase price provided for in any such right, warrant or
option, any extension of any date through which any
Convertible Securities are convertible into or exchangeable
for Common Stock or any change in the rate at which any
Convertible Securities are convertible into or exchangeable
for Common Stock (other than rights, warrants, options or
Convertible Securities issued or sold after the close of
business on the date of the original issuance of the Warrants
(i) for which an adjustment in the Purchase Price then in
effect was theretofore made or required to be made, upon the
issuance or sale thereof, or (ii) for which such an adjustment
would have been required had the exercise or purchase price of
such rights, warrants or options at the time of the issuance
or sale thereof or the rate of conversion or exchange of such
Convertible Securities, at the time of the sale of such
Convertible Securities, or the issuance or sale of rights or
warrants to subscribe for or purchase, or options for the
purchase of, such Convertible Securities, been the price or
rate as changed, in which case the provisions of Section
8(f)(E) hereof shall be applicable if, but only if, the
exercise or purchase price thereof, as changed, or the
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<PAGE>
rate of conversion or exchange thereof, as changed, consists
of cash or requires the payment of additional consideration,
if any, consisting of cash and the Company did not receive any
consideration other than cash, if any, in connection with such
change).
(h) As used in this Section 8, the term "Common Stock" shall
mean and include the Company's Common Stock authorized on the date of this
Warrant Agreement and shall also include any capital stock of any class of the
Company thereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary liquidation,
dissolution or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include only shares of such class
designated in the Company's Certificate of Incorporation as Common Stock on the
date of this Warrant Agreement or (i), in the case of any reclassification,
change, consolidation, merger, sale or conveyance of the character referred to
in Section 8(c) hereof, the stock, securities or property provided for in such
section or (ii), in the case of any reclassification or change in the
outstanding shares of Common Stock issuable upon exercise of the Warrants as a
result of a subdivision or combination or consisting of a change in par value,
or from par value to no par value, or from no par value to par value, such
shares of Common Stock as so reclassified or changed.
(i) Any determination as to whether an adjustment in the
Purchase Price in effect hereunder is required pursuant to Section 8, or as to
the amount of any such adjustment, if required, shall be binding upon the
holders of the Warrants and the Company if made in good faith by the Board of
Directors of the Company.
(j) If and whenever the Company shall declare any dividends or
distributions or grant to the holders of Common Stock, as such, rights or
warrants to subscribe for or to purchase, or any options for the purchase of,
Common Stock or securities convertible into or exchangeable for or carrying a
right, warrant or option to purchase Common Stock, the Company shall notify each
of the then Registered Holders of the Warrants of such event prior to its
occurrence to enable such Registered Holders to exercise their Warrants and
participate as holders of Common Stock in such event.
SECTION 9. Conversion of Warrants.
(a) In the event the Company consummates an initial public
offering of its securities ("IPO") through D.H. Blair Investment Banking Corp.,
and the securities offered in the IPO include warrants which are exercisable to
purchase common stock ("Class A Warrants"), the Warrants will be automatically
converted on the closing date of the IPO with no action needed on the part of
the holder into Class A Warrants with the identical terms as the Class A
Warrants offered to the public (except as provided in Section 9(b) below), which
may be redeemed by the Company under certain conditions. On such closing date,
this Warrant Agreement shall terminate and the Class A Warrants into which the
Warrants convert will be governed by the warrant agreement covering the Class A
Warrants sold in the IPO.
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<PAGE>
(b) The Class A Warrants and securities issuable upon exercise
of the Class A Warrants shall not be registered for resale under the United
States Securities Act of 1933, as amended, as part of the Company's registration
of securities in the IPO, but will be entitled to the benefits of the
Registration Rights Agreement dated as of January 9, 1996 among the Company and
the Holders.
SECTION 10. Fractional Warrants and Fractional Shares.
(a) If the number of shares of Common Stock purchasable upon
the exercise of each Warrant is adjusted pursuant to Section 8 hereof, the
Company shall nevertheless not be required to issue fractions of shares, upon
exercise of the Warrants or otherwise, or to distribute certificates that
evidence fractional shares. With respect to any fraction of a share called for
upon any exercise hereof, the Company shall pay to the Holder an amount in cash
equal to such fraction multiplied by the current market value of such fractional
share, determined as follows:
(1) If the Common Stock is listed on a national
securities exchange or admitted to unlisted trading privileges
on such exchange or listed for trading on the Nasdaq National
Market System ("NMS"), the current market value shall be the
last reported sale price of the Common Stock on such exchange
on the last business day prior to the date of exercise of this
Warrant or if no such sale is made on such day or no closing
sale price is quoted, the average of the closing bid and asked
prices for such day on such exchange or system; or
(2) If the Common Stock is listed in the
over-the-counter market (other than on NMS) or admitted to
unlisted trading privileges, the current market value shall be
the mean of the last reported bid and asked prices reported by
the National Quotation Bureau, Inc. on the last business day
prior to the date of the exercise of this Warrant; or
(3) If the Common Stock is not so listed or admitted
to unlisted trading privileges and bid and asked prices are
not so reported, the current market value shall be an amount
determined in such reasonable manner as may be prescribed by
the Board of Directors of the Company.
SECTION 11. Warrant Holders Not Deemed Stockholders. No holder
of Warrants shall, as such, be entitled to vote or to receive dividends or be
deemed the holder of Common Stock that may at any time be issuable upon exercise
of such Warrants for any purpose whatsoever, nor shall anything contained herein
be construed to confer upon the holder of Warrants, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issue or reclassification of stock, change of par value or
change of stock to no par value, consolidation, merger or conveyance or
otherwise), or to receive notice of meetings, or to receive dividends or
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<PAGE>
subscription rights, until such Holder shall have exercised such Warrants and
been issued shares of Common Stock in accordance with the provisions hereof.
SECTION 12. Rights of Action. All rights of action with
respect to this Agreement are vested in the respective Registered Holders of the
Warrants, and any Registered Holder of a Warrant, without consent of the Warrant
Agent or of the holder of any other Warrant, may, on his own behalf and for his
own benefit, enforce against the Company his right to exercise his Warrants for
the purchase of shares of Common Stock in the manner provided in the Warrant
Certificate and this Agreement.
SECTION 13. Agreement of Warrant Holders. Every holder of a
Warrant, by his acceptance thereof, consents and agrees with the Company, the
Warrant Agent and every other holder of a Warrant that:
(a) The Warrants are transferable only on the registry books
of the Warrant Agent by the Registered Holder thereof in person or by his
attorney duly authorized in writing and only if the Warrant Certificates
representing such Warrants are surrendered at the office of the Warrant Agent,
duly endorsed or accompanied by a proper instrument of transfer satisfactory to
the Warrant Agent and the Company in their sole discretion, together with
payment of any applicable transfer taxes; and
(b) The Company may deem and treat the person in whose name
the Warrant Certificate is registered as the holder and as the absolute, true
and lawful owner of the Warrants represented thereby for all purposes, and the
Company shall not be affected by any notice or knowledge to the contrary, except
as otherwise expressly provided in Section 7 hereof.
SECTION 14. Cancellation of Warrant Certificates. If the
Company shall purchase or acquire any Warrant or Warrants, the Warrant
Certificate or Warrant Certificates evidencing the same shall thereupon be
cancelled by it and retired. The Warrant Agent shall also cancel Common Stock
following exercise of any or all of the Warrants represented thereby or
delivered to it for transfer, splitup, combination or exchange.
SECTION 15. Concerning the Warrant Agent. The Warrant Agent
acts hereunder as agent and in a ministerial capacity for the Company, and its
duties shall be determined solely by the provisions hereof. The Warrant Agent
shall not, by issuing and delivering Warrant Certificates or by any other act
hereunder be deemed to make any representations as to the validity, value or
authorization of the Warrant Certificates or the Warrants represented thereby or
of any securities or other property delivered upon exercise of any Warrant or
whether any stock issued upon exercise of any Warrant is fully paid and
nonassessable.
The Warrant Agent shall account promptly to the Company with
respect to Warrants exercised and concurrently pay the Company, as provided in
Section 4, all moneys received by the Warrant Agent upon the exercise of such
Warrants. The Warrant Agent shall, upon request of the Company from time to
time, deliver to the Company such complete reports
-14-
<PAGE>
of registered ownership of the Warrants and such complete records of
transactions with respect to the Warrants and the shares of Common Stock as the
Company may request. The Warrant Agent shall also make available to the Company
for inspection by its agents or employees, from time to time as either of them
may request, such original books of accounts and record (including original
Warrant Certificates surrendered to the Warrant Agent upon exercise of Warrants)
as may be maintained by the Warrant Agent in connection with the issuance and
exercise of Warrants hereunder, such inspections to occur at the Warrant Agent's
office as specified in Section 17, during normal business hours.
The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price provided in this Agreement, or to determine
whether any fact exists which may require any such adjustments, or with respect
to the nature or extent of any such adjustment, when made, or with respect to
the method employed in making the same. It shall not (i) be liable for any
recital or statement of facts contained herein or for any action taken, suffered
or omitted by it in reliance on any Warrant Certificate or other document or
instrument believed by it in good faith to be genuine and to have been signed or
presented by the proper party or parties, (ii) be responsible for any failure on
the part of the Company to comply with any of its covenants and obligations
contained in this Agreement or in any Warrant Certificate, or (iii) be liable
for any act or omission in connection with this Agreement except for its own
negligence or wilful misconduct.
The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction, order
or demand of the Company shall be sufficiently evidenced by an instrument signed
by the Chairman of the Board, President, any Vice President, its Secretary, or
Assistant Secretary, (unless other evidence in respect thereof is herein
specifically prescribed). The Warrant Agent shall not be liable for any action
taken, suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand believed by it to be genuine.
The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; it further agrees to indemnify the Warrant Agent and save it
harmless against any and all losses, expenses and liabilities, including
judgments, costs and counsel fees, for anything done or omitted by the Warrant
Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's negligence
or wilful misconduct.
The Warrant Agent may resign its duties and be discharged from
all further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or wilful misconduct), after giving
30 days' prior written notice to the Company. At
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<PAGE>
least 15 days prior to the date such resignation is to become effective, the
Warrant Agent shall cause a copy of such notice of resignation to be mailed to
the Registered Holder of each Warrant Certificate at the Company's expense. Upon
such resignation, or any inability of the Warrant Agent to act as such
hereunder, the Company shall appoint a new warrant agent in writing. If the
Company shall fail to make such appointment within a period of 15 days after it
has been notified in writing of such resignation by the resigning Warrant Agent,
then the Registered Holder of any Warrant Certificate may apply to any court of
competent jurisdiction for the appointment of a new warrant agent. Any new
warrant agent, whether appointed by the Company or by such a court, shall be a
bank or trust company having a capital and surplus, as shown by its last
published report to its stockholders, of not less than $10,000,000 or a stock
transfer company. After acceptance in writing of such appointment by the new
warrant agent is received by the Company, such new warrant agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named herein as the Warrant Agent, without any further assurance,
conveyance, act or deed; but if for any reason it shall be necessary or
expedient to execute and deliver any further assurance, conveyance, act or deed,
the same shall be done at the expense of the Company and shall be legally and
validly executed and delivered by the resigning Warrant Agent. Not later than
the effective date of any such appointment the Company shall file notice thereof
with the resigning Warrant Agent and shall forthwith cause a copy of such notice
to be mailed to the Registered Holder of each Warrant Certificate.
Any corporation into which the Warrant Agent or any new
warrant agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party or any corporation succeeding to the trust business of the Warrant Agent
shall be a successor warrant agent under this Agreement without any further act,
provided that such corporation is eligible for appointment as successor to the
Warrant Agent under the provisions of the preceding paragraph. Any such
successor warrant agent shall promptly cause notice of its succession as warrant
agent to be mailed to the Company and to the Registered Holder of each Warrant
Certificate.
The Warrant Agent, its subsidiaries and affiliates, and any of
its or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effects as though it were not Warrant
Agent. Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
SECTION 16. Modification of Agreement. Subject to the
provisions of Section 4(b), the parties hereto may by supplemental agreement
make any changes or corrections in this Agreement (i) that it shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained; (ii) to reflect an
increase in the number of Warrants which are to be governed by this Agreement
resulting from an increase in the size of the Private Placement; or (iii) that
it may deem necessary or desirable and which shall not adversely affect the
interests of the holders of Warrant Certificates; provided, however, that this
Agreement shall not otherwise be modified, supplemented or altered
-16-
<PAGE>
in any respect except with the consent in writing of the Registered Holders of
Warrant Certificates representing not less than 50% of the Warrants then
outstanding; and provided, further, that no change in the number or nature of
the securities purchasable upon the exercise of any Warrant, or the Purchase
Price therefor, or the acceleration of the Warrant Expiration Date, shall be
made without the consent in writing of the Registered Holder of the Warrant
Certificate representing such Warrant, other than such changes as are
specifically prescribed by this Agreement as originally executed.
SECTION 17. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first class registered or certified mail, postage
prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the
address of such holder as shown on the registry books maintained by the Warrant
Agent; if to the Company, at 67 Irving Place North, New York, New York 10003,
Attention: Thomas McPartland , President; if to the Warrant Agent, at its
Corporate Office.
SECTION 18. Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York, without
reference to principles of conflict of laws.
SECTION 19. Binding Effect. This Agreement shall be binding
upon and inure to the benefit of the Company and the Warrant Agent (and their
respective successors and assigns) and the holders from time to time of Warrant
Certificates. Nothing in this Agreement is intended or shall be construed to
confer upon any other person any right, remedy or claim, in equity or at law, or
to impose upon any other person any duty, liability or obligation.
SECTION 20. Termination. This Agreement shall terminate on the
earlier to occur of (i) the close of business on the Warrant Expiration Date of
all the Warrants; (ii) the closing date of an IPO which results in the
conversion of the Warrants; or (iii) the date upon which all Warrants have been
exercised.
SECTION 21. Counterparts. This Agreement may be executed in
several counterparts, which taken together shall constitute a single document.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first above written.
PARADIGM MUSIC ENTERTAINMENT
COMPANY
By: _______________________________
Thomas McPartland, President
PRODIGY SERVICES CORPORATION
By: _______________________________
SUNSHINE INTERACTIVE NETWORK, INC.
By: _______________________________
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By: _______________________________
Authorized Officer
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<PAGE>
THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED
UNTIL (1) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "ACT")
SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO, OR (2) RECEIPT BY THE ISSUER
OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT
THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
TRANSFER NOR IS SUCH TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES
LAWS.
No. WS __ _______ Warrants
VOID AFTER JANUARY 13, 2000
WARRANT CERTIFICATE FOR PURCHASE
OF COMMON STOCK
PARADIGM MUSIC ENTERTAINMENT COMPANY
This certifies that FOR VALUE RECEIVED_______________________
________________________ or registered assigns (the "Registered Holder") is the
owner of the number of Warrants ("Warrants") specified above. Each Warrant
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
$.01 par value ("Common Stock") of Paradigm Music Entertainment Company, a
Delaware corporation (the "Company") at any time commencing January 13, 1998 and
prior to the Expiration Date (as hereinafter defined), upon the presentation and
surrender of this Warrant Certificate with the Subscription Form on the reverse
hereof duly executed, at the corporate office of American Stock Transfer & Trust
Company, as Warrant Agent, or its successor (the "Warrant Agent"), accompanied
by payment of an amount equal to $3.00 for each Warrant (the "Purchase Price")
in lawful money of the United States of America in cash or by official bank or
certified check made payable to Paradigm Music Entertainment Company. The
Company may, at its election, reduce the Purchase Price.
This Warrant Certificate and each Warrant represented hereby
are issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated
January 9, 1997 by and among the Company, the Warrant Agent, Prodigy Services
Corporation and Sunshine Interactive Network, Inc.
In the event of certain contingencies provided for in the
Warrant Agreement, the Purchase Price or the number of shares of Common Stock
subject to purchase upon the exercise of each Warrant represented hereby are
subject to modification or adjustment.
A-1
<PAGE>
Each Warrant represented hereby is exercisable at the option
of the Registered Holder, but no fractional shares of Common Stock will be
issued. In the case of the exercise of less than all the Warrants represented
hereby, the Company shall cancel this Warrant Certificate upon the surrender
hereof and shall execute and deliver a new Warrant Certificate or Warrant
Certificates of like tenor, which the Warrant Agent shall countersign, for the
balance of such Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York
time) on January 13, 2000 . If such date shall in the State of New York be a
holiday or a day on which the banks are authorized to close, then the Expiration
Date shall mean 5:00 P.M. (New York time) the next following day which in the
State of New York is not a holiday or a day on which banks are authorized to
close. The Company may, at its election, extend the Expiration Date.
This Warrant Certificate is exchangeable, upon the surrender
hereof by the Registered Holder at the corporate office of the Warrant Agent,
for a new Warrant Certificate or Warrant Certificates of like tenor representing
an equal aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment with any tax or other
governmental charge imposed in connection therewith, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any limitation, the right to vote or
to receive dividends or other distributions, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided in the
Warrant Agreement.
Prior to due presentment for registration of transfer hereof,
the Company may deem and treat the Registered Holder as the absolute owner
hereof and of each Warrant represented hereby (notwithstanding any notations of
ownership or writing hereon made by anyone other than a duly authorized officer
of the Company) for all purposes and shall not be affected by any notice to the
contrary.
This Warrant will automatically convert into a like number of
new warrants under certain circumstances in the event the Company completes an
initial public offering of its securities having the terms and conditions
specified in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York.
A-2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or in facsimile by two of its officers
thereunto duly authorized and a facsimile of its corporate seal to be imprinted
hereon.
PARADIGM MUSIC ENTERTAINMENT
COMPANY
Dated: January 9, 1997
By _____________________________
By ________________________
[seal]
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By _____________________________
A-3
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to
exercise Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
[please print or type name and address]
and be delivered to
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
[please print or type name and address]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
The undersigned represents that the exercise of the within
Warrant was solicited by a member of the National Association of Securities
Dealers, Inc. If not solicited by an NASD member, please write "unsolicited" in
the space below. Unless otherwise indicated by listing the name of another NASD
member firm, it will be assumed that the exercise was solicited by D.H.
Blair Investment Banking Corp.
--------------------------------------
(Name of NASD Member if other
than D.H. Blair Investment
Banking Corp.)
A-4
<PAGE>
Dated: ______________________
X______________________
-----------------
------------------
Address
----------------------
Taxpayer Identification Number
- - - - --------------------------
Signature Guaranteed
- - - - --------------------
A-5
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, ___________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
[please print or type name and address]
_________________________ of the Warrants represented by this Warrant
Certificate, and hereby irrevocably constitutes and appoints
____________________________________ _______________________________ Attorney to
transfer this Warrant Certificate on the books of the Company, with full power
of substitution in the premises.
Dated: ____________________
X________________________
Signature Guaranteed
- - - - -------------------------
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
A-6
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
1996 STOCK OPTION PLAN
1. Purpose.
The purpose of this plan (the "Plan") is to secure for
Paradigm Music Entertainment Company (the "Company") and its shareholders the
benefits arising from capital stock ownership by employees, officers and
directors of, and consultants or advisors to, the Company who are expected to
contribute to the Company's future growth and success. Except where the context
otherwise requires, the term "Company" shall include all present and future
subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the
Internal Revenue Code of 1986, as amended or replaced from time to time (the
"Code"). Those provisions of the Plan which make express reference to Section
422 shall apply only to Incentive Stock Options (as that term is defined in the
Plan).
2. Type of Options and Administration.
(a) Types of Options. Options granted pursuant to the Plan
shall be authorized by action of the Board of Directors of the Company (or a
Committee designated by the Board of Directors) and may be either incentive
stock options ("Incentive Stock Options") meeting the requirements of Section
422 of the Code or non-statutory options which are not intended to meet the
requirements of Section 422 of the Code.
(b) Administration. The Plan will be administered by a
committee (the "Committee") appointed by the Board of Directors of the Company,
whose construction and interpretation of the terms and provisions of the Plan
shall be final and conclusive. The delegation of powers to the Committee shall
be consistent with applicable laws or regulations (including, without
limitation, applicable state law and Rule 16b-3 promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act"), or any successor rule ("Rule
16b-3")). The Committee may in its sole discretion grant options to purchase
shares of the Company's Class A Common Stock, $.01 par value per share ("Common
Stock") and issue shares upon exercise of such options as provided in the Plan.
The Committee shall have authority, subject to the express provisions of the
Plan, to construe the respective option agreements and the Plan, to prescribe,
amend and rescind rules and regulations relating to the Plan, to determine the
terms and provisions of the respective option agreements, which need not be
identical, and to make all other determinations in the judgment of the Committee
necessary or desirable for the administration of the Plan. The Committee may
correct any defect or supply any omission or reconcile any inconsistency in the
Plan or in any option agreement in the manner and to the extent it shall deem
expedient to carry the Plan into effect and it shall be the sole and final judge
of such expediency. No director or person acting pursuant to authority delegated
by the Board of Directors shall be liable for any action or determination under
the Plan made in good faith. Subject to adjustment as provided in Section 15
below, the aggregate number of shares of
<PAGE>
Common Stock that may be subject to Options or granted to any person in a
calendar year shall not exceed 200,000 shares of Common Stock.
(c) Applicability of Rule 16b-3. Those provisions of the Plan
which make express reference to Rule 16b-3 shall apply to the Company only at
such time as the Company's Common Stock is registered under the Exchange Act,
subject to the last sentence of Section 3(b), and then only to such persons as
are required to file reports under Section 16(a) of the Exchange Act (a
"Reporting Person").
3. Eligibility.
(a) General. Options or Restricted Stock Awards may be granted
to persons who are, at the time of grant, employees, officers or directors of,
or consultants or advisors to, the Company or any subsidiaries of the Company as
defined in Sections 424(e) and 424(f) of the Code ("Participants") provided,
that Incentive Stock Options may only be granted to individuals who are
employees of the Company (within the meaning of Section 3401(c) of the Code). A
person who has been granted an option may, if he or she is otherwise eligible,
be granted additional options if the Committee shall so determine.
(b) Grant of Options to Reporting Persons. The selection of a
director or an officer who is a Reporting Person (as the terms "director" and
"officer" are defined for purposes of Rule 16b-3) as a recipient of an option,
the timing of the option grant, the exercise price of the option and the number
of shares subject to the option shall be determined either (i) by the Board of
Directors, or (ii) by a committee consisting solely of two or more directors
having full authority to act in the matter, each of whom shall be a
"Non-Employee Director" . For the purposes of the Plan, a director shall be
deemed to be a "Non-Employee Director" only if such person qualifies as a
"Non-Employee Director" within the meaning of Rule 16b-3, as such term is
interpreted from time to time. If at least two of the members of the Board of
Directors do not qualify as a "Non-Employee Director" within the meaning of Rule
16b-3, as such term is interpreted from time to time, then the granting of
options to officers and directors who are Reporting Persons under the Plan shall
not be determined in accordance with this Section 3(b) but shall be determined
in accordance with the other provisions of the Plan.
4. Stock Subject to Plan.
The stock subject to options granted under the Plan shall be
shares of authorized but unissued or reacquired Common Stock. Subject to
adjustment as provided in Section 15 below, the maximum number of shares of
Common Stock of the Company which may be issued and sold under the Plan is
300,000 shares. If an option granted under the Plan shall expire, terminate or
is cancelled for any reason without having been exercised in full, the
unpurchased shares subject to such option shall again be available for
subsequent option grants under the Plan.
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5. Forms of Option Agreements.
As a condition to the grant of an option under the Plan, each
recipient of an option shall execute an option agreement in such form not
inconsistent with the Plan as may be approved by the Board of Directors. Such
option agreements may differ among recipients.
6. Purchase Price.
(a) General. The purchase price per share of stock deliverable
upon the exercise of an option shall be determined by the Board of Directors at
the time of grant of such option; provided, however, that in the case of an
Incentive Stock Option, the exercise price shall not be less than 100% of the
Fair Market Value (as hereinafter defined) of such stock, at the time of grant
of such option, or less than 110% of such Fair Market Value in the case of
options described in Section 11(b). "Fair Market Value" of a share of Common
Stock of the Company as of a specified date for the purposes of the Plan shall
mean the closing price of a share of the Common Stock on the principal
securities exchange (including the Nasdaq National Market) on which such shares
are traded on the day immediately preceding the date as of which Fair Market
Value is being determined, or on the next preceding date on which such shares
are traded if no shares were traded on such immediately preceding day, or if the
shares are not traded on a securities exchange, Fair Market Value shall be
deemed to be the average of the high bid and low asked prices of the shares in
the over-the-counter market on the day immediately preceding the date as of
which Fair Market Value is being determined or on the next preceding date on
which such high bid and low asked prices were recorded. If the shares are not
publicly traded, Fair Market Value of a share of Common Stock (including, in the
case of any repurchase of shares, any distributions with respect thereto which
would be repurchased with the shares) shall be determined in good faith by the
Board of Directors. In no case shall Fair Market Value be determined with regard
to restrictions other than restrictions which, by their terms, will never lapse.
(b) Payment of Purchase Price. Options granted under the Plan
may provide for the payment of the exercise price by delivery of cash or a check
to the order of the Company in an amount equal to the exercise price of such
options, or by any other means which the Board of Directors determines are
consistent with the purpose of the Plan and with applicable laws and regulations
(including, without limitation, the provisions of Rule 16b-3 and Regulation T
promulgated by the Federal Reserve Board).
7. Option Period.
Subject to earlier termination as provided in the Plan, each
option and all rights thereunder shall expire on such date as determined by the
Board of Directors and set forth in the applicable option agreement, provided,
that such date shall not be later than (10) ten years after the date on which
the option is granted.
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8. Exercise of Options.
Each option granted under the Plan shall be exercisable either
in full or in installments at such time or times and during such period as shall
be set forth in the option agreement evidencing such option, subject to the
provisions of the Plan. No option granted to a Reporting Person for purposes of
the Exchange Act, however, shall be exercisable during the first six months
after the date of grant. Subject to the requirements in the immediately
preceding sentence, if an option is not at the time of grant immediately
exercisable, the Board of Directors may (i) in the agreement evidencing such
option, provide for the acceleration of the exercise date or dates of the
subject option upon the occurrence of specified events, and/or (ii) at any time
prior to the complete termination of an option, accelerate the exercise date or
dates of such option.
9. Nontransferability of Options.
No option granted under this Plan shall be assignable or
otherwise transferable by the optionee except by will or by the laws of descent
and distribution or pursuant to a qualified domestic relations order as defined
in the Code or Title I of the Employee Retirement Income Security Act, or the
rules thereunder. An option may be exercised during the lifetime of the optionee
only by the optionee. In the event an optionee dies during his employment by the
Company or any of its subsidiaries, or during the three-month period following
the date of termination of such employment, his option shall thereafter be
exercisable, during the period specified in the option agreement, by his
executors or administrators to the full extent to which such option was
exercisable by the optionee at the time of his death during the periods set
forth in Section 10 or 11(d).
10. Effect of Termination of Employment or Other Relationship.
Except as provided in Section 11(d) with respect to Incentive
Stock Options and except as otherwise determined by the Committee at the date of
grant of an Option, and subject to the provisions of the Plan, an optionee may
exercise an option at any time within three months following the termination of
the optionee's employment or other relationship with the Company or within one
(1) year if such termination was due to the death or disability of the optionee
but, except in the case of the optionee's death, in no event later than the
expiration date of the Option. If the termination of the optionee's employment
is for cause or is otherwise attributable to a breach by the optionee of an
employment or confidentiality or non-disclosure agreement, the option shall
expire immediately upon such termination. The Board of Directors shall have the
power to determine what constitutes a termination for cause or a breach of an
employment or confidentiality or non-disclosure agreement, whether an optionee
has been terminated for cause or has breached such an agreement, and the date
upon which such termination for cause or breach occurs. Any such determinations
shall be final and conclusive and binding upon the optionee.
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11. Incentive Stock Options.
Options granted under the Plan which are intended to be
Incentive Stock Options shall be subject to the following additional terms and
conditions:
(a) Express Designation. All Incentive Stock Options granted
under the Plan shall, at the time of grant, be specifically designated as such
in the option agreement covering such Incentive Stock Options.
(b) 10% Shareholder. If any employee to whom an Incentive
Stock Option is to be granted under the Plan is, at the time of the grant of
such option, the owner of stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company (after taking into account
the attribution of stock ownership rules of Section 424(d) of the Code), then
the following special provisions shall be applicable to the Incentive Stock
Option granted to such individual:
(i) The purchase price per share of the Common Stock
subject to such Incentive Stock Option shall not be less than
110% of the Fair Market Value of one share of Common Stock at
the time of grant; and
(ii) the option exercise period shall not exceed five
years from the date of grant.
(c) Dollar Limitation. For so long as the Code shall so
provide, options granted to any employee under the Plan (and any other incentive
stock option plans of the Company) which are intended to constitute Incentive
Stock Options shall not constitute Incentive Stock Options to the extent that
such options, in the aggregate, become exercisable for the first time in any one
calendar year for shares of Common Stock with an aggregate Fair Market Value, as
of the respective date or dates of grant, of more than $100,000.
(d) Termination of Employment, Death or Disability. No
Incentive Stock Option may be exercised unless, at the time of such exercise,
the optionee is, and has been continuously since the date of grant of his or her
option, employed by the Company, except that:
(i) an Incentive Stock Option may be exercised within
the period of three months after the date the optionee ceases
to be an employee of the Company (or within such lesser period
as may be specified in the applicable option agreement),
provided, that the agreement with respect to such option may
designate a longer exercise period and that the exercise after
such three-month period shall be treated as the exercise of a
non-statutory option under the Plan;
(ii) if the optionee dies while in the employ of the
Company, or within three months after the optionee ceases to
be such an employee, the Incentive Stock Option may be
exercised by the person to whom it is transferred by will or
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the laws of descent and distribution within the period of one
year after the date of death (or within such lesser period as
may be specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the
meaning of Section 22(e)(3) of the Code or any successor
provisions thereto) while in the employ of the Company, the
Incentive Stock Option may be exercised within the period of
one year after the date the optionee ceases to be such an
employee because of such disability (or within such lesser
period as may be specified in the applicable option
agreement).
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
12. Additional Provisions.
(a) Additional Option Provisions. The Board of Directors may,
in its sole discretion, include additional provisions in option agreements
covering options granted under the Plan, including without limitation
restrictions on transfer, repurchase rights, rights of first refusal,
commitments to pay cash bonuses, to make, arrange for or guaranty loans or to
transfer other property to optionees upon exercise of options, or such other
provisions as shall be determined by the Board of Directors; provided, that such
additional provisions shall not be inconsistent with any other term or condition
of the Plan and such additional provisions shall not cause any Incentive Stock
Option granted under the Plan to fail to qualify as an Incentive Stock Option
within the meaning of Section 422 of the Code.
(b) Acceleration, Extension, Etc. The Board of Directors may,
in its sole discretion, (i) accelerate the date or dates on which all or any
particular option or options granted under the Plan may be exercised or (ii)
extend the dates during which all, or any particular, option or options granted
under the Plan may be exercised; provided, however, that no such extension shall
be permitted if it would cause the Plan to fail to comply with Section 422 of
the Code or with Rule 16b-3 (if applicable).
13. General Restrictions.
(a) Investment Representations. The Company may require any
person to whom an Option is granted, as a condition of exercising such option,
to give written assurances in substance and form satisfactory to the Company to
the effect that such person is acquiring the Common Stock subject to the option
or award, for his or her own account for investment and not with any present
intention of selling or otherwise distributing the same, and to such other
effects as the Company deems necessary or appropriate in order to comply with
federal and applicable state securities laws, or with covenants or
representations made by the Company in connection
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with any public offering of its Common Stock, including any "lock-up" or other
restriction on transferability.
(b) Compliance With Securities Law. Each Option shall be
subject to the requirement that if, at any time, counsel to the Company shall
determine that the listing, registration or qualification of the shares subject
to such option upon any securities exchange or automated quotation system or
under any state or federal law, or the consent or approval of any governmental
or regulatory body, or that the disclosure of non-public information or the
satisfaction of any other condition is necessary as a condition of, or in
connection with the issuance or purchase of shares thereunder, such option may
not be exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval, or satisfaction of such condition shall have
been effected or obtained on conditions acceptable to the Board of Directors.
Nothing herein shall be deemed to require the Company to apply for or to obtain
such listing, registration or qualification, or to satisfy such condition.
14. Rights as a Stockholder.
The holder of an option shall have no rights as a stockholder
with respect to any shares covered by the option (including, without limitation,
any rights to receive dividends or non-cash distributions with respect to such
shares) until the date of issue of a stock certificate to him or her for such
shares. No adjustment shall be made for dividends or other rights for which the
record date is prior to the date such stock certificate is issued.
15. Adjustment Provisions for Recapitalizations, Reorganizations
and Related Transactions.
(a) Recapitalizations and Related Transactions. If, through or
as a result of any recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other similar transaction, (i) the outstanding
shares of Common Stock are increased, decreased or exchanged for a different
number or kind of shares or other securities of the Company, or (ii) additional
shares or new or different shares or other non-cash assets are distributed with
respect to such shares of Common Stock or other securities, an appropriate and
proportionate adjustment shall be made in (x) the maximum number and kind of
shares reserved for issuance under or otherwise referred to in the Plan, (y) the
number and kind of shares or other securities subject to any then outstanding
options under the Plan, and (z) the price for each share subject to any then
outstanding options under the Plan, without changing the aggregate purchase
price as to which such options remain exercisable. Notwithstanding the
foregoing, no adjustment shall be made pursuant to this Section 15 if such
adjustment (i) would cause the Plan to fail to comply with Section 422 of the
Code or with Rule 16b-3 or (ii) would be considered as the adoption of a new
plan requiring stockholder approval.
(b) Reorganization, Merger and Related Transactions. All
outstanding Options under the Plan shall become fully exercisable for a period
of sixty (60) days following the occurrence of any Trigger Event, whether or not
such Options are then exercisable under the
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provisions of the applicable agreements relating thereto. For purposes of the
Plan, a "Trigger Event" is any one of the following events:
(i) the date on which shares of Common Stock
are first purchased pursuant to a tender offer or exchange
offer (other than such an offer by the Company, any
Subsidiary, any employee benefit plan of the Company or of any
Subsidiary or any entity holding shares or other securities of
the Company for or pursuant to the terms of such plan),
whether or not such offer is approved or opposed by the
Company and regardless of the number of shares purchased
pursuant to such offer;
(ii) the date the Company acquires knowledge
that any person or group deemed a person under Section 13(d)-3
of the Exchange Act (other than the Company, any Subsidiary,
any employee benefit plan of the Company or of any Subsidiary
or any entity holding shares of Common Stock or other
securities of the Company for or pursuant to the terms of any
such plan or any individual or entity or group or affiliate
thereof which acquired its beneficial ownership interest prior
to the date the Plan was adopted by the Board), in a
transaction or series of transactions, has become the
beneficial owner, directly or indirectly (with beneficial
ownership determined as provided in Rule 13d-3, or any
successor rule, under the Exchange Act), of securities of the
Company entitling the person or group to 30% or more of all
votes (without consideration of the rights of any class or
stock to elect directors by a separate class vote) to which
all shareholders of the Company would be entitled in the
election of the Board of Directors were an election held on
such date;
(iii) the date, during any period of two
consecutive years, when individuals who at the beginning of
such period constitute the Board of Directors of the Company
cease for any reason to constitute at least a majority
thereof, unless the election, or the nomination for election
by the stockholders of the Company, of each new director was
approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of
such period; and
(iv) the date of approval by the
stockholders of the Company of an agreement (a "reorganization
agreement") providing for:
(A) The merger of consolidation of the
Company with another corporation where the stockholders of the
Company, immediately prior to the merger or consolidation, do
not beneficially own, immediately after the merger or
consolidation, shares of the corporation issuing cash or
securities in the merger or consolidation entitling such
shareholders to 80% or more of all votes (without
consideration of the rights of any class of stock to elect
directors by a separate class vote) to which all stockholders
of such corporation would be entitled in the
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election of directors or where the members of the Board of
Directors of the Company, immediately prior to the merger or
consolidation, do not, immediately after the merger or
consolidation, constitute a majority of the Board of Directors
of the corporation issuing cash or securities in the merger or
consolidation; or
(B) The sale or other disposition of all or
substantially all the assets of the Company.
(c) Board Authority to Make Adjustments. Any adjustments under
this Section 15 will be made by the Board of Directors, whose determination as
to what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.
16. Merger, Consolidation, Asset Sale, Liquidation, etc.
(a) General. In the event of any sale, merger, transfer or
acquisition of the Company or substantially all of the assets of the Company in
which the Company is not the surviving corporation, and provided that after the
Company shall have requested the acquiring or succeeding corporation (or an
affiliate thereof), that equivalent options shall be substituted and such
successor corporation shall have refused or failed to assume all options
outstanding under the Plan or issue substantially equivalent options, then any
or all outstanding options under the Plan shall accelerate and become
exercisable in full immediately prior to such event. The Committee will notify
holders of options under the Plan that any such options shall be fully
exercisable for a period of fifteen (15) days from the date of such notice, and
the options will terminate upon expiration of such notice.
(b) Substitute Options. The Company may grant options under
the Plan in substitution for options held by employees of another corporation
who become employees of the Company, or a subsidiary of the Company, as the
result of a merger or consolidation of the employing corporation with the
Company or a subsidiary of the Company, or as a result of the acquisition by the
Company, or one of its subsidiaries, of property or stock of the employing
corporation. The Company may direct that substitute options be granted on such
terms and conditions as the Board of Directors considers appropriate in the
circumstances.
17. No Special Employment Rights.
Nothing contained in the Plan or in any option shall confer
upon any optionee any right with respect to the continuation of his or her
employment by the Company or interfere in any way with the right of the Company
at any time to terminate such employment or to increase or decrease the
compensation of the optionee.
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18. Other Employee Benefits.
Except as to plans which by their terms include such amounts
as compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
19. Amendment of the Plan.
(a) The Board of Directors may at any time, and from time to
time, modify or amend the Plan in any respect; provided, however, that if at any
time the approval of the stockholders of the Company is required under Section
422 of the Code or any successor provision with respect to Incentive Stock
Options, the Board of Directors may not effect such modification or amendment
without such approval; and provided, further, that the provisions of Section
3(c) hereof shall not be amended more than once every six months, other than to
comport with changes in the Code, the Employer Retirement Income Security Act of
1974, as amended, or the rules thereunder.
(b) The modification or amendment of the Plan shall not,
without the consent of an optionee, affect his or her rights under an option
previously granted to him or her. With the consent of the optionee affected, the
Board of Directors may amend outstanding option agreements in a manner not
inconsistent with the Plan. The Board of Directors shall have the right to amend
or modify (i) the terms and provisions of the Plan and of any outstanding
Incentive Stock Options granted under the Plan to the extent necessary to
qualify any or all such options for such favorable federal income tax treatment
(including deferral of taxation upon exercise) as may be afforded incentive
stock options under Section 422 of the Code and (ii) the terms and provisions of
the Plan and of any outstanding option to the extent necessary to ensure the
qualification of the Plan under Rule 16b-3.
20. Withholding.
(a) The Company shall have the right to deduct from payments
of any kind otherwise due to the optionee any federal, state or local taxes of
any kind required by law to be withheld with respect to any shares issued upon
exercise of options under the Plan. Subject to the prior approval of the
Company, which may be withheld by the Company in its sole discretion, the
optionee may elect to satisfy such obligations, in whole or in part, (i) by
causing the Company to withhold shares of Common Stock otherwise issuable
pursuant to the exercise of an option or (ii) by delivering to the Company
shares of Common Stock already owned by the optionee. The shares so delivered or
withheld shall have a Fair Market Value equal to such withholding obligation as
of the date that the amount of tax to be withheld is to be determined. An
optionee who has made an election pursuant to this Section 20(a) may only
satisfy his or her
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withholding obligation with shares of Common Stock which are not subject to any
repurchase, forfeiture, unfulfilled vesting or other similar requirements.
(b) The acceptance of shares of Common Stock upon exercise of
an Incentive Stock Option shall constitute an agreement by the optionee (i) to
notify the Company if any or all of such shares are disposed of by the optionee
within two years from the date the option was granted or within one year from
the date the shares were issued to the optionee pursuant to the exercise of the
option, and (ii) if required by law, to remit to the Company, at the time of and
in the case of any such disposition, an amount sufficient to satisfy the
Company's federal, state and local withholding tax obligations with respect to
such disposition, whether or not, as to both (i) and (ii), the optionee is in
the employ of the Company at the time of such disposition.
(c) Notwithstanding the foregoing, in the case of a Reporting
Person whose options have been granted in accordance with the provisions of
Section 3(b) herein, no election to use shares for the payment of withholding
taxes shall be effective unless made in compliance with any applicable
requirements of Rule 16b-3.
21. Cancellation and New Grant of Options, Etc.
The Board of Directors shall have the authority to effect, at
any time and from time to time, with the consent of the affected optionees, (i)
the cancellation of any or all outstanding options under the Plan and the grant
in substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
22. Effective Date and Duration of the Plan.
(a) Effective Date. The Plan shall become effective when
adopted by the Board of Directors, but no Incentive Stock Option granted under
the Plan shall become exercisable unless and until the Plan shall have been
approved by the Company's stockholders. If such stockholder approval is not
obtained within twelve months after the date of the Board's adoption of the
Plan, no options previously granted under the Plan shall be deemed to be
Incentive Stock Options and no Incentive Stock Options shall be granted
thereafter. Amendments to the Plan not requiring stockholder approval shall
become effective when adopted by the Board of Directors; amendments requiring
shareholder approval (as provided in Section 21) shall become effective when
adopted by the Board of Directors, but no Incentive Stock Option granted after
the date of such amendment shall become exercisable (to the extent that such
amendment to the Plan was required to enable the Company to grant such Incentive
Stock Option to a particular optionee) unless and until such amendment shall
have been approved by the Company's stockholders. If such stockholder approval
is not obtained within twelve months of the Board's adoption of such amendment,
any Incentive Stock Options granted
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on or after the date of such amendment shall terminate to the extent that such
amendment to the Plan was required to enable the Company to grant such option to
a particular optionee. Subject to this limitation, options may be granted under
the Plan at any time after the effective date and before the date fixed for
termination of the Plan.
(b) Termination. Unless sooner terminated in accordance with
Section 16, the Plan shall terminate upon the earlier of (i) the close of
business on the day next preceding the tenth anniversary of the date of its
adoption by the Board of Directors, or (ii) the date on which all shares
available for issuance under the Plan shall have been issued pursuant to the
exercise or cancellation of options granted under the Plan. If the date of
termination is determined under (i) above, then options outstanding on such date
shall continue to have force and effect in accordance with the provisions of the
instruments evidencing such options.
23. Provision for Foreign Participants.
The Board of Directors may, without amending the Plan, modify
awards or options granted to participants who are foreign nationals or employed
outside the United States to recognize differences in laws, rules, regulations
or customs of such foreign jurisdictions with respect to tax, securities,
currency, employee benefit or other matters.
24. Governing Law.
The provisions of this Plan shall be governed and construed in
accordance with the laws of the State of Delaware without regard to the
principles of conflicts of laws.
Adopted by the Board of Directors and the Stockholders on December 10, 1996
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PARADIGM MUSIC ENTERTAINMENT COMPANY, INC.
67 Irving Place, 4th Floor
New York, New York 10003
January 1, 1996
Mr. Thomas McPartland
145 Glenlawn Avenue
Sea Cliff, New York 11579
Dear Tom:
Paradigm Music Entertainment Corporation, Inc., a New York corporation
(hereinafter referred to as "Paradigm"), agrees to employ you and you agree to
accept such employment under the following terms and conditions:
1. Term of Employment.
Except for earlier termination as provided in this Agreement, your employment
under this Agreement shall be for a term of three (3) years commencing on the
date hereof and terminating on December 31, 1998 (hereinafter referred to as the
"Term").
2. Compensation.
(a) You shall be compensated for all services rendered by you under
this Agreement at the rate of Three Hundred Seventy-five Thousand Dollars
($375,000) per annum (your "base salary"), payable in such manner as is
consistent with Paradigm's payroll practices for its most senior executive
employees. Paradigm currently pays its employees on a bi-weekly basis. Prior to
December 31 of each year during your employment with Paradigm, commencing with
December 31, 1997, the Board of Directors shall review your performance, the
earnings of Paradigm during the prior year and Paradigm's economic prospects for
the coming year and shall consider in its good faith business judgment and
discretion whether to increase the base salary payable to you hereunder.
(b) During the Term of your employment hereunder at such time as
determined by the Board following the completion of the audit of Paradigm's
financial statements for the fiscal year of Paradigm ending during such year of
employment, but in no case later than March 31, you shall receive additional
compensation in the form of a cash bonus based upon such performance goals and
objectives as shall be mutually determined, in good faith, by you and the Board.
(c) Notwithstanding subparagraphs 2(a) and (b) hereinabove, you hereby
acknowledge and agree that your base salary shall not be increased during the
first thirteen (13) months of the Term.
(d) In addition to your salary, you shall be entitled to receive bonus
compensation for each of the calendar years, commencing February 1997, during
the Term, which will be based upon the measurement of performance against
reasonable objectives, mutually determined by you and the Board, in accordance
with the Paradigm incentive plan, as same may be amended from time to time.
3. Employment of Executive, Acceptance of Employment; Time and Attention.
(a) Paradigm hereby employs you as President, Chief Executive Officer
and Chairman of the Board of Paradigm to perform such duties and
responsibilities
<PAGE>
incident to such office, subject at all times to the reasonable control and
reasonable direction of the Board of Directors of Paradigm (hereinafter referred
to as the "Board"). You may be elected to such other offices as may, from time
to time, be determined by the mutual agreement of you and the Board.
(b) You hereby accepts such employment and agree that throughout the
period of your employment hereunder, you will devote such time, attention,
knowledge and skills, faithfully, diligently, and to the best of your ability,
in furtherance of the business of Paradigm as is necessary to perform your
duties and responsibilities herein. As Chief Executive Officer, you shall be the
principle Executive Officer of Paradigm and shall in general, manage and control
all of the day-to-day operations of Paradigm. You shall have the responsibility
for and control of the day-to-day operations of the Paradigm, including, but not
limited to, developing and reviewing Paradigm's business plans and its profit
and cash budgets, formulating policies and marketing strategies, setting
inventory levels, selecting product manufacturers evaluating personnel and
subject to the reasonable approval of the Board, the selection of operating
officers and managers of Paradigm. You shall also perform such specific duties
and shall exercise such specific authority related to the management of the
day-to-day operations of Paradigm consistent with your position of Chief
Executive Officer as may be reasonably assigned to you from time to time by the
Board. You shall be President and Chief Executive Officer of Paradigm. Promptly
after the execution hereof you will be appointed a Director of the Corporation.
Notwithstanding the foregoing in this paragraph, you shall not
be precluded from engaging in recreational, eleemosynary, educational and other
activities which do not materially interfere with his duties hereunder.
4. Benefits.
You shall be entitled to four (4) weeks vacation during each year of your
employment with Paradigm you shall be entitled to any other employee benefits
which are provided to senior executives of Paradigm. For example, you will be
eligible to participate in life and medical insurance, 401 (k), stock option and
other similar plans as the Board may have approved or may from time to time
hereafter approve for its senior executive employees and in accordance with the
terms of such plans. The foregoing, however, shall not be construed to require
Paradigm to establish any such plans or to prevent Paradigm from modifying or
terminating any such plans, and no such action or failure thereof shall affect
this Agreement.
5. Expenses.
Paradigm will promptly reimburse you for reasonable expenses, including
traveling expenses, actually incurred by you in connection with the business of
Paradigm upon the presentation by you of appropriate substantiation for such
expenses.
6. Restrictive Covenants.
(a) During such time as you shall be employed by Paradigm (the
"Restricted Period"), you shall not, without the consent of the Board, directly
or indirectly, become associated with, render services to, invest in, represent,
advise or otherwise participate in as an officer, employee, director,
stockholder, partner, promoter, agent of, consultant for or otherwise, any
business which is conducted in any of the jurisdictions in which Paradigm's
business is conducted and which is competitive with the business in which
Paradigm is engaged or plans to be engaged at the time your employment with
Paradigm ceases; provided, however, that nothing contained herein will prevent
you from owning less than five percent (5%) of any class of equity or
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debt securities listed on a national securities exchange or traded in any
established over-the-counter securities market, so long as such involvement with
the issuer of any such securities is solely that of a passive investor.
(b) During the Restricted Period, you shall not employ or otherwise
engage, or offer to employ or otherwise engage, or solicit, entice or induce for
you or any other person, entity or corporation, the services or employment of
any person who is or has been an employee, sales representative, consultant to
or agent of Paradigm at the time of, or at any time during the year prior to,
the termination of your employment with Paradigm.
(c) The parties hereto intend that the covenants contained in this
Section 6 shall be deemed a series of separate covenants for each country,
state, county and city. If, in any judicial proceeding, a court shall refuse to
enforce all the separate covenants deemed included in this Section 6 because,
taken together, they cover too extensive a geographic area the parties intend
that those of such covenants (taken in order of the cities, counties, states and
countries therein which are least populous) which if eliminated would permit the
remaining separate covenants to be enforced in such proceeding shall, for the
purpose of such proceeding, be deemed eliminated from the provisions of this
Section 6.
(d) The provisions of this Section 6 shall survive your employment
hereunder and the termination of this Agreement for any reason whatsoever.
7. Confidentiality, Non-Interference and Proprietary Information.
(a) Confidentiality. In the course of your employment by Paradigm, you
will have access to and possession of valuable and important confidential or
proprietary data or information of Paradigm and its operations. You will not at
any time divulge or communicate to any person nor shall you direct any of
Paradigm's employees to divulge or communicate to any person (other than to a
person bound by confidentiality obligations similar to those contained herein
and other than as necessary in performing your duties hereunder) or use to the
detriment of Paradigm or for the benefit of any other person, any of such
confidential or proprietary data or information or make or remove any copies
thereof, whether or not marked or otherwise identified as confidential or
secret. You shall take all reasonable precautions in handling the confidential
or proprietary data or information, shall limit the use and circulation of the
confidential or proprietary data or information within Paradigm to a strict
need-to-know basis and shall comply with any and all security systems and
measures adopted from time to time by Paradigm to protect the confidentiality of
the confidential or proprietary data or information, however, you may disclose
such information when you are required to do so pursuant to a court or
governmental order.
(b) Confidential or Proprietary Data or Information. The term
"confidential or proprietary data or information" as used in this Agreement
shall mean information not generally available within industry or received from
a non-affiliated third party who is not bound by confidentiality, including,
without limitation, personnel information, financial information, customer
lists, supplier lists, trade secrets, information regarding operations, systems,
services, know how, computer and any other processed or collated data, computer
programs, pricing, marketing and advertising data.
(c) Non-Interference. You agree that, for the period one (1) year after
the termination or expiration of your employment hereunder, you will not at any
time after the termination of your employment with Paradigm, for your own
account or for the account of any other person, unduly interferes with
Paradigm's relationship with any of its suppliers, customers or employees.
However, this sub-paragraph is not intended to prevent you from pursuing the
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professional services of performing artists which are not and have not been
under contract to Paradigm.
(d) Return of Property. All written materials, records and documents
made by you or coming into your possession during your employment concerning any
products, processes or equipment manufactured, used, developed, investigated or
considered by Paradigm or otherwise concerning the business or affairs of
Paradigm shall be the sole property of Paradigm, and upon termination of your
employment, or upon request of Paradigm during your employment, you shall
promptly deliver the same to Paradigm. In addition, upon termination of your
employment, or upon request of Paradigm during your employment, you will deliver
to Paradigm all other property belonging to Paradigm in your possession or under
your control, including, but not limited to, financial statements, marketing and
sales data, customer and supplier lists and other documents, and all Paradigm
credit cards.
(e) Paradigm. For purposes of this Section 7, "Paradigm" shall mean the
Company and any subsidiaries or affiliates of Paradigm.
(f) Survival. The provisions of this Section 7 shall survive your
employment hereunder and the termination of this Agreement for any reason
whatsoever.
8. Equitable Relief.
With respect to the covenants contained in Sections 6 and 7 of this Agreement,
you agree that any remedy at law for any breach or threatened or attempted
breach of such covenants may be inadequate and that Paradigm shall be entitled
to seek specific performance or any other mode of injunctive and/or other
equitable relief to enforce its rights hereunder or any other relief a court
might award.
9. Earlier Termination.
(a) Your employment under this Agreement shall terminate on the
following terms and conditions:
i) Your employment under this Agreement shall terminate
automatically on the date of your death.
ii) Your employment under this Agreement shall terminate
immediately upon a determination in the sole judgment of a third party physician
that you have been unable by reason of physical or mental disability to
adequately perform fully your duties hereunder for an aggregate of 90 calendar
days (whether or not continuous) during any period of 360 consecutive calendar
days.
iii) Your employment under this Agreement shall terminate
immediately upon Paradigm sending you written notice terminating your employment
hereunder for just cause. For purposes of this Agreement, "just cause" shall
include, but not be limited to, (A) action by you involving dishonesty, fraud or
misconduct, (B) your conviction of a felony, or your willful refusal or any
material failure by you to perform your duties in accordance with this
Agreement. A written notice of termination in reasonable detail given to you by
Paradigm shall specify the reason(s) for such termination, and in the case where
a cause for termination shall be susceptible of cure, and such notice of
termination is the first notice of termination given to you for such reason, if
you fail to cure such cause for termination within fifteen (15) business days
after the date of such notice, termination shall be effective upon the
expiration date of such fifteen (15) day period, and if you cure such cause
within said period, such notice of termination shall be ineffective.
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<PAGE>
iv) If your employment is terminated during the Term pursuant
to Paragraph 9(a)(i), (ii) or (iii) herein above, Paradigm will pay you, in lieu
of any other payments hereunder, your base salary, bonus and vacation pay that
has accrued to that date and is payable under Paradigm's standard policies. You
acknowledge that upon receipt of such payment, Paradigm will have no further
obligations to you under this agreement.
(b) If Paradigm terminates this Agreement other than for cause, you
shall have the right to receive, for the unexpired Term, your base salary,
benefits and bonus, plus any base salary that has actually accrued to the date
of termination without regard to mitigation or offset by you.
10. Entire Agreement: Modification.
This Agreement constitutes the full and complete understanding of the parties
hereto and supersedes all prior agreements and understandings, oral or written,
with respect to the subject matter hereof, and as to any such prior agreements
and understandings you hereby acknowledge that you have no outstanding or
contingent rights or claims of any nature. Each party to this Agreement
acknowledges that no representations, inducements, promises or agreements oral
or otherwise, have been made by either party, or anyone acting on behalf of
either party, which are not embodied herein and that no other agreement,
statement or promise not contained in this Agreement shall be valid or binding.
This Agreement may not be modified or amended except by an instrument in writing
signed by the party against which enforcement may be sought.
11. Severability.
Any term or provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction.
12. Waiver of Breach.
The waiver by either party of a breach of any provision of this Agreement, which
waiver must be in writing to be effective, shall not operate as or be construed
as a waiver of any subsequent breach.
13. Notices.
All notices hereunder shall be in writing and shall be sent by express mail or
by certified or registered mail, postage prepaid, return receipt requested, if
to you, to your residence as listed in Paradigm's records; and if to Paradigm,
to Paradigm Music Entertainment Company, 62 Irving Place, 4th floor, New York,
NY 10003 and to Olshan Grundman Frome & Rosenzweig LLP, 505 Park Avenue, New
York, New York 10022, Attention: Barry H. Platnick, Esq.
13. Assignability: Binding Effect.
This Agreement shall not be assignable by you. This Agreement shall be binding
upon and inure to the benefit of you, your legal representatives, heirs and
distributees, and shall be binding upon and inure to the benefit of Paradigm,
its successors and assigns.
14. Third Parties.
Except as specifically set forth or referred to herein, nothing in this
Agreement, expressed or implied, is intended or shall be construed to confer
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<PAGE>
upon or give to any person or corporation other than the parties hereto and
their successors or permitted assigns any rights or remedies under or by reason
of this Agreement.
15. Governing Law.
This Agreement shall be construed and governed in accordance with the laws of
the State of New York, without giving effect to the conflicts or choice of law
provisions thereof.
16. Headings.
The headings in this Agreement are intended solely for convenience of reference
and shall be given no effect in the construction or interpretation of this
Agreement.
17. Review of this Agreement: No Conflicting Agreements.
The parties hereto hereby acknowledge that they have carefully read this
Agreement and each hereby represents and warrants to each other that they are
entering into this Agreement, and the respective obligations and duties
undertaken by them hereunder, will not conflict with, constitute a breach of or
otherwise violate the terms of any employment or other agreement to which they
are a party and that each party is not required to obtain the consent of any
person, firm, corporation or other entity in order to enter into this Agreement.
If this letter correctly sets forth our understanding, please sign the duplicate
original in the space provided below and return it to Paradigm, whereupon this
shall constitute the Employment Agreement between you and Paradigm effective for
the term as stated herein.
PARADIGM MUSIC ENTERTAINMENT
COMPANY, INC.
By:_____________________________
Agreed as of the date
first above written:
__________________________
THOMAS MCPARTLAND
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AGREEMENT made November 21, 1995, between PARADIGM
ENTERTAINMENT Co., a Delaware corporation ("Paradigm"), and LOU FALCIGNO
("Falcigno").
R E C I T A L S
Paradigm desires to retain Falcigno's experience and abilities
in connection with the operation of the business conducted by Paradigm and has
offered to engage Falcigno to render consultative and advisory services to it,
and
Falcigno desires to accept such engagement, upon the terms and
conditions set forth below.
NOW, THEREFORE, it is agreed as follows:
A G R E E M E N T
1. TERM AND DUTIES.
(a) Paradigm hereby engages Falcigno for a period beginning on
November 21, 1995, and ending on November 20, 1998, as a general advisor and
consultant to management on matters pertaining to Paradigm's business. Falcigno
shall devote so much of his time, attention and energies as he shall deem
reasonable required to perform his duties hereunder, subject to his
availability, reasonable vacations compatible with his position and with due
regard to the preservation of his health. It is understood that Falcigno's
duties are to be conducted in the City and State of New York.
(b) Paradigm may only terminate Falcigno's engagement for
Cause (as defined below) by giving written notice of termination to Falcigno as
herein provided, and the date of termination of this Agreement will be the
effective date of such notice. As used herein, "Cause" shall mean only
Falcigno's conviction of a felony under federal or state law.
(c) Falcigno may terminate this Agreement either (i) in the
event of a Change in Control (as hereinafter defined) of Paradigm, or (ii) for
Good Reason (as hereinafter defined) by giving notice of termination to Paradigm
(the "Executive Notice"). The date of termination of this Agreement pursuant to
this Section l(c) shall be the effective date of such Executive Notice.
(d) In the event that this Agreement is terminated by Paradigm
(except in the case of a termination for Cause) or by Falcigno pursuant to
Section 1(c) hereof, Paradigm will pay to Falcigno in a lump sum payment within
15 days of the date of termination an amount equal to the amount of compensation
Falcigno would have received but for such termination for the remainder of the
original term hereof.
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<PAGE>
(e) Falcigno will not be required to mitigate the amount of
any payment provided for in Section l(d) hereof by seeking other engagements or
employment nor will the amount of any payment provided for in Section 1(d) be
reduced by any compensation earned by Falcigno as the result of engagement or
employment by another person or entity after the date of termination.
(f) For purposes of this Agreement, a "Change in Control" of
Paradigm means (i) the sale by Paradigm of all or substantially all of its
assets to a single purchaser or to a group of purchasers in related
transactions; (ii) the merger or consolidation of Paradigm with a third party,
as a result of which Paradigm is not the surviving entity (as defined in Rule
13d-3 under the Securities Exchange Act of 1934); or (iii) securities of
Paradigm representing 33 1/3% or more of the combined voting power of the
Paradigm's outstanding securities are sold or otherwise disposed of (other than
pursuant to a private placement of securities on or before December 1, 1995 or a
public offering of such securities) in one or a related series of transactions
by Paradigm or current holders of such securities to a third person not
affiliated with or controlled by such holder or holders.
(g) For purposes of this Agreement, termination of this
Agreement by Falcigno for "Good Reason" means a termination:
(i) based on the assignment to Falcigno by the Board
of Directors of Paradigm of any duties inconsistent with his positions, duties,
responsibilities and status as an senior management executive with Paradigm; or
(ii) based on failure of Paradigm to pay compensation
or other amounts due hereunder when due following written notice and ten (10)
days to cure such default.
(h) Falcigno is currently employed on a full-time basis as
chief executive officer of Momentum Enterprises and related companies
(collectively, "Momentum") and intends to remain so employed. He may also be
engaged from time to time hereafter by other companies It is acknowledged that
Momentum is involved in the entertainment industry and may have interests in
businesses similar to that of Paradigm. It is understood and agreed that in no
event shall such employment of Falcigno by Momentum or any other company be
deemed a conflict of interest with Falcigno's duties hereunder. It is further
understood and agreed that such employment by Momentum or any other company
shall severely limit the availability of Falcigno to Paradigm, and that such
limited availability shall in no event be deemed a breach or default by him
hereunder.
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<PAGE>
2. DISABILITY WAIVER. Paradigm recognizes that Falcigno's past
experience in the entertainment industry has created unique goodwill to Paradigm
in the operation of its business. Paradigm desires to retain Falcigno's services
and his other agreements herein set forth, even though Falcigno may become
disabled or incapacitated. Accordingly, it is expressly understood that
Falcigno's inability to render services to Paradigm because of absences, or
temporary or permanent illness, disability, or incapacity, or for any other
reasonable cause, shall not constitute a failure to perform his obligations
hereunder and shall not be deemed a breach or default by him.
3. COMPENSATION.
(a) Paradigm shall pay to Falcigno, as full compensation for
any and all services that Falcigno may render to Paradigm, the sum of $12,500
per month, to be paid quarterly or on the first day of each month during the
term of this Agreement starting December 1, 1995 as he shall determine. It is
agreed that the payment due on December 1, 1995, will be $16,666.66 (containing
an adjustment for the term hereof occurring in November, 1995), and that the
last payment hereunder will be likewise adjusted.
(b) Paradigm will reimburse Falcigno for all expenses
reasonably incurred by Falcigno in connection with the performance by Falcigno
of his duties (including business travel, which shall include business class air
transportation, accommodations, and ground transportation for any travel outside
of the City of New York and entertainment expenses), in accordance with
Paradigm's policy with respect thereto as in effect from time to time.
4. DEATH BENEFIT. Should Falcigno die during the term of this
Agreement, this Agreement shall terminate as of the last day of the month of his
death. Paradigm shall, for a period of three months after Falcigno's death, pay
to his legal representatives, or to his surviving widow (provided that Falcigno
has so instructed Paradigm in writing prior to his death) the sum of $12,500, to
be paid on the first day of each month during the three-month period. If
Falcigno dies later than September 1. 1997, however, the $12,500 monthly
payments to his legal representatives or widow, as the case may be, shall be
made only until (and including) November 1, 1998.
5. RESTRICTIVE COVENANT. Falcigno agrees that during the term
of employment, Falcigno shall promptly reveal to Paradigm's Board of Directors
all material matters pertaining to Paradigm's business or interest. Falcigno
shall not accept full-time employment from any other concern which is engaged as
its principal business in a the manufacturing and distribution of recorded
popular music unless he first resigns as a consultant to Paradigm and terminates
this Agreement: provided, however, that the foregoing restriction shall not be
deemed to prohibit Falcigno from (a) continuing in any business in which he is
now involved or in which he held, directly or indirectly, any interest during
the last three years, (b) continuing to work for Momentum, regardless of the
business in which Momentum may be engaged.
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<PAGE>
6. ARBITRATION. Any controversy or claim arising out of or
relating to this Agreement shall be settled by arbitration in accordance with
the rules of the American Arbitration Association. Any judgment upon the award
rendered in such arbitration may be entered in any court of competent
jurisdiction. In the event the Falcigno prevails in any such proceeding,
Paradigm will pay to Falcigno on demand all costs and expenses (including costs
of investigation) incurred by Falcigno in connection therewith (including
reasonable attorneys' fees).
7. WAIVER, MODIFICATION, OR CANCELLATION. Any waiver,
alteration, or modification of any of the-provisions of this Agreement, or its
cancellation or replacement, shall not be valid unless in writing and signed by
the parties.
8. CONSTRUCTION. This Agreement shall be governed by the laws
of the State of New York, without regard to principles of conflict of laws.
9. ASSIGNMENT. This Agreement shall inure to the benefit of
and bind the parties and their respective legal representatives, successors, and
assigns.
10. NOTICES. All notices, requests, demands an other
communications hereunder shall be in writing and shall be deemed duly given when
delivered by hand, or when delivered if mailed by registered or certified mail,
postage prepaid, or sent by private express mail to the respective addresses as
follows:
If to Paradigm, to: Paradigm Music Entertainment Co.
67 Irving Place
4th floor
New York, NY 10003
If to Falcigno, to: Momentum Enterprises
67 Irving Place
4th floor
New York, NY 10003
or to such other addresses as a party hereto shall have designated by like
notice to the other parties hereto.
11. ENTIRE AGREEMENT. This Agreement supersedes all agreements
previously made between the parties relating to its subject matter. There are no
other understandings or agreements.
12. NON-WAIVER. No delay or failure by either party in
exercising any right under this Agreement, and no partial or single exercise of
that right, shall constitute a waiver of that or any other right.
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<PAGE>
13. HEADINGS. Headings in this Agreement are for convenience
only and shall not be used to interpret or construe its provisions.
14. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement the day and year first above written.
PARADIGM MUSIC ENTERTAINMENT CO.
By: ____________________________________
Thomas McPartland, President
____________________________________
Lou Falcigno
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<PAGE>
AGREEMENT made November 21, 1995, between PARADIGM
ENTERTAINMENT Co., a Delaware corporation ("Paradigm"), and ROBERT B.
MEYROWITZ ("Meyrowitz").
R E C I T A L S
Paradigm desires to retain Meyrowitz's experience and
abilities in connection with the operation of the business conducted by Paradigm
and has offered to engage Meyrowitz to render consultative and advisory services
to it, and
Meyrowitz desires to accept such engagement, upon the terms
and conditions set forth below.
NOW, THEREFORE, it is agreed as follows:
A G R E E M E N T
1. TERM AND DUTIES.
(a) Paradigm hereby engages Meyrowitz for a period
beginning on November 21, 1995, and ending on November 20, 1998, as a general
advisor and consultant to management on matters pertaining to Paradigm's
business. Meyrowitz shall devote so much of his time, attention and energies as
he shall deem reasonable required to perform his duties hereunder, subject to
his availability, reasonable vacations compatible with his position and with due
regard to the preservation of his health. It is understood that Meyrowitz's
duties are to be conducted in the City and State of New York. Paradigm shall
give Meyrowitz not less than seven (7) days' prior written notice of any and all
meetings at which Meyrowitz' attendance is requested, and his attendance at any
such meeting will be subject to his availability.
(b) Paradigm may only terminate Meyrowitz's
engagement for Cause (as defined below) by giving written notice of termination
to Meyrowitz as herein provided, and the date of termination of this Agreement
will be the effective date of such notice. As used herein, "Cause" shall mean
only Meyrowitz's conviction of a felony under federal or state law.
(c) Meyrowitz may terminate this Agreement either (i)
in the event of a Change in Control (as hereinafter defined) of Paradigm, or
(ii) for Good Reason (as hereinafter defined) by giving notice of termination to
Paradigm (the "Executive Notice"). The date of termination of this Agreement
pursuant to this Section l(c) shall be the effective date of such Executive
Notice.
(d) In the event that this Agreement is terminated by
Paradigm (except in the case of a termination for Cause) or by Meyrowitz
pursuant to Section 1(c) hereof, Paradigm will pay to Meyrowitz in a lump sum
payment within 15 days of the date of termination an amount equal to the amount
of compensation
<PAGE>
Meyrowitz would have received but for such termination for the remainder of the
original term hereof.
(e) Meyrowitz will not be required to mitigate the
amount of any payment provided for in Section l(d) hereof by seeking other
engagements or employment nor will the amount of any payment provided for in
Section 1(d) be reduced by any compensation earned by Meyrowitz as the result of
engagement or employment by another person or entity after the date of
termination.
(f) For purposes of this Agreement, a "Change in
Control" of Paradigm means (i) the sale by Paradigm of all or substantially all
of its assets to a single purchaser or to a group of purchasers in related
transactions; (ii) the merger or consolidation of Paradigm with a third party,
as a result of which Paradigm is not the surviving entity (as defined in Rule
13d-3 under the Securities Exchange Act of 1934); or (iii) securities of
Paradigm representing 33 1/3% or more of the combined voting power of the
Paradigm's outstanding securities are sold or otherwise disposed of (other than
pursuant to a private placement of securities on or before December 1, 1995 or a
public offering of such securities) in one or a related series of transactions
by Paradigm or current holders of such securities to a third person not
affiliated with or controlled by such holder or holders.
(g) For purposes of this Agreement, termination of
this Agreement by Meyrowitz for "Good Reason" means a termination:
(i) based on the assignment to Meyrowitz by
the Board of Directors of Paradigm of any duties inconsistent with his
positions, duties, responsibilities and status as an senior management executive
with Paradigm; or
(ii) based on failure of Paradigm to pay
compensation or other amounts due hereunder when due following written notice
and ten (10) days to cure such default.
(h) Meyrowitz is currently employed on a full-time
basis as chief executive officer of Semaphore Entertainment Group and related
companies (collectively, "SEG") and intends to remain so employed. He may also
be engaged from time to time hereafter by other companies It is acknowledged
that SEG is involved in the entertainment industry and may have interests in
businesses similar to that of Paradigm. It is understood and agreed that in no
event shall such employment of Meyrowitz by SEG or any other company be deemed a
conflict of interest with Meyrowitz's duties hereunder. It is further understood
and agreed that such employment by SEG or any other company shall severely limit
the availability of Meyrowitz to Paradigm, and that such limited availability
shall in no event be deemed a breach or default by him hereunder.
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<PAGE>
2. DISABILITY WAIVER. Paradigm recognizes that Meyrowitz's
past experience in the entertainment industry has created unique goodwill to
Paradigm in the operation of its business. Paradigm desires to retain
Meyrowitz's services and his other agreements herein set forth, even though
Meyrowitz may become disabled or incapacitated. Accordingly, it is expressly
understood that Meyrowitz's inability to render services to Paradigm because of
absences, or temporary or permanent illness, disability, or incapacity, or for
any other reasonable cause, shall not constitute a failure to perform his
obligations hereunder and shall not be deemed a breach or default by him.
3. COMPENSATION.
(a) Paradigm shall pay to Meyrowitz, as full
compensation for any and all services that Meyrowitz may render to Paradigm, the
sum of $12,500 per month, to be paid quarterly or on the first day of each month
during the term of this Agreement starting December 1, 1995 as he shall
determine. It is agreed that the payment due on December 1, 1995, will be
$16,666.66 (containing an adjustment for the term hereof occurring in November,
1995), and that the last payment hereunder will be likewise adjusted.
(b) Paradigm will reimburse Meyrowitz for all
expenses reasonably incurred by Meyrowitz in connection with the performance by
Meyrowitz of his duties (including business travel, which shall include business
class air transportation, accommodations, and ground transportation for any
travel outside of the City of New York and entertainment expenses), in
accordance with Paradigm's policy with respect thereto as in effect from time to
time.
4. DEATH BENEFIT. Should Meyrowitz die during the term of this
Agreement, this Agreement shall terminate as of the last day of the month of his
death. Paradigm shall, for a period of three months after Meyrowitz's death, pay
to his legal representatives, or to his surviving widow (provided that Meyrowitz
has so instructed Paradigm in writing prior to his death) the sum of $12,500, to
be paid on the first day of each month during the three-month period. If
Meyrowitz dies later than September 1. 1997, however, the $12,500 monthly
payments to his legal representatives or widow, as the case may be, shall be
made only until (and including) November 1, 1998.
5. RESTRICTIVE COVENANT. Meyrowitz agrees that during the term
of employment, Meyrowitz shall promptly reveal to Paradigm's Board of Directors
all material matters pertaining to Paradigm's business or interest. Meyrowtiz
shall not accept full-time employment from any other concern which is engaged as
its principal business in the manufacturing and distribution of recorded popular
music unless he first resigns as a consultant to Paradigm and terminates this
Agreement: provided, however, that the foregoing restriction shall not be deemed
to prohibit Meyrowtiz from (a) continuing in any business in which he is now
involved or in which he held, directly or indirectly, any interest during the
last three years, (b) continuing to work for SEG, regardless of the business in
which SEG may be engaged.
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<PAGE>
6. ARBITRATION. Any controversy or claim arising out of or
relating to this Agreement shall be settled by arbitration in accordance with
the rules of the American Arbitration Association. Any judgment upon the award
rendered in such arbitration may be entered in any court of competent
jurisdiction. In the event the Meyrowitz prevails in any such proceeding,
Paradigm will pay to Meyrowitz on demand all costs and expenses (including costs
of investigation) incurred by Meyrowitz in connection therewith (including
reasonable attorneys' fees).
7. WAIVER, MODIFICATION, OR CANCELLATION. Any waiver,
alteration, or modification of any of the-provisions of this Agreement, or its
cancellation or replacement, shall not be valid unless in writing and signed by
the parties.
8. CONSTRUCTION. This Agreement shall be governed by the laws
of the State of New York, without regard to principles of conflict of laws.
9. ASSIGNMENT. This Agreement shall inure to the benefit of
and bind the parties and their respective legal representatives, successors, and
assigns.
10. NOTICES. All notices, requests, demands an other
communications hereunder shall be in writing and shall be deemed duly given when
delivered by hand, or when delivered if mailed by registered or certified mail,
postage prepaid, or sent by private express mail to the respective addresses as
follows:
If to Paradigm, to: Paradigm Music Entertainment Co.
67 Irving Place
4th floor
New York, NY 10003
If to Meyrowitz, to: Semaphore Entertainment Group
32 East 57th Street,
7th floor
New York, NY 10022
Copy to: David H. Meyrowitz, Esq.
Simon, Meyrowitz, Meyrowitz
and Schlussel
470 Park Avenue South - 12S
New York, New York 10016
or to such other addresses as a party hereto shall have designated by like
notice to the other parties hereto.
11. ENTIRE AGREEMENT. This Agreement supersedes all agreements
previously made between the parties relating to its subject matter. There are no
other understandings or agreements.
4
<PAGE>
12. NON-WAIVER. No delay or failure by either party in
exercising any right under this Agreement, and no partial or single exercise of
that right, shall constitute a waiver of that or any other right.
13. HEADINGS. Headings in this Agreement are for convenience
only and shall not be used to interpret or construe its provisions.
14. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement the day and year first above written.
PARADIGM MUSIC ENTERTAINMENT CO.
By: ____________________________________
Thomas McPartland, President
------------------------------------
Robert B. Meyrowitz
5
<PAGE>
Appendix D
Appendix E
<PAGE>
Exhibit 10.6(a)
================================================================================
STANDARD FORM OF LOFT LEASE
The Real Estate Board of New York, Inc.
================================================================================
Agreement of Lease, made as of this 1st day of December 1995, between PUBLE
N.V., having an address at 67 Irving Place, NEW YORK, NEW YORK 10003 party of
the first part, hereinafter referred to as OWNER and PARADIGM MUSIC
ENTERTAINMENT COMPANY, A DELAWARE CORPORATION having an address at 145 Glenlawn
Avenue, Sea Cliff, New York 11579
party of the second part, hereinafter referred to as TENANT,
Witnesseth: Owner hereby lease to Tenant and Tenant hereby hires from Owner the
entire Fourth (4) floor as shown on the floor plan set forth in Exhibit "A"
attached hereto and made a part hereof.
in the building known as 67 Irving Place
in the borough of MANHATTAN, City of New York, for the term of
Five (5) years
(or until such term shall sooner cease and expire as hereinafter provided) to
commence on the 1st day of December nineteen hundred and ninety-five, and to end
on the 30th day of November two thousand and both dates inclusive, at an annual
rental rate of as set forth in Article 74 of the Riders attached hereto and made
a part hereof, together with all other sums of money as shall become due and
payable by Tenant to Landlord
which Tenant agrees to pay in lawful money of the United States which shall be
legal tender in payment of all debts and dues, public and private, at the time
of payment, in equal monthly installments in advance on the first day of each
month during said term, at the office of Owner or such other place as Owner may
designate, without any set off or deduction whatsoever, except that Tenant shall
pay the first monthly installment(s) on the execution hereof (unless this lease
be a renewal).
In the event that, at the commencement of the term of this lease, or
thereafter. Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment of rent payable hereunder and
the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby covenant
as follows:
<PAGE>
Rent:
1. Tenant shall pay the rent as above and as hereinafter provided.
Occupancy:
2. Tenant shall use and occupy demised premises for Executive and General
offices for Tenant's Business
provided such use is in accordance with the certificate of occupancy for the
building, if any, and for no other purpose.
Alterations: STRUCTURAL
3. Tenant shall make no changes in or to the demised premises of any nature
without Owner's prior written consent. Subject to the prior written consent of
Owner, and to the provisions of this article, Tenant, at Tenant's expense may
make alterations, installations, additions or improvements which are
nonstructural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises using
contractors or mechanics first approved in each instance by Owner. Tenant shall,
at its expense, before making any alteration, additions, installations or
improvements obtain all permits, approval and certificates required by any
governmental or quasi-governmental bodies and (upon completion) certificates of
final approval thereof and shall deliver promptly duplicates of all such
permits, approvals and certificates to Owner. Tenant agrees to carry and will
cause Tenant's contractors and subcontractors to carry such workman's
compensation, general liability, personal and property damage insurance as Owner
may require. If any mechanic's lien is filed against the demised premises, or
the building of which the same forms a part, for work claimed to have been done
for, or materials furnished to, tenant, whether or not done pursuant to this
article, the same shall be discharged by Tenant within thirty days thereafter,
at Tenant's expense, by payment of filing the bond required by law or otherwise.
All fixtures and all paneling, partitions, railings and like installations,
installed in the premises at any time, either by Tenant or by Owner on Tenant's
behalf, shall upon installation, become the property of Owner and shall remain
upon and be surrendered with the demised premises unless Owner, by notice to
Tenant no later than twenty days prior to the date fixes as the termination of
this lease, elects to relinquish Owner's right thereto and to have them removed
by Tenant, in which event the same shall be removed from the demised premises by
Tenant prior to the expiration of the lease, at Tenant's expense. Nothing in
this Article shall be construed to give Owner title to or to prevent Tenant's
removal of trade fixtures, moveable office furniture and equipment, but upon
removal of any such from the premises or upon removal of other installations as
may be required by Owner, Tenant shall immediately and at its expense, repair
and restore the premises to the condition existing prior to installation and
repair any damage to the demised premises or the building due to such removal.
All property permitted or required to be removed by Tenant at the end of the
term remaining in the premises after Tenant's removal shall be deemed abandoned
and may, at the election of Owner, either be retained as Owner's property or
removed from the premises by Owner, at Tenant's expense.
<PAGE>
Repairs:
4. Owner shall maintain and repair the exterior of and the public portions
of the building. Tenant shall, throughout the term of this lease, take good care
of the demised premises including the bathrooms and lavatory facilities (if the
demised premises encompass the entire floor of the building) and the windows and
window frames and, the fixtures and appurtenances therein and at Tenant's sole
cost and expenses promptly make all repairs thereto and to the building, whether
structural or non-structural in nature, caused by or resulting from the
carelessness, omission, neglect or improper conduct of Tenant, Tenant's
servants, employees, invitees, or licensees, and whether or not arising from
such tenant conduct or omission, when required by other provisions of this
lease, including Article 6. Tenant shall also repair all damage to the building
and the demises premises caused by the moving of Tenant's fixtures, furniture or
equipment. All the aforesaid repairs shall be of quality or class equal to the
original work or construction. If Tenant fails, after ten days notice, to
proceed with due diligence to make repairs required to be made by tenant, the
same may be made by the Owner at the expense of Tenant, and the expenses thereof
incurred by Owner shall be collectible, as additional rent, after rendition of a
bill or statement therefor. If the demised premises be or become infested with
vermin, Tenant shall, at its expense, cause the same to be exterminated. Tenant
shall give Owner prompt notice of any defective condition in any plumbing,
heating system or electrical lines located in the demises premises and following
such notice, Owner shall remedy the condition with due diligence, but at the
expense of Tenant, if repairs are necessitated by damage or injury attributable
to Tenant, Tenant's servants, agents, employees, invitees or licensees as
aforesaid. Except as specifically provided in Article 9 or elsewhere in this
lease, there shall be no allowance to the Tenant for a diminution of rental
value and no liability on the part of Owner by reason of inconvenience,
annoyance or injury to business arising from Owner, Tenant or others making or
failing to make any repairs, alterations, additions or improvements in or to any
portion of the building or the demised premises or in and to the fixtures,
appurtenances or equipment thereof. It is specifically agreed that Tenant shall
not be entitled to any set off or reduction of rent by reason of any failure of
Owner to comply with the covenants of this or any other article of this lease.
Tenant agrees that Tenant's sole remedy at law in such instance will be by way
of any action for damages for breach of contract. The provisions of this Article
4 with respect to the making of repairs shall not apply in the case of fire or
other casualty with regard to which Article 9 hereof shall apply.
Window Cleaning:
5. Tenant will not clean nor require, permit, suffer or allow any window in
the demised premises to be cleaned from the outside in violation of Section 202
of the New York State Labor Law or any other applicable law or of the Rules of
the Board of Standards and Appeals, or of any other Board or body having or
asserting jurisdiction.
Requirements of Law, Fire Insurance:
6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter Tenant shall, at Tenant's sole cost and
expense, promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, or the Insurance Services Office, or any similar body which shall
impose any violation, order or duty upon Owner or Tenant with respect to the
demised premises, whether or not arising out of Tenant's use or manner of use
thereof, or, with respect to the building, if arising out of Tenant's use or
manner of use of the demised premises of the building (including the use
permitted under the lease). Except as provided in Article 30 hereof, nothing
herein shall require Tenant to make structural repairs or alterations unless
Tenant has, by its manner of use of the demised premises or method of operation
therein, violated any such laws, ordinances, orders, rules, regulations or
requirements with respect thereto. Tenant shall not do or
<PAGE>
the demised premises the usual notices "To Let" and "For Sale" which notices
Tenant shall permit to remain thereon without molestation. If Tenant is not
present to open and permit an entry into the demised premises, Owner of Owner's
agents may enter the same whenever such entry may be necessary or permissible by
master key or forcibly and provided reasonable care is exercised to safeguard
Tenant's property, such entry shall not render Owner or its agents liable
therefor, nor in any event shall the obligations of Tenant hereunder be
affected. If during the last month of the term Tenant shall have removed all or
substantially all of Tenant's property therefrom. Owner may immediately enter,
alter, renovate or redecorate the demised premises without limitation or
abatement of rent, or incurring liability to Tenant for any compensation and
such act shall have no effect on this lease or Tenant's obligation hereunder.
Rider to Article 6:
Without limiting the general of this article 6, Landlord agrees that it
will be responsible for causing the public areas of the building to comply with
state, local and federal laws and orders.
Vault, Vault Space, Area:
14. No Vaults, vault space or area, whether or not enclosed or covered, not
within the property line of the building is leased hereunder anything contained
in or indicated on any sketch, blue print or plan, or anything contained
elsewhere in this lease to the contrary notwithstanding. Owner makes no
representation as to the location of the property line of the building. All
vaults and vault space and all such areas not within the property line of the
building, which Tenant may be permitted to use and/or occupy, is to be used
and/or occupied under a revocable license, and if any such license be revoked,
or if the amount of such space or area be diminished or required by any federal,
state or municipal authority or public utility, Owner shall not be subject to
any liability nor shall Tenant be entitled to any compensation or diminution or
abatement of rent, nor shall such revocation, diminution or requisition be
deemed constructive or actual eviction. Any tax, fee or charge of municipal
authorities for such vault or area shall be paid by Tenant, if used by Tenant,
whether or not specifically leased hereunder.
Occupancy:
15. Tenant will not at any time use or occupy the demised premises in
violation of the certificate of occupancy issued for the building of which the
demised premises are a part. Tenant has inspected the premises and accepts them
as is, subject to the riders annexed hereto with respect to Owner's work, if
any. In any event, Owner makes no representation as to the condition of the
premises and Tenant agrees to accept the same subject to violations, whether or
not of record. If any governmental license or permit shall be required for the
proper and lawful conduct of Tenant's business, Tenant shall be responsible for
and shall procure and maintain such license or permit. A copy of C of O is
attached as Exhibit "B"
<PAGE>
Bankruptcy:
16. (a) Anything elsewhere in this lease to the contrary notwithstanding,
this lease may be cancelled by Owners by sending of a written notice to Tenant
within a reasonable time after the happening of any one or more of the following
events: (1) the commencement of a case in bankruptcy or under the laws of any
state naming Tenant as the debtor; or (2) the making by Tenant of an assignment
or any other arrangement for the benefit of creditors under any state statute.
Neither Tenant nor any person claiming through or under Tenant, or by reason of
any statute or order of court, shall thereafter be entitled to possession of the
premises demised but shall forthwith quit and surrender the premises. If this
lease shall be assigned in accordance with its terms, the provisions of this
Article 16 shall be applicable only to the party then owning Tenant's interest
in this lease.
(b) It is stipulated and agreed that in the event of the termination of
this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any
other provisions of this lease to the contrary, be entitled to recover from
Tenant as and for liquidated damages an amount equal to the difference between
the rental reserved hereunder for the unexpired portion of the term demised and
the fair and reasonable rental value of the demised premises for the same
period. In the computation of such damages the difference between any
installment of rent becoming due hereunder after the date of termination and the
fair and reasonable rental value of the demised premises for the period for
which such installment was payable shall be discounted to the date of
termination at the rate of four percent (4%) per annum. If such premises or any
part thereof be relet by the Owner for the unexpired term of said lease, or any
part thereof, before presentation of proof of such liquidated damages to any
court, commission or tribunal, the amount of rent reserved upon such reletting
shall be deemed to be the fair and reasonable rental value for the part or the
whole of the premises so re-let during the term of the re-letting. Nothing
herein contained shall limit or prejudice the right of the Owner to prove for
and obtain as liquidated damages by reason of such termination, an amount equal
to the maximum allowed by any statute or rule or law in effect at the time when,
and governing the proceedings in which, such damages are to be proved, whether
or not such amount be greater, equal to, or less than the amount of the
difference referred to above.
Default:
17. (1) If Tenant defaults in fulfilling any of the covenants of this lease
other than the covenants for the payment of rent or additional rent; or if the
demised premises becomes vacant or deserted "or if this lease be rejected under
ss.235 of Title 11 of the U.S. Code (bankruptcy code);" or if any execution or
attachment shall be issued against Tenant or any of Tenant's property whereupon
the demised premises shall be taken or occupied by someone other than Tenant; or
if Tenant shall make default with respect to any other lease between Owner and
Tenant; or if Tenant shall have failed, after five (5) days written notice, to
redeposit with Owner any portion of the security deposited hereunder which Owner
has applied to the payment of any rent and additional rent and additional rent
due and payable hereunder or failed to move into or take possession of the
premises within thirty (30) days after the commencement of the term of this
lease, of which fact Owner shall be the sole judge; then in any other or more of
such events, upon Owner serving a written fifteen (15) days notice upon Tenant
specifying the nature of said default and upon the expiration of said fifteen
(15) days, if Tenant shall have failed to comply with or remedy such default, or
if the said default or omission complained of shall be of a nature that the same
cannot be completely cured or remedied within said fifteen (15) day period, and
if Tenant shall not have diligently commenced during such default, then Owner
may serve a written five (5) days' notice of cancellation of this lease upon
Tenant, and upon the expiration of said five (5) days this lease and the term
thereunder shall end and expire as fully and completely as if the expiration of
such five (5) day period were the day herein definitely fixed for the end and
expiration of this lease and the term hereof and Tenant shall then quit and
surrender the demised premises to Owner but Tenant shall remain liable as
hereinafter provided.
(2) If the notice provided for in (1) hereof shall have been given, and the
term shall expire as aforesaid; or if Tenant shall make default in the payment
of the rent reserved herein or any item of additional rent herein mentioned or
any part of either or in making any other payment herein required; then and in
any of such events Owner may without notice, re-enter the demised premises
either by force or otherwise, and dispossess Tenant by summary proceedings or
otherwise, and the legal representative of Tenant or other occupant of demised
premises and remove their effects and hold the premises as if this lease had not
been made, and Tenant hereby waives the service of notice of intention to
re-enter or to institute legal proceedings to that end. If Tenant shall make
default hereunder prior to the date fixed as the commencement of any renewal or
extension of this lease, Owner may cancel and terminate such renewal or
extension agreement by written notice.
<PAGE>
Remedies of Owner and Waiver of Redemption:
18. In case of any such default, re-entry, expiration and/or dispossess by
summary proceedings or otherwise, (a) the rent, and additional rent, shall
become due thereupon and be paid up to the time of such re-entry, dispossess
and/or expiration, (b) Owner may re-let the premises or any part or parts
thereof, either in the name of Owner or otherwise, for a term or terms, which
may at Owner's option be less than or exceed the period which would otherwise
have constituted the balance of the term of this lease and may grant concessions
or free rent or charge a higher rental than that in this lease, (c) Tenant or
the legal representatives of Tenant shall also pay Owner as liquidated damages
for the failure of Tenant to observe and perform said Tenant's covenants herein
contained, any deficiency between the rent hereby reserved and or covenanted to
be paid and the net amount, if any, of the rents collected on account of the
subsequent lease or leases of the demised premises for each month of the period
which would otherwise have constituted the balance of the term of this lease.
The failure of Owner to re-let the premises or any part or parts therefor shall
not release or affect Tenant's liability for damages. In computing such
liquidated damages there shall be added to the said deficiency such expenses as
Owner may incur in connection with re-letting, such as legal expenses,
reasonable attorney's fees, brokerage, advertising and for keeping the demised
premises in good order or for preparing the same for reletting. Any such
liquidated damages shall be paid in monthly installment by Tenant on the rent
day specified in this lease and any suit brought to collect the amount of the
deficiency for any month shall not prejudice in any way the rights of Owner to
collect the deficiency for any subsequent month by a similar proceeding. Owner,
in putting the demised premises in good order or preparing the same for
re-rental may, at Owner's option, make such alterations, repairs, replacements,
and/or decorations in the demised premises as Owner, in Owner's sole judgment,
considers advisable and necessary for the purpose of re-letting the demised
premises, and the making of such alterations, repairs, replacements, and/or
decorations shall not operate or be construed to release Tenant from liability
hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever
for failure to re-let the demised premises or in the event that the demised
premises are re-let, for failure to collect the rent thereof under such
re-letting, and in no event shall Tenant be entitled to received any excess, if
any, of such net rents collected over the sums payable by Tenant to Owner
hereunder. In the event of a breach or threatened breach by Tenant of any of the
covenants or provisions hereof, Owner shall have the right of injunction and the
right to invoke any remedy allowed at law or in equity as if re-entry, summary
proceedings and other remedies were not herein provided for. Mention in this
lease of any particular remedy, shall not preclude Owner from any other remedy,
in law or in equity. Tenant hereby expressly waives any and all rights or
redemption granted by or under any present or future laws.
Fees and Expenses:
19. If Tenant shall default in the observance or performance of any term or
covenant on Tenant's part to be observed or performed under or by virtue of any
of the terms or provisions in any article of this lease, after notice if
required and upon expiration of any applicable grace period if any, (except in
an emergency), then, unless otherwise provided elsewhere in this lease, Owner
may immediately or at any time thereunder and without notice perform the
obligations of Tenant thereunder. If Owner, in connection with the foregoing or
in connection with any default by Tenant in the covenant to pay rent hereunder,
makes any expenditures or incurs any obligations for the payment of money,
including but not limited to reasonable attorney's fees, in instituting,
prosecuting or defending any action or proceedings, and prevails in any such
action or proceeding, then Tenant will reimburse Owner for such sums so paid or
obligations incurred with interest and costs. The foregoing expenses incurred by
reason of Tenant's default shall be deemed to be additional rent hereunder and
shall be paid by Tenant to Owner within ten (10) days of rendition of any bill
or statement to Tenant therefor. If Tenant's lease term shall have expired at
the time of making of such expenditures or incurring of such obligations, such
sums shall be recoverable by Owner as damages.
Building Alterations and Management:
20. Owner shall have the right at any time without the same constituting an
eviction and without incurring liability to Tenant therefor to change the
arrangement and or location of public entrances, passageways, doors, doorways,
corridors, elevators, stairs, toilets or other public parts of the building and
to change the name, number or designation by which the building may be known.
There shall be no allowance to Tenant for diminution of rental value and no
liability on the part of Owner by reason of inconvenience, annoyance or injury
to business arising from Owner or other Tenant making any repairs in the
building or any such alterations, additions and improvements. Furthermore,
Tenant shall not have any claim against Owner by reason of Owner's imposition of
any controls of the manner of access to the building by Tenant's social or
business visitors as the Owner may deem necessary for the security of the
building and its occupants.
<PAGE>
No Representations by Owner:
21. Neither Owner nor Owner's agents have made any representations or
promises with respect to the physical condition of the building, the land, upon
which it is erected or the demised premises, the rents. Leases, expenses of
operation or any other matter or thing affecting or related to the demised
premises or the building except as herein expressly set forth and no rights,
easements or licenses are acquired by Tenant by implication or otherwise except
as expressly set forth in the provisions of this lease. Tenant has inspected the
building and the demised premises and is thoroughly acquainted with their
condition and agrees to take the same "as is" on the date possession is tendered
and acknowledges that the taking of possession of the demised premises by Tenant
shall be conclusive evidence that the said premises and the building of which
the same form a part were in good and satisfactory condition at the time such
possession was so taken, except as to latent defects. All understandings and
agreements heretofore made between the parties hereto are merged in this
contract, which alone fully and completely expresses the agreement between Owner
and Tenant and any executory agreement hereafter made shall be ineffective to
change, modify, discharge or effect an abandonment of it in whole or in part,
unless such executory agreement is in writing and signed by the party against
whom enforcement of the change, modification, discharge or abandonment is
sought.
End of Term:
22. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean, in
good order and condition, ordinary wear and damages which Tenant is not required
to repair as provided elsewhere in this lease excepted, and Tenant shall remove
all its property from the demised premises. Tenant's obligation to observe or
perform this covenant shall survive the expiration or other termination of this
lease. If the last day of the term of this Lease or any renewal thereof, falls
on Sunday, this lease shall expire at noon on the preceding Saturday unless it
be a legal holiday in which case it shall expire at noon on the preceding
business day.
Quiet Enjoyment:
23. Owner covenants and agrees with Tenant that upon Tenant paying the rent
and additional rent and observing and performing all the terms, covenants and
conditions, on Tenant's part to be observed and performed, Tenant may peaceably
and quietly enjoy the premises hereby demised, subject, nevertheless, to the
terms and conditions of this lease including, but not limited to, Article 34
hereof and to the ground leases, underlying leases and mortgages hereinbefore
mentioned.
Failure to Give Possession:
24. If Owner is unable to give possession of the demised premises on the
date of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or if Owner has not completed any work required to be performed by
Owner, or for any other reason, Owner shall not be subject to any liability for
failure to give possession on said date and the validity of the lease shall not
be impaired under such circumstance, nor shall the same be construed in any wise
to extend the term of this lease, but the rent payable hereunder shall be abated
(provided Tenant is not responsible for Owner's inability to obtain possession
or complete any work required) until after Owner shall have given Tenant notice
that Owner is able to deliver possession in the condition required by this
lease. If permission is given to Tenant to enter into the possession of the
demised premises or to occupy premises other than the demised premises prior to
the date specified as the commencement of the term of this lease, Tenant
covenants and agrees that such possession and/or occupancy shall be deemed to be
under all the terms, covenants, conditions and provisions of this lease, except
the obligation to pay the fixed annual rent set forth in page one of this lease.
The provisions of this article are intended to constitute "an express provision
to the contrary" within the meaning of Section 223-a of the New York Real
Property Law.
<PAGE>
No Waiver:
25. The failure of Owner to seek redress for violation of, or to insist
upon the strict performance of any covenant or condition of this lease or of any
of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not
prevent a subsequent act which would have originally constituted a violation
from having all the force and effect of an original violation. The receipt by
Owner of rent with knowledge of the breach of any covenant of this lease shall
not be deemed a waiver of such breach and no provision of this lease shall be
deemed to have been waived by Owner unless such waiver be in writing signed by
Owner. No payment by Tenant or receipt by Owner of a lesser amount than the
monthly rent herein stipulated shall be deemed to be other than on account of
the earliest stipulated rent, nor shall any endorsement or statement of any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Owner may accept such check or payment without
prejudice to Owner's right to recover the balance of such rent or pursue any
other remedy in this lease provided. All checks tendered to Owner as and for the
rent of the demised premises shall be deemed payments for the account of Tenant.
Acceptance by Owner of rent from anyone other than Tenant shall not be deemed to
operate as an attornment to Owner by the payor of such rent or as a consent by
Owner to an assignment or subletting by Tenant of the demised premises to such
payor, or as a modification of the provision of this lease. No act or thing done
by Owner or Owner's agents during the term hereby demised shall be deemed an
acceptance of a surrender of said premises and not agreement to accept such
surrender shall be valid unless in writing signed by Owner. No employee of Owner
or Owner's agent shall have any power to accept the keys of said premises prior
to the termination of the lease and the delivery of keys to any such agent or
employee shall not operate as a termination of the lease or a surrender of the
premises.
Waiver of Trial by Jury:
26. It is mutually agreed by and between Owner and Tenant that he
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other (except for personal injury or property damage) on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said premises,
and any emergency statutory or any other statutory remedy. It is further
mutually agreed that in the event Owner commences any proceeding or action for
possession including a summary proceeding for possession of the premises, Tenant
will not interpose any counterclaim of whatever nature or description in any
such proceeding including a counterclaim under Article 4 except for statutory
mandatory counterclaims.
Inability to Perform:
27. This Lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in no wise be affected, impaired or excused because Owner is
unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment,
fixtures or other materials if Owner is prevented or delayed from doing so by
reason of strike or labor troubles or any cause whatsoever beyond Owner's sole
control including, but not limited to, government preemption or restrictions or
by reason of any rule, order or regulation of any department or subdivision
thereof of any government agency or by reason of the conditions which have been
or are affected, either directly or indirectly, by war or other emergency.
Bills and Notices:
28. Except as otherwise in this lease provided, a bill statement, notice or
communication which Owner may desire or be required to give to Tenant, shall be
deemed sufficiently given or rendered if, in wiring, delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
building of which the demised premises form a part or at the last known
residence address or business address of Tenant or left at any of the aforesaid
premises addressed to Tenant, and the time of the rendition of such bill or
statement and of the giving of such notice or communication shall be deemed to
be the time when the same is delivered to Tenant, mailed, or left at the
premises as herein provided. Any notice by Tenant to Owner must be served by
registered or certified mail addressed to Owner at the address first hereinabove
given or at such other address as Owner shall designate by written notice.
<PAGE>
Water Charges:
29. If the Tenant requires, uses or consumes water for any purpose in
addition to ordinary lavatory purposes (of which fact Tenant constitutes Owner
to be the sole judge) Owner may install a water meter and thereby measure
Tenant's water consumption for all purposes. Tenant shall pay Owner for the cost
of the meter and the cost of the installation, thereof and throughout the
duration of Tenant's occupancy Tenant shall keep said meter and installation
equipment in good working order and repair at Tenant's own cost and expense in
default of which Owner may cause such meter and equipment to be replaced or
repaired and collect the cost thereof from tenant, as additional rent. Tenant
agrees to pay for water consumed, as shown on said meter as and when bills are
rendered, and on default in making such payment Owner may pay such charges and
collect the same from Tenant, as additional rent. Tenant covenants and agrees to
pay, as additional rent, the sewer rent, charge or any other tax, rent, levy or
charge which now or hereafter is assessed, imposed or a lien upon the demised
premises or the realty of which they are part pursuant to law, order or
regulation made or issued in connection with the use, consumption, maintenance
or supply of water, water system or sewage or sewage connection or system. If
the building or the demised premise or any part thereof is supplied with water
through a meter through which water is also supplied to other premises Tenant
shall pay to Owner, as additional rent, on the first day of each month. 9.54% ($
10.00)of the total meter charges as Tenant's portion. Independently of and in
addition to any of the remedies reserved to Owner hereinabove or elsewhere in
this lease, Owner may sue for and collect any monies to be paid by Tenant or
paid by Owner of any of the reasons or purposes hereinabove set forth.
Sprinklers:
30. Anything elsewhere in this lease to the contrary notwithstanding, if
the New York Board of Fire Underwriters or the New York Fire Insurance Exchange
or any bureau, department or official of the federal, state or city government
recommend or require the installation of a sprinkler system or that any changes,
modifications, alterations, or additional sprinkler heads or other equipment be
made or supplied in an existing sprinkler system by reason of Tenant's business,
or the location of partitions, trade fixtures, or other contents of the demised
premises, or for any other reason, or if any such sprinkler system
installations, modifications alterations, additional sprinkler heads or other
such equipment, become necessary to prevent the imposition of a penalty or
charge against the full allowance for a sprinkler system in the fire insurance
rate set by any said Exchange or by any fire insurance company, Tenant shall, at
Tenant's expense, promptly make such sprinkler system installations, changes,
modifications, alterations, and supply additional sprinkler heads or other
equipment as required whether the work involved shall be structural or
non-structural in nature. Tenant shall pay to Owner as additional rent the sum
of $ 10.00, on the first day of each month during the term of this lease, as
Tenant's portion of the contract price for sprinkler supervisory service.
Elevators, Heat, Cleaning:
31. As long as Tenant is not in monetary default under any of the covenants
of this lease beyond the applicable grace period provided in this lease for the
curing of such defaults, Owner shall: (a) provide necessary passenger elevator
facilities on business days from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m.
to 1 p.m.; (b) if freight elevator service is provided, same shall be provided
only on regular business days Monday through Friday inclusive, and on those days
only between the hours of 9 a.m. and 12 noon and between 1 p.m. and 5 p.m.; (c)
furnish heat, water and other services supplied by Owner to the demised
premises, when and as required by law, on business days from 8 a.m. to 6 p.m.
and on Saturdays from 8
- - - - -------------------------------------------
[GRAPHIC] Space to be filled in or deleted.
<PAGE>
a.m to 1 p.m.; (d) clean the public halls and public portions of the building
which are used in common by all tenants. Tenant shall, at Tenant's expense, keep
the demised premises, including the windows clean and in order, to the
reasonable satisfaction of Owner, and for that purpose shall employ persons or
persons, or corporation approved by Owner. Tenant shall pay to Owner the cost of
removal of any of Tenant's refuse and rubbish from the building. Bills for the
same shall be rendered by Owner to Tenant at such time as Owner may elect and
shall be due an payable hereunder, and the amount of such bills shall be deemed
to be, and be paid as, additional rent. Tenant shall, however, have the option
of independently contracting for the removal of such rubbish and refuse in the
event that Tenant does not wish to have same done by employees of Owner. Under
such circumstances, however, the removal of such refuse and rubbish by others
shall be subject to such rules and regulations as, in the judgment of Owner, are
necessary for the proper operation of the building. Owner reserves the right to
stop service of the heating, elevator, plumbing and electric systems, when
necessary, by reason of accident, or emergency, or for repairs, alterations,
replacements or improvements, in the judgment of Owner desirable or necessary to
be made, until said repairs, alterations, replacements or improvements shall
have been completed. If the building of which the demised premises are a part
supplies manually operated elevator service, Owner may proceed diligently with
alterations necessary to substitute automatic control elevator service without
in any way affecting the obligations of Tenant hereunder.
Security:
32. Tenant has deposited with Owner the sum of $* as security for the
faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provision and conditions of this lease, including,
but not limited to, the payment of rent and additional rent, Owner may use,
apply or retain the whole or any part of the security so deposited to the extent
required for the payment of any rent and additional rent or any other sum as to
which Tenant is in default or for any sum which Owner may expend or may be
required to expend by reason of Tenant's default in respect of any of the terms,
covenants and conditions of this lease, including but not limited to, any
damages or deficiency in the reletting of the premises, whether such damages or
deficiency accrued before or after summary proceedings or other re-entry by
Owner. In the event that Tenant shall fully and faithfully comply with all of
the terms, provision, covenants and conditions of this lease, the security shall
be returned to Tenant after the date fixed as the end of the Lease and after
delivery of entire possession of the demised premises to Owner. In the event of
a sale of the land and building or leasing of the building, of which the demised
premises form a part, Owner shall have the right to transfer the security to the
vendee or lessee and Owner shall thereupon be released by Tenant from all
liability for the return of such security; and Tenant agrees to look to the new
Owner solely for the return of said security, and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
security to a new Owner. Tenant further covenants that it will not assign or
encumber or attempt assign or encumber the monies deposited herein as security
and that neither Owner nor its successors or assigns shall be bound by any such
assignment, encumbrance, attempted assignment or attempted encumbrance.
* See Article 59 of Riders
Captions:
33. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provision thereof.
<PAGE>
Definitions:
34. The term "Owner" as used in this lease means only the owner of the fee
or of the leasehold of the building, or the mortgagee in possession, for the
time being of the land and building (or the owner of a lease of the building or
of the land and building) of which the demised premises form a part, so that in
the event of any sale or sales or said land and building or of said lease, or in
the event of a lease of said building, or of the land and building, the said
Owner shall be and hereby is entirely freed and relieved of all covenants and
obligations of Owner hereunder, and it shall be deemed and construed without
further agreement between the parties or their successors in interest, or
between the parties and the purchaser, at any such sale, or the said lessee of
the building, or of the land and building, that the purchaser or the lessee of
the building has assumed and agreed to carry out any and all covenants and
obligations of Owner hereunder. The words "re-enter" and "re-entry" as used in
this lease are not restricted to their technical legal meaning. The term "rent"
includes the annual rental rate whether so expressed or expressed in monthly
installments, and "additional rent." "Additional rent" means all sums which
shall be due to Owner from Tenant under this lease, in addition to the annual
rental rate. The term "business days" as used in this lease, shall exclude
Saturdays, Sundays and all days observed by the State or Federal Government as
legal holidays and those designated as holidays by the applicable building
service union employees service contract or by the applicable Operating
Engineers contract with respect to HVAC service. Whenever it expressly provided
in this lease that consent shall not be unreasonably delayed.
Adjacent Excavation-Shoring:
35. If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such excavation, license to enter upon the
demised premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the building of which demised premises form a
part from injury or damage and to support the same by proper foundations without
any claim for damages or indemnity against Owner, or diminution or abatement of
rent.
Rules and Regulations:
36. Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe faithfully, and comply strictly with, the Rules and
Regulations annexed hereto and such other and further reasonable Rules and
Regulations as Owner or Owner's agents may from time to time adopt. Notice of
any additional rules or regulations shall be given in such manner as Owner may
elect. In case tenant disputes the reasonableness of any additional Rule or
Regulation hereafter made or adopted by Owner or Owner's agents, the parties
hereto agree to submit the question of the reasonableness of such Rule or
Regulation for decision to the New York office of the American Arbitration
Association, whose determination shall be final and conclusive upon the parties
hereto. The right to dispute the reasonableness of any additional Rule or
Regulation upon tenant's part shall be deemed waived unless the same shall be
asserted by service of a notice, in writing upon Owner within fifteen (15) days
after the giving of notice thereof. Nothing in this lease contained shall be
construed to impose upon Owner any duty or obligation to enforce the Rules and
Regulations or terms, covenants or conditions in any other lease, as against any
other tenant and Owner shall not be liable to Tenant for violation of the same
by any other tenant, its servants, employees, agents, visitors or licensees.
Glass:
37. Owner shall replace, at he expense of the Tenant, any and all plate and
other glass damaged or broken as a result of Tenant's actions in and about the
demised premises.
Estoppel Certificate:
38. Tenant, at any time, and from time to time, upon at least 10 days'
prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or
to any other person, firm or corporation specified by Owner, a statement
certifying that this Lease is unmodified in full force and effect (or, if there
have been modifications, that the same is in full force and effect as modified
and stating the modifications), stating the dates to which the rent and
additional rent have been paid, and stating whether or not there exists any
default by Owner under this Lease, and, if so, specifying each such default.
<PAGE>
Directory Board Listing:
39. If, at the request of and as accommodation to Tenant, Owner shall place
upon the directory board in the lobby of the building, one or more names of
persons other than Tenant, such directory board listing shall not be construed
as the consent by Owner to an assignment or subletting by Tenant to such person
or persons.
Successors and Assigns:
40. The covenants, conditions and agreements contained in this lease shall
bind and inure to the benefit of Owner and Tenant and their respective heirs,
distributees, executors, administrators, successors, and except as otherwise
provided in this lease, their assigns. Tenant shall look only to Owner's estate
and interest in the land and building for the satisfaction of Tenant's remedies
for the collection of a judgment (or other judicial process) against Owner in
the event of any default by Owner hereunder, and no other property or assets of
such Owner (or any partner, member, officer or director thereof, disclosed or
undisclosed), shall be subject to levy, execution or other enforcement procedure
for the satisfaction of Tenant's remedies under or with respect to this lease,
the relationship of Owner and tenant hereunder, or Tenant's use and occupancy of
the demised premises.
- - - - -------------------------------------------
[GRAPHIC] Space to be filled in or deleted.
In Witness Whereof, Owner and Tenant have respectively signed and sealed this
lease as of the day and year first above written.
Witness for Owner: Puble N.V CORP.
SEAL
/s/ C. Lapas
- - - - ------------------------------- --------------------------------------
BY: C. Lapas Manager [L.S.]
PARADIGM MUSIC ENTERTAINMENT CO. CORP.
Witness for Tenant --------------------------------------
SEAL
/s/ Thomas McPartland
- - - - ------------------------------- --------------------------------------
BY: Thomas McPartland [L.S.]
ITS: Pres & CEO
<PAGE>
ACKNOWLEDGMENTS
Corporate Tenant
State of New York, ss:
County of
On this 30th day of November, 1995, before me personally came Thomas
McPartland to me known, who being by the duly sworn, did depose and say that he
resides in 67 Irving Place, New York, New York that he is the president and CEO
of Paradigm Music the corporation described in and which executed the foregoing
instrument, as TENANT; that he knows the seal of said Corporation; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by
order of the Board of Directors of said corporation, and that he signed his name
thereto by like order.
/s/ Valerie Marcus
-----------------------------------
VALERIE MARCUS
Notary Public. State of New York
No. 31-4946624
Qualified in New York County
Commission Expires February 8, 1997
<PAGE>
INDIVIDUAL TENANT
STATE OF NEW YORK, ss:
County of
On this day of , 19 , before me personally
came to be known and known to me to be the individual described in and who, as
TENANT, executed the foregoing instrument and acknowledged to me that
he executed the same.
-----------------------------------
<PAGE>
IMPORTANT - PLEASE READ
RULES AND REGULATIONS ATTACHED TO AND
MADE A PART OF THIS LEASE IN
ACCORDANCE WITH ARTICLE 36.
1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any Tenant or used for any purpose other than for ingress or egress from the
demised premises and for delivery of merchandise and equipment in a prompt and
efficient manner using elevators and passageways designated for such delivery by
Owner. There shall not be used in any space, or in the public hall of the
building, either by any Tenant or by jobbers or others in the delivery or
receipt of merchandise, any hand trucks, except those equipped with rubber tires
and sideguards. If said premises are situated on the ground floor of the
building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk
and curb in front of said premises clean and free from ice, snow, dirt and
rubbish.
2. The water and wash closets and plumbing fixtures shall not be used for
any purposes other than those for which they wee designed or constructed and no
sweepings, rubbish, rags, acids or other substances shall be deposited therein,
and the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the Tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.
3. No carpet, rug or other article shall be hung or shaken out of any
window of the building; and no Tenant shall sweep or throw or permit to be swept
or thrown from the demised premises any dirt or other substances into any of the
corridors of halls, elevators, or out of the doors or windows or stairways of
the building and Tenant shall not use, keep or permit to be used or kept any
foul or noxious gas or substance in the demised premises, or permit or suffer
the demised premises to be occupied or used in a manner offensive or
objectionable to Owner or other occupants of the buildings by reason of noise,
odors, and or vibrations, or interfere in any way, with other Tenants or those
having business therein, nor shall any bicycles, vehicles, animals fish, or
birds be kept in or about the building. Smoking or carrying lighted cigars or
cigarettes in the elevators of the building is prohibited.
4. No awnings or other projections shall be attached to the outside walls
of the building without the prior written consent of Owner.
5. No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any Tenant on any part of the outside of the
demised premises or the building or on the inside of the demised premises if the
same is visible from the outside of the premises without the prior written
consent of Owner, except that the name of Tenant may appear on the entrance door
of the premises. In the event of the violation of the foregoing by any Tenant,
Owner may remove same without any liability and may charge the expense incurred
by such removal to Tenant or Tenants violating this rule. Interior signs on
doors and directory tablet shall be inscribed, painted or affixed for each
Tenant by Owner at the expense of such Tenant, and shall be of a size, color and
style acceptable to Owner.
<PAGE>
6. No tenant shall mark, paint, drill into, or in any way deface any part
of the demised premises or the building of which they form a part. No boring,
cutting or stringing of wires shall be permitted, except with the prior written
consent of Owner, and as Owner may direct. No Tenant shall lay linoleum, or
other similar floor covering, so that the same shall come in direct contact with
the floor of the demised premises, and, if linoleum or other similar floor
covering is desired to be used an interlining of builder's deadening felt shall
be first affixed to the floor, by a paste or other material, soluble in water,
the use of cement or other similar adhesive material being expressly prohibited.
7. No additional locks or bolts of any kind shall be placed upon any of the
doors or windows by any Tenant, nor shall any changes be made in existing locks
or mechanism thereof. Each Tenant must, upon the termination of his Tenancy,
restore to owner all keys of stores, offices and toilet rooms, either furnished
to, or otherwise procured by, such Tenant, and in the event of the loss of any
keys, so furnished, such Tenant shall pay to Owner the cost thereof.
8. Freight, furniture, business equipment, merchandise and bulky matter of
any description shall be delivered to and removed from the premises only on the
freight elevators and through the service entrances and corridors, and only
during hours and in a manner approved by Owner. Owner reserves the right to
inspect all freight to be brought into the building and to exclude from the
building all freight which violates any of these Rules and Regulation of the
lease of which these Rules and Regulations are a part.
9. No Tenant shall obtain for use upon the demised premises ice, drinking
water, towel and other similar services, or accept barbering or bootblacking
services in the demised premises, except from persons authorized by Owner, and
at hours and under regulations fixed by owner. Canvassing, soliciting and
peddling in the building is prohibited and each Tenant shall cooperate to
prevent the same.
10. Owner reserves the right to exclude from the building all persons who
do not present a pass to the building signed by Owner. Owner will furnish passes
to persons for whom any Tenant requests same in writing. Each Tenant shall be
responsible for all persons for whom he request such pass and shall be liable to
owner for all acts of such persons. Notwithstanding the foregoing, Owner shall
not be required to allow Tenant or any person to enter or remain in the
building, except on business days from 8:00 a.m. to 6:00 p.m. and on Saturdays
from 8:00 a.m. to 1:00 p.m. Tenant shall not have a claim against owner by
reason of Owner excluding from the building any person who does not present such
pass.
11. Owner shall have the right to prohibit any advertising by any Tenant
which in Owner's opinion, tends to impair the reputation of the building or its
desirability as a loft building, and upon written notice from Owner, Tenant
shall refrain from or discontinue such advertising.
12. Tenant shall not bring or permit to be brought or kept in or on the
demised premises, any inflammable, combustible, or explosive, or hazardous
fluid, material, chemical or substance, or cause or permit any odors of cooking
or other processes, or any unusual or other objectionable odors to permeate in
or emanate from the demised premises.
13. Tenant shall not use the demised premises in a manner which disturbs or
interferes with other Tenants in the beneficial use of their premises.
* RULES AND REGULATIONS WILL BE ENFORCED IN A NON-DISCRIMINATORY MANNER.
<PAGE>
Address
Premises
================================================================================
TO
================================================================================
STANDARD FORM OF
LOFT
SEAL SEAL
LEASE
The Real Estate Board of New York, Inc.
Copyright 1994. All rights Reserved.
Reproduction in whole or in part prohibited.
================================================================================
Dated 19
Rent Per Year
Rent Per Month
Term
From
To
Drawn by .......................................
Checked by .....................................
Entered by .....................................
Approved by ....................................
================================================================================
<PAGE>
1
41. PROVISIONS OF RIDER
This rider is annexed to and made a part of the printed part of this lease
to which it is attached and in each instance in which the provisions of this
rider shall contradict or be inconsistent with the provisions of the printed
portion of this lease, as constituted without this rider, the provisions of this
rider shall prevail and govern and the contradicted or inconsistent provisions
of the printed portion of this lease shall be deemed amended accordingly.
42. HEAT AND ELEVATOR SERVICE
Landlord shall provide necessary elevator service and heat, except in event
of breakdown or emergency, only on business days from 8:00 a.m. to 6:00 p.m. For
the purpose of this lease, legal holidays wherein Landlord will not provide heat
or freight elevator service shall be deemed to be any and all holidays
recognized as contract holidays by Service Employees Union, Local 32B-32J. One
elevator shall be available for tenants use at all times, subject to normal
maintenance, repair, breakdown, strikes and damage.
43. PIPES AND CONDUITS
As an additional provision of Paragraph 13 of the printed form of this
lease, Landlord may erect, use and maintain any pipes, conduits or other lines
through the demised premises, provided such installation will not unreasonably
detract from the appearance of the premises and is made in a manner and at such
times so as not to unreasonably interfere with Tenant's use of the demised
premises.
44. VOLATILE MATERIALS
The Tenant nor any of Tenant's servants, employees, agents, visitors or
licensees shall not bring, keep, or use in or upon the demised premises or the
building of which they form a part, any solvent having a flash point below 110
F, nor shall any liquid which emits volatile vapors below the temperature of 100
F be brought, kept or used in or upon the demised premises or the building of
which they form a part, except as follows:
A. The process using such liquids shall be conducted in a room of fire
resistant construction, as the same is or may hereafter be defined by the Fire
Insurance Rating Organization.
B. If more than one but not more than two gallons of such liquids are kept
on the premises, they shall be stored in safety cans. If more than two but less
than ten gallons of such liquids are kept on the premises, they must be stored
in safety cans and kept in a cabinet constructed by Tenant in a manner approved
by the Fire Insurance Rating Organization. Reasonable amounts in excess of ten
gallons may be kept provided they are stored in a vault constructed by Tenant in
a manner approved by said Organization.
C. Any use or storage of such liquids shell at all times be in accordance
with the requirements of the Fire Department Board of Fire Underwriters and the
Fire Insurance Rating Organization.
A breach of the aforesaid regulations shall be deemed a default of this
lease under Paragraph l7 hereof.
<PAGE>
45. LANDLORD'S EXECUTION OF LEASE
It is specifically understood and agreed that this lease is offered to
Tenant for signature by the leasing agent of the building solely in its capacity
as such agent and subject to Landlord's final acceptance and approval, and that
Tenant shall affix its signature hereto with the understanding that such act
shall not in any way bind Landlord or its agent until such time as this lease
shall have been approved and executed by Landlord and delivered to Tenant.
46. EXTERMINATION
Tenant at its sole cost and expense shall maintain such extermination
services as are necessary to keep the demised premises free of pests and vermin
at all times. Landlord at its sole cost and expense will exterminate the public
and core areas on a regular basis.
47. ODORS AND WASTE MATERIALS
Tenant shall not cause or permit any unusual or objectionable odors,
by-products or waste material to permeate from the demised premises. Tenant
covenants that it will hold Landlord harmless against all claims, damages or
causes of action for damages arising after the commencement of the term of this
lease and will indemnify the Landlord for all such suits, orders or decrees and
judgments entered therein, brought on account of any such
ADDITIONAL CLAUSES attached to and forming a part of lease dated November _____
,1995 between PUBLE, N.V. and Paradigm Music Company for the fourth (4th) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
2
<PAGE>
permeation from the demised premises of said unusual or objectionable odors,
by-product or waste material caused by Tenant, and, in addition, Tenant
covenants to pay any attorneys' fees and other legal expenses made necessary in
connection with any claim or suit as aforesaid, all provided, however, that
Tenant is given immediate written notice thereof with the opportunity to defend
by attorneys of its designation and that Landlord cooperates in said defense.
For the purpose of eliminating any such odors, waste material or
by-products, caused by Tenant, Tenant may erect and maintain such facilities and
appurtenances as may be necessary to eliminate any such odors, by-products or
waste materials. All such facilities or appurtenances shall be erected at
Tenant's sole cost and expense, shall be in accordance with applicable laws,
orders and regulations of all governmental authorities and the New York Board of
Fire Underwriters as set forth in Paragraph 6 of this lease.
REFUSE RECYCLING AND REMOVAL
(i) Compliance by Tenant. Tenant covenants and agrees, at its sole cost and
expense to comply with all present and future laws, orders and regulations of
all state, federal, municipal, and local governments, departments, commissions,
and boards regarding the collection, sorting, separation, and recycling of waste
products, garbage, refuse and trash. Tenant or Tenants Cleaning Contractor shall
sort and separate such waste products, garbage, refuse, and trash into such
categories as provided by law. Each separately sorted category of waste
products, garbage, refuse, and trash shall be placed in separate receptacles
reasonably approved by Owner. Such separate receptacles may at Owner's option,
be removed from the demised premises in accordance with a collection schedule
prescribed by law.
(ii) Owner's Rights in Event of Noncompliance. Owner reserves the right to
prohibit the removal of refuse or to collect or accept from Tenant any waste
products, garbage, refuse, or trash that are not separated and sorted as
required by law, and to require Tenant to arrange for such collection at
Tenant's sole cost and expense, utilizing a contractor satisfactory to Owner.
Tenant shall pay all costs, expenses, fines, penalties, or damages that may be
imposed on Owner or Tenant by reason of Tenant's failure to comply with the
provisions of this article, and, at Tenant's sole cost and expense, shall
indemnify, defend, and hold Owner harmless (including legal fees and expenses)
from and against any actions, claims, and suits arising from such noncompliance,
utilizing counsel reasonably satisfactory to Owner.
<PAGE>
48. FLOOR LOAD
Tenant shall not place a load upon any floor of the demised premises
exceeding the floor load per square foot area which it was designed to carry and
which is allowed by law. Tenant agrees to position all machines, safes, business
machines, printing equipment or other mechanical equipment in such locations as
to minimize noise and vibration emanating therefrom. All of such installations
shall be placed and maintained by Tenant, at Tenant's sole expense, in settings
sufficient to minimize noise and annoyance to other tenants in Landlord's
building.
All of such machines and/or equipment installed by Tenant in the demised
premises will not at any time be in violation of existing laws affecting the
demised premises nor in violation of the certificate of occupancy issued for the
building of which the demised premises are a part.
49. SQUARE FOOTAGE
The Tenant does hereby acknowledge that no representations have been made
by the Landlord or anyone acting on behalf of the Landlord as to the amount of
square footage in the demised premises.
50. LANDLORD'S COSTS BY TENANT'S DEFAULTS
If Landlord, as a result of a default by Tenant of any of the provisions of
this lease, after applicable notice including the covenants to pay rent and/or
additional rent, makes any necessary expenditure or incurs any necessary
obligations for the payment of money, including but not limited to reasonable
attorney's fees, in instituting, prosecuting or defending any action or
proceeding, such sums so paid or obligations so incurred with interest and costs
shall be deemed to be additional rent hereunder and shall be paid by Tenant to
Landlord within ten (10) days of rendition of any bill or statement to Tenant
therefore, and if Tenant's lease term shall have expired at the time of making
such expenditure or incurring such obligations, such sum shall be recoverable by
Landlord as damages.
51. LIMITATION OF LIABILITY
2
ADDITIONAL CLAUSES attached to and forming a part of lease dated November ____
,1995 between PUBLE, N.V. and Paradigm Music Company for the fourth (4th) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
3
Tenant agrees that the liability of Landlord under this lease and all
matters pertaining to or arising out of the tenancy and the use and occupancy of
the demised premises, shall be limited to Landlord's interest in the building of
which the demised premises form a part, the land on which such building stands,
the rents and profits therefrom and the proceeds of insurance thereon and in no
event shall Tenant make any claim against or seek to impose any personal
liability upon any general or limited partner of Landlord or any principal of
any firm or corporation that may hereafter be or become the Landlord.
52. RENT COMMENCEMENT
Tenant's obligation to pay rent shall commence as of December 1st, 1995.
Notwithstanding the foregoing, provided Tenant shall not then be in default
under any of the provisions of this Lease, the Annual Base Rent set forth in
Article 74 shall be abated for the first (1st) through sixth (6th) months of
the term of this Lease (the "Rent Abatement Period").
Landlord acknowledges receipt of check, subject to collection, in the sum
of $5,853.33 representing first month's rent due under this lease.
53. REAL ESTATE BROKERS
Tenant covenants, represents and warrants that Tenant has had no dealings
or communications with any broker or agent other than Helmsley-Spear, Inc.
("Helmsley") and Edward S. Gordon Company ("ESG") in connection with the
negotiation or consummation of this Lease, and Tenant and Landlord covenants and
agrees to pay, defend, hold harmless and indemnify each other from and against
any and all claims, actions, costs, expenses (including reasonable attorneys'
fees) or liabilities for any compensation, commission or charges claimed by any
broker or agent other than Helmsley and ESG, with respect to this Lease or the
negotiation thereof. Landlord shall pay ESG such compensation commission or fee
due ESG pursuant to separate agreement.
54. TENANT ACCESS TO BUILDING
In the event the building is locked at any time, the Landlord agrees to
permit the Tenant access to building and elevator and to remain in possession of
the Card Access Key to the front entrance to the building, which Card Access Key
shall only be placed in the hands of a responsible employee(s) of the Tenant.
Tenant shall exercise due care and diligence to see that the front doors to the
building are locked after each entry after normal building hours. Tenant shall
have access to the demised premises at all times by whatever means the Landlord
designates. Tenant agrees that Landlord will not, and shall not be obligated to
furnish any services to Tenant beyond "normal building hours" outlined in
article 31 of this agreement.
<PAGE>
55. LATE CHARGE
Tenant acknowledges that monthly rental payments are due on or before the
first day of each month. Tenant shall herein be permitted to make such payments
up to the tenth day of each month without penalty. If Tenant shall fail to pay
all or any part of any installment of rent or additional rent for more than ten
(10) days after the same shall have become due and payable, Tenant shall pay as
additional rent hereunder to Landlord a late charge of three cents ($0.03) for
each dollar of the amount of such rent or additional rent which shall not have
been paid to Landlord within such ten (10) days after becoming due and payable.
The late charge payable pursuant to this Article 55 shall be (i) payable on
demand and (ii) without prejudice to any of Landlord's rights and remedies
hereunder at law and equity for non-payment or late payment of rent or other
sums and in addition to any such rights and remedies. No failure by Landlord to
insist upon the strict performance by Tenant of Tenant's obligations to pay late
charges as provided in this Article 55 shall constitute a waiver by Landlord of
its right to enforce the provisions of this Article 55 in any instance
thereafter occurring.
The provisions of this Article 55 shall not be construed in any way to
extend the grace periods or notice periods provided for elsewhere in this Lease.
56. ELECTRICITY
A. Tenant shall have a separate electric meter which presently exists and
for which Owner shall not charge Tenant, and shall contract directly with the
local utility company servicing the Building. The Tenant shall pay or cause to
be paid all charges for air conditioning, electricity, light, telephone, or any
other communication service used in or rendered or supplied to the Demised
Premises throughout the term of this lease, and shall indemnify the Owner
3
ADDITIONAL CLAUSES attached to and forming a part of lease dated November ____,
1995 between PUBLE, N.V. and Paradigm Music Company for the fourth (4th) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
4
and save it harmless against any liability or damages on such account. Tenant
shall also be responsible for the payment of any deposits or similar charges, as
well as any connection fee required by the utility or communication company.
B. Tenant understands and is aware that the Consolidated Edison Company of
New York, its successors or assigns, furnishes and shall furnish electric
current for all purposes to the building, and to the Demised Premises, and
Tenant covenants and agrees that Owner shall not be liable for any damage or for
any responsibility for an on account of the failure at any time of the
Consolidated Edison Company of New York to supply such electric current due to
strikes, lockouts, boycotts, labor disturbances accidents, or any other cause
beyond Owner's control, or by virtue of any direction, order or regulations of
any Federal, State, City, County or Municipal authority.
C. Owner reserves the right to interrupt the supply of electricity for the
Demised Premises for a maximum of twenty-four hours at a time, when required by
reason of accident or of repairs, alterations or improvements, until such
repairs, alterations or improvements shall have been completed. In each instance
where Landlord controls the scheduling of any work(s) requiring the interruption
of the supply of electricity to Tenant's premises, Landlord shall use its best
effort of informing Tenant of the scheduled interruption. After initial
installation, Owner shall continue to replace light bulbs and tubes when
requested by Tenant. In each instance when Tenant requests Landlord to replace
light bulbs and tubes, the cost of such replacement light bulbs, lamps and
tubes, plus the labor cost of such replacement, shall be chargeable to Tenant.
Tenant upon providing Landlord with the name of the supplier/installer, and
subject to Landlord's approval of same, may hire at Tenants sole cost and
expense for the replacement of the identical light bulbs and tubes currently in
the demised premises. Tenant agrees not to connect any additional electrical
equipment of any type to the building electric distribution system, other than
lamps, typewriters, and other small office machines which consume comparable
amounts of electricity, without Owner's prior written consent, which consent
shall not be unreasonably withheld. Any additional risers, feeders, or other
equipment proper or necessary to supply Tenant's electrical requirements, upon
written request of Tenant, will be installed by Owner, at the sole cost and
expense of Tenant, if, in Owner's sole judgment, the same are necessary and will
not cause permanent damage or injury to the building or the Demised Premises, or
cause or create a dangerous or hazardous condition or entail excessive or
unreasonable alterations, repair or expense or interfere with or disturb other
tenants or occupants.
<PAGE>
57. PORTER WAGE FORMULA
Operating Escalation
A. The amount of the Operating Adjustment, if any for the first and each
subsequent Operation Year shall be determined by comparing:
(i) The Labor Rate for the Operation Year in question with
(ii) The Labor Rate for the Base Operation Year.
If (i) is greater than (ii), then Tenant shall pay to Landlord as
additional rent for such Operation Year an amount equal to the product
obtained by multiplying 3,680 by the number of cents (including fractions
thereof) by which the Labor Rate for the Operation Year in question is more
than the Labor Rate for the Base Operation Year. All such payments shall be
made as provided in subparagraph (B) below.
The following terms are hereby defined to have the following meanings
in this lease:
"Labor Rate" shall mean the sum of the minimum regular hourly wage
rate prescribed for porters of the building in effect on January 1 of the
year in question, pursuant to the agreement with Local 32B of the Building
Service Employees International Union, AFL-CIO (or any successor thereto)
covering the wage rates of porters in the building, provided, however, that
if there is no such agreement in effect as of January 1 prescribing such
minimum regular hourly wage rate for porters, computation and payment shall
thereupon be made on the basis of the minimum regular hourly wage rate
being paid by the Landlord or by the Contractor performing the cleaning
service for Landlord on such January 1 for said porters and appropriate
retroactive adjustments shall thereafter be made when the minimum regular
hourly wage rate on such January 1 pursuant to such agreement prescribing
such minimum hourly wage rate for porters is finally determined, and
provided further that if as of the last day of such Operation Year, no such
agreement covering the January 1 occurring in such Operation Year shall
have been in effect, the minimum regular hourly wage rate paid by Landlord
or by the Contractor performing the cleaning service for Landlord on such
January 1 for said porters shall, for all purposes hereof, be determined to
be such minimum regular hourly wage rate prescribed by such agreement and
in effect such January 1 and appropriate retroactive adjustments shall be
made.
4
<PAGE>
ADDITIONAL CLAUSES attached to and forming a part of lease dated November ____,
1995 between PUBLE, N.V. and Paradigm Music Company for the fourth (4th) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
5
"Operation Year" shall mean each calendar year subsequent to the
Base Operation Year in which occurs any part of the demised term; and
"Base Operation Year" shall mean the 1996 calendar year.
B. Every Operating Adjustment shall commence on the first day of the
relevant Operation Year. After Landlord has furnished Tenant with an escalation
statement relating to any Operation Year, all monthly installments of rent shall
reflect one-twelfth (1/12) of the annual amount of the current Operating
Adjustment until a new adjustment under this paragraph shall become effective.
If, however, an escalation statement is furnished to Tenant after the
commencement of an Operation Year, there shall be promptly paid by Tenant to
Landlord an amount equal to the portion of the relevant adjustment allocable to
the part of the Operation Year which shall have elapsed prior to the first day
of the calendar month next succeeding the calendar month in which the applicable
escalation statement has been furnished to Tenant. In the event the date fixed
for the expiration of the demised term shall be a day other than the last day of
an Operation Year and in the event of any termination of this lease or any
increase or decrease in the square footage of the demised premises, then in
applying the provisions of this paragraph, appropriate apportionment's shall be
made. Payments shall be made pursuant to the provisions of this paragraph,
notwithstanding the fact that an escalation statement is furnished to Tenant
after the expiration of the demised term. No decrease in the Labor Rate shall in
any way affect the obligation of Tenant to pay the fixed rent or percentage
rent, if any.
58. REAL ESTATE TAX ESCALATION
Tenant agrees to pay as additional rent nine and 54/100 percent
(9.54%) of any and all increase in Real Estate Taxes above those for the June
30th, 1996/July 1st, 1997 New York City Fiscal Tax Year (hereinafter referred to
as the "Base Tax Year") imposed on the land and building of which the demised
premises are a part with respect to every subsequent tax year or part thereof
(hereinafter referred to "Comparative Tax Year") during the term of this lease,
whether any such increase results from a higher tax rate or an increase in the
assessed valuation of the property, or both.
"Real Estate Taxes" shall include any special Real Estate Tax assessment
imposed for any purpose whatsoever. If due to a change in the method of taxation
any franchise, income, profit, or other tax, however designated, shall be levied
against Landlord's interest in the property in whole or in part for or in lieu
of any tax which would otherwise constitute Real Estate Taxes, such taxes shall
be included in the term "Real Estate Taxes" for purposes hereof. All such
payments shall be appropriately pro-rated for any partial calendar years in
which the term of this lease shall commence or expire. A copy of the Tax Bill of
the City of New York shall be sufficient evidence of the amount of Real Estate
Taxes.
<PAGE>
In the event that the real estate taxes payable for any Comparative Year
shall exceed the amount of such Real Estate Taxes payable during the base tax
year, Tenant shall pay to Landlord, as additional rent for such Comparative
Year, an amount equal to The Percentage of the excess. Following the expiration
of each Tax Year, Landlord shall submit to Tenant a statement, certified by
Landlord, setting forth the Real Estate Tax Escalation due for the current
Comparative Tax Year and the Payment, if any, due to Landlord from Tenant for
such Comparative Tax Year. The rendition of such statement to Tenant together
with a copy of the Tax Bill shall constitute prima facie proof of the accuracy
thereof and, if such statement shows a payment due from Tenant to Landlord with
respect to such current Comparative Tax Year then (i) Tenant shall make payment
of any unpaid portion thereof within ten (10) days after receipt of such
statement; and (ii) Tenant shall also pay to Landlord, as additional rent,
within ten (10) days after receipt of such statement, an amount equal to the
product obtained by multiplying the total Payment for the current Comparative
Tax Year by a fraction, the denominator of which shall be 12 and the numerator
of which shall be the number of months of the current Comparative Year which
shall have elapsed prior to the first day of the month immediately following the
rendition of such statement; and (iii) Tenant shall also pay to Landlord, as
additional rent, commencing as of the first day of the month immediately
following the rendition of such statement and on the first day of each month
thereafter until a new statement is rendered, 1/12th of the total Payment for
the current Comparative Tax Year. The aforesaid monthly payments based on line
total Payment for the current Comparative Tax Year may be adjusted to reflect,
if Landlord can reasonably so estimate, known increases in rates, for the
subsequent Comparative Tax Year, whenever such increases become known during
such current Comparative Tax Year. The payments required to be made under (ii)
and (iii) above shall be credited toward the Payment due from
5
ADDITIONAL CLAUSES attached to and forming a part of lease dated November ____
,1995 between PUBLE, N.V. and Paradigm Music Company for the fourth (4th) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor) /s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
Tenant for the subsequent Comparative Year, subject to adjustment as and when
the statement for such subsequent Comparative Tax Year is rendered by Landlord.
Only Landlord shall be eligible to institute tax reduction or other
proceeding to reduce the assessed valuation of the land and building. Should
Landlord be successful in any such reduction proceedings and obtain a rebate for
periods during which Tenant has paid its share of increases, Landlord shall
after deducting its expenses, including without limitation, reasonable
attorney's fees and disbursement in connection therewith, return to Tenant its
pro-rata share of such rebate except that Tenant may not obtain any portion of
the benefits which may accrue to Landlord from any reduction in Real Estate
Taxes for any year below those imposed in the Base Tax Year.
59. SECURITY
Tenant has deposited with Landlord the sum of $17,799.99 as security for
the faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease. It is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease, including
but not limited to, the payment of rent and additional rent, after notice
Landlord may use, apply or retain the whole or any part of the security so
deposited to the extent required for the payment of any rent or additional rent
or any other sum which Landlord may expend or may be required to expend by
reason of Tenant's default in respect of any of the terms, covenants and
conditions of this lease, including but not limited to, any damages or
deficiency in the reletting of the premises, whether such damages or deficiency
accrued before or after summary proceedings or other re-entry by Landlord. In
the event that Tenant shall fully and faithfully comply with all of the terms,
provisions, covenants and conditions of this lease, the security shall be
returned to Tenant after the date fixed as the end of the Lease and after
delivery of entire possession of the demised premises to Landlord. In the event
of a sale of the land and building or leasing of the building, of which the
demised premises form a part, Landlord shall have the right to transfer the
security to the vendee or lessee and Landlord shall thereupon be released by
Tenant from all liability for the return of such security; and Tenant agrees to
look to the new Landlord solely for the return of said security; and it is
agreed that the provisions hereof shall apply to every transfer or assignment
made of the security to a new Landlord. Tenant further covenants that it will
not assign or encumber or attempt to assign or encumber the monies deposited
herein as security and that neither Landlord nor its successors or assigns shall
be bound by any such assignment, encumbrance, attempted assignment or attempted
encumbrance.
<PAGE>
All interest and/or dividends, if any, accruing on the security deposited,
whether in cash or otherwise as aforesaid, shall remain Tenant's property (less
standard management charge of 1%) and, provided Tenant is not in default in the
performance of the terms, conditions and covenants of this lease, shall be paid
to Tenant after each calendar year during the term, provided, however, that
Tenant shall make written demand therefor no late than January 31st in each
year.
60. LANDLORD'S WORK
Tenant has examined the Demised Premises and agrees to accept the same in
their condition and state of repair existing as of the date hereof subject to
normal wear and tear and to the removal therefrom of the property, if any, of
the existing tenant or occupants thereof, and understands and agrees that
Landlord shall not be required to perform any work, supply any materials or
incur any expense to prepare the demised premises for Tenant's occupancy, except
for removal of any furniture designated by Tenant, deliver the air-conditioning
in working order and broom clean the premises. Landlord shall have up to and
including Friday December 15th, 1995 to remove any furniture designated by
Tenant. In the event Landlord is unable to remove said furniture on or before
December 15th, 1995, Landlord shall abate the base rent of Tenant on a
day-for-day basis (by example, for every day the furniture remains in the
demised premises, Tenant will receive one day of free rent), up to and including
December 31st, 1995. After December 31st, 1995 Tenants sole remedy for Landlords
failure to remove said furniture is for Tenant to directly arrange for removal
of said furniture. Tenant agrees to cooperate fully with Landlord for Landlord
to accomplish the removal of said furniture.
61. SUBLETTING AND ASSIGNMENT
A. Supplementing Article 11 hereof, if Tenant requests Landlord's consent
to the subletting of the Demised Premises, it shall submit to Landlord in
writing, by registered or certified mail, the following information:
1. The name of the proposed subtenant;
2. The terms and conditions of the proposed subletting;
3. The nature and character of the business of the proposed subtenant;
6
ADDITIONAL CLAUSES attached to and forming a part of lease dated November
____,1995 between PUBLE, N.V. and Paradigm Music Company for the fourth (4th)
Floor at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
4. Banking, financial, and other credit information relating to the
proposed subtenant reasonably sufficient to enable Landlord to determine the
financial responsibility of said proposed subtenant.
Upon receipt of such request from Tenant, Landlord shall have an option, to
be exercised in writing within forty-five (45) days thereafter, to terminate the
lease effective on a date (the Termination Date) set forth in Landlord's notice
of termination, which shall not be less than thirty (30) days nor more than one
hundred and twenty (120) days following the service upon Tenant of Landlord's
notice of termination.
In the event Landlord shall exercise such option to terminate the lease,
this lease shall expire on the Termination Date as if that date had been
originally fixed as the expiration date of the term herein granted and Tenant
shall surrender possession of the entire Demised Premises on the Termination
Date in accordance with the provisions of this lease.
Landlord's option to terminate this lease shall not be exercised where
Tenant's request to sublet a portion of premises does not exceed 25% of demised
premises, provided that proposed subtenant is in a similar or related field.
B. If Landlord shall not exercise its option within the period aforesaid
then Landlord's consent to such request shall not be unreasonably withheld or
delayed, but only on condition:
(i) That the subletting shall be to a Tenant whose occupancy will be in
keeping with the dignity and character of the then use and occupancy of the
building by other Tenants and whose occupancy will not be more objectionable or
more hazardous than that of Tenant herein. In no event shall any subletting be
permitted to a school, medical clinic, or counseling facility of any kind; an
employment or placement agency; or governmental or quasi-governmental agency;
(ii) That the subletting shall not be to any Tenant, subtenant or assignee
of any premises in the building of which the Demised Premises form a part;
(iii) That the subletting shall not be marketed and/or represented at a
lower rental rate than that being charged by Landlord at the time for similar
space in the building;
(iv) That the sublease will expressly prohibit assignment of the sublease
or further subletting by the subtenant without Landlord's written consent.
The consent by Landlord to a subletting shall not relieve Tenant from
obtaining the express consent in writing of Landlord to any further subletting.
<PAGE>
C. Anything herein contained to the contrary notwithstanding, but without
releasing Tenant from its obligations for full performance hereunder, Tenant
shall have the right, without the consent of Landlord, to assign or sublet all
or any part of the Demised Premises to one or more controlled subsidiary or
affiliated companies, or to a parent company (existing or future), and Tenant
shall have the right to permit the Demised Premises or any part thereof to be
used by any controlled subsidiary or affiliated and/or parent companies,
provided that a duplicate original of the assignment or sublease shall be
delivered to Landlord within seven (7) days after execution, and provided that
such assignment or sublease shall permit only such use and occupancy as is
permitted under this lease.
Further, Tenant may assign this lease in its entirety without the consent
of Landlord to any successor corporation (by consolidation or merger or sale of
substantially all of its assets) provided the assets and consolidated net worth
of such successor corporation and its consolidated subsidiaries, determined in
accordance with generally accepted accounting principles on a pro-forma basis
from the then most recent audited (by independent certified public accountants)
balance sheets of all corporations which shall have been merged or consolidated
with or into such successor corporation, shall not be materially less than the
assets and consolidated net worth of Tenant and its consolidated subsidiaries as
shown by Tenant's most recent audited (by independent certified public
accountants) balance sheet, provided that Tenant shall have delivered to
Landlord an agreement on the part of such successor corporation whereby such
successor corporation agrees to assume, and does assume, all of the obligations
and duties on the part of the Tenant to be performed hereunder.
62. INSURANCE
A. Tenant agrees, throughout the term of this lease for the benefit of both
Landlord and Tenant as named assured, to maintain insurance against loss or
damage by fire and such other risks and hazards as are insurable under present
and future standard forms of fire and extended coverage insurance policies, to
the personal property,
7
<PAGE>
ADDITIONAL CLAUSES attached to and forming a part of lease dated November _____,
1995 between PUBLE, N.V. and Paradigm Music Company for the fourth (4th) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
8
furniture, furnishings and fixtures belonging to Tenant located in the demised
premises for the actual cash value thereof less depreciation with New York
standard insurance company clauses for not less than 80% of the actual cash
value thereof. The policy shall provide that not less than ten (10) days prior
to the expiration of any policy or policies, evidence of the renewal period, or
policies, or a new certificate, together with evidence of payments of premiums
for the renewal period, or insurance policy, as the case may be, shall be
delivered to Landlord. Such insurance shall further contain an agreement on the
part of the insurance company not to cancel such policy or coverage or change
the coverage without ten (10) day's prior written notice to Landlord. In the
event of the occurrence of any fire or other casualty insured against by
Tenant's policy, Landlord at the time of the occurrence of any such event, when
called upon to do so by Tenant, will, by appropriate written instrument, assign
to Tenant all of Landlord's right, title and interest in and to such insurance
proceeds. Upon receipt by Tenant of such insurance proceeds, Tenant agrees to
accept such payment in full for any loss or damage to its property and not to
make any claim against or seek to recover from Landlord any other sum for such
loss or damage, whether or not the loss or damage was due to the carelessness of
Landlord or its servants, agents or employees. Upon the occurrence of any
casualty insured against, Tenant shall have full authority to, and shall take
all necessary measures to negotiate, compromise or adjust any loss under
Tenant's policy.
B. During the term of this lease, the Tenant, at its own cost and expense:
(i) shall provide and keep in force for the benefit of the Landlord and
Tenant, a comprehensive general public liability policy, written by good and
solvent insurance companies satisfactory to Landlord and in standard form
protecting Landlord and Landlord's agent as additional insureds and Tenant
against any and all liability, occasioned by any occurrence on or about the
Demised Premises or any appurtenances thereto, in the amount of not less than
$3,500,000.00 in respect of any one accident or disaster, and in the amount of
not less than $1,000,000.00 in respect of injuries to or death of any one
person, and in the amount of not less than $500,000.00 in respect of destruction
or damage to property. Such policies shall cover the demised premises, and all
such policies with receipts evidencing payment of premium shall be delivered to
and held by Landlord.
(ii) Provide and keep in force sprinkler leakage insurance which shall be
in amounts sufficient to cover the value of Tenant's merchandise and fixtures.
<PAGE>
C. Tenant shall save Landlord harmless and indemnify it from and against
all injury, loss, claims or damage to any person or property while on the
demised premises arising out of use or occupancy of the demised premises by
Tenant and from and against all injury, loss, claim or damage to any person or
property anywhere occasioned by any act, neglect or default of Tenant.
D. Tenant shall provide, or cause to be provided, Workmen's Compensation
Insurance covering all persons employed in connection with the performance of
work upon, in or about the demised premises.
E. All such insurance shall be effected in standard form under valid,
enforceable policies issued by insurers of recognized responsibility and
licensed to do business in the State of New York and shall, except in the case
of Workmen's Compensation Insurance, name Landlord and Tenant as the insureds as
their respective interests may appear. Certificates of such insurance shall be
delivered to Landlord from time to time during the term of this lease at least
ten (10) days prior to the expiration date of the previous policy together with
certificates evidencing the renewal of such policy with satisfactory evidence of
payment of the premium on such policy. To the extent obtainable, all such
policies shall contain agreements by the insurers that (i) such policies shall
not be canceled except upon ten (10) days prior written notice to each named
insured and (ii) the coverage afforded thereby shall not be affected by the
performance of any work upon, in or about the demised premises. Nothing in this
Paragraph shall prevent Tenant from taking out such insurance under a blanket
insurance policy, or policies, which also can cover other properties, or parts
thereof, owned, leased or operated by Tenant as well as the demised premises.
The Tenant agrees to pay all premiums and charges for such insurance, and
in the event of its failure to make any such payment when due, or in the event
of its failure to provide such insurance or renewal thereof, the Landlord may
procure the same and/or pay the premium thereon (but in no event shall be
obligated so to do), and the Tenant agrees to pay such premiums to the Landlord
upon demand, and the same shall be deemed to be, and be, paid as additional rent
for said premises.
63. CERTIFICATES BY TENANT
At any time and from time to time, Tenant, for the benefit of Landlord and
the lessor under any ground lease or underlying lease or the holder of any
leasehold mortgage affecting any ground lease or underlying lease, or of any fee
mortgage covering the land or the land and building containing the demised
premises, on at least ten (10) days
8
ADDITIONAL CLAUSES attached to and forming a part of lease dated November ____,
1995 between PUBLE, N.V. and Paradigm Music Company for the fourth (4th) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Landlord) (Tenant)
<PAGE>
9
prior written request by Landlord, will deliver to Landlord a statement,
certifying that this lease is not modified and is in full force and effect (or
if there shall have been modifications that the same is in full force and effect
as modified and stating the modifications), the commencement and expiration
dates hereof, the dates to which the fixed rent, additional rent and other
charges have been paid, and whether or not, to the best knowledge of the signer
of such statement, there are any then existing defaults on the part of either
Landlord or Tenant in the performance of the terms, covenants and conditions of
this lease, and if so, specifying the default of which the signer of such
statement has knowledge. Landlord shall be limited to two requests per twelve
month period throughout the term hereof. Tenant shall have the right to request
a reference letter from Landlord on two occasions per twelve month period
throughout the term hereof.
64. TENANT'S ALTERATIONS
Supplementing Article 3 of this lease, Landlord's consent shall not be
required for minor changes such as painting and installation of cabinets and
shelves. If Tenant desires to perform any other renovations, decorations,
additions, installations, improvements and/or alterations whose cost is in
excess of $2,500 in the premises during the term of this lease (hereinafter
called "Tenant's Work"), it will deliver to Landlord plans and specifications
therefor for Landlord's prior prompt written approval (not to be unreasonably
withheld if Tenant's Work will not change the character of Landlord's building
standard installations or reduce the value of the demised premises below that
immediately before the performance of Tenant's Work). If Landlord shall approve
the plans and specifications for Tenant's Work, Tenant shall, before
commencement thereof:
A. Obtain the necessary consents, authorizations and licenses from all
federal, state and/or municipal authorities having jurisdiction over such work;
B. Furnish to Landlord a copy of the contract made by Tenant with the
contractor and/or, other person or persons who will perform Tenant's Work, which
contract will provide, among other things,
(i) that the work will be done in accordance with the approved plans and
specifications and the consents, authorizations and licenses obtained;
(ii) that the contractor or other persons performing the work will look
solely to Tenant for payment and will hold Landlord and the demised premises and
the building containing the demised premises free from all liens and claims of
all persons furnishing labor or materials therefor, or both;
(iii) that similar waivers of the right to file Mechanic's Liens shall be
obtained from all subcontractors and materialmen;
<PAGE>
C. Furnish to the Landlord a certificate or certificates of Workmen's
Compensation Insurance covering all persons who will perform Tenant's Work for
Tenant or any contractor, subcontractor or other person.
D. Furnish to Landlord an original Policy of Public Liability Insurance
covering Landlord in limits of five hundred thousand ($500,000) dollars for
injuries or damages to any one person and one million ($1,000,000) dollars in
any one accident or disaster and two hundred and fifty thousand ($250,000)
dollars with respect to property damage, in a company approved by Landlord. Such
policy shall provide that no cancellation shall be effective unless ten (10)
days prior written notice has been given to Landlord.
Tenant agrees to indemnify and save Landlord harmless from and against any
and all bills for labor performed and equipment, fixtures and materials
furnished to Tenant and from and against any and all liens, bills or claims
therefor or against the demised premises or the building containing the same
from and against all losses, damages, costs, expenses, suits and claims
whatsoever in connection with Tenant's Work. The cost of Tenant's Work shall be
paid for in cash or its equivalent, so that the demised premises and the
building containing the same shall at all times be free of liens for labor and
materials supplied or claimed to have been supplied.
If the performance of Tenant's Work shall unnecessarily and/or unreasonably
interfere with the comfort and/or convenience of other tenants in the building
or shall cause damage to or otherwise unnecessarily and/or unreasonably
interfere with the occupancy of adjacent buildings, Tenant shall upon Landlord's
demand remedy or remove the condition or conditions complained of. Tenant
further covenants and agrees to indemnify and save Landlord harmless from and
against any and all claims, losses, damages, costs, expenses, suits and demands
whatsoever made or asserted against Landlord by reason of the foregoing.
65. NO ORAL AGREEMENTS NO OTHER REPRESENTATIONS
9
ADDITIONAL CLAUSES attached to and forming a part of lease dated November __,
1995 between PUBLE, N.V. and Paradigm Music Company for the fourth (4th) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
10
<PAGE>
This lease together with riders attached, contains the complete agreement
between Landlord and Tenant in its entirety with respect to the premises leased
herein, and cannot be changed, modified or terminated orally. There are no
representations, arrangements or understandings oral or written, between
Landlord and Tenant up to the date of this lease, which are not fully contained
herein.
Tenant expressly acknowledges and agrees that Landlord has not made and is
not making, and Tenant in executing and delivering this Lease, is not relying
upon, any warranties, representations, promises or statement except to the
extent that the same are expressly set forth in this Lease or in any other
written agreement which may be made between the parties concurrently with the
execution and delivery of this Lease and shall expressly refer to this Lease.
This Lease and said other written agreement(s) made concurrently herewith, if
any, are hereinafter referred to as the "Lease Documents." It is understood and
agreed that all understandings and agreements heretofore had between the parties
are merged in the Lease Documents, which alone fully and completely express
their agreement, and that the same are entered into after full investigation,
neither party relying upon any statement or representation not embodied in the
Lease Documents, made by the other.
If any of the provisions of this Lease, or the application thereof or any
person or circumstances, shall, to any extent, be invalid or unenforceable, the
remainder of this Lease, or the application of said provision or provisions to
persons or circumstances other than those as to whom or which it is held invalid
or unenforceable, shall not be affected thereby, and every provision of this
Lease shall be valid and enforceable to the fullest extent permitted by law.
This Lease shall be governed in all respects by the laws of the State of
New York.
66. NOTICES
Any notice or other communication relative to this lease shall be in
writing and shall be considered given three (3) days after having been mailed by
registered or certified mail, return receipt requested, to the respective party
at its address herein set forth as at such other address as either party may
designate by notice given in accordance with this paragraph. All payments of
rent or additional rents due under this lease shall be mailed in accordance with
this paragraph, by regular mail or delivered by hand as Landlord may designate.
<PAGE>
67. LOBBY ATTENDANT
For the purpose of maintaining a Lobby Attendant service in the two
passenger lobbies of the building, if such service is provided, Tenant agrees to
pay its proportionate share of nine and 54/100 percent (9. 54%) of total cost of
maintaining such guard service, if provided. This sum shall be payable as
additional rent due under this lease. As the cost of maintaining such Lobby
Attendant shall increase or decrease, so shall the above mentioned charge be
adjusted proportionate to the increase or decrease in the total cost of
maintaining such Lobby Attendant service. This article 67 shall only be
operative and effective in the event 51% of all Tenants occupying space in 67
Irving Place request Landlord to arrange for a Lobby Guard to be stationed in
the Lobby (s).
68. ADDENDA TO ARTICLE 6 - REQUIREMENTS TO LAW
In conformity with this Article 68, Tenant agrees that it will comply with
all state, local and federal laws and codes, including but not limited to the
Americans with Disabilities Act ("ADA") resulting from tenants alterations or
use and occupancy within the Demised Premises.
69. NO RESIDENTIAL USE
10
ADDITIONAL CLAUSES attached to and forming a part of lease dated November __,
1995 between PUBLE, N.V. and Paradigm Music Company for the fourth (4th) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
11
<PAGE>
The demised premises have been leased to Tenant for commercial purposes
only. Under no circumstances shall Tenant at any time use the demised premises
for any residential purpose. Any breach of this article shall be deemed to be a
material default pursuant to Article 17 of this lease.
70. POSSESSION
Notwithstanding any provisions to the contrary contained within this lease,
Tenant may take immediate possession of the demised premises upon execution and
delivery of this Lease. Tenant shall be responsible for electric charges in
demised premises effective immediately upon execution of this lease. Tenant's
taking possession of the demised premises shall be conclusive evidence that the
demised premises and the Building were in good and satisfactory condition at the
time such possession was so taken.
71. EFFECT OF GOVERNMENTAL LIMITATION ON RENTS AND OTHER CHARGES
If any law, decision, order, rule or regulation (collectively called
"Limiting Law) of any governmental authority shall have the effect of limiting
for any period of time the amount of Rent or other amounts payable by Tenant to
any amount less than the amount required by this Lease, then:
A. Throughout the period of limitation, Tenant shall remain liable for the
maximum amount of Rent and other amounts which are legally payable; and
B. When the period of limitation ends, or if the Limiting Law is repealed,
or following any order or ruling that substantially restrains or prohibits
enforcement of the Limiting Law, Tenant shall pay to Landlord, on demand (to the
extent that payment of such amounts is not prohibited by law), all amounts that
would have been due from Tenant to Landlord during the period of limitation but
which were not paid because of the Limiting Law; and thereafter Tenant shall pay
to Landlord Rent and all other amounts due pursuant to this Lease, all
calculated as though there had been no intervening period of limitation.
72. ENTRANCE DOORS AND BUILDING DIRECTORY
Any signage, tenant identification, and/or room number displayed or locks,
doorknobs, mail slots, or other hardware installed on, or adjacent to, any
entrance door of demised premises facing the common hallway shall conform to the
building standard.
<PAGE>
Tenant shall purchase and install such sign(s) or hardware, at Tenant's own
cost and expense only after receiving Landlord's prior written consent to such
installation.
Listing of the name of the Tenant and/or Tenant's Trade Name on the
directory board of the Building shall be done by Landlord at its own expense,
but listings of any names other than the Tenant itself, shall be at the expense
of the Tenant. Notwithstanding the foregoing, Tenant may not exceed its
apportioned share of spaces on the directory of the Building.
73. LANDLORD'S APPROVALS
Whenever Tenant shall submit to Landlord any plan, agreement or other
document for Landlord consent or approval, and Landlord shall require the expert
opinion of Landlord's counsel or architect as to the form or substance thereof,
Tenant agrees to pay the reasonable fee of such architect and/or counsel for
reviewing the said plan, agreement or document. 6 month ext.
74. ANNUAL RENT
From the period December 1st, 1995 through and including November 30th,
2000 rental payments shall be Seventy Thousand ($70,000.00) Dollars per annum,
payable in monthly installments of $5,833.33.
75. HOLDING OVER
If Tenant holds over in possession after the expiration or sooner
termination of the original term or of any extended term of this lease, such
holding over shall not be deemed to extend the term or renew the lease, but such
holding over hereafter shall continue upon the covenants and conditions herein
set forth except that the charge for use and occupancy of such holding over for
each calendar month or part there (even if such part shall be a small fraction
of a calendar month) shall be the sum of:
11
ADDITIONAL CLAUSES attached to and forming a part of lease dated November __,
1995 between PUBLE, N.V. and Paradigm Music Company for the fourth (4th) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
12
a. 1/12 of the highest annual rent rate set forth on page one of this lease
times 2.0 plus
c. 1/12 of all other items of annual additional rental, which annual
additional rental would have been payable pursuant to this lease had lease not
expired, plus
d. those other items of additional rent (not annual additional rent) which
would have been payable monthly pursuant to this lease, had this lease not
expired, which total sum Tenant agrees to pay to Landlord promptly upon demand,
in full, without set-off or deduction. Neither the billing nor the collection of
use and occupancy in the above amount shall be deemed a waiver of any right of
landlord to collect damages for Tenant's failure to vacate the demised premised
after the expiration or sooner termination of this lease. The aforesaid
provisions of this Article shall survive the expiration or sooner termination of
this Lease.
76. CASUALTY DAMAGE
Anything in Article 9 to the contrary notwithstanding, in the event of
damage or destruction to the demised premises by fire or other casualty
(collectively, "Casualty"), if the demised premises cannot be restored to
substantially their condition immediately prior to the Casualty within nine (9)
months after the occurrence of the Casualty or are not so restored within such
nine (9) month period or if Landlord shall not have commenced the restoration
work four (4) months after the occurrence of the Casualty Tenant may terminate
the Lease, by notice sent to Landlord within thirty (30) days of the expiration
of such nine (9) month period or of the four (4) month period if Landlord shall
not have commenced the restoration work, whichever is earlier, in which event,
the Lease shall terminated as of the date in such notice, Fixed Rent and other
amounts payable under this Lease shall be apportioned as of such date and the
parties shall have no liability for subsequently accruing obligations hereunder.
77. AIR CONDITIONING
If the premises are equipped with a package air conditioning system
servicing the area, Landlord at its sole cost at the inception of the lease
term, agrees to deliver such air conditioning system in good working order.
Tenant herein agrees that the payment for cost of electric power consumed by the
air conditioning system shall be the responsibility of the Tenant. Tenant shall,
at its option at the inception of this lease, have an inspection of the air
conditioning system performed by an air conditioning service firm to be approved
by Landlord, and Landlord agrees to comply with all reasonable recommendations
of Tenant's air conditioning inspector. Tenant herein agrees that the payment
for cost of electric power consumed by the air conditioning system shall be the
responsibility of the Tenant.
<PAGE>
During the time of this lease, the air conditioning shall be owned by the
Landlord and shall be surrendered to the Landlord at the expiration of the
demised term in good working condition, reasonable wear and tear expected.
Throughout the term of this Lease, Tenant shall operate and maintain the air
conditioning at its own cost and expense pursuant to a maintenance contract
acceptable to Landlord.
Notwithstanding the foregoing, Tenant shall have up to April 30th, 1996 to
test and request corrections to the air conditioning equipment from Landlord.
Provided however, that any correction and/or repair to the air conditioning
equipment are not a result of any abuse and negligence of Tenant, Tenant's
employees and/or Tenant's invitees.
78. SATELLITE ANTENNA/DISH
Tenant shall have the right to install, in a location in or near the
demised premises, reasonably acceptable to Landlord on the Building, and
continuously operate a microwave satellite dish and/or antenna and
communications equipment necessary or reasonably desirable to Tenant
(collectively, the "Antenna Equipment") including, without limitation the right
to interconnect the Antenna Equipment with Tenant's equipment located in the
Demised Premises. The space used for the Antenna Equipment shall not exceed the
minimum space necessary for a satellite dish and/or antenna of three (3) feet in
diameter. Prior to its installation Tenant shall cause the point of installation
on the Building to be surveyed to determine the actual size and site of the
Antenna Equipment and maximum weight thereof and Tenant shall submit plans and
specifications to Landlord for review and approval, which approval shall not be
unreasonably withheld or delayed. Tenant shall be solely responsible for the
cost of installation, operation, and maintenance of the Antenna Equipment.
Tenant will install and operate the Antenna Equipment in accordance with all
federal, state and local regulations and the Rules and Regulations of the
Building. Tenant, at Tenant's sole cost and expense, shall install the Antenna
Equipment, wires, conduits, and appurtenant facilities on the Building subject
at all times to the rights of Landlord and other Tenants and the Rules and
Regulations and subject further to the
12
<PAGE>
ADDITIONAL CLAUSES attached to and forming a part of lease dated November __,
1995 between PUBLE, N.V. and Paradigm Music Company for the fourth (4th) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
13
<PAGE>
conditions that such wires, conduits and appurtenant facilities shall not
adversely affect the Building Systems, such as HVAC, elevator, elevator
controllers, fire and life safety electronic systems, electrical and other
systems. In the event Tenants Antenna Equipment interferes in any way with any
Building System and/or other Tenants, Tenant shall immediately cease operating
Tenant's Antenna Equipment and shall remove the Antenna Equipment, all at
Tenant's sole cost and expense. In addition, Tenant shall be responsible for
obtaining any permits and licenses required to install and operate the Antenna
Equipment forwarding a copy(s) of any permits and/or licenses to Landlord.
The Tenant's right to place the Antenna Equipment on the Building and to
operate the Antenna Equipment shall automatically terminate without notice upon
the expiration or earlier termination of this Lease. The Antenna Equipment (and
all wires, conduits and appurtenant facilities) shall be treated as Tenant's
Property, and shall be removed by the Tenant at Tenant's sole cost and expense
and the point of installation on the Building restored to its pre-existing
condition.
13
ADDITIONAL CLAUSES attached to and forming a part of lease dated November __,
1995 between PUBLE, N.V. and Paradigm Music Company for the fourth (4th) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
EXHIBIT "A"
[FLOOR PLAN OF 67 IRVING PLACE, 4th Floor]
ALL INFORMATION FURNISHED IS FROM SOURCES DEEMED RELIABLE AND IS SUBMITTED
SUBJECT TO ERRORS, OMISSIONS, CHANGES.
67 IRVING PLACE
4TH FLOOR
CROSS HATCHED AREA SHOWS APPROXIMATE AREA OF DEMISED PREMISES. ALL DIMENSIONS
ARE APPROXIMATE AND SUBJECT TO CHANGE. DO NOT SCALE.
<PAGE>
EXHIBIT "B"
(Page one of two)
B FORM 54 Rev. 8/85
THE CITY OF NEW YORK
[SEAL] DEPARTMENT OF BUILDINGS ALT 1429/89
CERTIFICATE OF OCCUPANCY AMENDED
BOROUGH MANHATTAN DATE: SEP 09 1993 NO. 103662
AMENDED
This certificate C.O. NO 72301 ZONING DISTRICT R-8
THIS CERTIFIES that the altered building -- premises located at 67 IRVING PLACE
N.W.C. OF IRVING PLACE & EAST 18TH Block 874 Lot 17
CONFORMS SUBSTANTIALLY TO THE APPROVED PLANS AND SPECIFICATIONS AND TO THE
REQUIREMENTS OF ALL APPLICABLE LAWS, RULES, AND REGULATIONS FOR THE USES AND
OCCUPANCIES SPECIFIED HEREIN.
<TABLE>
<CAPTION>
STREET
PERMISSIBLE USE AND OCCUPANCY
====================================================================================================================================
LIVE LOAD MAXIMUM ZONING BUILDING BUILDING
STORY LBS. PER NO. OF DWELLING CODE ZONING CODE DESCRIPTION OF USE
SQ. FT. PERSONS OR ROOMING HABITABLE USE GROUP OCCUPANCY
PERMITTED UNITS ROOMS GROUP
====================================================================================================================================
<S> <C> <C> <C> <C>
CELLAR OG 3 STORAGE AND BOILER ROOM
1ST FLOOR 120 30 6 OFFICES
2ND TO 120 30 6 OFFICES ON EACH
4TH FLOORS each each FLOOR
5TH FLOOR 120 30 6 OFFICES
6TH TO 120 30 6 OFFICES ON EACH
11TH each each FLOOR
FLOORS
12TH FLOOR 120 30 6 OFFICES
COMMERCIAL OLD
CODE
====================================================================================================================================
</TABLE>
<PAGE>
- - - - --------------------------------------------------------------------------------
THIS CERTIFICATE OF OCCUPANCY MUST BE POSTED WITHIN THE BUILDING IN ACCORDANCE
WITH THE RULES OF THE DEPARTMENT PROMULGATED MARCH 31ST, 1967.
- - - - --------------------------------------------------------------------------------
OPEN SPACE USES_________________________________________________________________
(SPECIFY--PARKING SPACES, LOADING BERTHS, OTHER USES, NONE)
================================================================================
M.C. NO CHANGES OF USE OR OCCUPANCY SHALL BE MADE UNLESS
A NEW AMENDED CERTIFICATE OF OCCUPANCY IS OBTAINED
THIS CERTIFICATE OF OCCUPANCY IS ISSUED SUBJECT TO FURTHER LIMITATIONS,
CONDITIONS AND SPECIFICATIONS NOTED ON THE REVERSE SIDE.
/S/ /S/
- - - - --------------------------------------------------------------------------------
BOROUGH SUPERINTENDENT COMMISSIONER
|X| ORIGINAL |_| OFFICE COPY-DEPARTMENT OF BUILDINGS |_| COPY
<PAGE>
EXHIBIT "B"
(Page two of two)
THAT THE ZONING LOT ON WHICH THE PREMISES IS LOCATED IS BOUNDED AS FOLLOWS:
BEGINNING at the point on the WEST side of IRVING PLACE
distant 23 NORTH feet from the corner formed by the intersection of
IRVING PLACE and EAST 18TH STREET
running thence...................... feet; thence ...................... feet;
thence NORTH 46 feet; thence WEST 85.5 feet;
thence SOUTH 46 feet; thence EAST 85.5 feet;
thence.............................. feet; thence ...................... feet;
to the point or place of beginning.
XXX or ALT. No. 1429/89 DATE OF COMPLETION 9/4/93 CONSTRUCTION CLASSIFICATION
CLASS 1 FIREPROOF
BUILDING OCCUPANCY
GROUP CLASSIFICATION HEIGHT STORIES FEET
COMMERCIAL 12 144'-0"
THE FOLLOWING FIRE DETECTION AND EXTINGUISHING SYSTEMS ARE REQUIRED AND WERE
INSTALLED IN COMPLIANCE WITH APPLICABLE LAWS.
<TABLE>
<CAPTION>
- - - - ------------------------------------------------------------------------------------------------------------------------------------
YES NO YES NO
- - - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
STANDPIPE SYSTEM AUTOMATIC SPRINKLER SYSTEM
- - - - ------------------------------------------------------------------------------------------------------------------------------------
YARD HYDRANT SYSTEM
- - - - --------------------------------------------------------------------------------
STANDPIPE FIRE TELEPHONE AND
SIGNALLING SYSTEM
- - - - --------------------------------------------------------------------------------
SMOKE DETECTOR
- - - - --------------------------------------------------------------------------------
FIRE ALARM AND SIGNAL SYSTEM
- - - - --------------------------------------------------------------------------------
</TABLE>
STORM DRAINAGE DISCHARGES INTO:
A) STORM SEWER |_| B) COMBINED SEWER |_| C) PRIVATE SEWAGE
DISPOSAL SYSTEM |_|
SANITARY DRAINAGE DISCHARGES INTO:
A) SANITARY SEWER |_| B) COMBINED SEWER |_| C) PRIVATE SEWAGE
DISPOSAL SYSTEM |_|
LIMITATIONS OR RESTRICTIONS:
BOARD OF STANDARDS AND APPEALS CAL. NO. ___________________________________
CITY PLANNING COMMISSION CAL. NO. _________________________________________
OTHERS:
<PAGE>
ACKNOWLEDGMENTS
CORPORATE TENANT
STATE OF NEW YORK, ss:
County of New York
On this day of , 19 , before me personally came
to me known, who being by me duly sworn, did depose and say that he resides
in that he is the of the corporation described in
and which executed the foregoing instrument, as TENANT; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by order of the Board of Directors of said
corporation, and that he signed his name thereto by like order.
...................................
<PAGE>
INDIVIDUAL TENANT
STATE OF NEW YORK, ss:
County of
On this day of , 19 , before me personally came
to be known and known to me to be the individual described in and who,
as TENANT, executed the foregoing instrument and acknowledged to me that
he executed the same.
...................................
<PAGE>
IMPORTANT - PLEASE READ
RULES AND REGULATIONS ATTACHED TO AND
MADE A PART OF THIS LEASE IN
ACCORDANCE WITH ARTICLE 36.
1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any Tenant or used for any purpose other than for ingress or egress from the
demised premises and for delivery of merchandise and equipment in a prompt and
efficient manner using elevators and passageways designated for such delivery by
Owner. There shall not be used in any space, or in the public hall of the
building, either by any Tenant or by jobbers or others in the delivery or
receipt of merchandise, any hand trucks, except those equipped with rubber tires
and sideguards. If said premises are situated on the ground floor of the
building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk
and curb in front of said premises clean and free from ice, snow, dirt and
rubbish.
2. The water and wash closets and plumbing fixtures shall not be used for
any purposes other than those for which they were designed or constructed and no
sweepings, rubbish, rags, acids or other substances shall be deposited therein,
and the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the Tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.
3. No carpet, rug or other article shall be hung or shaken out of any
window of the building; and no Tenant shall sweep or throw or permit to be swept
or thrown from the demised premises any dirt or other substances into any of the
corridors of halls, elevators, or out of the doors or windows or stairways of
the building and Tenant shall not use, keep or permit to be used or kept any
foul or noxious gas or substance in the demised premises, or permit or suffer
the demised premises to be occupied or used in a manner offensive or
objectionable to Owner or other occupants of the buildings by reason of noise,
odors, and or vibrations, or interfere in any way, with other Tenants or those
having business therein, nor shall any bicycles, vehicles, animals, fish, or
birds be kept in or about the building. Smoking or carrying lighted cigars or
cigarettes in the elevators of the building is prohibited.
4. No awnings or other projections shall be attached to the outside walls
of the building without the prior written consent of Owner.
5. No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any Tenant on any part of the outside of the
demised premises or the building or on the inside of the demised premises if the
same is visible from the outside of the premises without the prior written
consent of Owner, except that the name of Tenant may appear on the entrance door
of the premises. In the event of the violation of the foregoing by any Tenant,
Owner may remove same without any liability and may charge the expense incurred
by such removal to Tenant or Tenants violating this rule. Interior signs on
doors and directory tablet shall be inscribed, painted or affixed for each
Tenant by Owner at the expense of such Tenant, and shall be of a size, color and
style acceptable to Owner.
<PAGE>
6. No tenant shall mark, paint, drill into, or in any way deface any part
of the demised premises or the building of which they form a part. No boring,
cutting or stringing of wires shall be permitted, except with the prior written
consent of Owner, and as Owner may direct. No Tenant shall lay linoleum, or
other similar floor covering, so that the same shall come in direct contact with
the floor of the demised premises, and, if linoleum or other similar floor
covering is desired to be used an interlining of builder's deadening felt shall
be first affixed to the floor, by a paste or other material, soluble in water,
the use of cement or other similar adhesive material being expressly prohibited.
7. No additional locks or bolts of any kind shall be placed upon any of the
doors or windows by any Tenant, nor shall any changes be made in existing locks
or mechanism thereof. Each Tenant must, upon the termination of his Tenancy,
restore to Owner all keys of stores, offices and toilet rooms, either furnished
to, or otherwise procured by, such Tenant, and in the event of the loss of any
keys, so furnished, such Tenant shall pay to Owner the cost thereof.
8. Freight, furniture, business equipment, merchandise and bulky matter of
any description shall be delivered to and removed from the premises only on the
freight elevators and through the service entrances and corridors, and only
during hours and in a manner approved by Owner. Owner reserves the right to
inspect all freight to be brought into the building and to exclude from the
building all freight which violates any of these Rules and Regulations of the
lease of which these Rules and Regulations are a part.
9. No Tenant shall obtain for use upon the demised premises ice, drinking
water, towel and other similar services, or accept barbering or bootblacking
services in the demised premises, except from persons authorized by Owner, and
at hours and under regulations fixed by Owner. Canvassing, soliciting and
peddling in the building is prohibited and each Tenant shall cooperate to
prevent the same.
10. Owner reserves the right to exclude from the building all persons who
do not present a pass to the building signed by Owner. Owner will furnish passes
to persons for whom any Tenant requests same in writing. Each Tenant shall be
responsible for all persons for whom he request such pass and shall be liable to
owner for all acts of such persons. Notwithstanding the foregoing, Owner shall
not be required to allow Tenant or any person to enter or remain in the
building, except on business days from 8:00 a.m. to 6:00 p.m. and on Saturdays
from 8:00 a.m. to 1:00 p.m. Tenant shall not have a claim against owner by
reason of Owner excluding from the building any person who does not present such
pass.
<PAGE>
11. Owner shall have the right to prohibit any advertising by any Tenant
which in Owner's opinion, tends to impair the reputation of the building or its
desirability as a loft building, and upon written notice from Owner, Tenant
shall refrain from or discontinue such advertising.
12. Tenant shall not bring or permit to be brought or kept in or on the
demised premises, any inflammable, combustible, or explosive, or hazardous
fluid, material, chemical or substance, or cause or permit any odors of cooking
or other processes, or any unusual or other objectionable odors to permeate in
or emanate from the demised premises.
13. Tenant shall not use the demised premises in a manner which disturbs or
interferes with other Tenants in the beneficial use of their premises.
* RULES AND REGULATIONS WILL BE ENFORCED IN A NON-DISCRIMINATORY MANNER.
Address
Premises
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TO
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STANDARD FORM OF
LOFT
SEAL SEAL
LEASE
The Real Estate Board of New York, Inc.
Copyright 1994. All rights Reserved.
Reproduction in whole or in part prohibited.
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Dated 19
Rent Per Year
Rent Per Month
Term
From
To
Drawn by .......................................
Checked by .....................................
Entered by ......................................
Approved by ....................................
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<PAGE>
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STANDARD FORM OF LOFT LEASE
The Real Estate Board of New York, Inc.
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Agreement of Lease, made as of this day of May 1996, between PUBLE N.V.,
having an address at 67 Irving Place, NEW YORK, NEW YORK 10003 party of the
first part, hereinafter referred to as OWNER and PARADIGM MUSIC ENTERTAINMENT
COMPANY, A DELAWARE CORPORATION having an address at 145 Glenlawn Avenue, Sea
Cliff, New York 11579
party of the second part, hereinafter referred to as TENANT,
Witnesseth: Owner hereby lease to Tenant and Tenant hereby hires from Owner the
Entire Third (3) floor as shown on the floor plan set forth in Exhibit "A"
attached hereto and made a part hereof.
in the building known as 67 Irving Place
in the borough of MANHATTAN, City of New York, for the term of
Four (4) years and ten months
(or until such term shall sooner cease and expire as hereinafter provided) to
commence on the 1st day of August nineteen hundred and ninety-six, and to end on
the 31st day of May two thousand one and both dates inclusive, at an annual
rental rate of as set forth in Article 74 of the Riders attached hereto and made
a part hereof, together with all other sums of money as shall become due and
payable by Tenant to Landlord
which Tenant agrees to pay in lawful money of the United States which shall be
legal tender in payment of all debts and dues, public and private, at the time
of payment, in equal monthly installments in advance on the first day of each
month during said term, at the office of Owner or such other place as Owner may
designate, without any set off or deduction whatsoever, except that Tenant shall
pay the first monthly installment(s) on the execution hereof.
In the event that, at the commencement of the term of this lease. or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment of rent payable hereunder and
the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby covenant
as follows:
Rent:
1. Tenant shall pay the rent as above and as hereinafter provided.
Occupancy:
2. Tenant shall use and occupy demised premises for General offices for
Tenant's Business
provided such use is in accordance with the certificate of occupancy for the
building, if any, and for no other purpose.
<PAGE>
Alterations: STRUCTURAL
3. Tenant shall make no changes in or to the demised premises of any nature
without Owner's prior written consent. Subject to the prior written consent of
Owner, and to the provisions of this article, Tenant, at Tenant's expense, may
make alterations, installations, additions or improvements which are
nonstructural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises using
contractors or mechanics first approved in each instance by Owner. Tenant shall,
at its expense, before making any alterations, additions, installations or
improvements obtain all permits, approval and certificates required by any
governmental or quasi-governmental bodies and (upon completion) certificates of
final approval thereof and shall deliver promptly duplicates of all such
permits, approvals and certificates to Owner. Tenant agrees to carry and will
cause Tenant's contractors and subcontractors to carry such workman's
compensation, general liability, personal and property damage insurance as Owner
may require. If any mechanic's lien is filed against the demised premises, or
the building of which the same forms a part, for work claimed to have been done
for, or materials furnished to, Tenant, whether or not done pursuant to this
article, the same shall be discharged by Tenant within thirty days thereafter,
at Tenant's expense, by payment of filing the bond required by law or otherwise.
All fixtures and all paneling, partitions, railings and like installations,
installed in the premises at any time, either by Tenant or by Owner on Tenant's
behalf, shall upon installation, become the property of Owner and shall remain
upon and be surrendered with the demised premises unless Owner, by notice to
Tenant no later than twenty five days prior to the date fixed as the termination
of this lease, elects to relinquish Owner's right thereto and to have them
removed by Tenant, in which event the same shall be removed from the demised
premises by Tenant prior to the expiration of the lease, at Tenant's expense.
Nothing in this Article shall be construed to give Owner title to or to prevent
Tenant's removal of trade fixtures, moveable office furniture and equipment, but
upon removal of any such from the premises or upon removal of other
installations as may be required by Owner, Tenant shall immediately and at its
expense, repair and restore the premises to the condition existing prior to
installation and repair any damage to the demised premises or the building due
to such removal. All property permitted or required to be removed by Tenant at
the end of the term remaining in the premises after Tenant's removal shall be
deemed abandoned and may, at the election of Owner, either be retained as
Owner's property or removed from the premises by Owner, at Tenant's expense.
Repairs:
4. Owner shall maintain and repair the exterior of and the public portions
of the building. Tenant shall, throughout the term of this lease, take good care
of the demised premises including the bathrooms and lavatory facilities (if the
demised premises encompass the entire floor of the building) and the windows and
window frames and, the fixtures and appurtenances therein and at Tenant's sole
cost and expenses promptly make all repairs thereto and to the building, whether
structural or non-structural in nature, caused by or resulting from the
carelessness, omission, neglect or improper conduct of Tenant, Tenant's
servants, employees, invitees, or licenses, and whether or not arising from such
tenant conduct or omission, when required by other provisions of this lease,
including Article 6. Tenant shall also repair all damage to the building and the
demised premises caused by the moving of Tenant's fixtures, furniture or
equipment. All the aforesaid repairs shall be of quality or class equal to the
original work or construction. If Tenant fails, after ten days notice, to
proceed with due diligence to make repairs required to be made by tenant, the
same may be made by the Owner at the expense of Tenant, and the expenses thereof
incurred by Owner shall be collectible, as additional rent, after rendition of a
bill or statement therefor. If the demised premises be or become infested with
vermin, Tenant shall, at its expense, cause the same to be exterminated. Tenant
shall give Owner prompt notice of any defective condition in any plumbing,
<PAGE>
heating system or electrical lines located in the demises premises and following
such notice, Owner shall remedy the condition with due diligence, but at the
expense of Tenant, if repairs are necessitated by damage or injury attributable
to Tenant, Tenant's servants, agents, employees, invitees or licensees as
aforesaid. Except as specifically provided in Article 9 or elsewhere in this
lease, there shall be no allowance to the Tenant for a diminution of rental
value and no liability on the part of Owner by reason of inconvenience,
annoyance or injury to business arising from Owner, Tenant or others making or
failing to make any repairs, alterations, additions or improvements in or to any
portion of the building or the demised premises or in and to the fixtures,
appurtenances or equipment thereof. It is specifically agreed that Tenant shall
not be entitled to any set off or reduction of rent by reason of any failure of
Owner to comply with the covenants of this or any other article of this lease.
Tenant agrees that Tenant's sole remedy at law in such instance will be by way
of any action for damages for breach of contract. The provisions of this Article
4 with respect to the making of repairs shall not apply in the case of fire or
other casualty with regard to which Article 9 hereof shall apply.
Window Cleaning:
5. Tenant will not clean nor require, permit suffer or allow any window in
the demised premises to be cleaned from the outside in violation of Section 202
of the New York State Labor Law or any other applicable law or of the Rules of
the Board of Standards and Appeals, or of any other Board or body having or
asserting jurisdiction.
Requirements of Law, Fire Insurance:
6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter Tenant shall, at Tenant's sole cost and
expense, promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and board and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, or the Insurance Services Office, or any similar body which shall
impose any violation, order of duty upon Owner or Tenant with respect to the
demised premises, whether or not arising out of Tenant's use or manner of use
thereof, or, with respect to the building, if arising out of Tenant's use or
manner of use of the demised premises of the building (including the use
permitted under the lease). Except as provided in Article 30 hereof, nothing
herein shall require Tenant to make structural repairs or alterations unless
Tenant has, by its manner of use of the demised premises or method of operation
therein, violated any such laws, ordinances, orders, rules, regulations or
requirements with respect thereto. Tenant shall not do or
Rider to Article 6: Without limiting the generality of this article 6, Landlord
agrees that it will be responsible for causing the public areas of the building
to comply with state, local and federal laws and orders.
<PAGE>
permit any act or thing to be done in or to the demised premises which is
contrary to law, or which will invalidate or be in conflict with public
liability, fire or other policies of insurances at any time carried by or for
the benefit of Owner. Tenant shall not keep anything in the demised premises
except as now or hereafter permitted by the Fire Department, Board of Fire
Underwriters, Fire Insurance Rating Organization and other authority having
jurisdiction, and then only in such manner and such quantity so as not to
increase the rate for fire insurance applicable to the building, nor use the
premises in a manner which will increase the insurance rate for the building or
any property located therein over that in effect prior to the commencement of
Tenant's occupancy. If by reason of failure to comply with the foregoing the
fire insurance rate shall, at the beginning of this lease or at any time
thereafter, be higher than it otherwise would be, then Tenant shall reimburse
Owner, as additional rent hereunder, for that portion of all fire insurance
premiums thereafter paid by Owner which shall have been charged because of such
failure by Tenant. In any action or proceeding wherein Owner and Tenant are
parties, a schedule or "make-up" or rate for the building or demised premises
issued by a body making fire insurance rates applicable to said premises shall
be conclusive evidence of the facts therein stated and of the several items and
charges in the fire insurance rates then applicable to said premises. Tenant
shall not place a load upon any floor of the demised premises exceeding the
floor load per square foot area which it was designed to carry and which is
allowed by law. Owner reserves the right to prescribe the weight and position of
all safes, business machines and mechanical equipment. Such installations shall
be placed and maintained by Tenant, at Tenant's expense, in settings sufficient,
in Owner's judgment, to absorb and prevent vibration, noise and annoyance.
Subordination:
7. This lease is subject and subordinate to all ground or underlying leases
and to all mortgages which may now or hereafter affect such leases or the real
property of which demised premises are a part and to all renewals, modifications
consolidations, replacements and extensions of any such underlying leases and
mortgages. This clause shall be self-operative and no further instrument or
subordination shall be required by any ground or underlying lessor or by any
mortgagee, affecting any lease or the real property of which the demised
premises are a part. In confirmation of such subordination, Tenant shall from
time to time execute promptly any certificate that Owner may request.
Tenant's Liability Insurance Property Loss, Damage, Indemnity:
8. Owner or its agents shall not be liable for any damage to property of
Tenant or of others entrusted to employees of the building, nor for loss of or
damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence of Owner, its agents, servants or
employees; Owner or its agents shall not be liable for any damage caused by
other tenants or persons in, upon or about said building or caused by operations
in connection of any private, public or quasi public work. If at any time any
windows of the demised premises are temporarily closed, darkened or bricked up
(or permanently closed, darkened or bricked up, if required by law) for any
reason whatsoever including, but not limited to Owner's own acts, Owner shall
not be liable for any damage Tenant may sustain thereby and Tenant shall not be
entitled to any compensation therefor nor abatement or diminution of rent nor
shall the same release Tenant from its obligations hereunder nor constitute an
eviction. Tenant shall indemnify and save harmless Owner against and from all
liabilities, obligations, damages, penalties, claims, costs and expenses for
which Owner shall not be reimbursed by insurance, including reasonable
attorney's fees, paid, suffered or incurred as a result of any beach by Tenant,
Tenant's agents, contractors, employees, invitees, or licensees, of any covenant
or condition of this lease, or the carelessness, negligence or improper conduct
of the Tenant, tenant's agents, contractors, employees, invitees or licensees.
Tenant's liability under this lease extends to the acts and omissions of any
sub-tenant, and any agent, contractor, employee, invitee or licensee of any
sub-tenant. In case any action or proceeding is brought against Owner by reason
of any such claim, Tenant, upon written notice from Owner, will, at Tenant's
expense, resist or defend such action or proceeding by counsel approved by Owner
in writing, such approval not to be unreasonably withheld.
<PAGE>
Destruction, Fire and Other Casualty:
9. (a) If the demised premises or any part thereof shall be damaged by fire
or other casualty, Tenant shall give immediate notice thereof to Owner and this
lease shall continue in full force and effect except as hereinafter set forth.
(b) If the demised premises are partially damaged or rendered partially unusable
by fire or other casualty, the damages thereto shall be repaired by and at the
expense of Owner and the rent and other items of additional rent, until such
repair shall be substantially completed, shall be apportioned from the day
following the casualty according to the part of the premises which is usable.
(c)If the demised premises are totally damaged or rendered wholly unusable by
fire or the casualty, then the rent and other items of additional rent as
hereinafter expressly provided shall be proportionately paid up to the time of
the casualty and thenceforth shall cease until the date when the premises shall
have been repaired and restored by Owner (or sooner reoccupied in part by Tenant
then rent shall be apportioned as provided in subsection (b) above), subject to
Owner's right to elect not to restore the same as hereinafter provided. (d) If
the demised premises are rendered wholly unusable or (whether or not the demised
premises are damaged in whole or in part) if the building shall be so damaged
that Owner shall decide to demolish it or to rebuild it, then, in any of such
events, Owner may elect to terminate this lease by written notice to Tenant,
given within 90 days after such fire or casualty, or 30 days after adjustment of
the insurance claim for such fire or casualty, whichever is sooner, specifying a
date for the expiration of the lease, which date shall not be more than 60 days
after the giving of such notice, and upon the date specified in such notice the
term of this lease shall expire as fully and completely as if such date were the
date set forth above for the termination of this lease and Tenant shall
forthwith quit, surrender and vacate the premises without prejudice however, to
Owner's right and remedies against Tenant under the lease provisions in effect
prior to such termination, and any rent owing shall be paid up to such date and
any payments of rent made by Tenant which were on account of any period
subsequent to such date shall be returned to Tenant. Unless Owner shall serve a
termination notice as provided for herein, Owner shall make the repairs and
restorations under the conditions of (b) and (c) hereof, with all reasonable
expedition, subject to delays due to adjustment of insurance claims, labor
troubles and cause beyond Owner's control. After any such casualty, Tenant shall
cooperate with Owner's restoration by removing from the premises as promptly as
reasonably possible, all of Tenant's salvageable inventory and movable
equipment, furniture, and other property. Tenant's liability for rent shall
resume five (5) days after written notice from Owner that the premises are
substantially ready for Tenant's occupancy. (e) Nothing contained hereinabove
shall relieve Tenant from liability that may exist as a result of damage from
fire or other casualty. Notwithstanding the foregoing, including Owner's
obligation to restore under subparagraph (b)above, each party shall look first
to any insurance in its favor before making any claim against the other party
for recovery for loss or damage resulting from fire or other casualty, and to
the extent that such insurance is in force and collectible and to the extent
permitted by law, Owner and Tenant each hereby releases and waives all right of
recovery with respect to subparagraphs (b), (d) and (e) above, against the other
or any one claiming through or under each of them by way of subrogation or
otherwise. The release and waiver herein referred to shall be deemed to include
any loss or damage to the demised premises and/or to any personal property,
equipment, trade fixtures, goods and merchandise located therein. The foregoing
release and waiver shall be in force only if both releasors' insurance policies
contain a clause providing that such a release or waiver shall not invalidate
the insurance. If, and to the extent, that such waiver can be obtained only by
the payment of additional premiums, then the party benefitting from the waiver
shall pay such premium within ten days after written demand or shall be deemed
to have agreed that the party obtaining insurance coverage shall be free of any
further obligation under the provisions hereof with respect to waiver of
subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's
furniture and or furnishings or any fixtures or equipment, improvements, or
appurtenances removable by Tenant and agrees that Owner will not be obligated to
repair any damage thereto or replace the same. (f) Tenant hereby waives the
provisions of Section 227 of the Real Property Law and agrees that the
provisions of this article shall govern and control in lieu thereof.
<PAGE>
Eminent Domain:
10. If the whole or any part of the demised premises shall be acquired or
condemned by Eminent Domain for any public or quasi public use or purpose, then
and in that event, the term of this lease shall cease and terminate from the
date of title vesting in such proceeding and Tenant shall have no claim for the
value of any unexpired term of said lease. Tenant shall have the right to make
an independent claim to the condemning authority for the value of Tenant's
moving expenses and personal property, trade fixtures and equipment, provided
Tenant is entitled pursuant to the terms of the lease to remove such property,
trade fixtures and equipment at the end of the term and provided further such
claim does not reduce Owner's award.
Assignment, Mortgage, Etc.:
11. Tenant, for itself, it heirs, distributees, executors, administrators,
legal representatives, successors and assigns, expressly covenants that it shall
not assign, mortgage or encumber this agreement, nor underlet, or suffer or
permit the demised premises or any part thereof to be used by others, without
the prior written consent of Owner in each instance. Transfer of the majority of
the stock of a corporate Tenant of the majority partnership interest of a
partnership Tenant shall be deemed an assignment. If this lease be assigned, or
if the demised premises or any part thereof be underlet or occupied by anybody
other than Tenant, Owner may, after default by Tenant, collect rent from the
assignee, under-tenant or occupant, and apply the net amount collected to the
rent herein reserved, but no such assignment, underletting, occupancy or
collection shall be deemed a waiver of this covenant, or the acceptance of the
assignee, undertenant or occupant as Tenant, or a release of Tenant from the
further performance by Tenant of covenants on the part of Tenant herein
contained. The consent by Owner to an assignment or underletting shall not in
any wise be construed to relieve Tenant from obtaining the express consent in
writing of Owner to any further assignment or underletting.
Electric Current:
12. Rates and conditions in respect to submetering or rent inclusion, as
the case may be, to be added in RIDER attached hereto. Tenant covenants and
agrees that at all times its use of electric current shall not exceed the
capacity of existing feeders to the building or the risers or wiring
installation and Tenant may not use any electrical equipment which, in Owner's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the building. The change at any time of
the character of electric service shall in no wise make Owner liable or
responsible to Tenant, for any loss, damages or expenses which Tenant may
sustain.
Access to Premises:
13. Owner or Owner's agents shall have the right (but shall not be obligated) to
enter the demised premises in any emergency at any time, and, at other
reasonable times, to examine the same and to make such repairs, replacements and
improvements as Owner may deem necessary and reasonably desirable to any portion
of the building or which Owner may elect to perform in the premises after
Tenant's failure to make repairs or perform any work which Tenant is obligated
to perform under this lease, or for the purpose of complying with laws,
regulations and other directions of governmental authorities. Tenant shall
permit Owner to use and maintain and replace pipes and conduits in and through
the demised premises and to erect new pipes and conduits therein provided,
wherever possible, they are within walls or otherwise concealed. Owner may,
during the progress of any work in the demised premises, take all necessary
materials and equipment into said premises without the same constituting an
eviction nor shall the Tenant be entitled to any abatement of rent while such
work is in progress nor to any damages by reason of loss or interruption of
business or otherwise. Throughout the term hereof Owner shall have the right to
enter the demised premises at reasonable hours for the purpose of showing the
same to prospective purchases or mortgagees of the building, and during the last
six months of the term of the purpose of showing the same to prospective tenants
and may, during said six months period, place upon
- - - - -----------------------------------------
[GRAPHIC] Rider to be added if necessary.
<PAGE>
the demised premises the usual notices "To Let" and "For Sale" which notices
Tenant shall permit to remain thereon without molestation. If Tenant is not
present to open and permit an entry into the demised premises, Owner or Owner's
agents may enter the same whenever such entry may be necessary or permissible by
master key or forcibly and provided reasonable care is exercised to safeguard
Tenant's property, such entry shall not render Owner or its agents liable
therefor, nor in any event shall the obligations of Tenant hereunder be
affected. If during the last month of the term Tenant shall have removed all or
substantially all of Tenant's property therefrom. Owner may immediately enter,
alter, renovate or redecorate the demised premises without limitation or
abatement or rent, or incurring liability to tenant for any compensation and
such act shall have no effect on this lease or Tenant's obligation hereunder.
Vault, Vault Space, Area:
14. No Vaults, vault space or area, whether or not enclosed or covered, not
within the property line of the building is leased hereunder anything contained
in or indicated on any sketch, blue print or plan, or anything contained
elsewhere in this lease to the contrary notwithstanding. Owner makes no
representation as to the location of the property line of the building. All
vaults and vault space and all such areas not within the property line of the
building, which Tenant may be permitted to use and/or occupy, is to be used
and/or occupied under a revocable license, and if any such license be revoked,
or if the amount of such space or area be diminished or required by any federal,
state or municipal authority or public utility, Owner shall not be subject to
any liability nor shall Tenant be entitled to any compensation or diminution or
abatement of rent, nor shall such revocation, diminution or requisition be
deemed constructive or actual eviction. Any tax, fee or charge of municipal
authorities for such vault or area shall be paid by Tenant, if used by Tenant,
whether or not specifically leased hereunder.
Occupancy:
15. Tenant will not at any time use or occupy the demised premises in
violation of the certificate of occupancy issued for the building of which the
demised premises are a part. Tenant has inspected the premises and accepts them
as is, subject to the riders annexed hereto with respect to Owner's work, if
any. In any event, Owner makes no representation as to the condition of the
premises and Tenant agrees to accept the same subject to violations, whether or
not of record. If any governmental license or permit shall be required for the
proper and lawful conduct of Tenant's business, Tenant shall be responsible for
and shall procure and maintain such license or permit. A copy of C of O is
attached as Exhibit "B"
Bankruptcy:
16. (a) Anything elsewhere in this lease to the contrary notwithstanding,
this lease may be cancelled by Owners by sending of a written notice to Tenant
within a reasonable time after the happening of any one or more of the following
events: (1) the commencement of a case in bankruptcy or under the laws of any
state naming Tenant as the debtor; or (2) the making by Tenant of an assignment
or any other arrangement for the benefit of creditors under any state statute.
Neither Tenant nor any person claiming through or under Tenant, or by reason of
any statute or order of court, shall thereafter be entitled to possession of the
premises demised but shall forthwith quit and surrender the premises. If this
lease shall be assigned in accordance with its terms, the provisions of this
Article 16 shall be applicable only to the party then owning Tenant's interest
in this lease.
<PAGE>
(b) It is stipulated and agreed that in the event of the termination of
this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any
other provisions of this lease to the contrary, be entitled to recover from
Tenant as and for liquidated damages an amount equal to the difference between
the rental reserved hereunder for the unexpired portion of the term demised and
the fair and reasonable rental value of the demised premises for the same
period. In the computation of such damages the difference between any
installment of rent becoming due hereunder after the date of termination and the
fair and reasonable rental value of the demised premises for the period for
which such installment was payable shall be discounted to the date of
termination at the rate of four percent (4%) per annum. If such premises or any
part thereof be relet by the Owner for the unexpired term of said lease, or any
part thereof, before presentation of proof of such liquidated damages to any
court, commission or tribunal, the amount of rent reserved upon such reletting
shall be deemed to be the fair and reasonable rental value for the part or the
whole of the premises so re-let during the term of the re-letting. Nothing
herein contained shall limit or prejudice the right of the Owner to prove for
and obtain as liquidated damages by reason of such termination, an amount equal
to the maximum allowed by any statute or rule or law in effect at the time when,
and governing the proceedings in which, such damages are to be proved, whether
or not such amount be greater, equal to, or less than the amount of the
difference referred to above.
Default:
17. (1) If Tenant defaults in fulfilling any of the covenants of this lease
other than the covenants for the payment of rent or additional rent; or if the
demised premises becomes vacant or deserted "or if this lease be rejected under
ss.235 of Title 11 of the U.S. Code (bankruptcy code);" or if any execution or
attachment shall be issued against Tenant or any of Tenant's property whereupon
the demised premises shall be taken or occupied by someone other than Tenant; or
if Tenant shall make default with respect to any other lease between Owner and
Tenant; or if Tenant shall have failed, after five (5) days written notice, to
redeposit with Owner any portion of the security deposited hereunder which Owner
has applied to the payment of any rent and additional rent and additional rent
due and payable hereunder or failed to move into or take possession of the
premises within thirty (30) days after the commencement of the term of this
lease, of which fact Owner shall be the sole judge; then in any other or more of
such events, upon Owner serving a written fifteen (15) days notice upon Tenant
specifying the nature of said default and upon the expiration of said fifteen
(15) days, if Tenant shall have failed to comply with or remedy such default, or
if the said default or omission complained of shall be of a nature that the same
cannot be completely cured or remedied within said fifteen (15) day period, and
if Tenant shall not have diligently commenced during such default within such
fifteen (15) day period, and shall not thereafter with reasonable diligence and
in good faith, proceed to remedy or cure such default, then Owner may serve a
written five (5) days' notice of cancellation of this lease upon Tenant, and
upon the expiration of said five (5) days this lease and the term thereunder
shall end and expire as fully and completely as if the expiration of such five
(5) day period were the day herein definitely fixed for the end and expiration
of this lease and the term hereof and Tenant shall then quit and surrender the
demised premises to Owner but Tenant shall remain liable as hereinafter
provided.
<PAGE>
(2) If the notice provided for in (1) hereof shall have been given, and the
term shall expire as aforesaid; or if Tenant shall make default in the payment
of the rent reserved herein or any item of additional rent herein mentioned or
any part of either or in making any other payment herein required; then and in
any of such events Owner may without notice, re-enter the demised premises
either by force or otherwise, and dispossess Tenant by summary proceedings or
otherwise, and the legal representative of Tenant or other occupant of demised
premises and remove their effects and hold the premises as if this lease had not
been made, and Tenant hereby waives the service of notice of intention to
re-enter or to institute legal proceedings to that end. If Tenant shall make
default hereunder prior to the date fixed as the commencement of any renewal or
extension of this lease, Owner may cancel and terminate such renewal or
extension agreement by written notice.
Remedies of Owner and Waiver of Redemption:
18. In case of any such default, re-entry, expiration and/or dispossess by
summary proceedings or otherwise, (a) the rent, and additional rent, shall
become due thereupon and be paid up to the time of such re-entry, dispossess
and/or expiration, (b) Owner may re-let the premises or any part or parts
thereof, either in the name of Owner or otherwise, for a term or terms, which
may at Owner's option be less than or exceed the period which would otherwise
have constituted the balance of the term of this lease and may grant concessions
or free rent or charge a higher rental than that in this lease, (c) Tenant or
the legal representatives of Tenant shall also pay Owner as liquidated damages
for the failure of Tenant to observe and perform said Tenant's covenants herein
contained, any deficiency between the rent hereby reserved and or covenanted to
be paid and the net amount, if any, of the rents collected on account of the
subsequent lease or leases of the demised premises for each month of the period
which would otherwise have constituted the balance of the term of this lease.
The failure of Owner to re-let the premises or any part of parts therefor shall
not release or affect Tenant's liability for damages. In computing such
liquidated damages there shall be added to the said deficiency such expenses as
Owner may incur in connection with re-letting, such as legal expenses,
reasonable attorney's fees, brokerage, advertising and for keeping the demised
premises in good order or for preparing the same for reletting. Any such
liquidated damages shall be paid in monthly installment by Tenant on the rent
day specified in this lease and any suit brought to collect the amount of the
deficiency for any month shall not prejudice in any way the rights of Owner to
collect the deficiency for any subsequent month by a similar proceeding. Owner,
in putting the demised premises in good order or preparing the same for
re-rental may, at Owner's option, make such alterations, repairs, replacements,
and/or decorations in the demised premises as Owner, in Owner's sole judgment,
<PAGE>
considers advisable and necessary for the purpose of re-letting the demised
premises, and the making of such alterations, repairs, replacements, and/or
decorations shall not operate or be construed to release Tenant from liability
hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever
for failure to re-let the demised premises, or in the event that the demised
premises are re-let, for failure to collect the rent thereof under such
re-letting, and in no event shall Tenant be entitled to received any excess, if
any, of such net rents collected over the sums payable by Tenant to Owner
hereunder. In the event of a breach or threatened breach by Tenant of any of the
covenants or provisions hereof, Owner shall have the right of injunction and the
right to invoke any remedy allowed at law or in equity as if re-entry, summary
proceedings and other remedies were not herein provided for. Mention in this
lease of any particular remedy, shall not preclude Owner from any other remedy,
in law or in equity. Tenant hereby expressly waives any and all rights or
redemption granted by or under any present or future laws.
Fees and Expenses:
19. If Tenant shall default in the observance or performance of any term or
covenant on Tenant's part to be observed or performed under or by virtue of any
of the terms or provisions in any article of this lease, after notice if
required and upon expiration of any applicable grace period if any, (except in
an emergency), then, unless otherwise provided elsewhere in this lease, Owner
may immediately or at any time thereafter and without notice perform the
obligations of Tenant thereunder. If Owner, in connection with the foregoing or
in connection with any default by Tenant in the covenant to pay rent hereunder,
makes any expenditures or incurs any obligations for the payment of money,
including but not limited to reasonable attorney's fees, in instituting,
prosecuting or defending any action or proceedings, and prevails in any such
action or proceeding, then Tenant will reimburse Owner for such sums so paid or
obligations incurred with interest and costs. The foregoing expenses incurred by
reason of Tenant's default shall be deemed to be additional rent hereunder and
shall be paid by Tenant to Owner within ten (10 days) of rendition of any bill
or statement to Tenant therefor. If Tenant's lease term shall have expired at
the time of making of such expenditures or incurring of such obligations, such
sums shall be recoverable by Owner as damages.
Building Alterations and Management:
20. Owner shall have the right at any time without the same constituting an
eviction and without incurring liability to Tenant therefor to change the
arrangement and or location of public entrances, passageways, doors, doorways,
corridors, elevators, stairs, toilets or other public parts of the building and
to change the name, number or designation by which the building may be known.
There shall be no allowance to Tenant for diminution of rental value and no
liability on the part of Owner by reason of inconvenience, annoyance or injury
to business arising from Owner or other Tenant making any repairs in the
building or any such alterations, additions and improvements. Furthermore,
Tenant shall not have any claim against Owner by reason of Owner's imposition of
any controls of the manner of access to the building by Tenant's social or
business visitors as the Owner may deem necessary for the security of the
building and its occupants.
<PAGE>
No Representations by Owner:
21. Neither Owner nor owner's agents have made any representations or
promises with respect to the physical condition of the building, the land upon
which it is erected or the demised premises, the rents, leases, expenses of
operation or any other matter or thing affecting or related to the demised
premises or the building except as herein expressly set forth and no rights,
easements or licenses are acquired by Tenant by implication or otherwise except
as expressly set forth in the provisions of this lease. Tenant has inspected the
building and the demised premises and is thoroughly acquainted with their
condition and agrees to take the same "as is" on the date possession is tendered
and acknowledges that the taking of possession of the demised premises by Tenant
shall be conclusive evidence that the said premises and the building of which
the same form a part were in good and satisfactory condition at the time such
possession was so taken, except as to latent defects. All understandings and
agreements heretofore made between the parties hereto are merged in this
contract, which alone fully and completely expresses the agreement between Owner
and Tenant and any executory agreement hereafter made shall be ineffective to
change, modify, discharge or effect an abandonment of it in whole or in part,
unless such executory agreement is in writing and signed by the party against
whom enforcement of the change, modification, discharge or abandonment is
sought.
End of Term:
22. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean, in
good order and condition, ordinary wear and damages which Tenant is not required
to repair as provided elsewhere in this lease excepted, and Tenant shall remove
all its property from the demised premises. Tenant's obligation to observe or
perform this covenant shall survive the expiration or other termination of this
lease. If the last day of the term of this Lease or any renewal thereof, falls
on Sunday, this lease shall expire at noon on the preceding Saturday unless it
be a legal holiday in which case it shall expire at noon on the preceding
business day.
Quiet Enjoyment:
23. Owner covenants and agrees with Tenant that upon Tenant paying the rent
and additional rent and observing and performing all the terms, covenants and
conditions, on Tenant's part to be observed and performed. Tenant may peaceably
and quietly enjoy the premises hereby demised, subject, nevertheless, to the
terms and conditions of this lease including, but not limited to Article 34
hereof and to the ground leases, underlying leases and mortgages hereinbefore
mentioned.
Failure to Give Possession:
24. If Owner is unable to give possession of the demised premises on thee
date of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or if Owner has not completed any work required to be performed by
Owner, or for any other reason, Owner shall not be subject to any liability for
failure to give possession on said date and validity of the lease shall not be
impaired under such circumstances, nor shall the same be construed in any wise
to extend the term of this lease, but the rent payable hereunder shall be abated
(provided Tenant is not responsible for Owner's inability to obtain possession
or complete any work required) until after Owner shall have given Tenant notice
that Owners is able to deliver possession in the condition required by this
lease. If permission is given to Tenant to enter into the possession of the
<PAGE>
demised premises or to occupy premise other than the demised premises prior to
the date specified as the commencement of the term of this lease, Tenant
covenants and agrees that such possession and/or occupancy shall be deemed to be
under all the terms, covenants, conditions and provisions of this lease, except
the obligation to pay the fixed annual rent set forth in page one of this lease.
The provisions of this article are intended to constitute "an express provision
to the contrary" within the meaning of Section 223-a of the New York Real
Property Law.
No Waiver:
25. The failure of Owner to seek redress for violation of, or to insist
upon the strict performance of any covenant or condition of this lease or of any
of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not
prevent a subsequent act which would have originally constituted a violation
from having all the force and effect of an original violation. The receipt by
Owner of rent with knowledge of the breach of any covenant of this lease shall
not be deemed a waiver of such breach and no provision of this lease shall be
deemed to have been waived by Owner unless such waiver be in writing signed by
Owner. No payment by Tenant or receipt by Owner of a lesser amount than the
monthly rent herein stipulated shall be deemed to be other than on account of
the earliest stipulated rent, nor shall any endorsement or statement of any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Owner may accept such check or payment without
prejudice to Owner's right to recover the balance of such rent or pursue any
other remedy in this lease provided. All checks tendered to owner as and for the
rent of the demised premises shall be deemed payments for the account of Tenant.
Acceptance by Owner of rent from anyone other than Tenant shall not be deemed to
operate as an attornment to Owner by the payor of such rent or as a consent by
Owner to an assignment or subletting by Tenant of the demised premises to such
payor, or as a modification of the provision of this lease. No act or thing done
by Owner or Owner's agents during the term hereby demised shall be deemed an
acceptance of a surrender of said premises and no agreement to accept such
surrender shall be valid unless in writing signed by Owner. No employee of Owner
or Owner's agent shall have any power to accept the keys of said premises prior
to the termination of the lease and the delivery of keys to any such agent or
employee shall not operate as a termination of the lease or a surrender of the
premises.
Waiver of Trial by Jury:
26. It is mutually agreed by and between Owner and Tenant that he
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other (except for personal injury or property damage) or any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said premises,
and any emergency statutory or any other statutory remedy. It is further
mutually agreed that in the event Owner commences any proceeding or action for
possession including a summary proceeding for possession of the premises, Tenant
will not interpose any counterclaim of whatever nature or description in any
such proceeding including a counterclaim under Article 4 except for statutory
mandatory counterclaims.
Inability to Perform:
27. This Lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in no wise be affected, impaired or excused because Owner is
unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment,
fixtures or other materials if Owner is prevented or delayed from doing so by
reason of strike or labor troubles or any cause whatsoever beyond Owner's sole
control including, but not limited to, government preemption or restrictions or
by reason of any rule, order or regulation of any department or subdivision
thereof of any government agency or by reason of the conditions which have been
or are affected, either directly or indirectly, by war or other emergency.
Bills and Notices:
28. Except as otherwise in this lease provided, a bill statement, notice or
communication which Owner may desire or be required to give to Tenant, shall be
deemed sufficiently given or rendered if, in writing, delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
building of which the demised premises form a part or at the last known
residence address or business address of Tenant or left at any of the aforesaid
premises addressed to Tenant, and the time of the rendition of such bill or
statement and of the giving of such notice or communication shall be deemed to
be the time when the same is delivered to Tenant, mailed, or left at the
premises as herein provided. Any notice by Tenant to Owner must be served by
registered or certified mail addressed to Owner at the address first hereinabove
given or at such other address as Owner shall designate by written notice.
<PAGE>
Water Charges:
29. If the Tenant requires, uses or consumes water for any purpose in
addition to ordinary lavatory purposes (of which fact Tenant constitutes Owner
to be the sole judge) Owner may install a water meter and thereby measure
Tenant's water consumption for all purposes. Tenant shall pay Owner for the cost
of the meter and the cost of the installation, thereof and throughout the
duration of Tenant's occupancy Tenant shall keep said meter and installation
equipment in good working order and repair at Tenant's own cost and expense in
default of which Owner may cause such meter and equipment to be replaced or
repaired and collect the cost thereof from tenant, as additional rent. Tenant
agrees to pay for water consumed, as shown on said meter as and when bills are
rendered, and on default in making such payment Owner may pay such charges and
collect the same from Tenant, as additional rent. Tenant covenants and agrees to
pay, as additional rent, the sewer rent, charge or any other tax, rent, levy or
charge which now or hereafter is assessed, imposed or a lien upon the demised
premises or the realty of which they are part pursuant to law, order or
regulation made or issued in connection with the use, consumption, maintenance
or supply of water, water system or sewage or sewage connection or system. If
the building or the demised premise or any part thereof is supplied with water
through a meter through which water is also supplied to other premises Tenant
shall pay to Owner, as additional rent, on the first day of each month. 9.54% ($
10.00 )of the total meter charges as Tenant's portion. Independently of an in
addition to any of the remedies reserved to Owner hereinabove or elsewhere in
this lease, Owner may sue for an collect any monies to be paid by Tenant or paid
by Owner of any for the reasons or purposes hereinabove set forth.
Sprinklers:
30. Anything elsewhere in this lease to the contrary notwithstanding, if
the New York Board of Fire Underwriters or the New York Fire Insurance Exchange
or any bureau, department or official of the federal, state or city government
recommend or require the installation of a sprinkler system or that any changes,
modifications, alterations, or additional sprinkler heads or other equipment be
made or supplied in an existing sprinkler system by reason of Tenant's business,
or the location of partitions, trade fixtures, or other contents of the demised
premises, or for any other reason, or if any such sprinkler system
installations, modifications alterations, additional sprinkler heads or other
such equipment, become necessary to prevent the imposition of a penalty or
charge against the full allowance for a sprinkler system in the fire insurance
rate set by any said Exchange or by any fire insurance company, Tenant shall, at
Tenant's expense, promptly make such sprinkler system installations, changes,
modifications, alterations, and supply additional sprinkler heads or other
equipment as required whether the work involved shall be structural or
non-structural in nature. Tenant shall pay to Owner as additional rent the sum
of $ 10.00, on the first day of each month during the term of this lease, as
Tenant's position of the contract price for the sprinkler supervisory service.
Elevators, Heat, Cleaning:
31. As long as Tenant is not in monetary default under any of the covenants of
this lease beyond the applicable grace period provided in this lease for the
curing of such defaults, Owner shall: (a) provide necessary passenger elevator
facilities on business days from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m.
to 1 p.m.; (b) if freight elevator service is provided, same shall be provided
only on regular business days Monday through Friday inclusive, and on those days
only between the hours of 9 a.m. and 12 noon and between 1 p.m. and 5 p.m.; (c)
furnish heat, water and other services supplied by Owner to the demised
premises, when and as required by law, on business days from 8 a.m. to 6 p.m.
and on Saturdays from 8
- - - - -------------------------------------------
[GRAPHIC] Space to be filled in or deleted.
<PAGE>
a.m to 1 p.m.; (d) clean the public halls and public portions of the building
which are used in common by all tenants. Tenant shall, at Tenant's expense, keep
the demised premises, including the windows clean and in order, to the
reasonable satisfaction of Owner, and for that purpose shall employ persons or
persons, or corporation approved by Owner. Tenant shall pay to Owner the cost of
removal of any of Tenant's refuse and rubbish from the building. Bills for the
same shall be rendered by Owner to Tenant at such time as Owner may elect and
shall be due and payable hereunder, and the amount of such bills shall be deemed
to be, and be paid as, additional rent. Tenant shall, however, have the option
of independently contracting for the removal of such rubbish and refuse in the
event that Tenant does not wish to have same done by employees of Owner. Under
such circumstances, however, the removal of such refuse and rubbish by others
shall be subject to such rules and regulations as, in the judgment of Owner, are
necessary for the proper operation of the building. Owner reserves the right to
stop service of the heating, elevator, plumbing and electric systems, when
necessary, by reason of accident, or emergency, or for repairs, alterations,
replacements or improvements, in the judgment of Owner desirable or necessary to
be made, until said repairs, alterations, replacements or improvements shall
have been completed. If the building of which the demised premises are a part
supplies manually operated elevator service, Owner may proceed diligently with
alterations necessary to substitute automatic control elevator service without
in any way affecting the obligations of Tenant hereunder.
Security:
32. Tenant has deposited with Owner the sum of $ *** as security for the
faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease, including,
but not limited to, the payment of rent and additional rent, Owner may use,
apply or retain the whole or any part of the security so deposited to the extent
required for the payment of any rent and additional rent or any other sum as to
which Tenant is in default or for any sum which Owner may expend or may be
required to expend by reason of Tenant's default in respect of any of the terms,
covenants and conditions of this lease, including but not limited to, any
damages or deficiency in the reletting of the premises, whether such damages or
deficiency accrued before or after summary proceedings or other re-entry by
Owner. In the event that Tenant shall fully and faithfully comply with all of
the terms, provision, covenants and conditions of this lease, the security shall
be returned to Tenant after the date fixed as the end of the Lease and after
delivery of entire possession of the demised premises to Owner. In the event of
a sale of the land and building or leasing of the building, of which the demised
premises form a part, Owner shall have the right to transfer the security to the
vendee or lessee and Owner shall thereupon be released by Tenant from all
liability for the return of such security; and Tenant agrees to look to the new
Owner solely for the return of said security, and it is agreed that the
provision hereof shall apply to every transfer or assignment made of the
security to a new Owner. Tenant further covenants that it will not assign or
encumber or attempt to assign or encumber the monies deposited herein as
security and that neither Owner nor its successors or assigns shall be bound by
any such assignment, encumbrance, attempted assignment or attempted encumbrance.
* See Article 59 of Riders
<PAGE>
Captions:
33. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provision thereof.
Definitions:
34. The term "Owner" as used in this lease means only the owner of the fee
or of the leasehold of the building, or the mortgagee in possession, for the
time being of the land and building (or the owner of a lease of the building or
of the land and building) of which the demised premises form a part, so that in
the event of any sale or sales of said land and building or of said lease, or in
the event of a lease of said building, or of the land and building, the said
Owner shall be and hereby is entirely freed and relieved of all covenants and
obligations of Owner hereunder, and it shall be deemed and construed without
further agreement between the parties or their successors in interest, or
between the parties and the purchaser, at any such sale, or the said lessee of
the building or of the land and the building, that the purchaser or the lessee
of the building has assumed and agreed to carry out any and all covenants and
obligations of Owner hereunder. The words "re-enter" and "re-entry" as used in
this lease are not restricted to their technical legal meaning. The term "rent"
includes the annual rental rate whether so expressed or expressed in monthly
installments, and "additional rent." "Additional rent" means all sums which
shall be due to Owner from Tenant under this lease, in addition to the annual
rental rate. The term "business days" as used in this lease, shall exclude
Saturdays, Sundays and all days observed by the State or Federal Government as
legal holidays and those designated as holidays by the applicable building
service union employees service contract or by the applicable Operating
Engineers contract with respect to HVAC service. Wherever its expressly provided
in this lease that consent shall not be unreasonably withheld, such consent
shall not be unreasonably delayed.
Adjacent Excavation-Shoring:
35. If an excavation shall be made upon land adjacent to the demises
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such excavation, license to enter upon the
demised premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the building of which demised premises form a
part from injury or damage and to support the same by proper foundations without
any claim for damages or indemnity against owner, or diminution or abatement of
rent.
Rules and Regulations:
36. Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe faithfully, and comply strictly with, the Rules and
Regulations annexed hereto and such other and further reasonable Rules and
Regulations as Owner or Owner's agents may from time to time adopt. Notice of
any additional rules or regulations shall be given in such manner as Owner may
elect. In case Tenant disputes the reasonableness of any additional Rule or
Regulation hereafter made or adopted by Owner or Owner's agents, the parties
hereto agree to submit the question of the reasonableness of such Rule or
Regulation for decision to the New York office of the American Arbitration
Association, whose determination shall be final and conclusive upon the parties
hereto. The right to dispute the reasonableness of any additional Rule or
Regulation upon Tenant's part shall be deemed waived unless the same shall be
asserted by service of a notice, in writing upon Owner within fifteen (15) days
after the giving of notice thereof. Nothing in this lease contained shall be
construed to impose upon Owner any duty or obligation to enforce the Rules and
Regulations or terms, covenants or conditions in any other lease, as against any
other tenant and Owner shall not be liable to Tenant for violation of the same
by any other tenant, its servants, employees, agents, visitors or licensees.
<PAGE>
Glass:
37. Owner shall replace, at the expense of the Tenant, any and all plate
and other glass damaged or broken as a result of Tenant's actions in and about
the demised premises.
Estoppel Certificate:
38. Tenant, at any time, and from time to time, upon at least 10 days'
prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or
to any other person, firm or corporation specified by Owner, a statement
certifying that this Lease is unmodified in full force and effect (or, if there
have been modifications, that the same is in full force and effect as modified
and stating the modifications), stating the dates to which the rent and
additional rent have been paid, and stating whether or not there exists any
default by Owner under this lease, and, if so, specifying each such default.
Directory Board Listing:
39. If, at the request of and as accommodation to Tenant, Owner shall place
upon the directory board in the lobby of the building, one or more names of
persons other than Tenant, such directory board listing shall not be construed
as the consent by Owner to an assignment or subletting by Tenant to such person
or persons.
Successors and Assigns:
40. The covenants, conditions and agreements contained in this lease shall
bind and inure to the benefit of Owner and Tenant and their respective heirs,
distributees, executors, administrators, successors, and except as otherwise
provided in this lease, their assigns. Tenant shall look only to Owner's estate
and interest in the land and building for the satisfaction of Tenant's remedies
for the collection of a judgment (or other judicial process) against Owner in
the event of any default by Owner hereunder, and no other property or assets of
such Owner (or any partner, member, officer or director thereof, disclosed or
undisclosed), shall be subject to levy, execution or other enforcement procedure
for the satisfaction of Tenant's remedies under or with respect to this lease,
the relationship of Owner and Tenant hereunder, or Tenant's use and occupancy of
the demised premises.
- - - - -------------------------------------------
[GRAPHIC] Space to be filled in or deleted.
In Witness Whereof, Owner and Tenant have respectively signed and sealed this
lease as of the day and year first above written.
Witness for Owner: Puble N.V., Inc. CORP.
SEAL
/s/ C. Lapas [L.S.]
- - - - ------------------------------- -----------------------------------------
/s/ Lou Falcigno CORP.
Witness for Tenant -----------------------------------------
BY:PARADIGM MUSIC ENTERTAINMENT CO. SEAL
Lou Falcigno
ITS: SR VP [L.S.]
- - - - ------------------------------- -----------------------------------------
<PAGE>
1
41. PROVISIONS OF RIDER
This rider is annexed to and made a part of the printed part of this lease
to which it is attached and in each instance in which the provisions of this
rider shall contradict or be inconsistent with the provisions of the printed
portion of this lease, as constituted without this rider, the provisions of this
rider shall prevail and govern and the contradicted or inconsistent provisions
of the printed portion of this lease shall be deemed amended accordingly.
42. HEAT AND ELEVATOR SERVICE
Landlord shall provide necessary elevator service and heat, except in event
of breakdown or emergency, only on business days from 8:00 a.m. to 6:00 p.m. For
the purpose of this lease, legal holidays wherein Landlord will not provide heat
or freight elevator service shall be deemed to be any and all holidays
recognized as contract holidays by Service Employees Union, Local 32B-32J. One
elevator shall be available for tenants use at all times, subject to normal
maintenance, repair, breakdown, strikes and damage.
43. PIPES AND CONDUITS
As an additional provision of Paragraph 13 of the printed form of this
lease, Landlord may erect, use and maintain any pipes, conduits or other lines
through the demised premises, provided such installation will not unreasonably
detract from the appearance of the premises and is made in a manner and at such
times so as not to unreasonably interfere with Tenant's use of the demised
premises.
44. VOLATILE MATERIALS
The Tenant nor any of Tenant's servants, employees, agents, visitors or
licensees shall not bring, keep, or use in or upon the demised premises or the
building of which they form a part, any solvent having a flash point below 110
F, nor shall any liquid which emits volatile vapors below the temperature of 100
F be brought, kept or used in or upon the demised premises or the building of
which they form a part, except as follows:
A. The process using such liquids shall be conducted in a room of fire
resistant construction, as the same is or may hereafter be defined by the Fire
Insurance Rating Organization.
B. If more than one but not more than two gallons of such liquids are kept
on the premises, they shall be stored in safety cans. If more than two but less
than ten gallons of such liquids are kept on the premises, they must be stored
in safety cans and kept in a cabinet constructed by Tenant in a manner approved
by the Fire Insurance Rating Organization. Reasonable amounts in excess of ten
gallons may be kept provided they are stored in a vault constructed by Tenant in
a manner approved by said Organization.
C. Any use or storage of such liquids shall at all times be in accordance
with the requirements of the Fire Department Board of Fire Underwriters and the
Fire Insurance Rating Organization.
A breach of the aforesaid regulations shall be deemed a default of this
lease under Paragraph 17 hereof.
<PAGE>
45. LANDLORD'S EXECUTION OF LEASE
It is specifically understood and agreed that this lease is offered to
Tenant for signature. Tenant shall affix its signature hereto with the
understanding that such act shall not in any way bind Landlord until such time
as this lease shall have been approved and executed by Landlord and delivered to
Tenant.
46. EXTERMINATION
Tenant at its sole cost and expense shall maintain such extermination
services as are necessary to keep the demised premises free of pests and vermin
at all times. Landlord at its sole cost and expense will exterminate the public
and core areas on a regular basis.
47. ODORS AND WASTE MATERIALS
Tenant shall not cause or permit any unusual or objectionable odors,
by-products or waste material to permeate from the demised premises. Tenant
covenants that it will hold Landlord harmless against all claims, damages or
causes of action for damages arising after the commencement of the term of this
lease and will indemnify the Landlord for all such suits, orders or decrees and
judgments entered therein, brought on account of any such
ADDITIONAL CLAUSES attached to and forming a part of lease dated August 14, 1996
between PUBLE, N.V., INC. and Paradigm Music Company for the third (3rd) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
2
permeation from the demised premises of the said unusual or objectionable odors,
by-products or waste material, caused by Tenant, and, in addition, Tenant
covenants to pay any attorneys' fees and other legal expenses made necessary in
connection with any claim or suit as aforesaid, all provided, however, that
Tenant is given immediate written notice thereof with the opportunity to defend
by attorneys of its designation and that Landlord cooperates in said defense.
For the purpose of eliminating any such odors, waste material or
by-products, caused by Tenant, Tenant may erect and maintain such facilities and
appurtenances as may be necessary to eliminate any such odors, byproducts or
waste materials. All such facilities or appurtenances shall be erected at
Tenant's sole cost and expense, shall be in accordance with applicable laws,
orders and regulations of all governmental authorities and the New York Board of
Fire Underwriters as set forth in Paragraph 6 of this lease.
REFUSE RECYCLING AND REMOVAL
(i) Compliance by Tenant, Tenant covenants and agrees, at its sole cost and
expense to comply with all present and future laws, orders and regulations of
all state, federal, municipal, and local governments, departments, commissions,
and boards regarding the collection, sorting, separation, and recycling of waste
products, garbage, refuse and trash. Tenant or Tenants Cleaning Contractor shall
sort and separate such waste products, garbage, refuse. and trash into such
categories as provided by law. Each separately sorted category of waste
products, garbage, refuse, and trash shall be placed in separate receptacles
reasonably approved by Owner. Such separate receptacles may at Owner's option,
be removed from the demised premises in accordance with a collection schedule
prescribed by law.
(ii) Owner's Rights in Event of Noncompliance. Owner reserves the right to
prohibit the removal of refuse or to collect or accept from Tenant any waste
products, garbage, refuse, or trash that are not separated and sorted as
required by law, and to require Tenant to arrange for such collection at
Tenant's sole cost and expense, utilizing a contractor satisfactory to Owner.
Tenant shall pay all costs, expenses, fines, penalties, or damages that may be
imposed on Owner or Tenant by reason of Tenant's failure to comply with the
provisions of this article, and, at Tenant's sole cost and expense, shall
indemnify, defend, and hold Owner harmless (including legal fees and expenses)
from and against any actions, claims, and suits arising from such noncompliance,
utilizing counsel reasonably satisfactory to Owner.
<PAGE>
48. FLOOR LOAD
Tenant shall not place a load upon any floor of the demised premises
exceeding the floor load per square foot area which it was designed to carry and
which is allowed by law. Tenant agrees to position all machines, safes, business
machines, printing equipment or other mechanical equipment in such locations as
to minimize noise and vibration emanating therefrom. All of such installations
shall be placed and maintained by Tenant, at Tenant's sole expense, in settings
sufficient to minimize noise and annoyance to other tenants in Landlord's
building.
All of such machines and/or equipment installed by Tenant in the demised
premises will not at any time be in violation of existing laws affecting the
demised premises nor in violation of the certificate of occupancy issued for the
building of which the demised premises are a part.
49. SQUARE FOOTAGE
The Tenant does hereby acknowledge that no representations have been made
by the Landlord or anyone acting on behalf of the Landlord as to the amount of
square footage in the demised premises.
50. LANDLORD'S COSTS BY TENANT'S DEFAULTS
If Landlord, as a result of a default by Tenant of any of the provisions of
this lease, after applicable notice including the covenants to pay rent and/or
additional rent, makes any necessary expenditure or incurs any necessary
obligations for the payment of money, including but not limited to reasonable
attorney's fees, in instituting, prosecuting or defending any action or
proceeding, such sums so paid or obligations so incurred with interest and costs
shall be deemed to be additional rent hereunder and shall be paid by Tenant to
Landlord within ten (10) days of rendition of any bill or statement to Tenant
therefore, and if Tenant's lease term shall have expired at the time of making
such expenditure or incurring such obligations, such sum shall be recoverable by
Landlord as damages.
51. LIMITATION OF LIABILITY
ADDITIONAL CLAUSES attached to and forming a part of lease dated August 14, 1996
between PUBLE, N.V., INC. and Paradigm Music Company for the third (3rd) Floor
at 67 Irving Place, New York, New York.
2
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
3
Tenant agrees that the liability of Landlord under this lease and all
matters pertaining to or arising out of the tenancy and the use and occupancy of
the demised premises, shall be limited to Landlord's interest in the building of
which the demised premises form a part, the land on which such building stands,
the rents and profits therefrom and the proceeds of insurance thereon and in no
event shall Tenant make any claim against or seek to impose any personal
liability upon any general or limited partner of Landlord or any principal of
any firm or corporation that may hereafter be or become the Landlord.
52. RENT COMMENCEMENT
Tenant's obligation to pay rent shall commence as of August 1st, 1996.
Notwithstanding the foregoing, provided Tenant shall not then be in
default under any of the provisions of this Lease, the Annual Base Rent set
forth in Article 74 shall be abated for the first (1st) through sixth (6th)
month of the term of this Lease (the "Rent Abatement Period").
53. REAL ESTATE BROKERS
Tenant covenants, represents and warrants that Tenant has had no dealings
or communications with any broker or agent in connection with the negotiation or
consummation of this Lease, and Tenant and Landlord covenants and agrees to pay,
defend, hold harmless and indemnify each other from and against any and all
claims, actions, costs, expenses (including reasonable attorneys' fees) or
liabilities for any compensation, commission or charges claimed by any broker or
agent.
54. TENANT ACCESS TO BUILDING
In the event the building is locked at any time, the Landlord agrees to
permit the Tenant access to building and elevator and to remain in possession of
the Card Access Key to the front entrance to the building, which Card Access Key
shall only be placed in the hands of a responsible employee(s) of the Tenant.
Tenant shall exercise due care and diligence to see that the front doors to the
building are locked after each entry after normal building hours. Tenant shall
have access to the demised premises at all times by whatever means the Landlord
designates. Tenant agrees that Landlord will not, and shall not be obligated to
furnish any services to Tenant beyond "normal building hours" outlined in
article 31 of this agreement.
<PAGE>
55. LATE CHARGE
Tenant acknowledges that monthly rental payments are due on or before the
first day of each month. Tenant shall herein be permitted to make such payments
up to the tenth day of each month without penalty. If Tenant shall fail to pay
all or any part of any installment of rent or additional rent for more than ten
(10) days after the same shall have become due and payable, Tenant shall pay as
additional rent hereunder to Landlord a late charge of three cents ($0.03) for
each dollar of the amount of such rent or additional rent which shall not have
been paid to Landlord within such ten (10) days after becoming due and payable.
The late charge payable pursuant to this Article 55 shall be (i) payable on
demand and (ii) without prejudice to any of Landlord's rights and remedies
hereunder at law and equity for non-payment or late payment of rent or other
sums and in addition to any such rights and remedies. No failure by Landlord to
insist upon the strict performance by Tenant of Tenant's obligations to pay late
charges as provided in this Article 55 shall constitute a waiver by Landlord of
its right to enforce the provisions of this Article 55 in any instance
thereafter occurring.
The provisions of this Article 55 shall not be construed in any way to
extend the grace periods or notice periods provided for elsewhere in this Lease.
56. ELECTRICITY
A. Tenant shall have a separate electric meter which presently exists and
for which Owner shall not charge Tenant, and shall contract directly with the
local utility company servicing the Building. The Tenant shall pay or cause to
be paid all charges for air conditioning, electricity, light, telephone, or any
other communication service used in or rendered or supplied to the Demised
Premises throughout the term of this lease, and shall indemnify the Owner
ADDITIONAL CLAUSES attached to and forming a part of lease dated August 14, 1996
between PUBLE, N.V., INC. and Paradigm Music Company for the third (3rd)
Floor at 67 Irving Place, New York, New York.
3
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
4
and save it harmless against any liability or damages on such account. Tenant
shall also be responsible for the payment of any deposits or similar charges,
as well as any connection fee required by the utility or communications company.
B. Tenant understands and is aware that the Consolidated Edison Company of
New York, its successors or assigns, furnishes and shall furnish electric
current for all purposes to the building, and to the Demised Premises, and
Tenant covenants and agrees that Owner shall not be liable for any damage or for
any responsibility for an on account of the failure at any time of the
Consolidated Edison Company of New York to supply such electric current due to
strikes, lockouts, boycotts, labor disturbances accidents, or any other cause
beyond Owner's control, or by virtue of any direction, order or regulations of
any Federal, State, City, County or Municipal authority.
C. Owner reserves the right to interrupt the supply of electricity for the
Demised Premises, for a maximum of twenty-four hours at a time, when required by
reason of accident or of repairs, alterations or improvements, until such
repairs, alterations or improvements shall have been completed. In each instance
where Landlord controls the scheduling of any work(s) requiring the interruption
of the supply of electricity to Tenant's premises, Landlord shall use its best
effort of informing Tenant of the scheduled interruption. After initial
installation, Owner shall continue to replace light bulbs and tubes when
requested by Tenant. In each instance when Tenant requests Landlord to replace
light bulbs and tubes, the cost of such replacement light bulbs, lamps and
tubes, plus the labor cost of such replacement, shall be chargeable to Tenant.
Tenant upon providing Landlord with the name of the supplier/installer, and
subject to Landlord's approval of same, may hire at Tenants sole cost and
expense for the replacement of the identical light bulbs and tubes currently in
the demised premises. Tenant agrees not to connect any additional electrical
equipment of any type to the building electric distribution system, other than
lamps, typewriters, and other small office machines which consume comparable
amounts of electricity, without Owner's prior written consent, which consent
shall not be unreasonably withheld. Any additional risers, feeders, or other
equipment proper or necessary to supply Tenant's electrical requirements, upon
written request of Tenant, will be installed by Owner, at the sole cost and
expense of Tenant, if, in Owner's sole judgment, the same are necessary and will
not cause permanent damage or injury to the building or the Demised Premises, or
cause or create a dangerous or hazardous condition or entail excessive or
unreasonable alterations, repair or expense or interfere with or disturb other
tenants or occupants.
57. PORTER WAGE FORMULA
Operating Escalation
A. The amount of the Operating Adjustment, if any for the first and each
subsequent Operation Year shall be determined by comparing:
(i) The Labor Rate for the Operation Year in question with
(ii) The Labor Rate for the Base Operation Year.
If (i) is greater than (ii), then Tenant shall pay to Landlord as
additional rent for such Operation Year an amount equal to the product obtained
by multiplying 3,680 by the number of cents (including fractions thereof) by
which the Labor Rate for the Operation Year in question is more than the Labor
Rate for the Base Operation Year. All such payments shall be made as provided in
subparagraph (B) below.
<PAGE>
The following terms are hereby defined to have the following meanings in
this lease:
"Labor Rate" shall mean the sum of the minimum regular hourly wage rate
prescribed for porters of the building in effect on January I of the year in
question, pursuant to the agreement with Local 32B of the Building Service
Employees International Union, AFL-CIO (or any successor thereto) covering the
wage rates of porters in the building, provided, however, that if there is no
such agreement in effect as of January I prescribing such minimum regular hourly
wage rate for porters, computation and payment shall thereupon be made on the
basis of the minimum regular hourly wage rate being paid by the Landlord or by
the Contractor performing the cleaning service for Landlord on such January I
for said porters and appropriate retroactive adjustments shall thereafter be
made when the minimum regular hourly wage rate on such January I pursuant to
such agreement prescribing such minimum hourly wage rate for porters is finally
determined, and provided further that if as of the last day of such Operation
Year, no such agreement covering the January I occurring in such Operation Year
shall have been in effect, the minimum regular hourly wage rate paid by Landlord
or by the Contractor performing the cleaning service for [landlord on such
January I for said porters shall, for all purposes hereof, be determined to be
such minimum regular hourly wage rate prescribed by such agreement and in effect
such January I and appropriate retroactive adjustments shall be made.
ADDITIONAL CLAUSES attached to and forming a part of lease dated August 14, 1996
between PUBLE, N.V., INC. and Paradigm Music Company for the third (3rd) Floor
at 67 Irving Place, New York, New York.
4
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
5
"Operation Year" shall mean each calendar year subsequent to the Base
Operation Year in which occurs any part of the demised term; and
"Base Operation Year" shall mean the 1997 calendar year.
B. Every Operating Adjustment shall commence on the first day of the
relevant Operation Year. After Landlord has furnished tenant with an escalation
statement relating to any Operation Year, all monthly installments of rent shall
reflect one-twelfth (1/l2) of the annual amount of the current Operating
Adjustment until a new adjustment under this paragraph shall become effective.
If, however, an escalation statement is furnished to Tenant after the
commencement of an Operation Year, there shall be promptly paid by Tenant to
Landlord an amount equal to the portion of the relevant adjustment allocable to
the part of the Operation Year which shall have elapsed prior to the first day
of the calendar month next succeeding the calendar month in which the applicable
escalation statement has been furnished to Tenant. In the event the date fixed
for the expiration of the demised term shall be a day other than the last day of
an Operation Year and in the event of any termination of this lease or any
increase or decrease in the square footage of the demised premises, then in
applying the provisions of this paragraph, appropriate apportionment's shall be
made. Payments shall be made pursuant to the provisions of this paragraph,
notwithstanding the fact that an escalation statement is furnished to Tenant
after the expiration of the demised term. No decrease in the Labor Rate shall in
any way affect the obligation of Tenant to pay the fixed rent or percentage
rent, if any.
58. REAL ESTATE TAX ESCALATION
Tenant agrees to pay as additional rent nine and 54/100 percent (9.54%) of
any and all increase in Real Estate Taxes above those for the June 30th,
1997/July 1st, 1998 New York City Fiscal Tax Year (hereinafter referred to as
the "Base Tax Year") imposed on the land and building of which the demised
premises are a part with respect to every subsequent tax year or part thereof
(hereinafter referred to "Comparative Tax Year") during the term of this lease,
whether any such increase results from a higher tax rate or an increase in the
assessed valuation of the property, or both.
"Real Estate Taxes" shall include any special Real Estate Tax assessment
imposed for any purpose whatsoever. If due to a change in the method of taxation
any franchise, income, profit, or other tax, however designated, shall be levied
against Landlord's interest in the property in whole or in part for or in lieu
of any tax which would otherwise constitute Real Estate Taxes, such taxes shall
be included in the term "Real Estate Taxes" for purposes hereof. All such
payments shall be appropriately pro-rated for any partial calendar years in
which the term of this lease shall commence or expire. A copy of the Tax Bill of
the City of New York shall be sufficient evidence of the amount of Real Estate
Taxes.
<PAGE>
In the event that the real estate taxes payable for any Comparative Year
shall exceed the amount of such Real Estate Taxes payable during the base tax
year, Tenant shall pay to Landlord, as additional rent for such Comparative
Year, an amount equal to The Percentage of the excess. Following the expiration
of each Tax Year, Landlord shall submit to Tenant a statement, certified by
Landlord, setting forth the Real Estate Tax Escalation due for the current
Comparative Tax Year and the Payment, if any, due to Landlord from Tenant for
such Comparative Tax Year. The rendition of such statement to Tenant together
with a copy of the Tax Bill shall constitute prima facie proof of the accuracy
thereof and, if such statement shows a payment due from Tenant to Landlord with
respect to such current Comparative Tax Year then (i) Tenant shall make payment
of any unpaid portion thereof within ten (10) days after receipt of such
statement; and (ii) Tenant shall also pay to Landlord, as additional rent,
within ten (10) days after receipt of such statement, an amount equal to the
product obtained by multiplying the total Payment for the current Comparative
Tax Year by a fraction, the denominator of which shall be 12 and the numerator
of which shall be the number of months of the current Comparative Year which
shall have elapsed prior to the first day of the month immediately following the
rendition of such statement; and (iii) Tenant shall also pay to Landlord, as
additional rent. commencing as of the first day of the month immediately
following the rendition of such statement and on the first day of each month
thereafter until a new statement is rendered, 1/12th of the total Payment for
the current Comparative Tax Year. The aforesaid monthly payments based on the
total Payment for the current Comparative Tax Year may be adjusted to reflect,
if Landlord can reasonably so estimate, known increases in rates, for the
subsequent Comparative Tax Year, whenever such increases become known during
such current Comparative Tax Year. The payments required to be made under (ii)
and (iii) above shall be credited toward the Payment due from
ADDITIONAL CLAUSES attached to and forming a part of lease dated August 14, 1996
between PUBLE, N.V., INC. and Paradigm Music Company for the third (3rd) Floor
at 67 Irving Place, New York, New York.
5
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
6
Tenant for the subsequent Comparative Year, subject to adjustment as and when
the statement for such subsequent Comparative Tax Year is rendered by Landlord.
Only Landlord shall be eligible to institute tax reduction or other
proceeding to reduce the assessed valuation of the land and building. Should
Landlord be successful in any such reduction proceedings and obtain a rebate for
periods during which Tenant has paid its share of increases, Landlord shall
after deducting its expenses, including without limitation, reasonable
attorney's fees and disbursement in connection therewith, return to Tenant its
pro-rata share of such rebate except that Tenant may not obtain any portion of
the benefits which may accrue to Landlord from any reduction in Real Estate
Taxes for any year below those imposed in the Base Tax Year.
59. SECURITY
Tenant has deposited with Landlord the sum of $18,000.00 security for the
faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease. It is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease, including
but not limited to, the payment of rent and additional rent, after notice
Landlord may use, apply or retain the whole or any part of the security so
deposited to the extent required for the payment of any rent or additional rent
or any other sum which Landlord may expend or may be required to expend by
reason of Tenant's default in respect of any of the terms, covenants and
conditions of this lease, including but not limited to, any damages or
deficiency in the reletting of the premises, whether such damages or deficiency
accrued before or after summary proceedings or other re-entry by Landlord. In
the event that Tenant shall fully and faithfully comply with all of the terms,
provisions, covenants and conditions of this lease, the security shall be
returned to Tenant after the date fixed as the end of the Lease and after
delivery of entire possession of the demised premises to Landlord. In the event
of a sale of the land and building or leasing of the building, of which the
demised premises form a part, Landlord shall have the right to transfer the
security to the vendee or lessee and Landlord shall thereupon be released by
Tenant from all liability for the return of such security; and Tenant agrees to
look to the new Landlord solely for the return of said security, and it is
agreed that the provisions hereof shall apply to every transfer or assignment
made of the security to a new Landlord. Tenant further covenants that it will
not assign or encumber or attempt to assign or encumber the monies deposited
herein as security and that neither Landlord nor its successors or assigns shall
be bound by any such assignment, encumbrance, attempted assignment or attempted
encumbrance.
<PAGE>
All interest and/or dividends, if any, accruing on the security deposited,
whether in cash or otherwise as aforesaid, shall remain Tenant's property (less
standard management charge of 1%) and, provided Tenant is not in default in the
performance of the terms, conditions and covenants of this lease, shall be paid
to Tenant after each calendar year during the term, provided, however, that
Tenant shall make written demand therefor no later than January 31st in each
year.
60. LANDLORD'S WORK
Tenant has examined the Demised Premises and agrees to accept the same in
their condition and state of repair existing as of the date hereof subject to
normal wear and tear and to the removal therefrom of the property, if any, of
the existing tenant or occupants thereof, and understands and agrees that
Landlord shall not be required to perform any work, supply any materials or
incur any expense to prepare the demised premises for Tenant's occupancy, except
for removal of any furniture designated by Tenant, deliver the air-conditioning
in working order and broom clean the premises.
61. SUBLETTING AND ASSIGNMENT
A. Supplementing Article 11 hereof, if Tenant requests Landlord's consent
to the subletting of the Demised Premises, it shall submit to Landlord in
writing, by registered or certified mail, the following information:
1. The name of the proposed subtenant;
2. The terms and conditions of the proposed subletting;
3. The nature and character of the business of the proposed subtenant;
6
ADDITIONAL CLAUSES attached to and forming a part of lease dated August 14, 1996
between PUBLE, N.V., INC. and Paradigm Music Company for the third (3rd) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
7
4 Banking, financial, and other credit information relating to the proposed
subtenant reasonably sufficient to enable Landlord to determine the financial
responsibility of said proposed subtenant.
Upon receipt of such request from Tenant, Landlord shall have an option to
be exercised in writing within forty-five (45) days thereafter, to terminate the
lease effective on a date (the Termination Date) set forth in Landlord's notice
of termination, which shall not be less than thirty (30) days nor more than one
hundred and twenty (120) days following the service upon Tenant of Landlord's
notice of termination.
In the event Landlord shall exercise such option to terminate the lease,
this lease shall expire on the Termination Date as if that date had been
originally fixed as the expiration date of the term herein granted and Tenant
shall surrender possession of the entire Demised Premises on the Termination
Date in accordance with the provisions of this lease.
Landlord's option to terminate this lease shall not be exercised where
Tenant's request to sublet a portion of premises does not exceed 25% of demised
premises, provided that proposed subtenant is in a similar or related field.
B. If Landlord shall not exercise its option within the period aforesaid
then Landlord's consent to such request shall not be unreasonably withheld or
delayed, but only on condition:
(i) That the subletting shall be to a Tenant whose occupancy will be in
keeping with the dignity and character of the then use and occupancy of the
building by other Tenants and whose occupancy will not be more objectionable or
more hazardous than that of Tenant herein. In no event shall any subletting be
permitted to a school, medical clinic, or counseling facility of any kind; an
employment or placement agency; or governmental or quasi-governmental agency;
(ii) That the subletting shall not be to any Tenant, subtenant or assignee
of any premises in the building of which the Demised Premises form a part;
(iii) That the subletting shall not be marketed and/or represented at a
lower rental rate than that being charged by Landlord at the time for similar
space in the building;
(iv) That the sublease will expressly prohibit assignment of the sublease
or further subletting by the subtenant without Landlord's written consent.
The consent by Landlord to a subletting shall not relieve Tenant from
obtaining the express consent in writing of Landlord to any further subletting.
C. Anything herein contained to the contrary notwithstanding, but without
releasing Tenant from its obligations for full performance hereunder, Tenant
shall have the right, without the consent of Landlord, to assign or sublet all
or any part of the Demised Premises to one or more controlled subsidiary or
affiliated companies, or to a parent company (existing or future), and Tenant
shall have the right to permit the Demised Premises or any part thereof to be
used by any controlled subsidiary or affiliated and/or parent companies,
provided that a duplicate original of the assignment or sublease shall be
delivered to Landlord within seven (7) days after execution, and provided that
such assignment or sublease shall permit only such use and occupancy as is
permitted under this lease.
<PAGE>
Further, Tenant may assign this lease in its entirety without the consent
of Landlord to any successor corporation (by consolidation or merger or sale of
substantially all of its assets) provided the assets and consolidated net worth
of such successor corporation and its consolidated subsidiaries, determined in
accordance with generally accepted accounting principles on a pro-forma basis
from the then most recent audited (by independent certified public accountants)
balance sheets of all corporations which shall have been merged or consolidated
with or into such successor corporation, shall not be materially less than the
assets and consolidated net worth of Tenant and its consolidated subsidiaries as
shown by Tenant's most recent audited (by independent certified public
accountants) balance sheet, provided that Tenant shall have delivered to
Landlord an agreement on the part of such successor corporation whereby such
successor corporation agrees to assume, and does assume, all of the obligations
and duties on the part of the Tenant to be performed hereunder.
62. INSURANCE
A. Tenant agrees, throughout the term of this lease for the benefit of both
Landlord and Tenant as named assured, to maintain insurance against loss or
damage by fire and such other risks and hazards as are insurable under present
and future standard forms of fire and extended coverage insurance policies, to
the personal property,
7
ADDITIONAL CLAUSES attached to and forming a part of lease dated August 14, 1996
between PUBLE, N.V., INC. and Paradigm Music Company for the third (3rd) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
8
furniture, furnishings and fixtures belonging to Tenant located in the demised
premises for the actual cash value thereof less depreciation with New York
standard insurance company clauses for not less than 80% of the actual cash
value thereof. The policy shall provide that not less than ten (10) days prior
to the expiration of any policy or policies, evidence of the renewal period, or
policies, or a new certificate, together with evidence of payments of premiums
for the renewal period, or insurance policy, as the case may be, shall be
delivered to Landlord. Such insurance shall further contain an agreement on the
part of the insurance company not to cancel such policy or coverage or change
the coverage without ten (10) day's prior written notice to Landlord. In the
event of the occurrence of any fire or other casualty insured against by
Tenant's policy, Landlord at the time of the occurrence of any such event, when
called upon to do so by Tenant, will, by appropriate written instrument, assign
to Tenant all of Landlord's right, title and interest in and to such insurance
proceeds. Upon receipt by Tenant of such insurance proceeds, Tenant agrees to
accept such payment in full for any loss or damage to its property and not to
make any claim against or seek to recover from Landlord any other sum for such
loss or damage, whether or not the loss or damage was due to the carelessness of
Landlord or its servants, agents or employees. Upon the occurrence of any
casualty insured against, Tenant shall have full authority to, and shall take
all necessary measures to negotiate compromise or adjust any loss under Tenant's
policy.
B. During the term of this lease, the Tenant, at its own cost and expense:
(i) shall provide and keep in force for the benefit of the Landlord and
Tenant, a comprehensive general public liability policy, written by good and
solvent insurance companies satisfactory to Landlord and in standard form
protecting Landlord and Landlord's agent as additional insureds and Tenant
against any and all liability, occasioned by any occurrence on or about the
Demised Premises or any appurtenances thereto, in the amount of not less than
$3,500,000.00 in respect of any one accident or disaster, and in the amount of
not less than $1,000,000.00 in respect of injuries to or death of any one
person, and in the amount of not less than $500,000.00 in respect of destruction
or damage to property. Such policies shall cover the demised premises, and all
such policies with receipts evidencing payment of premium shall be delivered to
and held by Landlord.
(ii) Provide and keep in force sprinkler leakage insurance which shall be
in amounts sufficient to cover the value of Tenant's merchandise and fixtures.
C. Tenant shall save Landlord harmless and indemnify it from and
against all injury, loss, claims or damage to any person or property while on
the demised premises arising out of use or occupancy of the demised premises by
Tenant and from and against all injury, loss, claim or damage to any person or
property anywhere occasioned by any act, neglect or default of Tenant.
D. Tenant shall provide, or cause to be provided, Workmen's
Compensation Insurance covering all persons employed in connection with the
performance of work upon, in or about the demised premises.
<PAGE>
E. All such insurance shall be effected in standard form under valid,
enforceable policies issued by insurers of recognized responsibility and
licensed to do business in the State of New York and shall, except in the case
of Workmen's Compensation Insurance, name Landlord and Tenant as the insureds as
their respective interests may appear. Certificates of such insurance shall be
delivered to Landlord from time to time during the term of this lease at least
ten (10) days prior to the expiration date of the previous policy together with
certificates evidencing the renewal of such policy with satisfactory evidence of
payment of the premium on such policy. To the extent obtainable, all such
policies shall contain agreements by the insurers that (i) such policies shall
not be canceled except upon ten (10) days prior written notice to each named
insured and (ii) the coverage afforded thereby shall not be affected by the
performance of any work upon, in or about the demised premises. Nothing in this
Paragraph shall prevent Tenant from taking out such insurance under a blanket
insurance policy, or policies, which also can cover other properties, or parts
thereof, owned, leased or operated by Tenant as well as the demised premises.
The Tenant agrees to pay all premiums and charges for such insurance, and
in the event of its failure to make any such payment when due, or in the event
of its failure to provide such insurance or renewal thereof, the Landlord may
procure the same and/or pay the premium thereon (but in no event shall be
obligated so to do), and the Tenant agrees to pay such premiums to the Landlord
upon demand, and the same shall be deemed to be, and be, paid as additional rent
for said premises.
63. CERTIFICATES BY TENANT
At any time and from time to time, Tenant, for the benefit of Landlord and
the lessor under any ground lease or underlying lease or the holder of any
leasehold mortgage affecting any ground lease or underlying lease, or of any fee
mortgage covering the land or the land and building containing the demised
premises, on at least-ten (10)days
ADDITIONAL CLAUSES attached to and forming a part of lease dated August 14, 1996
between PUBLE, N.V., INC. and Paradigm Music Company for the Third (3rd) Floor
at 67 Irving Place, New York, New York.
8
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
9
prior written request by Landlord, will deliver to Landlord a statement,
certifying that this lease is not modified and is in full force and effect (or
if there shall have been modifications that the same is in full force and effect
as modified, and stating the modifications), the commencement and expiration
dates hereof, the dates to which the fixed rent, additional rent and other
charges have been paid, and whether or not, to the best knowledge of the signer
of such statement, there are any then existing defaults on the part of either
Landlord or Tenant in the performance of the terms, covenants and conditions of
this lease, and if so, specifying the default of which the signer of such
statement has knowledge. Landlord shall be limited to two requests per twelve
month period throughout the term hereof. Tenant shall have the right to request
a reference letter from Landlord on two occasions per twelve month period
throughout the term hereof.
64. TENANTS ALTERATIONS
Supplementing Article 3 of this lease, Landlord's consent shall not be
required for minor changes such as painting and installation of cabinets and
shelves. If Tenant desires to perform any other renovations, decorations,
additions, installations, improvements and/or alterations whose cost is in
excess of $2,500 in the premises during the term of this lease (hereinafter
called "Tenant's Work"), it will deliver to Landlord plans and specifications
therefor for Landlord's prior prompt written approval (not to be unreasonably
withheld if Tenant's Work will not change the character of Landlord's building
standard installations or reduce the value of the demised premises below that
immediately before the performance of Tenant's Work). If Landlord shall approve
the plans and specifications for Tenant's Work, Tenant shall, before
commencement thereof:
A. Obtain the necessary consents, authorizations and licenses from all
federal, state and/or municipal authorities having jurisdiction over such work;
B. Furnish to Landlord a copy of the contract made by Tenant with the
contractor and/or other person or persons who will perform Tenant's Work, which
contract will provide, among other things,
(i) that the work will be done in accordance with the approved plans and
specifications and the consents, authorizations and licenses obtained;
(ii) that the contractor or other persons performing the work will look
solely to Tenant for payment and will hold Landlord and the demised premises and
the building containing the demised premises free from all liens and claims of
all persons furnishing labor or materials therefor, or both;
(iii) that similar waivers of the right to file Mechanic's Liens shall be
obtained from all subcontractors and materialmen;
C. Furnish to the Landlord a certificate or certificates of Workmen's
Compensation Insurance covering all persons who will perform Tenant's Work for
Tenant or any contractor, subcontractor or other person.
<PAGE>
D. Furnish to Landlord an original Policy of Public Liability Insurance
covering Landlord in limits of five hundred thousand ($500,000) dollars for
injuries or damages to any one person and one million ($1,000,000) dollars in
any one accident or disaster and two hundred and fifty thousand ($250,000)
dollars with respect to property damage, in a company approved by Landlord. Such
policy shall provide that no cancellation shall be effective unless ten (10)
days prior written notice has been given to Landlord.
Tenant agrees to indemnify and save Landlord harmless from and against any
and all bills for labor performed and equipment, fixtures and materials
furnished to Tenant and from and against any and all liens, bills or claims
therefor or against the demised premises or the building containing the same
from and against all losses, damages, costs, expenses, suits and claims
whatsoever in connection with Tenant's Work. The cost of Tenant's Work shall be
paid for in cash or its equivalent, so that the demised premises and the
building containing the same shall at all times be free of liens for labor and
materials supplied or claimed to have been supplied.
If the performance of Tenant's Work shall unnecessarily and/or unreasonably
interfere with the comfort and/or convenience of other tenants in the building
or shall cause damage to or otherwise unnecessarily and/or unreasonably
interfere with the occupancy of adjacent buildings, Tenant shall upon Landlord's
demand remedy or remove the condition or conditions complained of. Tenant
further covenants and agrees to indemnify and save Landlord harmless from and
against any and all claims, losses, damages, costs, expenses, suits and demands
whatsoever made or asserted against Landlord by reason of the foregoing.
In the event tenant decides to install an internal spiral staircase at its
own cost and expense, thereby joining the 3rd and 4th floors, tenant shall
provide plans as to the intended exact location for approval, in accordance with
all of the above conditions.
ADDITIONAL CLAUSES attached to and forming a part of lease dated August 14, 1996
between PUBLE, N.V., INC. and Paradigm Music Company for the third (3rd) Floor
at 67 Irving Place, New York, New York.
9
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
10
65. NO ORAL AGREEMENTS NO OTHER REPRESENTATIONS
This lease together with riders attached, contains the complete agreement
between Landlord and Tenant in its entirety with respect to the premises leased
herein, and cannot be changed, modified or terminated orally. There are no
representations, agreements, arrangements or understandings oral or written
between Landlord and Tenant up to the date of this lease, which are not fully
contained herein.
Tenant expressly acknowledges and agrees that Landlord has not made and is
not making, and Tenant, in executing and delivering this Lease, is not relying
upon, any warranties, representations, promises or statement except to the
extent that the same are expressly set forth in this Lease or in any other
written agreement which may be made between the parties concurrently with the
execution and delivery of this Lease and shall expressly refer to this Lease.
This Lease and said other written agreement(s) made concurrently herewith, if
any, are hereinafter referred to as the "Lease Documents." It is understood and
agreed that all understandings and agreements heretofore had between the parties
are merged in the Lease Documents, which alone fully and completely express
their agreement, and that the same are entered into after full investigation,
neither party relying upon any statement or representation not embodied in the
Lease Documents, made by the other.
If any of the provisions of this Lease, or the application thereof or any
person or circumstances, shall, to any extent, be invalid or unenforceable, the
remainder of this Lease, or the application of said provision or provisions to
persons or circumstances other than those as to whom or which it is held invalid
or unenforceable, shall not be affected thereby, and every provision of this
Lease shall be valid and enforceable to the fullest extent permitted by law.
This Lease shall be governed in all respects by the laws of the State of
New York.
66. NOTICES
Any notice or other communication relative to this lease shall be in
writing and shall be considered given three (3) days after having been mailed by
registered or certified mail], return receipt requested, to the respective party
at its address herein set forth as at such other address as either party may
designate by notice given in accordance with this paragraph. All payments of
rent or additional rents due under this lease shall be mailed in accordance with
this paragraph, by regular mail or delivered by hand as Landlord may designate.
<PAGE>
67. LOBBY ATTENDANT
For the purpose of maintaining a Lobby Attendant service in the two
passenger lobbies of the building, if such service is provided, Tenant agrees to
pay its proportionate share of nine and 54/100 percent (9. 54%) of total cost of
maintaining such guard service, if provided. This sum shall be payable as
additional rent due under this lease. As the cost of maintaining such Lobby
Attendant shall increase or decrease, so shall the above mentioned charge be
adjusted proportionate to the increase or decrease in the total cost of
maintaining such Lobby Attendant service. This article 67 shall only be
operative and effective in the event 51% of all Tenants occupying space in 67
Irving Place request Landlord to arrange for a Lobby Guard to be stationed in
the Lobby(s).
68 ADDENDA TO ARTICLE 6 - REOUIREMENTS TO LAW
In conformity with this Article 68, Tenant agrees that it will comply with
all state, local and federal laws and codes, including, but not limited to the
Americans with Disabilities Act ("ADA") resulting from tenants alterations or
use and occupancy within the Demised Premises.
69. NO RESIDENTIAL USE
ADDITIONAL CLAUSES attached to and forming a part of lease dated August 14, 1996
between PUBLE, N.V., INC. and Paradigm Music Company for the third (3rd) Floor
at 67 Irving Place, New York, New York.
10
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord (Tenant)
<PAGE>
11
The demised premises have been leased to Tenant for commercial purposes
only. Under no circumstances shall Tenant at any time use the demised premises
for any residential purpose. Any breach of this article shall be deemed to be a
material default pursuant to Article 17 of this lease.
70. POSSESSION
Notwithstanding any provisions to the contrary contained within this lease,
Tenant may take possession of the demised premises on August 1st, 1996. Tenant
shall be responsible for electric charges in demised premises effective as of
August 1st, 1996. Tenant's taking possession of the demised premises shall be
conclusive evidence that the demised premises and the Building were in good and
satisfactory condition at the time such possession was so taken.
71. EFFECT OF GOVERNMENTAL LIMITATION ON RENTS AND OTHER CHARGES
If any law, decision, order, rule or regulation (collectively called
"Limiting Law) of any governmental authority shall have the effect of limiting
for any period of time the amount of Rent or other amounts payable by Tenant to
any amount less than the amount required by this Lease, then:
A. Throughout the period of limitation, Tenant shall remain liable for the
maximum amount of Rent and other amounts which are legally payable; and
B. When the period of limitation ends, or if the Limiting Law is repealed,
or following any order or ruling that substantially restrains or prohibits
enforcement of the Limiting Law, Tenant shall pay to Landlord, on demand (to the
extent that payment of such amounts is not prohibited by law), all amounts that
would have been due from Tenant to Landlord during the period of limitation but
which were not paid because of the Limiting Law; and thereafter Tenant shall pay
to Landlord Rent and all other amounts due pursuant to this Lease, all
calculated as though there had been no intervening period of limitation.
72. ENTRANCE DOORS AND BUILDING DIRECTORY
Any signage, tenant identification, and/or room number displayed or locks,
doorknobs, mail slots, or other hardware installed on, or adjacent to, any
entrance door of demised premises facing the common hallway shall conform to the
building standard.
Tenant shall purchase and install such sign(s) or hardware, at Tenant's own
cost and expense, only after receiving Landlord's prior written consent to such
installation.
Listing of the name of the Tenant and/or Tenant's Trade Name on the
directory board of the Building shall be done by Landlord at its own expense,
but listings of any names other than the Tenant itself, shall be at the expense
of the Tenant. Notwithstanding the foregoing, Tenant may not exceed its
apportioned share of spaces on the directory of the Building.
73. LANDLORD'S APPROVALS
Whenever Tenant shall submit to Landlord any plan, agreement or other
document for Landlord consent or approval, and Landlord shall require the expert
opinion of Landlord's counsel or architect as to the form or substance thereof,
Tenant agrees to pay the reasonable fee of such architect and/or counsel for
reviewing the said plan, agreement or document.
74. ANNUAL RENT
From the period August 1st, 1996 through and including May 31st, 2001
rental payments shall be Seventy Two Thousand ($72,000.00) Dollars per annum,
payable in monthly installments of $6,000.00.
75. HOLDING OVER
If Tenant holds over in possession after the expiration or sooner
termination of the original term or of any extended term of this lease, such
holding over shall not be deemed to extend the term or renew the lease, but such
holding over hereafter shall continue upon the covenants and conditions herein
set forth except that the charge for use and occupancy of such holding over for
each calendar month or part there (even if such part shall be a small fraction
off a calendar month) shall be the sum of:
11
ADDITIONAL CLAUSES attached to and forming a part of lease dated August 14, 1996
between PUBLE, N.V., INC. and Paradigm Music Company for the third (3rd) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
12
a. 1/12 of the highest annual rent rate set forth on page one of this
lease, times 2.0 plus
c. 1/12 of all other items of annual additional rental, which annual
additional rental would have been payable pursuant to this lease had this lease
not expired, plus
d. those other items of additional rent (not annual additional rent) which
would have been payable monthly pursuant to this lease, had this lease not
expired, which total sum Tenant agrees to pay to Landlord promptly upon demand,
in full, without set-off or deduction. Neither the billing nor the collection of
use and occupancy in the above amount shall be deemed a waiver of any right of
landlord to collect damages for Tenant's failure to vacate the demised premised
after the expiration or sooner termination of this lease. The aforesaid
provisions of this Article shall survive the expiration or sooner termination of
this Lease.
76. CASUALTY DAMAGE
Anything in Article 9 to the contrary notwithstanding, in the event of
damage or destruction to the demised premises by fire or other casualty
(collectively, "Casualty"), if the demised premises cannot be restored to
substantially their condition immediately prior to the Casualty within nine (9)
months after the occurrence of the Casualty or are not so restored within such
nine (9) month period or if Landlord shall not have commenced the restoration
work four (4) months after the occurrence of the Casualty Tenant may terminate
the Lease, by notice sent to Landlord within thirty (30) days of the expiration
of such nine (9) month period or of the-four(4) month period if Landlord shall
not have commenced the restoration work whichever is earlier, in which event,
the Lease shall terminated as of the date in such notice, Fixed Rent and other
amounts payable under this Lease shall be apportioned as of such date and the
parties shall have no liability for subsequently accruing obligations hereunder.
77. AIR CONDITIONING
If the premises are equipped with a package air conditioning system
servicing the area, Landlord at its sole cost at the inception of the lease
term, agrees to deliver such air conditioning system in good working order.
Tenant herein agrees that the payment for cost of electric power consumed by the
air conditioning system shall be the responsibility of the Tenant. Tenant shall,
at its option at the inception of this lease, have an inspection of the air
conditioning system performed by an air conditioning service firm to be approved
by Landlord, and Landlord agrees to comply with all reasonable recommendations
of Tenant's air conditioning inspector. Tenant herein agrees that the payment
for cost of electric power consumed by the air conditioning system shall be the
responsibility of the Tenant.
<PAGE>
During the time of this lease, the air conditioning shall be owned by the
Landlord and shall be surrendered to the Landlord at the expiration of the
demised term in good working condition, reasonable wear and tear expected.
Throughout the term of this Lease, Tenant shall operate and maintain the air
conditioning at its own cost and expense pursuant to a maintenance contract
acceptable to Landlord.
Notwithstanding the foregoing, Tenant shall have up to April 30th, 1 say to
test and request corrections to the air conditioning equipment from Landlord.
Provided however, that any correction and/or repair to the air conditioning
equipment are not a result of any abuse and negligence of Tenant, Tenant's
employees and/or Tenants invitees.
78. SATELLITE ANTENNA/DISH
Tenant shall have the right to install, in a location in or near the
demised premises, reasonably acceptable to Landlord on the Building, and
continuously operate a microwave satellite dish and/or antenna and
communications equipment necessary or reasonably desirable to Tenant
(collectively, the "Antenna Equipment") including, without limitation, the right
to interconnect the Antenna Equipment with Tenant's equipment located in the
Demised Premises. The space used for the Antenna Equipment shall not exceed the
minimum space necessary for a satellite dish and/or antenna of three (3) feet in
diameter. Prior to its installation, Tenant shall cause the point of
installation on the Building to be surveyed to determine the actual size and
site of the Antenna Equipment and maximum weight thereof and Tenant shall submit
plans and specifications to Landlord for review and approval, which approval
shall not be unreasonably withheld or delayed. Tenant shall be solely
responsible for the cost of installation, operation, and maintenance of the
Antenna Equipment. Tenant will install and operate the Antenna Equipment in
accordance with all federal, state and local regulations and the Rules and
Regulations of the Building. Tenant, at Tenant's sole cost and expense, shall
install the Antenna Equipment, wires, conduits, and appurtenant facilities on
the Building subject at all times to the rights of Landlord and other Tenants
and the Rules and Regulations and subject further to the
12
ADDITIONAL CLAUSES attached to and forming a part of lease dated August 14, 1996
between PUBLE, N.V., INC. and Paradigm Music Company for the third (3rd) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
13
conditions that such wires, conduits and appurtenant facilities shall not
adversely affect the Building Systems, such as HVAC, elevator, elevator
controllers, fire and life safety electronic systems, electrical and other
systems. In the event Tenants Antenna Equipment interferes in any way with any
Building System and/or other Tenants, Tenant shall immediately cease operating
Tenant's Antenna Equipment and shall remove the Antenna Equipment, all at
Tenant's sole cost and expense. In addition, Tenant shall be responsible for
obtaining any permits and licenses required to install and operate the Antenna
Equipment forwarding a copy(s) of any permits and/or licenses to Landlord.
The Tenant's right to place the Antenna Equipment on the Building and to
operate the Antenna Equipment shall automatically terminate without notice upon
the expiration or earlier termination of this Lease. The Antenna Equipment (and
all wires, conduits and appurtenant facilities) shall be treated as Tenant's
Property, and shall be removed by the Tenant at Tenant's sole cost and expense
and the point of installation on the Building restored to its pre-existing
condition.
13
ADDITIONAL CLAUSES attached to and forming a part of lease dated August 14, 1996
between PUBLE, N.V., INC. and Paradigm Music Company for the third (3rd) Floor
at 67 Irving Place, New York, New York.
TO BE INITIALED BY THE LESSOR AND THE LESSEE
- - - - --------------------------------------------------------------------------------
(Lessor)/s/ (Lessee)
(Landlord) (Tenant)
<PAGE>
[FLOOR PLAN OF 67 IRVING PLACE, 3rd Floor]
<PAGE>
EXHIBIT "B"
(Page one of two)
B Form 54(Rev. 8/85)
THE CITY OF NEW YORK
[SEAL] DEPARTMENT OF BUILDINGS ALT 1429/89
CERTIFICATE OF OCCUPANCY AMENDED
BOROUGH MANHATTAN DATE: SEP 09 1993 NO. 103662
AMENDED
This certificate C.O. NO 72301 ZONING DISTRICT R-8
THIS CERTIFIES that the altered building -- premises located at 67 IRVING PLACE
N.W.C. OF IRVING PLACE & EAST 18TH Block 874 Lot 17
CONFORMS SUBSTANTIALLY TO THE APPROVED PLANS AND SPECIFICATIONS AND TO THE
REQUIREMENTS OF ALL APPLICABLE LAWS, RULES, AND REGULATIONS FOR THE USES AND
OCCUPANCIES SPECIFIED HEREIN.
<TABLE>
<CAPTION>
STREET
PERMISSIBLE USE AND OCCUPANCY
====================================================================================================================================
LIVE LOAD MAXIMUM ZONING BUILDING BUILDING
STORY LBS. PER NO. OF DWELLING CODE ZONING CODE DESCRIPTION OF USE
SQ. FT. PERSONS OR ROOMING HABITABLE USE GROUP OCCUPANCY
PERMITTED UNITS ROOMS GROUP
====================================================================================================================================
<S> <C> <C> <C> <C>
CELLAR OG 3 STORAGE AND BOILER ROOM
1ST FLOOR 120 30 6 OFFICES
2ND TO 120 30 6 OFFICES ON EACH
4TH FLOORS each each FLOOR
5TH FLOOR 120 30 6 OFFICES
6TH TO 120 30 6 OFFICES ON EACH
11TH each each FLOOR
FLOORS
12TH FLOOR 120 30 6 OFFICES
COMMERCIAL OLD
CODE
====================================================================================================================================
</TABLE>
- - - - --------------------------------------------------------------------------------
THIS CERTIFICATE OF OCCUPANCY MUST BE POSTED WITHIN THE BUILDING IN ACCORDANCE
WITH THE RULES OF THE DEPARTMENT PROMULGATED MARCH 31ST, 1967.
- - - - --------------------------------------------------------------------------------
OPEN SPACE USES_________________________________________________________________
(SPECIFY--PARKING SPACES, LOADING BERTHS, OTHER USES, NONE)
================================================================================
M.C. NO CHANGES OF USE OR OCCUPANCY SHALL BE MADE UNLESS
A NEW AMENDED CERTIFICATE OF OCCUPANCY IS OBTAINED
- - - - --------------------------------------------------------------------------------
THIS CERTIFICATE OF OCCUPANCY IS ISSUED SUBJECT TO FURTHER LIMITATIONS,
CONDITIONS AND SPECIFICATIONS NOTED ON THE REVERSE SIDE.
- - - - --------------------------------------------------------------------------------
/S/ /S/
- - - - --------------------------------------------------------------------------------
BOROUGH SUPERINTENDENT COMMISSIONER
|X| ORIGINAL |_| OFFICE COPY-DEPARTMENT OF BUILDINGS |_| COPY
<PAGE>
EXHIBIT "B"
(Page two of two)
THAT THE ZONING LOT ON WHICH THE PREMISES IS LOCATED IS BOUNDED AS FOLLOWS:
BEGINNING at the point on the WEST side of IRVING PLACE
distant 23 NORTH feet from the corner formed by the intersection of
IRVING PLACE and EAST 18TH STREET
running thence...................... feet; thence ...................... feet;
thence NORTH 46 feet; thence WEST 85.5 feet;
thence SOUTH 46 feet; thence EAST 85.5 feet;
thence.............................. feet; thence ...................... feet;
to the point or place of beginning.
XXX or ALT. No. 1429/89 DATE OF COMPLETION 9/4/93 CONSTRUCTION CLASSIFICATION
CLASS 1 FIREPROOF
BUILDING OCCUPANCY
GROUP CLASSIFICATION HEIGHT STORIES FEET
COMMERCIAL 12 144'-0"
THE FOLLOWING FIRE DETECTION AND EXTINGUISHING SYSTEMS ARE REQUIRED AND WERE
INSTALLED IN COMPLIANCE WITH APPLICABLE LAWS.
<TABLE>
<CAPTION>
- - - - ------------------------------------------------------------------------------------------------------------------------------------
YES NO YES NO
- - - - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
STANDPIPE SYSTEM AUTOMATIC SPRINKLER SYSTEM
- - - - ------------------------------------------------------------------------------------------------------------------------------------
YARD HYDRANT SYSTEM
- - - - --------------------------------------------------------------------------------
STANDPIPE FIRE TELEPHONE AND
SIGNALLING SYSTEM
- - - - --------------------------------------------------------------------------------
SMOKE DETECTOR
- - - - --------------------------------------------------------------------------------
FIRE ALARM AND SIGNAL SYSTEM
- - - - --------------------------------------------------------------------------------
</TABLE>
STORM DRAINAGE DISCHARGES INTO:
A) STORM SEWER |_| B) COMBINED SEWER |_| C) PRIVATE SEWAGE
DISPOSAL SYSTEM |_|
SANITARY DRAINAGE DISCHARGES INTO:
A) SANITARY SEWER |_| B) COMBINED SEWER |_| C) PRIVATE SEWAGE
DISPOSAL SYSTEM |_|
LIMITATIONS OR RESTRICTIONS:
BOARD OF STANDARDS AND APPEALS CAL. NO. ___________________________________
CITY PLANNING COMMISSION CAL. NO. _________________________________________
OTHERS:
<PAGE>
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT, made and entered into
as of the 8th day of November, 1995 ("Agreement"), by and between Paradigm Music
Entertainment Co., a Delaware corporation (the "Corporation"), and Robert B.
Meyrowitz ("Indemnitee").
WHEREAS, recently, highly competent persons have become
more reluctant to serve both privately and publicly-held corporations as
directors, officers, or in other capacities, unless they are provided with
better protection from the risk of claims and actions against them arising out
of their service to and activities on behalf of such corporations; and
WHEREAS, the current impracticability of obtaining
adequate insurance and the uncertainties related to indemnification have
increased the difficulty of attracting and retaining such persons; and
WHEREAS, the Board of Directors of the Corporation (the
"Board") has determined that the ability to attract and retain such persons is
in the best interests of the Corporation's shareholders and that such persons
should be assured that they will have better protection in the future; and
WHEREAS, it is reasonable, prudent and necessary for
the Corporation to obligate itself contractually to indemnify such persons to
the fullest extent permitted by applicable law, so that such persons will serve
or continue to serve the Corporation free from undue concern that they will not
be adequately indemnified; and
WHEREAS, this Agreement is a supplement to and in
furtherance of Article SEVENTH of the Certificate of Incorporation of the
Corporation (the "Certificate") and Article V of the By-Laws of the Corporation
("By-Laws"); any rights granted under the Certificate or By-Laws and any
resolutions adopted pursuant thereto shall not be deemed to be a substitute
therefor nor to diminish or abrogate any rights of Indemnitee thereunder; and
WHEREAS, Indemnitee is willing to serve, continue to
serve and to take on additional service for or on behalf of the Corporation on
the condition that he be indemnified according to the terms of this Agreement;
NOW, THEREFORE, in consideration of the premises and
the covenants contained herein, the Corporation and Indemnitee do hereby
covenant and agree as follows:
<PAGE>
Section 1. Definitions. For purposes of this Agreement:
(a) "Change in Control" means a change in control of
the Corporation of a nature that would be required to be reported in response to
Item 6(e) of Schedule l4A of Regulation l4A (or in response to any similar item
on any similar schedule or form) promulgated under the Securities Exchange Act
of 1934 (the "Act"), whether or not the Corporation is then subject to such
reporting requirement; provided, however, that, without limitation, such a
Change in Control shall be deemed to have occurred if (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Act) is or becomes the
"beneficial owner" (as defined in Rule l3d-3 under the Act), directly or
indirectly, of securities of the Corporation representing 20% or more of the
combined voting power of the Corporation's then outstanding securities without
the prior approval of at least two-thirds of the members of the Board in office
immediately prior to such person attaining such percentage interest; (ii) the
Corporation is a party to a merger, consolidation, sale of assets or other
reorganization, or a proxy contest, as a consequence of which members of the
Board in office immediately prior to such transaction or event constitute less
than a majority of the Board thereafter; or (iii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board (including for this purpose any new director whose election or
nomination for election by the Corporation's shareholders was approved by a vote
of at least two-thirds of the directors then still in office who were directors
at the beginning of such period) cease for any reason to constitute at least a
majority of the Board.
(b) "Corporate Status" means the status of a person who
is or was a director, officer, employee, agent or fiduciary of the Corporation
or of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such person is or was serving at the request of
the Corporation.
(c) "Disinterested Director" means a director of the
Corporation who is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.
(d) "Expenses" means all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, or being or preparing to be a witness in
a Proceeding.
(e) "Independent Counsel" means a law firm, or a member
of a law firm, that is experienced in matters of corporation law and neither
presently is, nor in the past five years has been, retained to represent: (i)
the Corporation or Indemnitee in any other matter material to either such party,
or (ii) any other party to the Proceeding giving rise to a claim for
indemnification hereunder. Notwithstanding the foregoing, the term "Independent
Counsel" shall not include any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in
representing either the Corporation or Indemnitee in an action to determine
Indemnitee's rights under this Agreement.
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<PAGE>
(f) "Proceeding" means any action, suit, arbitration,
alternate dispute resolution mechanism, investigation, administrative hearing or
any other proceeding, whether civil, criminal, administrative or investigative,
except one initiated by an Indemnitee pursuant to Section 11 of this Agreement
to enforce his rights under this Agreement.
Section 2. Services by Indemnitee. Indemnitee agrees to
serve as a director of the Corporation. Indemnitee may at any time and for any
reason resign from any such position (subject to any other contractual
obligation or any obligation imposed by operation of law).
Section 3. Indemnification - General. The Corporation
shall indemnify, and advance Expenses to, Indemnitee as provided in this
Agreement to the fullest extent permitted by applicable law in effect on the
date hereof and to such greater extent as applicable law may thereafter from
time to time permit. The rights of Indemnitee provided under the preceding
sentence shall include, but shall not be limited to, the rights set forth in the
other Sections of this Agreement and shall cover any claims or actions arising
from or based upon the Corporation's Confidential Private Placement Memorandum
dated October 6, 1995 and the statements made therein.
Section 4. Proceedings Other Than Proceedings by or in
the Right of the Corporation. Indemnitee shall be entitled to the rights of
indemnification provided in this Section if, by reason of his Corporate Status,
he is, or is threatened to be made, a party to any threatened, pending, or
completed Proceeding, other than a Proceeding by or in the right of the
Corporation. Pursuant to this Section, Indemnitee shall be indemnified against
Expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by him or on his behalf in connection with any such
Proceeding or any claim, issue or matter therein, if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Corporation, and, with respect to any criminal Proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 5. Proceedings by or in the Right of the
Corporation. Indemnitee shall be entitled to the rights of indemnification
provided in this Section if, by reason of his Corporate Status, he is, or is
threatened to be made, a party to any threatened, pending, or completed
Proceeding brought by or in the right of the Corporation to procure a judgment
in its favor. Pursuant to this Section, Indemnitee shall be indemnified against
Expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by him or on his behalf in connection with any such
Proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation. Notwithstanding
the foregoing, no indemnification against such Expenses shall be made in respect
of any claim, issue or matter in any such Proceeding as to which Indemnitee
shall have been adjudged to be liable to the Corporation if applicable law
prohibits such indemnification unless the Chancery Court of the State of
Delaware, or the court in which such Proceeding shall have been brought or is
pending, shall determine that indemnification against Expenses may nevertheless
be made by the Corporation.
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Section 7. Indemnification for Expenses of a Witness.
Notwithstanding any other provision of this Agreement, to the extent that
Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding,
he shall be indemnified against all Expenses actually and reasonably incurred by
him or on his behalf in connection therewith.
Section 8. Advancement of Expenses. The Corporation
shall advance all Expenses incurred by or on behalf of Indemnitee in connection
with any Proceeding within twenty days after the receipt by the Corporation of a
statement or statements from Indemnitee requesting such advance or advances from
time to time, whether prior to or after final disposition of such Proceeding and
prior to a determination as to whether Indemnitee is entitled to indemnification
under Section 9 below. Such statement or statements shall reasonably evidence
the Expenses incurred by Indemnitee and shall include or be preceded or
accompanied by an undertaking by or on behalf of Indemnitee to repay any
Expenses advanced if it shall ultimately be determined that Indemnitee is not
entitled to be indemnified against such Expenses.
Section 9. Procedure for Determination of Entitlement
to Indemnification.
(a) To obtain indemnification under this Agreement in
connection with any Proceeding, and for the duration thereof, Indemnitee shall
submit to the Corporation a written request, including therein or therewith such
documentation and information as is reasonably available to Indemnitee and is
reasonably necessary to determine whether and to what extent Indemnitee is
entitled to indemnification. The Secretary of the Corporation shall, promptly
upon receipt of any such request for indemnification, advise the Board in
writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for
indemnification pursuant to Section 9(a) hereof, a determination, if required by
applicable law, with respect to Indemnitee's entitlement thereto shall be made
in such case: (i) if a Change in Control shall have occurred, by Independent
Counsel (unless Indemnitee shall request that such determination be made by the
Board or the shareholders, in which case in the manner provided for in clauses
(ii) or (iii) of this Section 9(b)) in a written opinion to the Board, a copy of
which shall be delivered to Indemnitee; (ii) if a Change of Control shall not
have occurred, (A) by the Board by a majority vote of a quorum consisting of
Disinterested Directors, or (B) if a quorum of the Board consisting of
Disinterested Directors is not obtainable, or even if such quorum is obtainable,
if such quorum of Disinterested Directors so directs, either (x) by Independent
Counsel in a written opinion to the Board, a copy of which shall be delivered to
Indemnitee, or (y) by the shareholders of the Corporation, as determined by such
quorum of Disinterested Directors, or a quorum of the Board, as the case may be;
or (iii) as provided in Section 10(b) of this Agreement. If it is so determined
that Indemnitee is entitled to indemnification, payment to Indemnitee shall be
made within ten (10) days after such determination. Indemnitee shall cooperate
with the person, persons or entity making such determination with respect to
Indemnitee's entitlement to indemnification, including providing to such person,
persons or entity upon reasonable advance request any documentation or
information which is not privileged or otherwise protected from disclosure and
which is reasonably available to Indemnitee and reasonably necessary to such
determination. Any costs or expenses (including attorneys' fees and
disbursements) incurred by Indemnitee in so cooperating with the person, persons
or entity making such determination shall be borne by the Corporation
(irrespective of the determination as to Indemnitee's entitlement to
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<PAGE>
indemnification) and the Corporation hereby indemnifies and agrees to hold
Indemnitee harmless therefrom.
(c) If required, Independent Counsel shall be selected
as follows: (i) if a Change of Control shall not have occurred, Independent
Counsel shall be selected by the Board, and the Corporation shall give written
notice to Indemnitee advising him of the identity of Independent Counsel so
selected; or (ii) if a Change of Control shall have occurred, Independent
Counsel shall be selected by Indemnitee (unless Indemnitee shall request that
such selection be made by the Board, in which event (i) shall apply), and
Indemnitee shall give written notice to the Corporation advising it of the
identity of Independent Counsel so selected. In either event, Indemnitee or the
Corporation, as the case may be, may within 7 days after such written notice of
selection shall have been given, deliver to the Corporation or to Indemnitee, as
the case may be, a written objection to such selection. Such objection may be
asserted only on the grounds that Independent Counsel so selected does not meet
the requirements of "Independent Counsel" as defined in Section 1 of this
Agreement, and the objection shall set forth with particularity the factual
basis of such assertion. If such written objection is made, Independent Counsel
so selected may not serve as Independent Counsel unless and until a court has
determined that such objection is without merit. If, within 20 days after
submission by Indemnitee of a written request for indemnification pursuant to
Section 9(a) hereof, no Independent Counsel shall have been selected and not
objected to, either the Corporation or Indemnitee may petition the Chancery
Court of the State of Delaware, or other court of competent jurisdiction, for
resolution of any objection which shall have been made by the Corporation or
Indemnitee to the other's selection of Independent Counsel and/or for the
appointment as Independent Counsel of a person selected by such court or by such
other person as such court shall designate, and the person with respect to whom
an objection is so resolved or the person so appointed shall act as Independent
Counsel under Section 9(b) hereof. The Corporation shall pay any and all
reasonable fees and expenses of Independent Counsel incurred by such Independent
Counsel in connection with its actions pursuant to this Agreement, and the
Corporation shall pay all reasonable fees and expenses incident to the
procedures of this Section 9(c), regardless of the manner in which such
Independent Counsel was selected or appointed. Upon the due commencement date of
any judicial proceeding or arbitration pursuant to Section 11(a)(iii) of this
Agreement, Independent Counsel shall be discharged and relieved of any further
responsibility in such capacity (subject to the applicable standards of
professional conduct then prevailing).
Section 10. Presumption and Effects of Certain
Proceedings.
(a) If a Change of Control shall have occurred, in
making a determination with respect to entitlement to indemnification hereunder,
the person or persons or entity making such determination shall presume that
Indemnitee is entitled to indemnification under this Agreement if Indemnitee has
submitted a request for indemnification in accordance with Section 9(a) of this
Agreement, and the Corporation shall have the burden of proof to overcome that
presumption in connection with the making by any person, persons or entity of
any determination contrary to that presumption.
(b) If the person, persons or entity empowered or
selected under Section 9 of this Agreement to determine whether Indemnitee is
entitled to indemnification shall not have made a determination within 60 days
after receipt by the Corporation of the request
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<PAGE>
therefor, the requisite determination of entitlement to indemnification shall be
deemed to have been made and Indemnitee shall be entitled to such
indemnification, absent (i) a misstatement by Indemnitee of a material fact, or
an omission of a material fact necessary to make Indemnitee's statement not
materially misleading, in connection with the request for indemnification, or
(ii) prohibition of such indemnification under applicable law; provided,
however, that such 60-day period may be extended for a reasonable time, not to
exceed an additional 30 days, if the person, persons or entity making the
determination with respect to entitlement to indemnification in good faith
require(s) such additional time for the obtaining or evaluating of documentation
and/or information relating thereto; and provided, further, that the foregoing
provisions of this Section 10(b) shall not apply (i) if the determination of
entitlement to indemnification is to be made by the shareholders pursuant to
Section 9(b) of this Agreement and if (A) within 15 days after receipt by the
Corporation of the request for such determination the Board has resolved to
submit such determination to the shareholders for their consideration at an
annual meeting thereof to be held within 75 days after such receipt and such
determination is made thereat, or (B) a special meeting of shareholders is
called within 15 days after such receipt for the purpose of making such
determination, such meeting is held for such purpose within 60 days after having
been so called and such determination is made thereat, or (ii) if the
determination of entitlement to indemnification is to be made by Independent
Counsel pursuant to Section 9(b) of this Agreement.
(c) The termination of any Proceeding or of any claim,
issue or matter therein, by judgment, order, settlement or conviction, or upon a
plea of nolo contendere or its equivalent, shall not (except as otherwise
expressly provided in this Agreement) of itself adversely affect the right of
Indemnitee to indemnification or create a presumption that Indemnitee did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Corporation or, with respect to any
criminal Proceeding, that Indemnitee had reasonable cause to believe that his
conduct was unlawful.
Section 11. Remedies of Indemnitee.
(a) In the event that (i) a determination is made
pursuant to Section 9 of this Agreement, (ii) advancement of Expenses is not
timely made pursuant to Section 8 of this Agreement, (iii) the determination of
entitlement to indemnification is to be made by Independent Counsel pursuant to
Section 9(b) of this Agreement and such determination shall not have been made
and delivered in a written opinion within 90 days after receipt by the
Corporation of the request for indemnification, (iv) payment of indemnification
is not made pursuant to Section 7 of this Agreement within ten (10) days after
receipt by the Corporation of a written request therefor, or (v) payment of
indemnification is not made within ten (10) days after a determination has been
made that Indemnitee is entitled to indemnification or such determination is
deemed to have been made pursuant to Section 9 or 10 of this Agreement,
Indemnitee shall be entitled to an adjudication in the Chancery Court of the
State of Delaware, or in any other court of competent jurisdiction, of his
entitlement to such indemnification or advancement of Expenses. Alternatively,
Indemnitee, at his option, may seek an award in arbitration to be conducted by a
single arbitrator in Delaware. The Corporation shall not oppose Indemnitee's
right to seek any such adjudication or award in arbitration.
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<PAGE>
(b) In the event that a determination shall have been
made pursuant to Section 9 of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section shall be conducted in all respects as a de novo trial or
arbitration on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination. If a Change of Control shall have occurred in any
judicial proceeding or arbitration commenced pursuant to this Section, the
Corporation shall have the burden of proving that Indemnitee is not entitled to
indemnification or advancement of Expenses, as the case may be.
(c) If a determination shall have been made or deemed
to have been made pursuant to Section 9 or 10 of this Agreement that Indemnitee
is entitled to indemnification, the Corporation shall be bound by such
determination in any judicial proceeding or arbitration commenced pursuant to
this Section, absent (i) a misstatement by Indemnitee of a material fact, or an
omission of a material fact necessary to make Indemnitee's statement not
materially misleading, in connection with the request for indemnification, or
(ii) prohibition of such indemnification under applicable law.
(d) The Corporation shall be precluded from asserting
in any judicial proceeding or arbitration commenced pursuant to this Section
that the procedures and presumptions of this Agreement are not valid, binding
and enforceable and shall stipulate in any such court or before any such
arbitrator that the Corporation is bound by all the provisions of this
Agreement.
(e) In the event that Indemnitee, pursuant to this
Section, seeks a judicial adjudication of, or an award in arbitration to
enforce, his rights under, or to recover damages for breach of, this Agreement,
Indemnitee shall be entitled to recover from the Corporation, and shall be
indemnified by the Corporation against, any and all expenses (of the kinds
described in the definition of Expenses) actually and reasonably incurred by him
in such judicial adjudication or arbitration, but only if he prevails therein.
If it shall be determined in such judicial adjudication or arbitration that
Indemnitee is entitled to receive part but not all of the indemnification or
advancement of expenses sought, the expenses incurred by Indemnitee in
connection with such judicial adjudication or arbitration shall be appropriately
prorated.
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<PAGE>
Section 12. Non-Exclusivity; Survival of Rights;
Insurance; Subrogation.
(a) The rights of indemnification and to receive
advancement of Expenses as provided by this Agreement shall not be deemed
exclusive of any other rights to which Indemnitee may at any time be entitled
under applicable law, the certificate of incorporation or by-laws of the
Corporation, any agreement, a vote of shareholders for a resolution of
directors, or otherwise. No amendment, alteration or repeal of this Agreement or
any provision hereof shall be effective as to any Indemnitee with respect to any
action taken or omitted by such Indemnitee in his Corporate Status prior to such
amendment, alteration or repeal.
(b) To the extent that the Corporation maintains an
insurance policy or policies providing liability insurance for directors,
officers, employees, agents or fiduciaries of the Corporation or of any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise which such person serves at the request of the Corporation,
Indemnitee shall be covered by such policy or policies in accordance with its or
their terms to the maximum extent of the coverage available for any such
director, officer, employee, agent or fiduciary under such policy or policies.
(c) In the event of any payment under this Agreement,
the Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and take
all action necessary to secure such rights, including execution of such
documents as are necessary to enable the Corporation to bring suit to enforce
such rights.
(d) The Corporation shall not be liable under this
Agreement to make any payment of amounts otherwise indemnifiable hereunder if
and to the extent that Indemnitee has otherwise actually received such payment
under any insurance policy, contract, agreement or otherwise.
Section 13. Duration of Agreement. This Agreement shall
continue until and terminate upon the later of: (a) 10 years after the date that
Indemnitee shall have ceased to serve as a director, officer, employee, agent or
fiduciary of the Corporation or of any other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise which Indemnitee
served at the request of the Corporation; or (b) the final termination of all
pending Proceedings in respect of which Indemnitee is granted rights of
indemnification or advancement of Expenses hereunder and of any proceeding
commenced by Indemnitee pursuant to Section 11 of this Agreement. This Agreement
shall be binding upon the Corporation and its successors and assigns and shall
inure to the benefit of Indemnitee and his heirs, executors and administrators.
Section 14. Severability. If any provision or
provisions of this Agreement shall be held to be invalid, illegal or
unenforceable for any reason whatsoever: (a) the validity, legality and
enforceability of the remaining provisions of this Agreement (including, without
limitation, each portion of any Section of this Agreement containing any such
provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall not in any way be affected or impaired
thereby; and (b) to the fullest extent possible, the provisions of this
Agreement (including, without limitation, each portion of any Section of this
Agreement
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containing any such provision held to be invalid, illegal or unenforceable, that
is not itself invalid, illegal or unenforceable shall be construed so as to give
effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
Section 15. Exception to Right of Indemnification or
Advancement of Expenses. Except as provided in Section 11(e), Indemnitee shall
not be entitled to indemnification or advancement of Expenses under this
Agreement with respect to any Proceeding, or any claim therein, brought or made
by him against the Corporation.
Section 16. Identical Counterparts. This Agreement may
be executed in one or more counterparts, each of which shall for all purposes be
deemed to be an original but all of which together shall constitute one and the
same Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of this
Agreement.
Section 17. Headings. The headings of the paragraphs of
this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction thereof.
Section 18. Modification and Waiver. No supplement,
modification or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
Section 19. Notice by Indemnitee. Indemnitee agrees
promptly to notify the Corporation in writing upon being served with any
summons, citation, subpoena, complaint, indictment, information or other
document relating to any Proceeding or matter which may be subject to
indemnification or advancement of Expenses covered hereunder.
Section 20. Notices. All notices, requests, demands and
other communications hereunder shall be in writing and shall be deemed to have
been duly given if (i) delivered by hand and receipted for by the party to whom
such notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to Indemnitee, to:
Robert Meyrowitz
32 East 57th Street
New York, NY 10022
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with a copy to:
David H. Meyrowitz, Esq.
Simon, Meyrowitz, Meyrowitz & Schlussel
470 Park Avenue South
New York, New York 10016
(b) If to the Corporation, to:
Paradigm Music Entertainment Co.
67 Irving Place
New York, New York 10003
or to such other address as may have been furnished to Indemnitee by the
Corporation or to the Corporation by Indemnitee, as the case may be.
Section 21. Governing Law. The parties agree that this
Agreement shall be governed by, and construed and enforced in accordance with,
the laws of the State of New York.
Section 22. Miscellaneous. Use of the masculine pronoun
shall be deemed to include usage of the feminine pronoun where appropriate.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement on the day and year first above written.
PARADIGM MUSIC ENTERTAINMENT CO.
By: /s/ Thomas McPartland
-------------------------------
Thomas McPartland, President and
Chief Executive Officer
INDEMNITEE
/s/ Robert B. Meyrowitz
------------------------------------
Robert B. Meyrowitz
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================================================================================
STOCK PURCHASE AGREEMENT
between
PRODIGY SERVICES CORPORATION, SUNSHINE INTERACTIVE NETWORK, INC.
and
PARADIGM MUSIC ENTERTAINMENT COMPANY
dated
January 9, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 1 Authorization and Sale of the Shares; Closing............................................... 1
1.1 Purchase and Sale of the Shares............................................................. 1
SECTION 2 Representations and Warranties of the Shareholders.......................................... 2
2.1 Organization, Good Standing and Qualification............................................... 2
2.2 Authorization............................................................................... 2
2.3 Validity; No Violation of Agreements, Etc................................................... 2
2.4 Title to the Stock.......................................................................... 3
2.5 Organization and Standing; Certificate of Incorporation and By-Laws......................... 3
2.6 Subsidiaries; Joint Ventures, Etc........................................................... 3
2.7 Capitalization.............................................................................. 3
2.8 Conflicts................................................................................... 4
2.9 Consents; Permits........................................................................... 4
2.10 Compliance with Charter, By-Laws and Other Instruments...................................... 5
2.11 Compliance with Law......................................................................... 5
2.12 Litigation and Bankruptcy................................................................... 5
2.13 Material Contracts.......................................................................... 6
2.14 Title to Properties; Liens and Encumbrances................................................. 6
2.15 Leases...................................................................................... 7
2.16 Trademarks and Other Intellectual Property.................................................. 7
2.17 Employee Benefit Plans...................................................................... 8
2.18 Employees................................................................................... 9
2.19 Financial Statements........................................................................ 10
2.20 Certain Events.............................................................................. 11
2.21 Insurance................................................................................... 12
2.22 Tax Matters................................................................................. 13
2.23 Disclosure.................................................................................. 15
2.24 Books and Records........................................................................... 15
2.25 Transactions with Related Parties........................................................... 15
2.26 Bank Accounts............................................................................... 15
2.27 Acquisition for Investment.................................................................. 15
2.28 Restricted Securities....................................................................... 16
2.29 Investor Suitability........................................................................ 16
2.30 Legends..................................................................................... 16
SECTION 3 Representations and Warranties of the Purchaser............................................. 17
3.1 Organization and Standing; Certificate of Incorporation and By-Laws......................... 17
3.2 Authorization............................................................................... 17
3.3 Enforceability.............................................................................. 17
3.4 Capitalization.............................................................................. 17
3.5 No Conflicts................................................................................ 18
3.6 Status of Shares............................................................................ 19
3.7 Financial Statements........................................................................ 19
3.8 Litigation and Bankruptcy................................................................... 20
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
3.9 Title to Properties; Liens and Encumbrances................................................. 20
3.10 Disclosure.................................................................................. 20
SECTION 4 Closing Deliveries of Shareholders.......................................................... 21
4.1 Officers' Certificate(s).................................................................... 21
4.2 Resignations................................................................................ 21
4.3 Opinion of Company's Counsel................................................................ 21
4.4 Termination of Shareholders' Agreement...................................................... 21
4.5 Release of Obligations...................................................................... 21
SECTION 5 Closing Deliveries of Purchaser............................................................. 22
5.1 Officer's Certificate....................................................................... 22
5.2 Opinion of Counsel.......................................................................... 22
5.3 Warrant Agreements.......................................................................... 22
5.4 Registration Rights Agreement............................................................... 22
SECTION 6 Covenants................................................................................... 23
6.1 By Prodigy.................................................................................. 23
6.2 By Purchaser................................................................................ 23
6.3 By Purchaser and the Company................................................................ 23
SECTION 7 Indemnification............................................................................. 23
7.1 Survival of Representations and Warranties.................................................. 23
7.2 Shareholder Indemnification................................................................. 23
7.3 Purchaser Indemnification................................................................... 25
7.4 Indemnification Procedure................................................................... 25
7.5 Purchaser's Non-Waiver...................................................................... 26
7.6 Shareholders' Non-Waiver.................................................................... 26
SECTION 8 Miscellaneous............................................................................... 26
8.1 Governing Law............................................................................... 26
8.2 Successors and Assigns...................................................................... 26
8.3 Entire Agreement; Amendment................................................................. 26
8.4 Notices, Etc................................................................................ 26
8.5 Brokers' and Finders' Fees.................................................................. 28
8.6 Titles and Subtitles........................................................................ 28
8.7 Counterparts................................................................................ 28
8.8 Publicity................................................................................... 28
8.9 Assurances.................................................................................. 28
</TABLE>
ii
<PAGE>
STOCK PURCHASE AGREEMENT
AGREEMENT dated this 9th day of January, 1997, by and among PARADIGM
MUSIC ENTERTAINMENT COMPANY, a Delaware corporation (the "Purchaser"); and
PRODIGY SERVICES CORPORATION, a Delaware corporation ("Prodigy"), and SUNSHINE
INTERACTIVE NETWORK, INC., a Delaware corporation ("Sunshine" and together with
Prodigy, the "Shareholders").
R E C I T A L S:
Sunshine is the owner of 49 shares of the common stock, no par value
(the "Common Stock"), of SonicNet, Inc., a Delaware corporation (the "Company"),
and Prodigy is the owner of 56 shares of the preferred stock, no par value (the
"Preferred Stock"), of the Company.
The 49 shares of Common Stock and 56 shares of Preferred Stock owned by
the Shareholders (collectively, the "Shares") constitute all of the Company's
issued and outstanding capital stock.
The Purchaser desires to acquire and the Shareholders desire to sell
all, but not less than all, of the issued and outstanding capital stock of the
Company on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises hereof and the mutual
covenants and conditions herein contained, the parties hereto agree as follows:
SECTION 1
Authorization and Sale of the Shares; Closing
1.1 Purchase and Sale of the Shares. Subject to the terms and
conditions hereof and in reliance upon the representations, warranties and
agreements contained herein, the Shareholders hereby sell to the Purchaser, and
the Purchaser hereby purchases from the Shareholders, all right and title to and
interest of the Shareholders in the Shares. Simultaneously with herewith the
Shareholders are delivering to Purchaser certificates representing the Shares
with stock powers duly executed in favor of Purchaser.
The consideration for the Shares, which is being paid simultaneously
herewith, consists of $100,000 being paid by bank check or wire transfer,
200,000 shares of the Class A common stock of Purchaser, par value $.01 per
share (the "Paradigm Stock") and warrants in the form set forth in Exhibit 1.1
hereto, to purchase 100,000 shares of the Class A common stock of Purchaser (the
"Paradigm Warrants"). Certificates representing the Paradigm Stock and Warrant
Agreements with respect to the Paradigm Warrants, registered in the names of the
Shareholders in such amounts as have been directed by the Shareholders, are
being delivered to the Shareholders simultaneously herewith.
<PAGE>
SECTION 2
Representations and Warranties of the Shareholders
The Shareholders represent and warrant to the Purchaser jointly and
severally, as to all matters other than those contained jointly in Sections 2.1,
2.2, 2.3, 2.4, 2.27, 2.28, 2.29 and 2.30 as to which the Shareholders severally
represent and warrant, as follows:
2.1 Organization, Good Standing and Qualification. Each Shareholder is
a corporation duly organized, validly existing and in good standing under the
laws of the state in which it was incorporated and is in good standing in each
jurisdiction in which the character of its properties or the nature of its
business require each such qualification. Each Shareholder has the requisite
power and authority to own and use its properties, to carry on its business as
presently conducted, and to enter into and perform this Agreement.
2.2 Authorization. The execution and delivery of this Agreement by each
Shareholder and the consummation by each Shareholder of the transactions
contemplated hereby have been duly authorized by all necessary corporate action.
2.3 Validity; No Violation of Agreements, Etc. This Agreement
constitutes the valid and binding agreement of each Shareholder and is
enforceable against it in accordance with its terms. Neither the execution nor
the delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, (a) violates or will violate, or conflicts or will conflict
with, or constitutes or will constitute a default (with or without notice, the
passage of time, or both) under, the certificate of incorporation or by laws of
each Shareholder or any material contract, commitment, agreement, understanding,
arrangement, or restriction of any kind to which either Shareholder is a party
or by which it is bound, or (b) violates or will violate any existing statute or
law, rule or regulation or order of any court or governmental authority, or (c)
will cause, or give any person grounds to cause (with or without notice, the
passage of time, or both), the maturity of any liability or obligation of either
Shareholder to be accelerated, or will increase any such liability or
obligation. No consent, declaration or filing with, or approval by any
governmental authority is required, in connection with the execution, delivery
and performance by either Shareholder of this Agreement or the consummation by
either Shareholder of the transactions contemplated hereby.
2.4 Title to the Stock. Each Shareholder has good, valid
and marketable title to the Shares set forth opposite his name on Schedule 2.4
annexed hereto, all of which have been fully paid for and are non-assessable,
and are free and clear of all pledges, liens, claims, charges, options, calls,
encumbrances, restrictions and assessments whatsoever (except any restrictions
which may be created by operation of Federal and State Securities laws).
2.5 Organization and Standing; Certificate of Incorporation and
By-Laws. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and is qualified to do
business and is in good standing in each jurisdiction in which the character of
its properties or the nature of its business requires such qualification, except
where the failure to so qualify would have no material adverse impact upon
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the business, operations, financial condition or prospects of the Company. The
Company has the requisite corporate power to own the properties owned by it and
to conduct business as now being conducted by it and as proposed to be conducted
by it. The Company has furnished the Purchaser with true, correct and complete
copies of its Certificate of Incorporation, as amended to date (as amended, the
"Charter"), and By-Laws, as amended to date (as amended, the "ByLaws") and no
actions have been taken to amend, modify or repeal the forms of the Charter and
By-Laws delivered to the Purchaser.
2.6 Subsidiaries; Joint Ventures, Etc. The Company has no subsidiaries
and does not control, directly or indirectly, or have an interest in, any
corporation, association, partnership, joint venture or other business entity.
2.7 Capitalization.
(a) The Company's authorized capital stock consists of 1000 shares,
of which:
(A) 700 shares are Common Stock, of which 49 shares are duly
issued and outstanding, fully-paid and non-assessable; and
(B) 300 shares are Preferred Stock, having the rights,
preferences and designations set forth in the Charter, of
which 56 shares are duly issued and outstanding, fully paid
and non-assessable.
(b) There are no outstanding preemptive, conversion or other rights,
options, warrants or agreements granted or issued by or binding on the Company
for the purchase or acquisition of any shares of its capital stock.
(c) All shares of capital stock and other securities of the Company
issued prior to the date hereof have been issued in transactions exempt from
compliance with the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), and all applicable state securities or "blue
sky" laws. The Company has not violated, nor is it in violation of, the
Securities Act or any applicable state securities or "blue sky" laws in
connection with the issuance of any shares of capital stock or other securities.
2.8 Conflicts.
The execution, delivery and performance by the Shareholders of this
Agreement and their compliance herewith, and the sale and delivery of the Shares
do not result in any violation of, and do not conflict with, or result in a
breach of any of the terms of, or constitute a default under, the Charter or
By-Laws of the Company. The execution, delivery and performance by the
Shareholders of this Agreement, and their compliance herewith, and the sale and
delivery of the Shares do not result in any violation of and do not conflict
with, or result in a breach of any of the terms of, or constitute a default
under, any mortgage, indenture, lease, agreement, instrument, judgment, decree,
order, rule or regulation or other restriction to which the Company is a party
or by which it or any of its assets is bound or the provision of any state or
Federal law to which the Company is subject, or result in the creation of any
lien upon any of the properties or assets of the Company pursuant to any such
term, or result in the suspension,
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revocation, impairment, forfeiture or non-renewal of any permit, license,
authorization or approval applicable to the Company's operations or any of its
assets or properties.
2.9 Consents; Permits.
(a) Except as set forth on Schedule 2.9, no consent, approval,
qualification, order or authorization of, or filing with, any Governmental Body
(as defined in Section 2.22) or non-governmental Person, including, without
limitation, the Secretary of State of Delaware, is required in connection with
the execution, delivery or performance of this Agreement, the offer and sale of
the Shares by the Shareholders, or the consummation of any other transaction
contemplated on the part of the Shareholders or the Company hereby. As used
herein, "Person" means any individual, corporation, limited liability company,
partnership, joint venture, trust, association, unincorporated organization or
other entity or Governmental Body.
(b) The Company has all governmental registrations, certificates,
consents, qualifications, accreditations, licenses, permits, authorizations and
approvals (collectively, "Approvals") necessary to own and operate the Company's
business and operations. All Approvals are valid and in full force and effect
and the Company has not received any notice that any governmental entity intends
to cancel, terminate or not renew any such Approvals. The Company is not in
default under any such approvals and no event has occurred and no condition
exists which, with the giving of notice the passage of time, or both, would
constitute a default thereunder.
2.10 Compliance with Charter, By-Laws and Other Instruments. The
Company is not in violation of any term of its Charter or By-Laws. The Company
is not in violation of any term of any mortgage, indenture, contract, agreement
or instrument to which it is a party or by which it is bound or to which its
properties or assets are subject, except for such violations which, in the
aggregate, will not, or are not reasonably likely to, materially adversely
affect the financial condition, operations, assets or business of the Company.
2.11 Compliance with Law. The Company is in compliance in all material
respects with all judgments, decrees, orders, rules and regulations, and all
state, local and federal laws, and other restrictions to which it is a party or
by which it is bound (other than minor violations which are not likely to lead
to criminal charges or to civil penalties exceeding $5,000 in the aggregate).
2.12 Litigation and Bankruptcy.
(a) Except as set forth on Schedule 2.12, there are no actions, suits,
proceedings, investigations or claims pending or, to the Company's knowledge,
threatened against or involving the Company or its assets.
(b) The Company has not admitted in writing its inability to pay its
debts generally as they become due, nor has it filed or consented to the filing
against it of a petition in bankruptcy or a petition to take advantage of any
insolvency act, nor has it made an assignment for the benefit of creditors,
consented to the appointment of a receiver for itself or for the whole or any
substantial part of its property or assets, or had a petition in bankruptcy
filed against it,
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been adjudicated bankrupt, or filed a petition or answer seeking reorganization
or arrangement under the federal bankruptcy laws or any other similar law or
statute of the United States of America or any other jurisdiction.
2.13 Material Contracts. Except as set forth on Schedule 2.13, the
Company has no currently existing contract, obligation, agreement, plan,
arrangement, commitment or the like (written or oral) (i) to undertake capital
expenditures, or to acquire any property or assets other than in the ordinary
course of business consistent with past practice, in an aggregate amount
exceeding Ten Thousand Dollars ($10,000); (ii) providing for or evidencing
indebtedness (other than trade payables and accrued liabilities constituting
current liabilities); (iii) having a remaining term of more than six months and
providing for payments to or by the Company in excess of Ten Thousand Dollars
($10,000) individually or (if such contracts are of a similar nature or with the
same party) in the aggregate; (iv) to loan money or extend credit (other than
trade credit in the ordinary course of business consistent with past practice)
to or guarantee the obligations of any other Person (other than guarantees by
way of endorsement of negotiable instruments in the ordinary course of business
consistent with past practice); (v) which involves any joint venture,
partnership or other arrangement involving sharing of profits with any Person;
(vi) which would restrict the Company from carrying on business anywhere in the
world; (vii) providing for employment or consulting arrangements; (viii)
providing for mortgages or security interests (other than a vendor's security
interest in goods delivered and not paid for); (ix) providing for brokerage or
finder's fees; (x) providing for any purchase of assets, shares of capital stock
or other equity interests, or other acquisition or divestiture, in connection
with the purchase or sale of a business or any substantial part of a business;
(xi) with any employee or officer of the Company other than in connection with
his or her employment; or (xii) described in Section 2.16 relating to
Intellectual Property (each, a "Material Contract"). The Company has complied
with all material provisions of all said Material Contracts and there does not
exist any event of default either by the Company or, to the Company's knowledge,
the other party to the agreement under any such agreement or any event which,
after notice or lapse of time or both, would constitute an event of default
under any such Material Contract.
2.14 Title to Properties; Liens and Encumbrances. Except as set forth
on Schedule 2.14, the Company has good and marketable title to all of the
properties and assets, both real and personal, tangible and intangible, which it
purports to own, including, without limitation, all assets reflected on the
Unaudited Statements (as defined in Section 2.19), and such properties and
assets are not subject to any mortgage, pledge, lien, security interest,
conditional sale agreement, encumbrance or charge. The Company is not in default
or in breach of any provision of its leases or licenses and the Company holds
valid leasehold or licensed interests in the property which it leases or which
is licensed to it. No other party to any lease or license to which the Company
is a party is in default under or breach of any such lease or license.
The Company has never owned any real property or any interest in real
property. The personal property, including without limitation machinery,
equipment and other fixed assets, owned or leased by the Company is in a
condition sufficient to conduct the business of the Company in all material
respects in the same manner as it is conducted on or has been conducted for the
three months preceding the date of this Agreement, and all of such property is
generally in good repair and operating condition (subject to normal wear and
tear). The Company is not
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in material violation of any applicable building, zoning or other law in respect
of its buildings, plants or structures or their operation.
2.15 Leases. Schedule 2.15 attached hereto contains a true, correct and
complete list of all leases under which the Company is a lessee or sublessee of
real property, equipment, vehicles or any other item, other than leases or
licenses for routine office equipment which, in the aggregate, require payments
of $10,000 or less per year. The Company holds valid leasehold or licensed
interests in the properties which it leases or which are licensed to it, and
enjoys peaceful and undisturbed possession under all such leases. All such
leases are valid and enforceable in accordance with their respective terms
(subject to applicable bankruptcy, insolvency, reorganization and moratorium
laws and other laws of general application affecting enforcement of creditors'
rights generally and to general equitable principles), are in full force and
effect, without any default by the Company, to the Company's knowledge, by any
landlord under any such lease, or any condition, event or act which, with the
giving of notice or lapse of time, or both, would constitute such a default
unless such default can be remedied or cured by the payment of less than $5,000
and the Company has made reserves therefor as reflected in the financial
statements delivered to the Purchaser.
2.16 Trademarks and Other Intellectual Property.
(a) Schedule 2.16 attached hereto sets forth a true, complete and
accurate list of all trademarks and trademark applications (collectively,
"Trademarks") now owned, licensed or controlled by the Company, and attached to
Schedule 2.16 are true and correct copies of all Trademarks registered by the
Company or any Subsidiary with the United States Patent and Trademark Office. No
Trademarks have been adjudged invalid or unenforceable, in whole or in part, and
there is no litigation or proceeding pending concerning the validity or
enforceability of the registered Trademarks. To the knowledge of the
Shareholders and the Company, each of the issued Trademarks is valid and
enforceable. The Company is the sole and exclusive owner of the entire right and
title to and interest in each of the trademark registrations, free and clear of
any Liens. The Company has not received any communication(s), or otherwise
received any information, asserting a claim by any person to the ownership of or
right to use said Trademarks and the Company does not know of any basis for any
such claim.
The Company does not own, license or control any other United States or
foreign patents, patent applications, service marks, trade names, copyrights or
registrations thereof or applications for such registrations.
(b) The conduct by the Company of its business does not (a) infringe
upon or violate the registered trademarks, registered service marks, registered
copyrights or other Intellectual Property, registered with the U. S. Patent and
Trademark Office or the U. S. Copyright Office, of any Person or (b) involve the
misappropriation or other improper use of the trade secrets or other
intellectual or industrial property rights of any other Person. The Company owns
or has the right to use all of the Intellectual Property necessary for the
conduct and operation of the business of the Company as now being conducted free
from any Liens other than those which arise in the ordinary course of business
and do not materially impair the Company's use of such Intellectual Property. No
claim or demand of any Person has been made, nor is there any proceeding that is
pending or to the best knowledge of the Company threatened, which (in any
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such case) (i) challenges the rights of the Company in respect of any
Intellectual Property or (ii) asserts that the Company is infringing or
otherwise in conflict with, or is required to pay any royalty, license fee,
charge or other amount with regard to, any Intellectual Property. As used
herein, the term "Intellectual Property" means any and all software and any and
all United States and foreign: (i) trademarks, service marks, trade names, trade
dress, logos, business and product names, slogans, and registrations and
applications for registration thereof and (ii) copyrights and registrations
thereof.
(c) The Company is not obligated or under any liability whatsoever to
make any payments by way of royalties, fees or otherwise to any owner or
licensee of, or other claimant to, any Intellectual Property being used by the
Company with respect to its use thereof or in connection with the conduct of its
business or otherwise.
(d) Except as set forth on Schedule 2.16, no Intellectual Property has
been licensed by the Company to any other Person.
2.17 Employee Benefit Plans. Except as set forth in Schedule 2.17, the
Company has not maintained, sponsored, adopted, made contributions to or
obligated itself to make contributions to or to pay any benefits or grant rights
under or with respect to any "Employee Pension Benefit Plan" (as defined in
Section 3(2) of the Employment Retirement Security Act of 1974, as amended
("ERISA")), "Employee Welfare Benefit Plan" (as defined in Section 3(1) of
ERISA, "multi-employer plan" (as defined in Section 3(37) of ERISA), plan of
deferred compensation, medical plan, life insurance plan, long-term disability
plan, dental plan or other plan providing for the welfare of any of the
Company's employees or former employees or beneficiaries thereof, personnel
policy (including but not limited to vacation time, holiday pay, bonus programs,
moving expense reimbursement programs and sick leave), excess benefit plan,
bonus or incentive plan (including but not limited to stock options, restricted
stock, stock bonus and deferred bonus plans), salary reduction agreement,
change-of-control agreement, employment agreement, consulting agreement or any
other benefit, program or contract (collectively, "Employee Benefit Plans"),
whether or not written, which could give rise to or result in the Company having
any material debt, liability, claim or obligation of any kind or nature, whether
accrued, absolute, contingent, direct, indirect, known or unknown, perfected or
inchoate or otherwise and whether or not due or to become due. Correct and
complete copies of all Employee Benefit Plans previously have been furnished to
the Purchaser. The Employee Benefit Plans are in compliance in all material
respects with governing documents and agreements and with applicable laws. There
has not been any act or omission by the Company or any Plan Affiliate of the
Company under ERISA or the terms of the Employee Benefit Plans, or any other
applicable law or agreement which could give rise to any liability of the
Company, whether under ERISA, the Code or other laws or agreements. With respect
to the Employee Benefit Plans set forth on Schedule 2.17, the Company has
accrued or reserved for all obligations to fund such Employee Benefit Plans, if
any. The term "Plan Affiliate" shall mean any other person or entity together
with which the Company constitutes all or part of a controlled group, or which
would be so treated with the Company, under Section 414 of the Code and any
regulations, administrative rulings and case law interpreting the foregoing.
2.18 Employees.
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(a) Schedule 2.18 attached hereto contains a true, complete and correct
list of the Company's employees as of the date hereof, and the respective
offices and titles thereof.
(b) Except as set forth on Schedule 2.18, the Company is not a party to
any collective bargaining or similar labor agreements.
(c) Set forth on Schedule 2.18 is a list by name and date of agreement
of those employees of the Company who have employment agreements, other than
those employees who are "employees at will." Schedule 2.18 contains a list of
the base salary and bonus arrangement of each employee.
(d) The Company is in compliance in all material respects with all
applicable laws, rules and regulations of governmental agencies or authorities
relating to the employment of labor in connection with the operation of its
business, including, without limitation, ERISA and the regulations and published
interpretations thereunder, the requirements of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, relating to employees and former
employees ("COBRA"), and those relating to wages, hours, collective bargaining,
unemployment insurance, workers' compensation, equal employment opportunity,
race, sex and age discrimination or harassment, and the payment and withholding
of taxes, including income and social security taxes. There are no
administrative charges nor court complaints pending or, to its knowledge,
threatened against the Company or any Subsidiary before the U.S. Equal
Employment Opportunity Commission concerning alleged employment discrimination
or any other matters relating to employment of labor nor any basis therefor. The
Company has not agreed to recognize any union or other collective bargaining
unit, nor has any union or other collective bargaining unit been certified or
sought to be certified as representing any of its employees. The Company has not
experienced any strikes, work stoppages, significant grievance proceedings or
filings of claims of unfair labor practices.
(e) No employee or consultant of the Company is, or is now believed to
be, in violation of any term of any employment contract, disclosure agreement,
non-competition agreement, proprietary information and inventions assignment, or
any other contract or agreement or any restrictive covenant or any other common
law obligation to a former employer or other person or entity relating to the
right of any such employee or consultant to be employed by the Company. The
employment by the Company of the Company's employees or the retainer by the
Company of the Company's consultants does not subject the Company or the
Purchaser to any liability to a third party. The Company does not have any
collective bargaining agreement covering any of its employees.
2.19 Financial Statements.
(a) The Shareholders provided Purchaser with an unaudited
balance sheet of the Company as at December 31, 1996 (the "Balance Sheet Date")
and the related statement of income for the year then ended (the "Unaudited
Statements").
(b) The Unaudited Statements are reconcilable to the books and
records of the Company in all material respects, and present fairly the
financial position of the Company as of the date and the results of operations
for the period, indicated. The books of account and other
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financial records of the Company have been maintained in accordance with good
business practice. The Unaudited Statements were prepared from the books and
records of the Company and such books and records accurately reflect all
transactions to which the Company was and is a party.
(c) Except as reflected in the Unaudited Statements, and/or in
the Schedules to this Agreement, there were, as at the Balance Sheet Date, no
material liabilities or obligations of the Company of a type that would be
required under generally accepted accounting principles to be reflected in a
balance sheet or notes thereto.
(d) Except as set forth on Schedule 2.19, the Company has no
liabilities or obligations, other than those reflected on the Unaudited
Statements or incurred since the Balance Sheet Date in the ordinary course of
business. There are no asserted claims for indemnification by any person or
entity against the Company under any law or agreement or pursuant to the Charter
or By-laws, and the Company is not aware of any facts or circumstances that
might reasonably give rise to the assertion of such a claim against the Company.
(e) The accounts receivable of the Company reflected in the
Unaudited Statements arose from bona fide transactions in the ordinary course of
business. Except as set forth on Schedule 2.19, the Company has not received
notice of any counterclaims or setoffs against such accounts receivable for
which allowances have not been established. The Unaudited Statements reflect
adequate allowances for uncollectible receivables. Notwithstanding the
foregoing, the Shareholders make no representation as to the actual
collectibility, either individually or in the aggregate, of the accounts
receivable of the Company.
(f) Since December 31, 1996, there has been no material
adverse change in the business, operations or financial condition of the
Company.
2.20 Certain Events. Except as set forth on Schedule 2.20, since June
30, 1996, the Company has not:
(a) issued any stock, bond or other corporate security (including
without limitation securities convertible into or rights to acquire
capital stock of the Company or any Subsidiary) other than as provided
herein;
(b) borrowed any amount or incurred or become subject to any liability
(absolute, accrued or contingent), except current liabilities incurred,
liabilities under contracts entered into, borrowings under its credit
facilities, liabilities for customer advances and liabilities in
respect of letters of credit, all of which are in the ordinary course
of business;
(c) discharged or satisfied any lien or incurred or paid any obligation
or liability (absolute, accrued or contingent) other than current
liabilities shown on the Schedule 2.20 and current liabilities incurred
in the ordinary course of business;
(d) declared or made any payment or distribution to stockholders or
purchased or redeemed any shares of its capital stock or other
securities;
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(e) mortgaged, pledged or subjected to lien any of its assets, tangible
or intangible, other than liens of current real property taxes not yet
due and payable;
(f) sold, assigned or transferred any of its tangible assets except in
the ordinary course of business, or canceled any debt or claim;
(g) sold, assigned, transferred or granted any license with respect to
any patent, trademark, trade name, service mark, copyright, trade
secret or other intangible asset other than in the ordinary course of
business;
(h) suffered any material loss of property or waived any right of
substantial value whether or not in the ordinary course of business;
(i) suffered any material adverse change in its relations with, or any
loss or threatened loss of, any of its suppliers or customers;
(j) made any change in the employment arrangements or benefits for its
executive officers;
(k) made any material change in the manner of its business or
operations;
(l) made any material change in any method of accounting or accounting
practice, except for any such change required by reason of a concurrent
change in generally accepted accounting principles;
(m) entered into any transaction except in the ordinary course of
business or as otherwise contemplated hereby; or
(n) entered into any commitment (contingent or otherwise) to do any of
the foregoing except as contemplated hereby.
2.21 Insurance. Schedule 2.21 is a true, correct and complete list and
description, including policy numbers, of all insurance maintained by the
Company and complete and correct copies thereof have been delivered to the
Purchaser. The Company is not in default with respect to its obligations under
any insurance policy maintained by it.
2.22 Tax Matters. (a) Schedule 2.22 is a true, correct and complete
list of all of the taxing authorities with which the Company is required to file
any tax returns, estimates or returns in connection with the conduct of its
business. The Company has timely filed all federal, state and local tax returns,
estimates and reports with respect to the business of the Company required to be
filed by it as of the date hereof and has paid in full all taxes shown to be due
by such returns, estimates or reports. As of the time of filing, all such
returns, estimates and reports were true, correct and complete, and correctly
reflected in all material respects the facts regarding the income, business,
assets, operations, activities and status of the Company and any other
information required to be shown therein.
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(b) None of the United States federal, foreign, state and
local Tax Returns that have been filed by the Company since its formation have
been audited by any Governmental Body, nor have any adjustments to Tax Returns
filed by or on behalf of the Company been proposed by any representative of any
Governmental Body. The Company has not given nor been requested to give waivers
or extensions (or is or would be subject to a waiver or extension given by any
other entity) of any statute of limitations relating to the payment of Taxes for
which the Company may be liable. There are no other agreements between the
Company and any Governmental Body relating to Taxes.
(c) The Company has paid, accrued for payment on its books and
records or made provision for the payment of, all Taxes that have or may become
due for all periods ending on or before the date hereof attributable to the
income, business, assets, operations, activities and status of the Company on or
before the date hereof, including, without limitation, all Taxes reflected on
the Tax Returns referred to in Section 2.22(a), or in any assessment, proposed
assessment, or notice, either formal or informal, received by the Shareholders
or the Company except such Taxes, if any, that are being contested in good faith
and as to which adequate accruals have been provided. The charges and accruals
with respect to Taxes on the books of the Company are adequate and are at least
equal to the Company's liabilities for Taxes for all periods ending on or before
the date hereof. All Taxes that the Company is, or was, required by law to
withhold or collect for all periods ending on or before the date hereof have
been duly withheld or collected and, to the extent required, have been paid to
the appropriate Governmental Body. There are no liens with respect to Taxes upon
any of the properties or assets, real or personal, tangible or intangible, of
the Company. (For purposes of this Section 2.22(c), the date of this Agreement
shall be treated as the last day of a taxable period in fact ends on such date).
(d) There is no existing tax sharing agreement that may or
will require that any payment be made by or to the Company on or after the date
hereof.
(e) Schedule 2.22 contains a true and correct schedule of the
tax basis of all assets of the Company with an individual value in excess of
$5,000 and a true and correct schedule of all tax credit and tax loss carry
forwards of the Company with respect to federal, state, local or foreign Taxes.
(f) No Shareholder is a foreign person within the meaning of
Section 1445 of the Code.
(g) None of Shareholders nor the Company has in effect any tax
elections for federal income tax purposes under Sections 108, 168, 338, 341(f),
441, 471, 1017, 1033 or 4977 of the Code.
(h) During the previous two (2) years the Company has not
engaged in any exchange under which the gain realized on such exchange was not
recognized due to Section 1031 of the Code.
(i) The Company is not a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code.
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(j) The Company has no liability, actual or contingent, for
Taxes of any predecessor entity, including without limitation Sonic Net L.P. or
SonicNet LLC.
Definitions used in this Section:
"Code" -- The Internal Revenue Code of 1986, as amended.
"Governmental Body" -- Any domestic or foreign national,
state, multi-state or municipal or other local government, any subdivision,
agency, commission or authority thereof, or any quasi-governmental or private
body exercising any regulatory or taxing authority thereunder.
"Taxes" -- (a) Any federal, state, local, foreign and other
income, alternative or add-on minimum, accumulated earnings, personal holding
company, franchise, capital stock, profits, windfall profits, gross receipts,
value added, sales, use, excise (including the golden parachute excise tax
imposed by Section 4999 of the Code and the green mail excise tax imposed by
Section 5881 of the Code), customs duties, transfer, conveyance, registration,
stamp, documentation, recording, premium, severance, environmental (including
taxes under Section 59A of the Code), real property, personal property, ad
valorem, intangibles, rent, occupancy, firearm, ammunition, license, occupation,
employment, unemployment insurance, social security, disability, workers'
compensation, payroll, withholding, estimated or any other tax, duty,
governmental fee or other like assessment or charge of any kind whatsoever
(including all interest and penalties thereon and additions thereto whether
disputed or not) imposed by any Governmental Body and (b) any obligations under
any agreements or arrangements with respect to Taxes described in clause (a)
above.
"Tax Returns" -- Any returns, reports, declarations, forms,
claims for refund or information returns or statements relating to Taxes,
including any schedule or attachment thereto, and including any amendment
thereof.
2.23 Disclosure. Neither this Agreement nor any other document,
certificate, schedule, financial, business or other statement furnished to the
Purchaser by or on behalf of the Shareholders in connection with the
transactions contemplated hereby or referred to herein, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained therein or herein not misleading in light
of the circum stances under which they were made.
2.24 Books and Records. The minute books of the Company contain
complete and accurate records of all meetings and other corporate actions of
stockholders, Board of Directors and committees thereof. The stock ledgers of
the Company are complete and reflect all issuances, transfers of which it is
aware, repurchases and cancellations of shares of capital stock of the Company.
2.25 Transactions with Related Parties. Except as disclosed on Schedule
2.25, no officer or shareholder of the Company nor any of their respective
affiliates is presently a party to any transaction with the Company including,
without limitation, any contract, agreement or arrangement (i) providing for the
furnishing of services, (ii) providing for rental of real or
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personal property, or (iii) otherwise requiring payments to any Person in which
such person has an interest. There are no loans outstanding to or from any such
officer or Shareholder from or to the Company.
2.26 Bank Accounts. Schedule 2.26 hereto sets forth a true, correct and
complete list of the names and addresses of all banks and other financial
institutions in which the Company maintains an account, deposit or safe-deposit
box, together with the names of all Persons authorized to draw on these accounts
or deposits or to have access to these boxes.
2.27 Acquisition for Investment. The Paradigm Stock and Paradigm
Warrants to be received by each Shareholder pursuant to the terms hereof will be
acquired for investment for such Shareholder's own account, without any view to
the unregistered public distribution or resale thereof, all without prejudice,
however, to the right of each Shareholder at any time lawfully to sell or
otherwise to dispose of all or any part of the Paradigm Stock and Paradigm
Warrants pursuant to registration or any exemption therefrom under the
Securities Act and applicable state securities laws.
2.28 Restricted Securities. Each Shareholder understands that the
Paradigm Stock and Paradigm Warrants to be received by it pursuant to the terms
hereof and characterized as "restricted securities" under the federal securities
laws inasmuch as they are being acquired from Purchaser in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act only
in certain limited circumstances.
2.29 Investor Suitability. Each Shareholder is an "accredited investor"
within the meaning of Rule 501 of Regulation D under the Securities Act. Each
Shareholder has the capacity to evaluate the merits and high risks of an
investment in the Paradigm Stock and Paradigm Warrants and is able to bear the
economic risk of this investment. Each Shareholder understands that an
investment in Paradigm Stock and Paradigm Warrants is highly speculative and
involves a high degree of risk. Each Shareholder has been provided access to all
information requested by it in order to evaluate the merits and risks of an
investment in the Paradigm Stock and Paradigm Warrants.
2.30 Legends. Each Shareholder acknowledges that the certificates
evidencing the Paradigm Stock, Paradigm Warrants and securities issued upon
exercise of the Paradigm Warrants may bear the following legend:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE
SECURITIES UNDER SUCH ACT OR AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT."
The foregoing legend shall be removed by Purchaser from any certificate at such
time as the holder of the Paradigm Stock, Paradigm Warrant or other security
represented by the certificate delivers an opinion of counsel reasonably
satisfactory to Purchaser to the effect that such legend
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is not required in order to establish compliance with any provisions of the
Securities Act, or at such time as the holder of such Paradigm Stock, Paradigm
Warrant or other security satisfies the requirements of Rule 144(k) under the
Securities Act (provided that Rule 144(k) as then in effect does not differ
substantially from Rule 144(k) as in effect as of the date of this Agreement),
and provided further that Purchaser has received from the holder a written
representation that such holder satisfies the requirements of Rule 144(k) as
then in effect with respect to such Paradigm Stock, Paradigm Warrant or other
security.
SECTION 3
Representations and Warranties of the Purchaser
The Purchaser represents and warrants to the Shareholders as follows:
3.1 Organization and Standing; Certificate of Incorporation and
By-Laws. The Purchaser is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and is qualified to do
business and is in good standing in each jurisdiction in which the character of
its properties or the nature of its business requires such qualification, except
where the failure to so qualify would have no material adverse impact upon the
business, operations or prospects of the Purchaser. The Purchaser has the
requisite corporate power to own the properties owned by it and to conduct
business as now being conducted by it and as proposed to be conducted by it. The
Purchaser has furnished the Shareholders with true, correct and complete copies
of its Certificate of Incorporation, as amended to date (as amended, the
"Charter"), and By-Laws, as amended to date (as amended, the "By-Laws") and no
actions have been taken to amend, modify or repeal the forms of the Charter and
By-Laws delivered to the Shareholders.
3.2 Authorization. The Purchaser has all requisite power and authority
to enter into this Agreement and to carry out and perform its obligations under
the terms of this Agreement. The Purchaser has taken all action necessary for
the authorization, execution, delivery and performance by it of this Agreement.
3.3 Enforceability. This Agreement is the valid and binding obligation
of the Purchaser, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization and moratorium laws and other
laws of general application affecting enforcement of creditors' rights generally
and to general equitable principles.
3.4 Capitalization. (a) The Purchaser has the authority to issue
40,000,000 shares of capital stock, consisting of (i) 31,999,900 shares of Class
A Common Stock, par value $0.01 per share, (ii) 1,000,1000 shares of Class B
Common Stock, par value $0.01 per share, (iii) 2,000,000 shares of Class E
Common Stock, par value $0.01 per share, and (iv) 5,000,000 shares of Preferred
Stock, par value $0.01 per share, of which 1,342,036 shares of Class of Class A
Common Stock, 1,000,005 shares of Class B Common Stock, 1,216,047 shares of
Class E Common Stock and no shares of Preferred Stock are outstanding. An
aggregate of 666,670 shares of Class A Common Stock and Class B Common Stock
have been placed in escrow and are subject to cancellation if the Purchaser does
not attain certain earnings levels or the
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Purchaser is sold below certain per share prices. In addition, the Purchaser has
reserved for issuance (i) 300,000 shares of Class A Common Stock upon exercise
of stock options which may be granted to employees, directors and consultants of
the Purchaser under the Purchaser's 1996 Stock Option Plan, (ii) 333,333 shares
of Class A Common Stock to certain directors, consultants and employees of the
Purchaser, of which 100,000 shares will be placed in escrow upon issuance, and
(iii) 500,004 shares of Class A Common Stock issuable upon exercise of warrants.
The shares of Class A Common Stock, Class B Common Stock and Class E Common
Stock are substantially identical, except that holders of Class A Common Stock
and Class E Common Stock have the right to cast one vote, and the holders of
Class B Common Stock have the right to cast five votes, on all matters submitted
to a vote of the holders of Common Stock. Each share of Class B Common Stock is
convertible into one share of Class A Common Stock (i) at the option of the
holder or (ii) automatically upon the sale or any other transfer thereof except
to a person who immediately prior to such sale or transfer is a holder of Class
B Common Stock. In addition, the outstanding shares of Class E Common Stock are
subject to redemption under certain circumstances.
(b) After giving effect to the presently-contemplated initial
public offering of Purchaser's securities (the "Paradigm IPO"), an additional
12,000,000 shares of Class A Common Stock will be issued and outstanding or
issuable on the exercise of outstanding options and warrants (assuming the sale
of 3,000,000 units in the Paradigm IPO, consisting in the aggregate of 3,000,000
shares of Class A Common Stock and warrants to purchase 9,000,000 shares of
Class A Common Stock, but excluding the unit purchase option to be granted to
the underwriter in connection with the Paradigm IPO). There are as of the date
of this Agreement no other outstanding subscriptions, options, rights, warrants,
convertible securities or other agreements (other than this Agreement) or calls,
demands or commitments of any kind relating to the issuance, sale or transfer of
any capital stock or other equity securities of the Purchaser, whether directly
or upon the exercise or conversion of other securities.
3.5 No Conflicts. Neither the execution and delivery of this Agreement
or any of the other agreements or documents necessary to effect the provisions
of this Agreement nor the consummation of the transactions contemplated hereby
or thereby nor compliance by Purchaser with any of the provisions hereof or
thereof, do or will (a) conflict with, result in a breach or violation of or
constitute (or with notice or lapse of time both constitute) a default under,
(i) Purchaser's Certificate of Incorporation or By-Laws or (ii) any statute,
regulation, order, judgment or decree or any instrument, contract or other
agreement to which Purchaser is a party or by which Purchaser (or any of the
properties, assets or business of Purchaser) is subject or bound; (b) result in
the creation of, or give any party the right to create, any lien upon the
properties or assets of Purchaser; (c) result in any suspension, revocation,
impairment, forfeiture or non-renewal of any approval applicable to Purchaser;
or (d) require Purchaser to obtain any authorization, consent, approval or
waiver from, or to make any filing with, any governmental entity or to obtain
the approval or consent of any other person other than if required,
qualifications or filings under the Securities Act, and the applicable
securities laws of other states, which qualifications or filings, if required,
will be obtained on behalf of the Shareholders and will be effective within the
period required by law.
3.6 Status of Shares. The Paradigm Stock, when sold and issued in
compliance with the provisions of this Agreement, will be validly issued, fully
paid and nonassessable, and will
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be free of any mortgage, pledge, lien, security interest, encumbrance or charge
of any kind whatsoever.
3.7 Financial Statements.
(a) The Purchaser provided the Shareholders with the audited balance
sheet of the Purchaser as at December 31, 1995, and the related statement of
income and cash flows for the year then ended (the "Audited Statements"). The
Purchaser also provided the Shareholder with the unaudited balance sheet of the
Purchaser as at September 30, 1996 (the "Balance Sheet Date") and the related
statements for the nine months then ended (the "Unaudited Statements").
(b) The Audited Statements present fairly the financial position of the
Purchaser in conformity with generally accepted accounting principles applied on
a consistent basis as at the date thereof. The Audited Statements and Unaudited
Statements reflect only assets and liabilities and results of operations and
transactions of the Purchaser, and do not include any assets, liabilities or
transactions of any corporation or entity except the Purchaser. The Unaudited
Financial Statements were prepared from the books and records of the Purchaser
and such books and records accurately reflect, on a basis consistent with the
Audited Statements, all transactions to which the Purchaser was and is a party.
There are no asserted claims for indemnification by any person or entity against
the Purchaser under any law or agreement or pursuant to the Charter or By-laws,
and the Purchaser is not aware of any facts or circumstances that might
reasonably give rise to the assertion of such a claim against the Purchaser.
3.8 Litigation and Bankruptcy.
(a) Except as set forth on Schedule 3.8, there are no actions, suits,
proceedings, investigations or claims pending or, to the Purchaser's knowledge,
threatened against or involving the Purchaser.
(b) The Purchaser has not admitted in writing its inability to pay its
debts generally as they become due, nor has it filed or consented to the filing
against it of a petition in bankruptcy or a petition to take advantage of any
insolvency act, nor has it made an assignment for the benefit of creditors,
consented to the appointment of a receiver for itself or for the whole or any
substantial part of its property or assets, or had a petition in bankruptcy
filed against it, been adjudicated bankrupt, or filed a petition or answer
seeking reorganization or arrangement under the federal bankruptcy laws or any
other similar law or statute of the United States of America or any other
jurisdiction.
3.9 Title to Properties; Liens and Encumbrances. Except as set forth on
Schedule 3.9, the Purchaser has good and marketable title to all of its material
properties and assets, both real and personal, tangible and intangible, which it
purports to own, and such properties and assets are not subject to any mortgage,
pledge, lien, security interest, conditional sale agreement, encumbrance or
charge which would materially adversely affect the proposed use thereof by
Purchaser. The Purchaser is not in material default or in breach of any
provision of its material leases or licenses and the Purchaser holds valid
leasehold or licensed interests in the property which it leases or which is
licensed to it. To the best knowledge of Purchaser, no other party
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to any material lease or license to which the Purchaser is a party is in
material default under or breach of any such lease or license.
3.10 Disclosure. Neither this Agreement nor any certificate or schedule
furnished to the Shareholders by or on behalf of the Purchaser in connection
with the transactions contemplated hereby contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained therein or herein not misleading or incomplete in light of
the circumstances under which they were made.
SECTION 4
Closing Deliveries of Shareholders
In addition to certificates representing their respective shares of
capital stock of the Company, simultaneously herewith the Shareholders are
delivering to Purchaser:
4.1 Officers' Certificate(s). A certificate of their respective
secretaries in form and substance reasonably satisfactory to the Purchaser,
certifying as to their respective Charters and By-laws; the incumbency of the
officers executing this Agreement on their behalf, and the adoption and
effectiveness of resolutions authorizing the execution, delivery and performance
of this Agreement; and certifying as to such other matters as the Purchaser may
reasonably request.
4.2 Resignations. Resignations from their respective positions as
officers and directors of the Company of such individuals as the Purchaser shall
designate.
4.3 Opinion of Company's Counsel. An opinion addressed to the
Purchaser, to the effect that the Company is duly organized and validly
existing; that all corporate action on the part of the Company necessary or
appropriate in connection with the transaction contemplated hereby has been
taken and that the Shares, have been duly authorized, validly issued and are
non-assessable.
4.4 Termination of Shareholders' Agreement. An agreement terminating
the Shareholders' Agreement made as of the first day of December 1995 among the
Shareholders and the Company and waiving any rights that may arise thereunder as
a result of the execution, delivery or performance of this Agreement.
4.5 Release of Obligations. An agreement whereby Prodigy releases the
Company from all obligations to Prodigy arising prior to December 31, 1996,
including all obligations under the Sub-Sublease Agreement dated as of April 15,
1996, as amended provided that such agreement shall not terminate the Publisher
Area Agreement dated December 1, 1995, between Prodigy or any obligation arising
under the Sub-Sublease after December 31, 1996, and the Company or release the
Company from any obligations arising thereunder and provided further that in
consideration of such release the Company shall deliver to Prodigy an agreement
releasing Prodigy from all obligations under the Conveyance and Contribution
Agreement dated December 1, 1995 and the Subscription Agreement dated December
1, 1995, whereby Prodigy
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subscribed to purchase 56 shares of the Preferred Stock of the Company, as
amended by the letter agreement dated ___________, 1996.
SECTION 5
Closing Deliveries of Purchaser
In addition to certificates representing the Paradigm Stock and a
certified check or wire transfer for the cash portion of the Purchase Price,
simultaneously herewith the Purchaser is delivering to the Shareholders:
5.1 Officer's Certificate. A certificate of its secretary, in form and
substance reasonably satisfactory to the Shareholders certifying as to its
Charter and By-laws, the incumbency of the officers executing this Agreement on
its behalf, and the adoption and effectiveness of resolutions authorizing the
execution, delivery and performance of this Agreement and certifying as to such
other matters as either Shareholder may reasonably require.
5.2 Opinion of Counsel. An opinion addressed to each of the
Shareholders to the effect that Purchaser is duly organized and validly
existing; that all corporate action on the part of Purchaser necessary or
appropriate in connection with the transactions contemplated hereby has been
taken and that the Paradigm Stock, when issued in accordance with the terms
hereof, shall have been duly authorized and validly issued and are
non-assessable.
5.3 Warrant Agreements. A Warrant Agreement in the form of Exhibit 1.1
together with Warrant Certificates evidencing the Paradigm Warrants.
5.4 Registration Rights Agreement. A Registration Rights Agreement
providing each of the Shareholders with certain "piggy-back" registration rights
with respect to their Paradigm Stock and Paradigm Warrants.
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SECTION 6
Covenants
6.1 By Prodigy and Sunshine. (a) Prodigy hereby covenants and agrees
that prior to July 31, 1997, it shall not recruit or solicit any person who
currently is or prior to such date becomes an employee of the Company or its
affiliates; provided that the foregoing shall not prohibit Prodigy from
employing in a non-managerial position any such employee who seeks employment
with Prodigy to fill a vacancy arising in the normal course of business.
(b) Prodigy and Sunshine hereby represent and warrant that all
consents, if any, necessary in connection with the execution and delivery of the
Sub-Sublease, and any which may be required by the Sub-Sublease or any overlease
in connection herewith have been obtained, and if any such consents have not
been obtained, Prodigy and Sunshine shall, jointly and severally, indemnify the
Company and hold it harmless from any damage, cost or expense resulting from the
failure to obtain the same.
6.2 By Purchaser. Purchaser hereby covenants and agrees to invest in
the Company during the next twelve months such amounts, up to $2 million, as
shall be necessary to enable the Company to continue to operate in the ordinary
course; provided, however, nothing contained herein shall be construed to
prevent Purchaser from modifying the strategic focus and business priorities of
the Company.
6.3 By Purchaser and the Company. The Company and the Purchaser hereby
covenant and agree that prior to July 31, 1997, they shall not recruit or
solicit any person, other than David Friedensohn, who currently is or prior to
such date becomes an employee of Prodigy or its affiliates; provided that the
foregoing shall not prevent either of them from employing in a non-managerial
position any such employee who seeks employment with either of them to fill a
vacancy arising in the normal course of business.
SECTION 7
Indemnification
7.1 Survival of Representations and Warranties. The representations,
warranties, covenants and agreements made herein shall survive until December
31, 1997, except that the representation and warranty contained in Section 2.19
shall survive only until June 30, 1997.
7.2 Shareholder Indemnification. The Shareholders, jointly and
severally, shall indemnify, defend and hold the Purchaser harmless against all
liability, loss or damage, together with all reasonable costs and expenses
related thereto (including legal and accounting fees and expenses), arising from
(i) the untruth, inaccuracy or breach of any of the representations or
warranties of the Shareholders herein or (ii) a breach of one or more of the
covenants and or agreements of the Shareholders set forth in this Agreement (any
such event being hereinafter referred to collectively as an "Event of
Shareholder Non-Compliance"); provided that neither Shareholder shall be
required to indemnify, defend or hold the Purchaser harmless from any
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loss, damage or expenses arising out of the untruth of the representations and
warranties of the other Shareholder in Section 2.1, 2.2, 2.3, 2.4, 2.27, 2.28,
2.29 and 2.30. Upon the occurrence of an Event of Shareholder Non-Compliance,
the Purchaser may proceed to protect and enforce its rights either by suit in
equity and/or by action at law, including, but not limited to, an action for
damages as a result of any such breach and/or an action for specific performance
of any such covenant or agreement contained in this Agreement. Damages
recoverable by the Purchaser hereunder are not limited to matters asserted by
third parties against the Company or the Purchaser, but include damages incurred
or sustained by the Company or the Purchaser in the absence of third party
claims. Payments by the Company or the Purchaser of amounts for which the
Purchaser is indemnified hereunder shall not be a condition precedent to
recovery.
Notwithstanding the foregoing, there shall be no obligation on the part
of the Shareholders to indemnify or hold Purchaser or the Company harmless
except to the extent that the sum of all liabilities, losses or damages,
together with the reasonable costs and expenses related thereto, for which the
Purchaser and the Company seeks to be indemnified exceeds $50,000 (the
"Shareholders' Basket"), in which event the Shareholders shall be responsible
for all liabilities, losses, damages and expenses in excess of the first $50,000
thereof, and provided further that the Shareholders' Basket shall not be
applicable to Sections 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 2.10, 2.12, 2.22,
2.25, 2.26, 2.27, 2.28 and 2.29.
The parties acknowledge although the Shareholders are making the
representations and warranties contained herein, the Company has operated
independently and the Shareholders have no actual knowledge of the facts
underlying the representations and warranties regarding the business and affairs
of the Company. Consequently, in the absence of a demonstration of actual
knowledge or intentional misconduct a breach of a representation or warranty
shall give rise only to a claim for indemnification hereunder and not a claim
for fraud. Further, in the event of a breach of a representation or warranty,
Purchaser's recourse shall be limited to the securities issuable hereunder and,
in the absence of fraud, the Shareholders shall not be liable for monetary
damages hereunder.
7.3 Purchaser Indemnification. The Purchaser shall indemnify, defend
and hold the Shareholders harmless against all liability, loss or damage,
together with all reasonable costs and expenses related thereto (including legal
and accounting fees and expenses), arising from (i) the untruth, inaccuracy or
breach of any of the representations or warranties of the Purchaser herein or
(ii) a breach of one or more of the covenants and or agreements set forth in
this Agreement (any such event being hereinafter referred to collectively as an
"Event of Purchaser NonCompliance"). Upon the occurrence of an Event of
Purchaser Non-Compliance, the Shareholders may proceed to protect and enforce
their rights either by suit in equity and/or by action at law, including, but
not limited to, an action for damages as a result of any such breach and/or an
action for specific performance of any such covenant or agreement contained in
this Agreement.
Notwithstanding the foregoing, there shall be no obligation on the part
of the Purchaser to indemnify or hold the Shareholders harmless except to the
extent that the sum of all liabilities, losses or damages, together with the
reasonable costs and expenses related thereto, for which the Shareholders seek
to be indemnified exceeds $50,000 (the "Purchaser's Basket"), in which event the
Purchaser shall be responsible for all liabilities, losses, damages and expenses
in
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excess of the first $50,000 thereof, and provided further that the Purchaser's
basket shall apply only to Sections 3.5, 3.7, 3.8, 3.9 and 3.10.
7.4 Indemnification Procedure. Each party entitled to indemnification
under this Section 7 (the "Indemnified Party") shall give notice in writing in
the manner provided under Section 8.4 hereof to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemni fying Party of its obligations under this Section 7 except to the extent
the Indemnifying Party has been prejudiced by such failure. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect to such claim or litigation. Each Indemnified Party
shall furnish such information regarding itself or the claim in question as an
Indemnifying Party may reasonably request in writing and as shall be reasonably
required in connection with defense of such claim and litigation resulting
therefrom.
7.5 Purchaser's Non-Waiver. The rights or remedies of the Purchaser
shall be cumulative and not exclusive of any right or remedy which the Purchaser
would otherwise have and no failure or delay by the Purchaser in exercising any
right shall operate as a waiver of such right nor shall any single or partial
exercise of any power or right preclude its other or further exercise or the
exercise of any other power or right.
7.6 Shareholders' Non-Waiver. The rights or remedies of the
Shareholders shall be cumulative and not exclusive of any right or remedy which
the Shareholders would otherwise have and no failure or delay by the Purchaser
in exercising any right shall operate as a waiver of such right nor shall any
single or partial exercise of any power or right preclude their other or further
exercise or the exercise of any other power or right.
SECTION 8
Miscellaneous
8.1 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of New York, without reference to the conflict of laws
provisions thereof.
8.2 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
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8.3 Entire Agreement; Amendment. This Agreement (including the
Schedules and Exhibits hereto) and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof. Neither this Agreement nor any
term hereof may be amended, waived, discharged or terminated, except by a
written instrument signed by the Shareholders, the Company and the Purchaser.
8.4 Notices, Etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by first-class mail,
postage prepaid, return receipt requested, or delivered either by hand, by
messenger or by nationally recognized overnight courier, addressed:
(a) if to the Purchaser, to the following address, or at such other
address as the Purchaser shall have furnished to the Shareholders and to the
Company in writing:
Paradigm Music Entertainment Company
67 Irving Place North
New York, New York 10003
Attn: Thomas McPartland
(b) if to the Company to the following address, or at such other
address as the Company shall have furnished to the Purchaser in writing,
SonicNet, Inc.
632 Broadway
New York, New York 10012
Attn: David Friedensohn
with, in the case of the Purchaser and the Company, a copy to:
Bachner, Tally, Polevoy & Misher LLP
380 Madison Avenue
New York, New York 10017
Attn: Roger E. Berg, Esq.
(c) If to the Shareholders, notice must be sent to each of the
Shareholders at the following addresses, or at such other address as the
Shareholders shall have furnished to the Purchaser in writing,
(i) Prodigy Services Corporation
445 Hamilton Avenue
White Plains, New York 10061
Attn: General Counsel
(ii) Sunshine Interactive Network, Inc.
740 Broadway
2nd Floor
New York, New York 10002
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Attn: Chief Financial Officer
(d) with a copy, in the case of Prodigy, to:
Phillips Nizer Benjamin Krim & Ballon LLP
666 Fifth Avenue
New York, New York 10103
Attn: Vincent J. McGill, Esq.
Fax: (212) 262-5152
and in the case of Sunshine, to:
Rudolph & Beer
432 Park Avenue South
2nd Floor
New York, New York 10016
Attn: Jedidiah O. Alpert, Esq.
8.5 Brokers' and Finders' Fees. Each party hereto (i) represents and
warrants that it has not retained a finder or broker in connection with the
transactions contemplated by this Agreement and (ii) hereby agrees to indemnify
and to hold the other party harmless of and from any liability for commission or
compensation in the nature of an agent's fee to any broker or other person or
firm incurred in connection with the transactions contemplated hereby (and the
costs and expenses of defending against such liability or asserted liability)
arising from any act by it or any of its employees or representatives.
8.6 Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
8.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
8.8 Publicity. None of the parties hereto shall make or issue, or cause
to be made or issued, by the Company or otherwise, any announcement or written
statement concerning this Agreement or the transactions contemplated hereby for
dissemination to the general public without the prior consent of the other
parties hereto. This provision shall not apply, however, to any announcement or
written statement required to be made by law or the regulations of any federal
or state governmental agency, except that the party required to make such
announcement shall, whenever practicable, consult with the other party
concerning the timing and content of such announcement before such announcement
is made.
8.9 Assurances. From time to time after the date hereof, and without
any further consideration, each of the parties shall execute, acknowledge and
deliver all such additional assignments, conveyances, instruments, notices,
releases, acquittances and other documents, and will do all such other acts and
things, all in accordance with applicable law, as may be necessary or
appropriate (i) more fully to assure any other party hereto and its successors
and assigns all
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of the properties, rights, titles, interests, estates, remedies, powers and
privileges by this Agreement granted to such party or intended so to be.
IN WITNESS WHEREOF, each of the parties has executed this Agreement as
of the date above written.
PARADIGM MUSIC ENTERTAINMENT
COMPANY
By: _______________________________________
Thomas McPartland, its President
PRODIGY SERVICES CORPORATION
By: _______________________________________
Marc Jacobson, Vice President-
General Counsel
SUNSHINE INTERACTIVE NETWORK, INC.
By: _______________________________________
John Morisano, Chief Financial Officer
SONICNET, INC.
By: _______________________________________
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STOCK PURCHASE AGREEMENT
By and Among
PURPLE DEMON, INC.
David Wolin
Dean Brownrout
Charles Pye
and
Paradigm Music Entertainment Company, Inc.
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Dated as of February 14, 1997
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<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of
December __, 1996, by and among, Dean Brownrout, David Wolin, and Charles Pye
(hereinafter individually referred to as, a "Seller" and collectively, the
"Sellers"), Paradigm Music Entertainment Company, Inc., a Delaware corporation
(hereinafter referred to as "Paradigm" and/or "Buyer").
W I T N E S S E T H:
WHEREAS, the Sellers own the number of shares of common stock
("Common Stock"), no par value, of Purple Demon set forth below, which
constitutes all of the outstanding capital stock of Purple Demon
Dean Brownrout 90 shares
David Wolin 90 shares
Charles Pye 20 shares; and
WHEREAS, the Buyer desires to purchase, and the Sellers desire
to sell, an aggregate of two hundred (200) shares of Common Stock (the
"Shares"), representing 100% of the issued and outstanding capital stock of
Purple Demon, inc., a New York Corporation (hereinafter referred to as "Purple
Demon") for consideration consisting solely of common shares, without par value
(hereinafter referred to as "Payment Shares"), of Paradigm; and
WHEREAS, the parties intend that this transaction qualify as a
tax-free reorganization under Section 368(a)(1)(B) of the Internal Revenue Code
of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, and mutual covenants and agreements herein
contained, the parties hereby agree as follows:
ARTICLE I
SALE OF SHARES
Section 1.1 Delivery of Shares. On the terms and subject to
the conditions of this Agreement, on the Closing Date (as hereinafter defined),
the Buyer shall purchase the Shares from the Sellers, and the Sellers shall sell
the Shares to the Buyer, for an aggregate amount equal to the Purchase Price (as
hereinafter defined). On the Closing Date, the Sellers will transfer, assign,
convey and deliver to the Buyer certificates representing all of the Shares.
Each of the certificates shall be duly endorsed for transfer or accompanied by
appropriate stock powers duly executed, in either case in favor of the Buyer,
and each certificate shall have any and all necessary stock transfer tax stamps
affixed thereto at the Sellers' expense.
Section 1.2 Purchase Consideration. The aggregate purchase
price for the Shares shall consist of the "Payment Shares" (Class A Common
Stock) having a par value of $.01. The Payment Shares shall be issued by
Paradigm and delivered by Paradigm pro rata to each of the Sellers based on his
ownership of the Shares in the following proportions:
Dean Brownrout 45,000 shares
David Wolin 45,000 shares
Charles Pye 10,000 shares
The Payment Shares shall be issued, as follows, pro rata to each of the Sellers,
each such installment with no par value, the first such installment of Payment
Shares, shall be equal to 33,333 Payment Shares, to be issued on the "Closing
Date" (as hereinafter defined) and the balance, 66,667 of Payment Shares to be
issued on the earlier of ninety (90) days after the date of the commencement of
Paradigm's initial public stock offering or December 31, 1997, (a "Deferred
Payment Date").
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For purposes of this Section 1.2 and for determining the number
of Payment Shares issuable in payment of the Purchase Price on a Deferred
Payment Date, the value of each Payment Share shall be equal to the book value
of a Paradigm Common Share. No fractional Payment Shares shall be issued, but
any Seller entitled thereto shall receive a full Payment Share.
ARTICLE II
CLOSING
The closing (the "Closing") of the transactions contemplated
by this Agreement shall take place as soon as practicable after satisfaction or
waiver of all conditions set forth herein at the offices of Olshan Grundman
Frome & Rosenzweig LLP, 505 Park Avenue, New York, New York 10022, or at such
other time and place as the Buyer and the Sellers shall mutually agree (the date
on which such closing occurs being herein referred to as the "Closing Date").
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURPLE DEMON AND THE SELLERS
The Sellers hereby jointly and severally represent and warrant
to the Buyer, as of the date of this Agreement, as follows:
Section 3.1 Corporate Organization; Requisite Authority to
Conduct Business; Articles of Incorporation and By-Laws. Purple Demon is a
corporation duly organized, validly existing and in good standing under the laws
of the State of New York. Purple Demon has provided the Buyer with true and
complete copies of its articles of incorporation (certified by the Secretary of
State of the State of New York) and By-laws (certified by the Secretary of
Purple Demon) as in effect on the date hereof. Prior to the Closing, the minute
books of Purple Demon will be made available to the Buyer for inspection, and
will contain true and complete records of all meetings and consents in lieu of
meeting of Purple Demon's Board of Directors and of Purple Demon's stockholders
since the incorporation of Purple Demon, which accurately reflect in all
material respects all transactions referred to in such minutes and consents in
lieu of meeting. Purple Demon has all corporate power and authority to own,
operate as a record company and to carry on its business as the same is now
being conducted. Purple Demon is duly qualified or licensed to do business and
is in good standing in the State of New York.
Section 3.2 Capitalization and Shareholdings. The authorized
capital stock of Purple Demon consists of two hundred (200) shares of Common
Stock without par value, two hundred (200) of which are issued and outstanding.
Except as set forth on Schedule 3.2 hereto, the Sellers own all of the Shares
free and clear of all liens, claims or encumbrances. The Sellers have full
right, power, legal capacity and authority to transfer and deliver the Shares
pursuant to this Agreement. The capital stock of Purple Demon is duly authorized
and all issued capital stock has been duly and validly issued and is fully paid
and non-assessable and free of preemptive rights. There is not outstanding, and
none of Purple Demon or the Sellers is bound by or subject to, any subscription,
option, warrant, call, right, contract, commitment, agreement, understanding or
arrangement to issue any additional shares of capital stock of Purple Demon,
including any right of conversion or exchange under any outstanding security or
other instrument, and no shares are reserved for issuance for any purpose.
Section 3.3 Subsidiaries, etc. Other then Green Demon, Inc.,
Purple Demon does not own (directly or indirectly) any equity interest in any
corporation, partnership, limited liability company, joint venture, association
or other entity. Notwithstanding anything contained herein to the contrary the
parties hereto acknowledge that Green Demon, Inc., is not subject to the terms
and conditions of this Agreement.
Section 3.4 Authority Relative to and Validity of Agreements.
The Sellers have the requisite corporate power and authority to execute and
deliver this Agreement and the Employment Agreements of Annex A and Annex B
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hereto. The execution and delivery of this Agreement by the Sellers and the
performance by the Sellers of their obligations hereunder and have been duly
authorized by their Board of Directors and no further authorization on the part
of Purple Demon is necessary to authorize the execution and delivery by it of,
and the performance of its obligations under, this Agreement. To the best of
Seller's knowledge, there are no corporate, contractual, statutory or other
restrictions of any kind upon the power and authority of Purple Demon to execute
and deliver this Agreement and to consummate the transactions contemplated
hereunder and thereunder and no action, waiver or consent by any foreign,
Federal, state, municipal or other governmental department, commission or agency
("Governmental Authority") is necessary to make this Agreement a valid
instrument binding upon the Seller's in accordance with its terms. This
Agreement has been duly executed and delivered by the Seller's and constitutes,
as and when executed and delivered by the Seller's in accordance with their
terms will constitute, legal, valid and binding obligations of Purple Demon,
enforceable in accordance with their terms, except (i) as such enforceability
may be limited by or subject to any bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally, (ii) as
such obligations are subject to general principles of equity and (iii) as rights
to indemnity may be limited by federal or state securities laws or by public
policy.
Section 3.5 Required Filings and Consents; No Conflict. To the
best of Seller's knowledge, Purple Demon and/or the Sellers are not required to
submit any notice, report or other filing with any Governmental Authority in
connection with the execution, delivery or performance of this Agreement. The
execution, delivery and performance of this Agreement by the Seller's and the
consummation of the transactions contemplated hereby and thereby do not and will
not, to the best of Seller's knowledge (a) conflict with or violate any law,
regulation, judgment, order or decree binding upon Purple Demon, (b) conflict
with or violate any provision of its charter or Bylaws, or (c) conflict with or
result in a breach of any condition or provision of, or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any properties or assets of Purple Demon pursuant to, or cause
or permit the acceleration prior to maturity of any amounts owing under, any
indenture, loan agreement, mortgage, deed of trust, lease, contract, license,
franchise or other agreement or instrument to which Purple Demon is a party or
which is or purports to be binding upon Purple Demon or by which any of its
properties are bound. The execution, delivery and performance of this Agreement
by Purple Demon and the Seller's and the consummation of the transactions
contemplated hereby and thereby will not result in the loss of any license,
franchise, legal privilege or permit possessed by Purple Demon or give a right
of termination to any party to any agreement or other instrument to which Purple
Demon is a party or by which any of its properties are bound.
Section 3.6 Financial Statements. Purple Demon has heretofore
delivered to the Buyer true and complete copies of Purple Demon's compiled
balance sheets and income statements for the fiscal year ended December 31, 1995
and for the period ended September 30, 1996 (together with the related notes,
such year-end and interim financial statements are referred to in this Agreement
as the "Financial Statements"). The Financial Statements have in all material
respects been prepared in accordance with Statements and Standards for
accounting and review services being issued by the American Institute of
Certified Public Accountants.
Section 3.7 No Undisclosed Liabilities. Purple Demon has no
debts, liabilities or obligations of any kind, whether accrued, absolute,
contingent or other, whether due or to become due, except as (i) shown in the
Financial Statements, or (ii) incurred in the ordinary course of business since
the date of the Financial Statement mentioned in paragraph 3.6 hereinafter.
Section 3.8 Absence of Certain Changes and Events. Since
December 15, 1996, there has not been, with respect to Purple Demon, (i) any
material damage, destruction or loss (whether or not covered by insurance) with
respect to any assets or properties; (ii) any redemption or other acquisition by
it of Common Stock or any declaration or payment of any dividend or other
distribution in cash, stock or property with respect thereto; (iii) except in
connection with or as contemplated by this Agreement, any entry into any
material commitment or transaction (including, without limitation, any borrowing
or capital expenditure) other than in the ordinary course of business; (iv) any
transfer of, or rights granted under, any material leases, licenses, agreements,
patents, trademarks, trade names, or copyrights other than those transferred or
granted in the ordinary course of business and consistent with past practice;
(v) any mortgage, pledge, security interest or imposition of any other
encumbrance on any assets or properties except in the ordinary course of
business; any payment of any debts, liabilities or obligations ("Liabilities")
of any kind other than Liabilities currently due; any cancellation of
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any debts or claims or forgiveness of amounts owed to Purple Demon; or (vii) any
change in accounting principles or methods (except insofar as may have been
required by a change in the Statements and Standards for accounting and review
services being issued by the American Institute of Certified Public
Accountants). Since September 30, 1996, Purple Demon has conducted its business
only in the ordinary course and in a manner consistent with past practice and
has not made any material change in the conduct of its business or operations.
Without limiting the generality of the foregoing, since September 30, 1996,
Purple Demon has not made any payments (except in the ordinary course of
business and in amounts and in a manner consistent with past practice) under any
Purple Demon Employee Plan (as hereinafter defined) or to any employee,
independent contractor or consultant, entered into any new Purple Demon Employee
Plan or any new consulting agreement, granted or established any awards under
any such Purple Demon Employee Plan or agreement, in any such case providing for
any payments or adopted or otherwise amended any of the foregoing.
Section 3.9 Taxes and Tax Returns. (a) For purposes of this
Agreement, (i) the term "Taxes" shall mean all taxes, charges, fees, levies or
other assessments, including, without limitation, income, gross receipts,
excise, property, sales, license, payroll and franchise taxes, imposed by the
United States, or any state, local or foreign government or subdivision or
agency thereof whether computed on a unitary, combined or any other basis; and
such term shall include any interest and penalties or additions to tax; and (ii)
the term "Tax Return" shall mean any report, return or other information
required to be filed with, supplied to or otherwise made available to a taxing
authority in connection with Taxes.
(b) Except as set forth on Schedule 3.9(b) hereto, Purple
Demon has (i) duly filed with the appropriate taxing authorities all Tax Returns
required to be filed by or with respect to Purple Demon, or are properly on
extension and all such duly filed Tax Returns are true, correct and complete in
all respects, and (ii) paid in full or made adequate provisions for on its
balance sheet (in accordance with the Statements and Standards for accounting
and review services being issued by the American Institute of Certified Public
Accountants) all Taxes shown to be due on such Tax Returns. There are no liens
for Taxes upon the assets of Purple Demon except for statutory liens for current
Taxes not yet due and payable or which may thereafter be paid without penalty or
are being contested in good faith. Purple Demon has not received any notice of
audit, is not undergoing any audit of its Tax Returns, and has not received any
notice of deficiency or assessment from any taxing authority with respect to
liability for Taxes of Purple Demon which has not been fully paid or finally
settled. There have been no waivers of statutes of limitations by Purple Demon
with respect to any Tax Returns which relate to Purple Demon. Purple Demon has
not filed a request with the Internal Revenue Service for changes in accounting
methods within the last two years which change would effect the accounting for
tax purposes, directly or indirectly, of Purple Demon.
Section 3.10 Employee Benefit Plans. Purple Demon hereby
represents and warrants that there are not in existence any employee benefit
plans (e.g. profit sharing, deferred compensation, savings, retirement, etc.)
and in the event any such plan does exist, it shall be set forth on Schedule
3.10 attached hereto and the terms of any such plan will expire on the Closing
Date.
Section 3.11 Title to Property. Purple Demon has good and
marketable title, to all the Master recordings which titles appear on Schedule
3.11, free and clear of all encumbrances, including liens for taxes, fees,
levies, imposts, duties or governmental charges of any kind which are not yet
delinquent or are being contested in good faith by appropriate proceedings which
suspend the collection thereof. Purple Demon hereby acknowledges a claim
hereunder against Fox Television Network, the particulars of which are set forth
on the above-mentioned schedule. The negotiation of a license to Fox Television
Network or any other third party in connection with the name "Purple Demon"
shall be within the sole dominion and control of Paradigm.
Section 3.12 Trademarks, Patents and Copyrights. (a) For
purposes of this Agreement, the term "Purple Demon Rights" shall mean all
worldwide industrial and intellectual property rights, including, without
limitation, each patent, patent rights, license, patent application, trade name,
trademark, trade name and trademark registration, copyright, copyright
registration, copyright application, service mark, brand mark and brand name,
trade secrets relating to or arising from Purple Demon's business endeavors.
Purple Demon owns or has the right to use, sell or license all Purple Demon
Rights and such Purple Demon Rights are sufficient for the conduct of Purple
Demon's businesses as being conducted as
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of the date hereof. Schedule 3.12 hereto lists each patent, patent right, patent
application, tradename registration, trademark registration, copyright
registration and copyright application owned or possessed by Purple Demon.
Paradigm acknowledges that the names Big Deal and/or Purple Demon have neither
been registered for the purposes of trademark protection nor have the masters
been registered for copyright;
(b) The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby will not constitute
a breach of any instrument or agreement governing any Purple Demon Rights, will
not cause the forfeiture or termination or give rise to a right of forfeiture or
termination of any Purple Demon Rights or impair the right of Purple Demon to
use, sell or license any Purple Demon Rights or any portion thereof;
(c) Neither the manufacture, marketing, license, sale or
intended use of any product currently licensed or sold by Purple Demon or
currently under development by Purple Demon violates any license or agreement
between Purple Demon and any third party relating to such product or infringes
any intellectual property right of any other party, and there is no pending or,
to the best knowledge of Purple Demon, threatened claim or litigation contesting
the validity, ownership or right to use, sell, license or dispose of any Purple
Demon Right nor, to the best knowledge of Purple Demon is there any basis for
any such claim, nor has Purple Demon received any notice asserting that any
Purple Demon Right or the proposed use, sale, license or disposition thereof
conflicts or will conflict with the rights of any other party, nor, to the best
knowledge of Purple Demon, is there any basis for any such assertion; and
(d) No current or prior officers, employees or consultants of
Purple Demon claim an ownership interest in any Purple Demon Rights as a result
of having been involved in the development of such property while employed by or
consulting to Purple Demon or otherwise.
Section 3.13 Legal Proceedings, Claims, Investigations, etc.
Except as set forth on Schedule 3.13 hereto, there is no legal, administrative,
arbitration or other action or proceeding or governmental investigation pending,
or to the Sellers' Knowledge, threatened, against Purple Demon, any director,
officer or employee thereof relating to Purple Demon's business. Purple Demon
and the Sellers have not been informed of any violation of or default under, any
laws, ordinances, regulations, judgments, injunctions, orders or decrees
(including without limitation, any immigration laws or regulations) of any
court, governmental department, commission, agency, instrumentality or
arbitrator applicable to the business of Purple Demon. Purple Demon is not
currently subject to any judgment, order, injunction or decree of any court,
arbitral authority, administrative agency or other governmental authority.
Section 3.14 Insurance. Purple Demon hereby warrants and
represents that it maintains no insurance policies pertaining to its business
properties or assets. If any such insurance policies do exist, they shall be
listed on Schedule 3.14 attached hereto.
Section 3.15 Material Contracts. (a) Except as set forth on
Schedule 3.15 hereto, Purple Demon is not a party to and is not bound by any
contract or has any commitment, whether written or oral which has a term in
excess of one year and will result in payments in excess of $1,000.00 or require
material performance on the part of Purple Demon, other than (i) contracts,
commitments entered into in the ordinary course of business with vendors and
customers, recording artists, producers, record distributors and manufacturers
and/or similar persons and/or entities and (ii) contracts or commitments
cancelable upon not more than 30 days' notice. Each of the contracts and
commitments set forth on Schedule 3.15 hereto and each of the other contracts
and commitments to which Purple Demon is a party, is valid and existing, in full
force and effect and enforceable in accordance with its terms (subject to
equitable principles and limitations on indemnity) and to the Sellers' Knowledge
there is no material default or claim of default against Purple Demon or any
notice of termination with respect thereto. Purple Demon has complied in all
material respects with all requirements of, and performed all of its obligations
under, such contracts and commitments. In addition, no other party to any such
contract or commitment is, to the Sellers' Knowledge, in default under or in
breach of any material term or provision thereof, and to the Sellers' Knowledge
there exists no condition or event which, after notice or lapse of time or both,
would constitute a material default by any party to any such contract or
commitment. Copies of all the written documents and a synopsis of all oral
contracts and commitments described on Schedule 3.15 hereto have heretofore been
made available to the Buyer,
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who has examined same, and are true and complete and include all amendments and
supplements thereto and modifications thereof to and including the date hereof.
(b) Except as set forth on Schedule 3.15 hereto, Purple Demon
is not a party to any oral or written (i) agreement with any consultant,
executive officer or other key employee the benefits of which are contingent, or
the terms of which are materially altered, upon the occurrence of the
transactions contemplated by this Agreement, or (ii) agreement or plan,
including any stock option plan and the like, any of the benefits of which will
be increased, or the vesting of the benefits of which will be accelerated, by
the occurrence of the transactions contemplated by this Agreement.
Section 3.16 Certain Transactions. No officer, director or, to
the Sellers' knowledge, any employee of Purple Demon, or any member of any such
person's immediate family is presently a party to any contract, arrangement or
understanding with Purple Demon (i) except as set forth on Schedule 3.16 hereto,
providing for the furnishing of services by, (ii) providing for the rental of
real or personal property from, or (ii) otherwise requiring payments to (other
than for services as officers, directors or employees of Purple Demon), any such
person or any corporation, partnership, trust or other entity in which any such
person has a substantial interest as a stockholder, officer, director, trustee
or partner. Buyer acknowledges that Charles Pye is a shareholder who provides
accounting and similar services to Purple Demon.
Section 3.17 Broker. No broker, finder or investment banker is
entitled to any brokerage or finder's fee or other commission in connection with
the transactions contemplated hereby based on the arrangements made by or on
behalf of Purple Demon or the Sellers.
Section 3.18 Compliance with Law. To the Sellers' Knowledge
and, except as set forth in Schedule 3.9(b) hereto, Purple Demon has complied in
all respects with all laws, rules, regulations, arbitral determinations, orders,
writs, decrees and injunctions which are applicable to or binding upon Purple
Demon, the non-compliance with which could reasonably be expected to constitute
a Purple Demon Material Adverse Effect.
Section 3.19 Receivables. Each account receivable reflected on
the balance sheet of Purple Demon as of December 1, 1996 constitutes a bona fide
receivable resulting from a bona fide sale to a customer in the ordinary course
of business, the account of which was actually due on the date hereof and has
been or will be collected in the ordinary course of business. The books and
records of Purple Demon state correctly the facts with respect to each account
receivable of Purple Demon and the balance due thereon. No payment reflected on
such books and records as having been made on any such account receivable was
made by any director, officer, employee or agent of Purple Demon unless such
person is shown on said books and records as such account debtor. Each document
and instrument evidencing, securing or relating to each account receivable,
including, without limitation, each insurance policy, certificate, bill or
statement, is correct and complete in all respects, is genuine and valid and is
enforceable in accordance with its terms. To the knowledge of Purple Demon,
there are no defenses, claims of disabilities, counterclaims, offsets, refusals
to pay or other rights of set-off against any accounts receivable and there is
no threatened, intended or proposed defense, claim or disability, counterclaim,
offset, refusal to pay or other right of set-off with respect thereto. At the
Closing all accounts receivable, shall be assigned to Paradigm and the Sellers
hereby agree not to forgive any such account receivables.
Section 3.20 Banks; Safe Deposit Boxes, Bank Accounts.
Schedule 3.20 hereto lists the names and locations of all banks at which Purple
Demon has an account and/or safe deposit box, the numbers of any such accounts
and the names of all persons authorized to draw thereon or to have access
thereto. All the assets of Purple Demon, including but not limited to cash in
banks, bank accounts, etc. shall all be assigned to Paradigm at the Closing. The
Sellers acknowledge that no monies have been withdrawn from any Purple Demon
account, at least sixty (60) days prior to Closing.
Section 3.21 Books of Account; Records. The general ledgers,
books of account and other records of Purple Demon are complete and correct,
have been maintained in accordance with good business practices and the matters
contained therein are appropriately and accurately reflected in the Financial
Statements.
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ARTICLE IV
ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Each Seller hereby severally represents and warrants to the
Buyer and Paradigm, as of the date of this Agreement, as follows:
Section 4.1 Title to Shares; Authority. Except for the rights,
if any, of Seller's spouse, and as set forth on Schedule 3.2 hereto, such Seller
owns the shares of Common Stock set forth opposite his name in the Preambles
hereof, free and clear of all liens, claims or encumbrances. Such Seller has
full right, power, legal capacity and authority to transfer and deliver such
Shares pursuant to this Agreement.
Section 4.2 Authority Relative to and Validity of Agreements.
Such Seller has full power and authority to execute and deliver this Agreement
and the Employment Agreement to which such Seller is a party and to assume and
perform all of their obligations hereunder and thereunder. There are no
contractual, statutory or other restrictions of any kind upon the power and
authority of such Seller to execute and deliver this Agreement and the
Employment Agreement to which such Seller is a party and to consummate the
transactions contemplated hereunder and thereunder and no action, waiver or
consent by any Governmental Authority is necessary to make this Agreement or the
Employment Agreement to which such Seller is a party, a valid instrument binding
upon such Seller in accordance with its terms.
Section 4.3 Required Filings and Consents; No Conflict. Such
Seller is not required to submit any notice, report or other filing with any
Governmental Authority in connection with the execution, delivery or performance
of this Agreement or the Employment Agreement to which such Seller is a party.
The execution, delivery and performance of this Agreement, and the Employment
Agreement to which such Seller is a party and the consummation of the
transactions contemplated hereby and thereby do not and will not (a) conflict
with or violate any law, regulation, judgment, order or decree binding upon such
Seller, or (b) except as set forth on Schedule 3.2 hereto, conflict with or
result in a breach of any condition or provision of, or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any properties or assets of such Seller pursuant to, or cause
or permit the acceleration prior to maturity of any amounts owing under, any
indenture, loan agreement, mortgage, deed of trust, lease, contract, license,
franchise or other agreement or instrument to which such Seller is a party or
which is or purports to be binding upon such Seller or by which any of his
properties are bound. The execution, delivery and performance of this Agreement,
and the Employment Agreement to which such Seller is a party and the
consummation of the transactions contemplated hereby and thereby will not result
in the loss of any license, franchise, legal privilege or permit possessed by
such Seller or give a right of termination to any party to any agreement or
other instrument to which such Seller is a party or by which any of his
properties are bound.
Section 4.4 Investment. Such Seller is acquiring the Payment
Shares being acquired by him for his own account as principal, not as a nominee
or agent, and not with a view to, or for, resale, distribution or
fractionalization thereof in whole or in part and no other person or entity has
a direct or indirect beneficial interest in such Payment Shares. Such Seller
does not have any contract, undertaking, agreement or arrangement with any
person or entity to sell, transfer or grant participations to such person or
entity or to any third person or entity with respect to any of such Payment
Shares.
Section 4.5 Exemption from Registration. Such Seller
acknowledges that the issuance of the Payment Shares (the "Issuance") is
intended to be exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"), by virtue of Section 4(2) of the Securities Act
and the provisions of Regulation D promulgated thereunder ("Regulation D"). In
furtherance thereof, such Seller represents and warrants to Buyer and Paradigm
as follows:
(i) Such Seller has the financial ability to bear the economic
risk of his investment, has adequate means for providing for
his current needs
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and personal contingencies and has no need for liquidity with
respect to the acquisition of the Payment Shares; and
(ii) Such Seller has such knowledge and experience in
financial, and business matters as to be capable of evaluating
the merits and risks of the acquisitions of the Payment
Shares.
Section 4.6 Available Information. Such Seller:
(i) Has been furnished with any and all documents that may
have been made available by Paradigm upon request of the
Seller for a reasonable time prior to the date hereof;
(ii) Has been provided an opportunity for a reasonable time
prior to the date hereof to obtain additional information
concerning the Issuance, Paradigm and all other information to
the extent Paradigm possesses such information or can acquire
it without unreasonable effort or expense;
(iii) Has been given the opportunity for a reasonable time
prior to the date hereof to ask questions of, and receive
answers from, Paradigm or its representatives concerning the
terms and conditions of the Issuance and other matters
pertaining to the acquisition of the Payment Shares, or that
which was otherwise provided in order for them to evaluate the
merits and risks of a purchase of the Payment Shares to the
extent Paradigm possesses such information or can acquire it
without unreasonable effort or expense;
Section 4.7 Seller Representative. Such Seller is not relying
on any statements or representations made by the Buyer or Paradigm or their
affiliates with respect to economic considerations involved in an investment in
the Payment Shares. Such Seller has relied on the advice of, or has consulted
with only those persons, if any, named as Seller Representative(s) herein. Each
Seller Representative is capable of evaluating the merits and risks of an
investment in the Payment Shares on the terms and conditions set forth herein
and each Seller Representative has disclosed to the Seller in writing (a copy of
which is annexed to this Agreement) the specific details of any and all past,
present or future relationships, actual or contemplated, between himself and the
Buyer or Paradigm or any affiliate or subsidiary thereof.
Section 4.8 Transfer Restrictions. Such Seller will not sell
or otherwise transfer the Payment Shares without registration under the
Securities Act or an exemption therefrom and such Seller fully understands and
agrees that such Seller must bear the economic risk of such Seller's purchase
because, among other reasons, the Payment Shares have not been registered under
the Securities Act or under the securities laws of any state and, therefore,
cannot be resold, pledged, assigned or otherwise disposed of unless they are
subsequently registered under the Securities Act and under the applicable
securities laws of such states, or unless exemptions from such registration
requirements are available.
Section 4.9 Entire Agreement. No representations or warranties
have been made to such Seller by the Buyer or Paradigm, or any officer,
employee, agent, affiliate or subsidiary of the Buyer or Paradigm, and in
subscribing for Payment Shares such Seller is not relying upon any
representations other than those contained herein.
Section 4.10 Seller Information. Any information that such
Seller has heretofore furnished or is simultaneously herewith furnishing to the
Buyer and Paradigm with respect to such Seller's financial position and business
experience is correct and complete as of the date of this Agreement and, if
there should be any material change in such information, such Seller will
immediately furnish revised or corrected information to the Buyer and Paradigm.
Section 4.11 Legend. The Seller understands and acknowledges
that the certificates for the Payment Shares shall bear a legend substantially
as follows until (i) such securities shall have been registered under the
Securities Act and effectively been disposed of in accordance with an effective
registration statement thereunder; or (ii) in the opinion of counsel for
Paradigm such securities may be sold without registration under the Securities
Act as well as any applicable "Blue Sky" or state securities laws:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND
THEY MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED
OR TRANSFERRED EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT
UNDER THE SECURITIES ACT WHICH
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HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO THESE
SECURITIES OR PURSUANT TO AN EXEMPTION THEREFROM."
Section 4.12 Citizenship; Age; Residence. The Seller is a
citizen of the United States and is at least 21 years of age. The address set
forth next to the Seller's name on the signature pages to this Agreement is the
Seller's correct home address.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BUYER AND PARADIGM
The Buyer and Paradigm hereby jointly and severally represent
and warrant to the Sellers as follows:
Section 5.1 Corporate Organization; Requisite Authority to
Conduct Business. Each of the Buyer and Paradigm is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. The Buyer and Paradigm have provided the Sellers
with true and complete copies of their respective certificates of incorporation
(certified by the Secretary of State of the State of New York, and By-laws
(certified by the Secretaries of the Buyer and Paradigm) as in effect on the
date hereof. Each of the Buyer and Paradigm has full corporate power and
authority to enter into this Agreement to perform its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and thereby;
there are no corporate, contractual, statutory or other restrictions of any kind
upon the power and authority of the Buyer or Paradigm to execute and deliver
this Agreement.
Section 5.2 Execution and Delivery. Neither the Buyer nor
Paradigm is required to submit any notice, report or other filing with any
Governmental Authority in connection with the execution, delivery or performance
of this Agreement (other than state "Blue Sky" laws relating to the issuance of
the Payment Shares). This Agreement has been duly executed and delivered by the
Buyer and Paradigm and will, when executed and delivered by Purple Demon and the
Sellers in accordance with their terms will constitute, legal, valid and binding
obligations of the Buyer and Paradigm, enforceable against the Buyer and
Paradigm in accordance with their terms (to the extent each is a party thereto),
except (i) as such enforceability may be limited by or subject to any
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally, (ii) as such obligations are subject to
general principles of equity and (iii) as rights to indemnity may be limited by
federal or state securities laws or by public policy.
Section 5.3 No Conflicts; Absence of Defaults. The execution,
delivery and performance or this Agreement by the Buyer and Paradigm (to the
extent each is a party thereto) and the consummation of the transactions
contemplated hereby and thereby does not and will not conflict with or violate
(a) the Buyer's or Paradigm's Certificate of Incorporation or By-laws or (b) any
agreement governing the organization, management, business or affairs of the
Buyer or Paradigm or, in any material respect, any agreement or instrument to
which the Buyer or Paradigm is bound, or (c) any material law, administrative
regulation or rule or court order, judgment or decree applicable to the Buyer or
Paradigm; nor will the execution and delivery of this Agreement or the
consummation of the transaction contemplated hereby constitute a material breach
of, or any event of default under, any material contract or agreement to which
the Buyer or Paradigm may be bound or affected.
Section 5.4 Investment. The Buyer is acquiring the Shares
solely for its own account as an investment and not with a view to any
distribution or resale thereof within the meanings of such terms under the
Securities Act.
Section 5.5 Capitalization. The Company's authorized capital
stock consists of (i) 31,999,900 shares of Class A Common Stock, $.01 par value
per share, (ii) 1,000,100 shares of Class B Common Stock, $.01 par value per
share, and (iii) 2,000,000 shares of Class E-1 Common Stock, $.01 par value per
share and 5,000,000 shares of Preferred Stock, $.01 par value per share, and
(iv) 2,000,000 shares of Class E-1 Common Stock, $.01 par value per share and
5,000,000 shares of Preferred Stock, $.01 par value per share.
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Section 5.6 Broker. No broker, finder or investment banker is
entitled to any brokerage or finder's fee or other commission in connection with
the transactions contemplated hereby based upon the arrangements made by or on
behalf of the Buyer or Paradigm.
ARTICLE VI
COVENANTS OF PURPLE DEMON
Section 6.1 Covenants of Purple Demon Regarding Conduct of
Business Operations Pending the Closing. Purple Demon covenants and agrees that
between the date of this Agreement and the Closing Date, Purple Demon will carry
on its business in the ordinary course and consistent with past practice, will
use its best efforts to (i) preserve its business organization intact, (ii)
retain the services of its present employees, and (iii) preserve the good will
of its suppliers and customers, and will not, except in the ordinary course of
business, purchase, sell, lease or dispose of any property or assets or incur
any liability or enter into any other extraordinary transaction. By way of
amplification and not limitation, Purple Demon shall not, between the date of
this Agreement and the Closing Date, directly or indirectly, do any of the
following without the prior written consent of the Buyer:
(a) (i) issue, sell, pledge, dispose of, encumber, authorize,
or propose the issuance, sale, pledge, disposition, encumbrance or authorization
of any shares of capital stock of any class, or any options, warrants,
convertible securities or other rights of any kind to acquire any shares of
capital stock, or any other ownership interest, of Purple Demon; (ii) amend or
propose to amend its Articles of Incorporation; (iii) split, combine or
reclassify any of its outstanding shares, or declare, set aside or pay any
dividend or other distribution payable in cash, stock, property or otherwise
with respect thereto; or (iv) redeem, purchase or otherwise acquire any shares
of its capital stock;
(b) (i) make any acquisition (by merger, consolidation, or
acquisition of stock or assets) of any corporation, partnership or other
business organization or division thereof; (ii) except in the ordinary course of
business and in a manner consistent with past practice, sell, pledge, dispose
of, or encumber or authorize or propose the sale, pledge, disposition or
encumbrance of any of its assets; (iii) other than under any existing credit
facility, incur any indebtedness for borrowed money, assume, guarantee, endorse
or otherwise become responsible for the obligations of any other individual,
partnership, firm or corporation, or make any loans or advances to any
individual, partnership, firm, or corporation, or enter into any contract or
agreement to do so, except in the ordinary course of business and consistent
with past practice; (iv) authorize any single capital expenditure or series of
related capital expenditures; or (v) release or assign any indebtedness owed to
it or any claims held by it, except in the ordinary course of business and
consistent with past practice;
(c) take any action other than in the ordinary course of
business and in a manner consistent with past practice (none of which actions
shall be unreasonable or unusual);
(d) make any payments (except in the ordinary course of
business and in amounts and in a manner consistent with past practice) under any
Purple Demon employee plan to any employee, independent contractor or
consultant, enter into any new Purple Demon Employee Plan or any new consulting
agreement, grant or establish any awards under such Purple Demon employee plan
or agreement, or adopt or otherwise amend any of the foregoing Purple Demon does
not have any medical, dental or benefit plans established;
(e) take any action except in the ordinary course of business
and in a manner consistent with past practice (none of which actions shall be
unreasonable or unusual) with respect to accounting policies or procedures,
other than such actions deemed necessary to comply with U.S. GAAP (including
without limitation its procedures with respect to the payment of accounts
payable);
(f) enter into or terminate any material contract or agreement
or make any material change in any of its material contracts or agreements,
other than (i) in the ordinary course of business, (ii) relating to indebtedness
incurred in clause (b)(iii) above and (iii) agreements, if any, relating to the
transactions contemplated hereby; or
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(g) take, or agree in writing or otherwise to take, any of the
foregoing actions or any action which would make any of its representations or
warranties contained in this Agreement untrue or incorrect in any material
respect as of the date when made or as of a future date.
Section 6.2 No Other Negotiations. Purple Demon agrees that,
between the date hereof and the earlier to occur of (i) November 15, 1996 and
(ii) the termination of this Agreement pursuant to the provisions of Article XII
hereof (the "Termination Date"), Purple Demon will not, nor will it permit any
of its affiliates (including any officers, directors, employees, financial
advisors, brokers, stockholders or any other person acting on its behalf) to,
(i) enter into any agreement with a third party with respect to the acquisition,
directly or indirectly, of shares or other securities of Purple Demon or a
material part of its assets or any merger, business combination, consolidation
or reorganization, (ii) enter into negotiations with a third party regarding
such an agreement, or (iii) provide a third party with general access to their
books, records or employees for the purpose of enabling such third party to
conduct a purchase investigation of the legal, financial or business condition
of them.
ARTICLE VII
ADDITIONAL COVENANTS
Each of the Sellers, the Buyer and Paradigm covenants and
agrees:
(a) Best Efforts. To proceed diligently and use its best
efforts to take or cause to be taken all actions and to do or cause to be done
all things necessary, proper and advisable to consummate the transactions
contemplated by this Agreement, including the execution and delivery of the
Employment Agreements.
(b) Compliance. To comply in all material respects with all
applicable rules and regulations of any Governmental Authority in connection
with the execution, delivery and performance of this Agreement and the
transactions contemplated hereby; to use all reasonable efforts to obtain in a
timely manner all necessary waivers, consents and approvals and to take, or
cause to be taken, all other actions and to do, or cause to be done, all other
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement.
(c) Notice. To give prompt notice to the other party of (i)
the occurrence, or failure to occur, of any event whose occurrence or failure to
occur, would be likely to cause any representation or warranty contained in this
Agreement to be untrue or incorrect in any material respect at any time from the
date hereof to the Closing Date and (ii) any material failure on its part, or on
the part of any of its officers, directors, employees or agents, to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by it hereunder; provided, however, that the delivery of any such notice shall
not limit or otherwise affect the remedies available hereunder to the party
receiving such notice.
(d) Access. To cause its affiliates, officers, directors,
employees, auditors and agents to afford the officers, employees and agents of
the other party hereto complete access at all reasonable times and upon
reasonable notice to its properties, offices and other facilities and to all
books and records, and shall furnish such other party with all financial,
operating and other data and information as the other party through its
officers, employees or agents, may reasonably request, provided that the party
providing such access and furnishing such data and information to the other
party incurs no cost in doing so.
(e) Confidentiality. To hold in strict confidence all data and
information obtained from the other party hereto or any subsidiary, division,
associate, representative, agent or affiliate of any such party (unless such
information is or becomes publicly available without the fault of any
representative of such party, or public disclosure of such information is
required by law in the opinion of counsel to such party) and shall insure that
such representatives do not disclose information to others without the prior
written consent of the other party hereto, and in the event of the termination
of this Agreement, to cause its representatives to return promptly every
document furnished by the other party hereto or any subsidiary, division,
associate, representative, agent or affiliate of any such party in connection
with the transactions
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contemplated hereby and any copies thereof which may have been made, other than
documents which are publicly available. Notwithstanding anything contained in
this subparagraph (e) to the contrary, said subparagraph shall not preclude any
party hereto from (i) upon advice of counsel, making any disclosure required by
any applicable law, rule or regulation; (ii) using or disclosing information
known generally to the public or (other than information known generally to the
public as a result of any violation of this subparagraph (e) by or on behalf of
such party; or (iii) or using or disclosing information received from a third
party who is not bound by a confidentiality agreement.
(f) Announcements. That all public announcements, statements
and press releases concerning the transactions contemplated by this Agreement
shall be mutually agreed to by Sellers and the Buyer before the issuance or the
making thereof and, subject to the advice of counsel, no party shall issue any
such press releases or make any such public statement prior to such mutual
agreement, except as may be required by law.
(g) Further Assurances. Buyer and the Sellers shall each
promptly take such actions and execute, acknowledge and deliver to the other(s)
and cause to be executed and delivered to the other(s) such further instructions
and documents as may be reasonably requested by the other and will otherwise
cooperate with the other as reasonably requested at anytime hereafter for the
purposes of establishing and/or evidencing the rights granted to such party
hereunder, or otherwise implement the intent hereof.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS
The obligations of the Sellers under this Agreement are
subject to the satisfaction, on or prior to the Closing Date, unless waived in
writing, of each of the following conditions:
Section 8.1 Representations and Warranties True. The
representations and warranties of the Buyer and Paradigm contained in this
Agreement shall be true and correct in all material respects as of the date when
made and at and as of the Closing Date, except as and to the extent that the
facts and conditions upon which such representations and warranties are based
are expressly required or permitted to be changed by the terms hereof, with the
same force and effect as if made on and as of the Closing Date, and the Sellers
shall have received a certificate to that effect and as to the matters set forth
in Section 8.2 hereof, dated the Closing Date, from the President or Chief
Executive Officer of the Buyer and Paradigm.
Section 8.2 Performance of Covenants. The Buyer and Paradigm
shall have performed or complied in all material respects with all agreements,
conditions and covenants required by this Agreement to be performed or complied
with by them on or before the Closing Date.
Section 8.3 No Proceedings. No preliminary or permanent
injunction or other order (including a temporary restraining order) of any
Federal, state or local court or other governmental agency or of any foreign
jurisdiction which prohibits the consummation of the transactions which are the
subject of this Agreement or prohibits the Buyer's ownership of the Shares shall
have been issued or entered and remain in effect.
Section 8.4 Agreements. The Employment Agreement has been
executed by the parties thereto.
Section 8.5 Material Changes. Since the date hereof, there
shall not have been any material adverse change in the business, operations,
financial condition, assets, liabilities, prospects or regulatory status of the
Buyer or Paradigm.
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ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE BUYER AND PARADIGM
The obligations of the Buyer and Paradigm under this Agreement
are subject to the satisfaction, on or prior to the Closing Date, unless waived
in writing, of each of the following conditions:
Section 9.1 Representation and Warranties True. The
representations and warranties of Purple Demon and the Sellers contained in this
Agreement shall be true and correct in all material respects as of the date when
made and at and as of the Closing Date, except as and to the extent that the
facts and conditions upon which such representations and warranties are based
are expressly required or permitted to be changed by the terms hereof with the
same force and effect as if made on and as of the Closing Date.
Section 9.2 Performance of Covenants. Purple Demon and the
Sellers shall have performed or complied in all material respects with all
agreements, conditions and covenants required by this Agreement to be performed
or complied with by them on or before the Closing Date.
Section 9.3 No Proceedings. No preliminary or permanent
injunction or other order (including a temporary restraining order) of any
Federal, state or local court or other governmental agency or of any foreign
jurisdiction which prohibits the consummation of the transactions which are the
subject of this Agreement or prohibits the Buyer's ownership of the Shares or
operation of Purple Demon's business shall have been issued or entered and
remain in effect.
Section 9.4 Agreements. The Employment Agreements and
Assignment Certificates shall have been executed by the parties thereto.
Section 9.5 Consents and Approvals. All filings and
registrations with, and notifications to, all Federal, state, local and foreign
authorities required for consummation of the transactions contemplated by this
Agreement shall have been made, and all consents, approvals and authorizations
of all Federal, state, local and foreign authorities and parties to material
contracts, licenses, agreements or instruments required for consummation of the
transactions contemplated by this Agreement shall have been received and shall
be in full force and effect.
ARTICLE X
CLOSING DOCUMENTS
Section 10.1 Documents to be delivered by Purple Demon and the
Sellers. At the Closing, Purple Demon and the Sellers shall deliver or cause to
be delivered to the Buyer and Paradigm:
(i) stock certificates representing the Shares,
either duly endorsed for transfer or accompanied by
appropriate stock powers duly executed by the Sellers;
(ii) resignations, effective as of the Closing Date,
of all directors and officers of Purple Demon requested by the
Buyer;
(iii) Purple Demon's minute book and stock transfer
ledger;
(iv) two originals of each of the Employment
Agreements executed by Purple Demon and the named employees
which have heretofore been received by Purchaser; and
(v) any and all other documents, book of accounts,
agreements or certificates the Buyer may reasonably request in
order to effectuate the Closing and any other items,
documents, agreements, statements, etc. which relate to the
business of Purple Demon.
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Section 10.2 Documents to be delivered by the Buyer and
Paradigm. At the Closing, the Buyer and Paradigm shall deliver or cause to be
delivered to the Sellers:
(i) the initial grant of the 33,333 Payment Shares;
and
(ii) any other documents, agreements or certificates
the Sellers may reasonably request in order to effectuate the
Closing.
ARTICLE XI
INDEMNIFICATION
Section 11.1 Indemnification by the Sellers. Subject to the
limitations set forth in this Article XI, each of the Sellers hereby jointly and
severally agrees to defend, indemnify and hold harmless the Buyer and Paradigm
from and after the Closing Date against and with respect to the following
(together referred to as "Buyer Losses"), provided any such claim arises within
twenty-four (24) months after the execution hereof:
(a) any and all loss, injury, damage or deficiency resulting
from any misrepresentation or breach of warranty on the part of Purple Demon or
the Sellers under this Agreement;
(b) any and all loss, injury, damage or deficiency resulting
from any non-fulfillment of any covenant or agreement on the part of Purple
Demon or the Sellers under this Agreement; and
(c) any and all demands, claims, actions, suits or
proceedings, assessments, judgments, costs and legal and other expenses incident
to any of the foregoing.
Section 11.2 Indemnification by the Buyer and Paradigm.
Subject to the limitations set forth in this Article XI, each of the Buyer and
Paradigm hereby jointly and severally agrees to defend, indemnify and hold
harmless each of the Sellers at all times from and after the Closing Date
against and with respect to the following (together referred to as "Sellers'
Losses"):
(a) any and all loss, injury, damage or deficiency resulting
from any misrepresentation or breach of warranty on the part of the Buyer or
Paradigm under this Agreement;
(b) any and all loss, injury, damage or deficiency resulting
from any non-fulfillment of any covenant or agreement on the part of the Buyer
or Paradigm under this Agreement; and
(c) any and all demands, claims, actions, suits or
proceedings, assessments, judgments, costs and legal and other expenses incident
to any of the foregoing.
Section 11.3 Procedures for Indemnification. Promptly after
receipt by an indemnified party pursuant to the provisions of Section 11.1 or
Section 11.2 of notice of the commencement of any action involving the subject
matter of such indemnity provisions, such indemnified party shall, if a claim is
to be made against an indemnifying party pursuant to the provisions of Section
11.1 or Section 11.2, promptly notify such indemnifying party of the
commencement of such action; but the omission so to notify such indemnifying
party shall not relieve the indemnifying party from any liability which it may
have to the indemnified party. In case such action is brought against an
indemnified party and it notifies the indemnifying party of the commencement of
such action, the indemnifying party shall have the right to participate in and,
to the extent that it may wish, to assume the defense of such action, with
counsel satisfactory to such indemnified party; provided, however, that if the
defendants in such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it which are different from or
additional to those available to the indemnifying party, or if there is a
conflict of interest which would prevent
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counsel for the indemnifying party from also representing the indemnified party,
the indemnified party shall have the right to select separate counsel to
participate in the defense of such action on behalf of such indemnified party,
at the expense of the indemnifying party. After notice from the indemnifying
party to the indemnified party of the indemnifying party's election so to assume
the defense of such action, the indemnifying party shall not be liable to the
indemnified party pursuant to the provisions of Sections 11.1 or 11.2 for any
legal or other expense subsequently incurred by such indemnified party in
connection with the defense of such action other than reasonable costs of
investigation, unless (a) the indemnified party shall have employed counsel in
accordance with the proviso of the preceding sentence, (b) the indemnifying
party shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after the notice of the
commencement of the action, or (c) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. No indemnifying party shall, except with the consent of each
indemnified party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term of such settlement the release
of all indemnified parties from all liability in respect of such claim.
Notwithstanding anything contained in this paragraph 11.3 to the contrary, the
forgoing indemnity shall only apply upon the issuance of a final adverse
judgement in a court of competent jurisdiction or settled with the Buyer's
consent, such consent not to be unreasonably withheld.
Section 11.4 Cooperation in Defense. In case of any claim,
arbitration or legal proceeding, the defense of which is assumed by any or all
of the Sellers in accordance with this Article XI, Purple Demon and the Buyer,
upon request of such Seller(s), shall provide reasonable cooperation (at the
expense of such Seller(s) in accordance with this Article XI) in such defense,
including affording to such Seller(s) the right of access, during normal
business hours, upon reasonable notice and without disturbing the business of
Purple Demon or the Buyer, to pertinent books and records for purposes of
inspection and making copies.
ARTICLE XII
TERMINATION, AMENDMENT AND WAIVER
Section 12.1 Termination. This Agreement may be terminated and
the transactions contemplated by this Agreement abandoned at any time prior to
the Closing:
(a) By mutual written consent of the Buyer and the Sellers;
(b) By either the Buyer or any Seller if the transactions
contemplated by this Agreement shall not have been consummated on or before
January 31, 1996;
(c) By any Seller if any condition specified in Article VIII
hereto has not been met or waived at such time as such condition can no longer
be satisfied; or
(d) By the Buyer if any condition specified in Article IX
hereto has not been met or waived at such time as such condition can no longer
be satisfied; or
(e) By either the Buyer or any Seller if a court of competent
jurisdiction or Governmental Authority shall have issued a final, non-appealable
order, decree or ruling or taken any other action (which order, decree or ruling
the parties hereto shall use their best efforts to lift), in each case
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement.
Section 12.2 Effect of Termination. Except as provided in
Section 13.1 hereof, in the event of any termination of this Agreement in
accordance with Section 12.1 hereof, this Agreement shall forthwith become void
and, except for the parties' obligations under Section 7.1(e) hereof which shall
remain in full force and effect, there shall be no liability under this
Agreement on the part of any party hereto or their respective affiliates,
officers, directors, employees or agents by virtue of such termination.
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Section 12.3 Amendment. This Agreement may only be amended by
the written agreement signed by the Buyer, Paradigm and the Sellers.
ARTICLE XIII
MISCELLANEOUS
Section 13.1 Expenses. Except as otherwise provided in Section
8.8 hereof, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such costs and expenses regardless of the termination of this Agreement or the
failure to consummate the transactions contemplated hereby.
Section 13.2 Notices. All notices, requests, demands and other
communications which are required or may be given under this Agreement shall be
in writing and shall be deemed to have been duly given when delivered personally
or by facsimile transmission, in either case with receipt acknowledged, or five
days after being sent by registered or certified mail, return receipt requested,
postage prepaid:
(a) If to the Buyer or Paradigm to:
Paradigm Music Entertainment Company, Inc.
67 Irving Place
New York, New York 10007
with a copy to:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attention: Barry H, Platnick, Esq.
(b) If to the Sellers or Purple Demon to:
Purple Demon
40 East 12th Street, Suite 5B
New York, New York 10003
with a copy to:
Selverne Flam & Mandelbaum LLP
353 Lexington Avenue
New York, New York 10016
Attention: Whitney C. Broussard, Esq.
or to such other address as any party shall have specified by notice in writing
to the other in compliance with this Section 13.2.
Section 13.3 Entire Agreement. This Agreement constitutes the
entire agreement among the parties hereto with respect to the subject matter
hereof and thereof and supersedes all prior agreements, representations and
understandings among the parties hereto.
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Section 13.4 Binding Effect, Benefits, Assignments. This
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective successors and assigns; nothing in this Agreement,
expressed or implied, is intended to confer on any other person, other than the
parties hereto or their respective successors and assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement. This Agreement
may not be assigned without the prior written consent of the other parties
hereto.
Section 13.5 Applicable Law. This Agreement and the legal
relations between the parties hereto shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of law.
Section 13.6 Jurisdiction. The parties hereto shall submit to
the jurisdiction of any Federal or state court located in the State of New York
for the purpose of resolving any action or claim arising out of the performance
of the provisions of this Agreement.
Section 13.7 Headings. The headings and captions in this
Agreement are included for purposes of convenience only and shall not affect the
construction or interpretation of any of its provisions.
Section 13.8 Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
Section 13.9 Survival of Representations, Warranties,
Covenants and Agreements. The representations, warranties, covenants and
agreements of the parties contained in this Agreement shall survive the Closing
Date.
Section 13.10 Costs and Fees of Dispute. In the event any
proceeding is commenced by a party under this Agreement to enforce any of its
terms or to recover damages in connection with a breach of this Agreement, the
prevailing party or parties shall be entitled to recover attorneys' fees and
costs (including, without limitation, such fees and costs as may be incurred in
any bankruptcy or appellate proceeding) in an amount to be fixed by the court.
Section 13.11 Definition of Purple Demon Material Adverse
Effect. A "Purple Demon Material Adverse Effect" shall mean an individual or
cumulative adverse change in or effect on the business, customers, customer
relations, operations, properties, working capital condition (financial or
otherwise), assets, properties or liabilities of Purple Demon taken as a whole
which is reasonably expected to be materially adverse to the business,
properties, working capital condition (financial or otherwise), assets, or
liabilities of Purple Demon taken as a whole or would prevent Purple Demon or
the Sellers from consummating the transactions contemplated by this Agreement.
Section 13.12 Definition of Sellers' Knowledge. As used in
this Agreement, the phrase "to Sellers' Knowledge" means solely knowledge
actually and currently possessed by the Sellers, or any one of them, and, except
as set forth in the succeeding sentence, there shall be no imputation of
constructive knowledge, nor any inference that a Seller has undertaken any
inquiry or investigation with respect to the matter so qualified. Knowledge of
any one of the Sellers shall be imputed to all other Sellers.
Section 13.13 Spouses' Powers of Attorney. By their signatures
appearing on Schedule 13.13, each spouse of a named Seller consents to the
consummation of the transactions contemplated by this Agreement and grants to
her husband the right, power and authority, as such spouse's attorney-in-fact,
to execute any and all documents and instruments arising in connection with the
transactions contemplated by this Agreement (including, without limitation, with
respect to her interests in the Shares owned by her marital community), and to
bind her marital community, but not to bind her individually or separate
property, now owned or hereafter acquired.
Section 13.14 Set-Offs. Except as provided herein with respect
to the Payment Shares not delivered at the Closing, no party may set off against
consideration owed to another party under this Agreement any amount to which
such party claims it may be entitled, either under Article XI or otherwise
pursuant to this Agreement.
-17-
<PAGE>
Section 13.15 Piggy-Back Registration
(a) Right to Piggy-Back. If at any time Paradigm proposes to
file a registration statement under the Securities Act with respect to any of
its Common Stock or any securities convertible or exchangeable into its Common
Stock other than (i) a registration statement (A) on Form S-8 or any successor
form to such Form, (B) on Form S-4 or any successor form to such Form, or (C)
filed in connection with an exchange offer or an offering of its Common Stock or
of securities convertible or exchangeable into its Common Stock made solely to
its existing stockholders in connection with a rights offering or solely to
employees of Paradigm, then Paradigm shall give written notice of such proposed
filing to the holders of Registrable Securities at least 30 days before the
anticipated filing date. Such notice shall offer such holders the opportunity to
register such amount of Registrable Securities as each such holder may request
(a "Piggy-Back Registration"). Subject to Section 13.15(b) hereof, Paradigm
shall include in each such Piggy-Back Registration all Registrable Securities
with respect to which Paradigm has received written requests for inclusion
therein within 15 days after notice has been duly given the applicable holder.
The holders of Registrable Securities shall be permitted to withdraw all or any
part of the Registrable Securities from a Piggy-Back Registration at any time
prior to the effective date of such Piggy-Back Registration.
(b) Priority on Piggy-Back Registrations. Paradigm shall cause
the managing underwriter or underwriters of a proposed underwritten offering to
permit holders of Registrable Securities requested to be included in the
registration for such offering to include all such Registrable Securities in
such offering on the same terms and conditions as any similar securities, if
any, of Paradigm included therein. Notwithstanding the foregoing, if the
managing underwriter or underwriters of such offering deliver(s) a written
opinion to such holders that the total amount of securities that such holders,
Paradigm, and any other persons or entities having registration rights intend to
include in such offering is such as to materially and adversely affect the
success of such offering (including, without limitation, the price or quantity
of the securities to be sold), then the amount of securities to be offered for
the account of the holders of Registrable Securities shall be reduced or limited
pro rata in proportion to the respective dollar amounts of securities to be
registered to the extent necessary to reduce the total amount of securities to
be included in such offering to the amount recommended by such managing
underwriter or underwriters.
Section 13.16 Holdback Agreements. Restrictions on Public Sale
by Holders of Registrable Securities. Each holder of Registrable Securities
whose Registrable Securities are covered by a Registration Statement filed
pursuant to this Agreement, if requested by the managing underwriter or
underwriters in an underwritten offering (to the extent timely notified in
writing by Paradigm or the managing underwriter or underwriters), not to effect
any public sale or distribution of securities of Paradigm of any class included
in such Registration Statement, including a sale pursuant to Rule 144 under the
Securities Act (except as part of such underwritten registration), during the
10-day period prior to, and the 90-day period beginning on, the effective date
of any underwritten offering made pursuant to such Registration Statement.
Section 13.17 Registration Procedures
(a) The Sellers shall pay the underwriting discount and
commissions attributable to such Seller's Shares, any transfer tax payable with
respect thereto and the fees and expenses of such Seller's counsel. All other
expenses of registration under this Section 13.17 shall be borne by Paradigm.
(b) Paradigm will use its best efforts to permit any
prospectus used pursuant to the Registration Statement contemplated by this
Section 13.17 to remain effective for a period of not less than one hundred and
eighty (180) days from the effective date of the Registration Statement or
amendment thereto in which such prospectus is contained. If the offering
pursuant to any registration statement provided for herein is made through
underwriters, Paradigm will enter into an underwriting agreement in customary
form and indemnify, in customary form, such underwriters and each person who
controls any such underwriter within the meaning of the Securities Act. Such
underwriting agreement shall also contain provisions for the indemnification of
Paradigm in customary form.
-18-
<PAGE>
(c) Paradigm may require each Seller of Shares as a condition
to registration to furnish Paradigm such information regarding such Seller and
the distribution of such securities as may be required to be included in any
registration statement or amendment thereto that Paradigm may request in
writing.
Section 13.18 Indemnification
(a) Indemnification by Company. Paradigm shall indemnify and
hold harmless, to the full extent permitted by law, each holder of Registrable
Securities, its officers, directors, agents and employees, each person who
controls such holder (within the meaning of Section 15 of the Securities Act or
Section 20 the Exchange Act), and the officers, directors, agents or employees
of any such controlling person, from and against all losses, claims, damages,
liabilities, costs (including, without limitation, costs of preparation and
attorney's fees) and expenses (collectively, "Losses"), arising out of or based
upon any untrue statement or alleged untrue statement of a material fact
contained in any Registra tion Statement, Prospectus or preliminary prospectus,
or arising out of or based upon any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except insofar as the same are based solely upon information
furnished in writing to Paradigm by such holder expressly for use therein.
Paradigm shall also indemnify underwriters, selling brokers, dealer managers and
similar securities industry professionals participating in the distribution,
their officers, directors, agents and employees and each person who controls
such persons (within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act) to the same extent as provided above with respect to the
indemnification of the holders of Registrable Securities.
(b) Indemnification by Holders of Registered Registrable
Securities. In connection with any Registration Statement in which a holder of
Registrable Securities is participating, such holder of Registrable Securities
shall furnish to Paradigm in writing such information as Paradigm reasonably
requests for use in connection with any Registration Statement or Prospectus and
agrees to indemnify and hold harmless, to the full extent permitted by law,
Paradigm, its directors, officers, agents and employees, each person who
controls Paradigm (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) and the directors, officers, agents or employees
of such controlling persons, from and against all Losses arising out of or based
upon any untrue statement of a material fact contained in any Registration
Statement, Prospectus or preliminary prospectus, or arising out of or based upon
any omission of a material fact required to be stated therein or necessary to
make the statement therein not misleading, to the extent, but only to the
extent, that such untrue statement or omission is contained in any information
furnished by such holder to Paradigm. Paradigm shall be entitled to receive
indemnities from underwriters, selling brokers, dealer managers
and similar securities industry professionals participating in the distribution
to the same extent as provided above with respect to information so furnished in
writing by such persons expressly for use in any Prospectus or Registration
Statement.
(c) Conduct of Indemnification Proceedings. If any action or
proceeding (including any governmental investigation or inquiry) shall be
brought or any claim shall be asserted against any person entitled to indemnity
hereunder (an "indemnified party"), such indemnified party shall promptly notify
the party from which such indemnity is sought (the "indemnifying party") in
writing, and the indemnifying party shall assume the defense thereof, including
the employment of counsel and the payment of all fees and expenses incurred in
connection with the defense thereof. Any such indemnified party shall have the
right to employ separate counsel in any such action, claim or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be the expenses of such indemnified party unless (i) the indemnifying
party has agreed to pay such fees and expenses or (ii) the indemnifying party
shall have failed to promptly assume the defense of such action, claim or
proceeding and to employ counsel for the indemnified party in any such action,
claim or proceeding, it being understood, however, that the indemnifying party
shall not, in connection with any one such action, claim or proceeding or
separate but substantially similar or related actions, claims or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys at any time for all such indemnified parties.
(d) Contribution. If the indemnification provided for in this
Section 13.18 is unavailable to an indemnified party under Section 13.18(a) or
13.18(b) hereof (other than by reason of exceptions provided in those Sections)
in respect of any Losses, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable
-19-
<PAGE>
by such indemnified party as a result of such Losses, in such proportion
as is appropriate to reflect the relative fault of the indemnifying party and
indemnified party in connection with the actions, statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such indemnifying party and such indemnified party shall
be determined by reference to, among other things, whether any action in
question, including any untrue statement or alleged untrue statement of a
material fact or omission or alleged omission of a material fact, has been taken
or made by, or relates to information supplied by, such indemnifying party or
indemnified party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action, statement or
omission. The amount paid or payable to a party as a result of any Losses shall
be deemed to include, subject to the limitations set forth in this Agreement,
any legal or other fees or expenses reasonably incurred by such party in
connection with any investigation or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 13.18(d) were determined by
pro rata allocation or by any other method of allocation which does not take
into account the equitable considerations referred to in the immediately
preceding paragraph. No person guilty of fraudulent misrepresentation (within
the meaning of Section 12(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
Section 13.19 Registrable Securities: All of the Payment
Shares issued and/or issuable pursuant to this Agreement and any and all Common
Shares issued as a dividend or distribution thereon or in connection with a
split thereof or as a result of the recapitalization of Paradigm, until such
time as such Common Shares cease to be Registrable Securities as provided in the
next sentence. Any Registrable Security will cease to be a Registrable Security
when (i) a Registration Statement covering such Registrable Security has been
declared effective by the SEC and such Registrable Security has been disposed of
pursuant to such effective Registration Statement or (ii) such Registrable
Security is distributed to the public pursuant to Rule 144 (or any similar rule
then in force) under the Securities Act.
Section 13.20 Registration Statement: Any registration
statement of Paradigm that covers any of the Registrable Securities pursuant to
the provisions of this Agreement, including the prospectus, amendments and
supplements to such registration statement or the prospectus, as the case may
be, including post-effective amendments, all exhibits, and all material
incorporated or deemed to be incorporated by reference in such registration
statement.
Section 13.21 Entire Agreement. This Agreement is intended by
the parties as a final expression of their agreement, and is intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto, in respect of the subject matter contained herein. There are no
restrictions, promises, warranties nor undertakings, other than those set forth
or referred to herein, with respect to the registration rights granted by
Paradigm with respect to the Payment Shares. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year hereinabove first set forth.
SELLERS: PARADIGM MUSIC ENTERTAINMENT
COMPANY, INC.
__________________________ By:____________________________________
DEAN BROWNROUT Name:
Title:
- - - - --------------------------
DAVID WOLIN
- - - - --------------------------
CHARLES PYE
Confirmed with Respect to Sellers Only
Purple Demon, Inc.
By: ___________________________________
Name:
Title:
-21-
<PAGE>
Schedule 3.2
Capitalization and Shareholdings
Capitalization of Purple Demon, Inc. 0
Shareholders:
Dean Brownrout 90 shares
David Wolin 90 shares
Charles Pye 20 shares
<PAGE>
Schedule 3.9(b)
Taxes and Tax Returns
NONE
<PAGE>
Schedule 3.10
Employee Benefit Plans
NONE
<PAGE>
Schedule 3.11
Title to Property
To be provided at closing
<PAGE>
Schedule 3.12
Trademarks, Patents and Copyrights
NONE
<PAGE>
Schedule 3.13
Legal Proceedings, Claims, Investigations, etc.
NONE
<PAGE>
Schedule 3.14
Insurance
SCHEDULE OF POLICIES
<TABLE>
<CAPTION>
Type of Policy
Coverage Company Policy Number Period Premium
- - - - -------------------- -------------------- -------------------- ----------------- ------------------------
<S> <C> <C> <C> <C>
NONE
</TABLE>
<PAGE>
Schedule 3.16
Certain Transactions
NONE
<PAGE>
Schedule 3.20
Banks; Safe Deposit Boxes
To be provided at Closing
<PAGE>
Schedule 13.13
Spouses' Powers of Attorney
By your signatures below, each spouse of a named Seller
consents to the consummation of the transactions contemplated by the Stock
Purchase Agreement dated February 14, 1997 among Dean Brownrout, David Wolin,
Charles Pye and Paradigm Music Entertainment Company, Inc. and grants to her
respective husband the right, power and authority, as such spouses' attorney in
fact, to execute any and all documents and instruments arising in connection
with the transactions, contemplated by this Agreement (including, without
limitation, with respect to her interests in the capital Shares owned by her
marital community), and to bind her marital community, but not to bind her
individually or separate property, now owned or hereinafter required.
--------------------------------------
Nancy Brennan (Spouse of David Wolin)
--------------------------------------
Carol Clow Pye (Spouse of Charles Pye)
<PAGE>
Schedule 13.15
Material Contracts
Exclusive Recording Artist Agreements
1. Purple Demon, Inc. with Steven Deal, Robert Dietrich p/k/a
"CHOPPER" dated June 1, 1993.
2. Purple Demon, Inc. with Elizabeth Trundle p/k/a
"Boo Trundle" dated July 26, 1993.
3. Purple Demon, Inc. with Justin Chapman, Brett
Essler and Matt Roblee p/k/a "MILF" dated September 2, 1993.
4. Purple Demon, Inc. with Will Croxton, James Burke,
Keith Campbell, James Renard p/k/a "IDLE" dated September 25,
1993.
5. Purple Demon, Inc. with Dan Sarka and Peter Lockner
p/k/a "THE VANDALIAS" d/b/a Ten Pop Works dated February 5, 1994.
6. Big Deal, Inc. with W. Devin Hill dated February
15, 1994.
7. Purple Demon, Inc. with Doug Edmunds, Jeff Carlson,
Pat McGraw p/k/a "GLAD HANDS" dated November 15, 1994.
8. Purple Demon, Inc. with Ian Alsgaard, Steve
Bunovsky, Bill Steinmetz, Rocko Villavicencio p/k/a "HANNA
CRANNA" dated November 30, 1994.
9. Purple Demon, Inc. with Dan Kibler dated December
1, 1995.
10. Purple Demon, Inc. with Adam Marsland and Robert
Cassell p/k/a "COCKEYED GHOST" dated June 1, 1996.
11. Purple Demon, Inc. with Chris Tucker, Damon Howard
and Lorren Sherrel p/k/a "THE VERGE" dated November 15, 1996.
12. Purple Demon, Inc. with Matt Huseman, Brandt
Huseman and Paul Krysiak p/k/a "SPLITSVILLE" dated January 15,
1997.
<PAGE>
Schedule 13.15 Continued
Exclusive Licensing Agreements
1. Purple Demon, Inc. with Tite Wad, Inc. dated February 15,
1994/Artist "Enuff ZNuff", Licensed album entitled "1985".
2. Purple Demon, Inc. with John Rubin dated May 15,
1994/Artist "The Rubinoos", Licensed album entitled "Garage
Sale".
3. Purple Demon, Inc. with Harold Goldberg dated July
15, 1994/Various Artists. Licensed album entitled "Relationships
From Hell".
4. Purple Demon, Inc. with Mitchell Rasor dated March
15, 1995/Artist Mitchell Rasor. Licensed album embodying the
performances of Mitchell Rasor.
5. Purple Demon, Inc. with OMAD Productions dated May
15, 1995/Artists and Masters to be mutually designated.
6. Purple Demon, Inc. with Roving Gypsies, Inc. dated
August 25, 1995/Artist "Enuff ZNuff". Licensed album entitled
"Peach Fuzz".
7. Purple Demon, Inc. with Gary Meister and Kenny
Weinstein dated October 29, 1995/Artists Gary Meister and Kenny
Weinstein p/k/a "You And What Army", Licensed album entitled
"Kinda Wanna".
8. Purple Demon, Inc. with Matt Huseman, Brandt
Huseman and Paul Krysiak dated February 1, 1996/Artists Matt
Huseman, Brandt Huseman and Paul Krysiak p/k/a "SPLITSVILLE".
Licensed Albums and Masters involving the performances of
"SPLITSVILLE" and contained on recordings collectively entitled
"SPLITSVILLE USA".
9. Purple Demon, Inc. with Toys Factory Music
Publishing dated August 21, 1996/Artist/"Wundermints" Masters and
Licensed recordings embodied on the Album entitled "WUNDERMINTS".
10. Purple Demon, Inc. with MCA Victor, Inc. dated
October 15, 1996/Artist "Shonen Knife". Licensed album entitled
"BRAND NEW KNIFE".
11. "YELLOW PILLS" compilation recording agreements Yellow
Pills One recorded 1993, Yellow Pills Two recorded 1994, three Yellow Pills
Three recorded 1996.
<PAGE>
Schedule 13.15 Continued
Exclusive P & D Agreement
1. Purple Demon, Inc. with Carolyn Records, Inc. dated
August 5, 1993.
<PAGE>
PARADIGM MUSIC ENTERTAINMENT COMPANY
67 IRVING PLACE NORTH
NEW YORK, NEW YORK 10003
February 14, 1997
Mr. Michael Goldberg
106 Surrey Street
San Francisco, California 94131
Letter of Intent
Dear Michael,
This is to confirm the mutual intention of Paradigm Music Entertainment
Company ("Paradigm") and Michael Goldberg "Goldberg"), doing business as
"Addicted to Noise", that Paradigm, through its wholly-owned subsidiary
SonicNet, Inc. ("SonicNet") or another affiliate, will purchase all of the
assets, subject to the liabilities described below, of the "Addicted to Noise"
internet website publishing business (the "ATN Business"), subject to the terms
and conditions specified below.
1. Purchase Price. The aggregate purchase price (the "Purchase Price") for the
assets of the ATN Business (the "Assets") will be up to 75,000 shares of Class A
Common Stock, par value $0.01 per share ("Paradigm Common Stock"), as set forth
in paragraph 1a below plus approximately $ 220,000 in cash and promissory notes
as set forth in paragraph 1b below.
a. Of the 75,000 shares of Paradigm Common Stock, 50,000 shares of
Paradigm Common Stock will be delivered at the Closing hereinafter referred to
(the "Closing") and 25,000 shares of Paradigm Common Stock will be delivered if,
and only if, on or before December 31, 1998 the combined site traffic of the
"Addicted to Noise" and "SonicNet" websites (including sites linked or ancillary
thereto which are maintained by SonicNet) and any other websites maintained by
SonicNet or maintained by Paradigm or its affiliates with the substantive
participation of Goldberg equal or exceed 250% of the combined site traffic of
such sites as of the Closing Date (as defined below). If such combined site
traffic level has not been achieved by December 31, 1998, the additional 25,000
shares of Paradigm Common Stock will be forfeited. The "site traffic" as used
herein will be defined in the definitive Acquisition Agreement. The parties will
also seek to address in the definitive Acquisition Agreement the impact of
conversion of the "Addicted to Noise" website or any portion thereof to a
subscription basis. The Paradigm Common Stock will be available to satisfy
indemnity claims by Paradigm.
b. At the Closing, Paradigm will also deliver to Goldberg (i) a
promissory note of Paradigm in the amount of $25,000 payable in a lump sum on
the first anniversary of the
<PAGE>
Closing, (ii) a second promissory note in the amount of $151,145.39, payable in
12 equal monthly installments beginning one month after the Closing, and (iii) a
check or wire transfer in an amount equal to the ordinary course operating
expenses of the ATN Business due to third parties which are accrued and unpaid
as of the Closing in an amount not to exceed $44,000. The promissory notes will
bear interest at a variable rate equal to the "prime rate" of Bank of America
(San Francisco Main Branch) and will be subject to set-off for indemnity claims
of Paradigm.
2. Assets and Liabilities Included. The Assets to be acquired will include,
without limitation, the software code for the "Addicted to Noise" web site at
www.addict.com and all other ATN software codes, designs, databases and
documentation therefor, trademarks, business plans and financial budgets and
potential customer contact lists. They will also include all cash, cash
equivalents and accounts receivable of the ATN Business as of the Closing Date
and such of the ATN Business contracts (customer contracts, employment contracts
and independent contractor agreements) as Paradigm elects upon review to
continue. The Assets will not include those assets designated as "excluded
assets" on Exhibit A hereto. The liabilities to be assumed will be limited to:
legal and accounting fees and disbursements incurred by the ATN Business
(exclusive of those referred to in paragraph 10); other third-party operating
liabilities of the ATN Business arising in the ordinary course of business; and
the obligations of Goldberg arising under the Settlement and Release Agreement
between Goldberg and Jeff Gold dated August 7, 1995; provided, that the
liabilities so assumed, other than the liabilities under the Release and
Settlement Agreement, will (i) be limited to those liabilities reflected on a
financial statement of the ATN Business as of January 31, 1997 (which will not
exceed $44,000 in the aggregate) plus liabilities arising in the ordinary course
of business after that date, and (ii) be reduced by the amount of the cash
payment at Closing referrred to in paragraph 1. No indebtedness for money
borrowed will be assumed.
3. Operation of the Business Pending Closing; Access. From the date of this
letter until the Closing, except as may be otherwise agreed between Paradigm and
Goldberg,
a. The ATN Business will be operated in the ordinary course in
accordance with historical practices and in such manner as to preserve and
continue all of its relationships with employees, customers, suppliers [and
artists] to the extent deemed prudent by current management.
b. There will be no sale or other disposition of ATN assets except for
inventory held for sale which is sold in the ordinary course of business. The
ATN Business will not incur any obligations or commitments (including
commitments for capital expenditures, joint venture arrangements and licensing
arrangement) except in the ordinary course of business.
c. Paradigm and its representatives (including professionals) will be
given full and prompt access at all reasonable times on reasonable notice to the
facilities, books,
-2-
<PAGE>
records and all information regarding the ATN Business and its assets and
business for the purpose of completing its due diligence.
4. Definitive Agreement. Promptly following execution of this letter, Paradigm
shall prepare and the parties shall negotiate and endeavor to execute a
definitive asset purchase agreement (the "Acquisition Agreement") embodying the
terms of this letter and containing such other provisions as are customary and
mutually agreed to. The Acquisition Agreement will contain or provide customary
provisions including, among other matters:
a. An allocation of the purchase price among the Assets of ATN to be
acquired by Paradigm.
b. Representations and warranties, including representations and
warranties as to: title to the Assets; no conflict with material agreements or
applicable law; requirements for consents and approvals; accuracy of financial
statements; undisclosed liabilities; receivables and inventory; taxes; absence
of material changes or events since 1/1/96; condition of property; status of
trademarks and other intellectual property; list and status of material
agreements; absence of burdensome agreements or commitments; absence of
litigation; compliance with laws (including environmental matters); insurance,
product liability and warranty claims; benefit plans (ERISA); labor relations;
sufficiency of rights and assets to conduct business; and related party
transactions.
c. Covenants pending closing, including covenants incorporating the
obligations in paragraph 3 of this letter and restricting changes to the assets,
businesses, operations, procedures or structures of the ATN Business prior to
the Closing.
d. Closing conditions, including: absence of material adverse change;
no breach of or change in representations, warranties or covenants; delivery of
certificates and legal opinions; obtaining of necessary consents and approvals;
completion of due diligence investigations to the reasonable satisfaction of
Paradigm; execution of the employment agreement with Goldberg referred to in
paragraph 5(a) below.
e. Goldberg's representations and warranties will survive the Closing.
Breaches of such representations and warranties, and liabilities of Goldberg or
the ATN Business not expressly assumed by Paradigm or SonicNet, will give rise
to a right on the part of Paradigm to indemnification for costs, liabilities and
damages incurred.
5. Continuing Arrangements.
a. SonicNet will enter into a three-year employment agreement with
Goldberg, which will provide for base compensation of $105,000 in the first
contract year (Closing Date to the first anniversary of the Closing Date),
$115,000 in the second contract year and $125,000 in the third contract year.
The employment agreement will also provide for cash
-3-
<PAGE>
performance bonuses of 25-50% of base compensation, subject to achievement of
operating targets.
b. SonicNet will engage in good faith negotiations to employ David
Hyman and Jon Luini on mutually acceptable terms.
c. Following the Closing, the operations of SonicNet and ATN will be
combined. All strategic planning and long-term business development decisions of
SonicNet/ATN will be made by a Management Committee, consisting of the CEO and
the CFO of Paradigm, the CEO of SonicNet, Nicholas Butterworth and Goldberg.
d. Goldberg will open a West Coast office for SonicNet/ATN in
commercial premises in San Francisco (which office, at the option of Paradigm,
may also serve as the West Coast office of Paradigm), from which he will
continue to operate the ATN portion of the combined business. The West Coast
office will have available all reasonable resources necessary to conduct the ATN
Business and West Coast operations of SonicNet. The office space and all other
commitments to be undertaken in connection with the West Coast office will be
subject to review and final approval by Paradigm.
e. Goldberg, as head of the ATN portion of the combined ATN/SonicNet,
will report to Nicholas Butterworth with respect to all editorial projects which
may be undertaken and/or maintained in the West Coast offices of SonicNet/ATN.
f. Goldberg will be subject to the same restrictions on his Paradigm
Common Stock as other Paradigm stockholders prior to a Paradigm public offering.
g. Paradigm will invest in SonicNet/ATN during the 12 months beginning
January 9, 1997 such amounts, up to $2 million, as shall be necessary to enable
SonicNet/ATN to continue to operate in the ordinary course; provideed, however,
that nothing contained herein shall be construed to prevent the Management
Committee from modifying the strategic focus and business priorities of
SonicNet/ATN.
h. If, following the Closing, Goldberg or SonicNet (as successor to the
ATN Business) is assessed any liability arising out of Goldberg's failure to pay
payroll or withholding taxes, disability insurance or other payroll charges with
respect to persons hired by him as independent contractors in 1995 and 1996,
SonicNet will advance the funds to cover such liabilility and may charge
Goldberg only by set-off against the promissory notes or claim against the
Paradigm Common Stock referred to in paragraph 1. Nothing in this paragraph
shall be construed as an agreement by Paradigm or SonicNet to assume any such
liability.
6. Exclusivity. From the date of this letter for a period of 60 days, or until
execution of a definitive Acquisition Agreement (which will continue such period
until the Closing), or until termination of negotiations by Paradigm by written
notice to Goldberg prior to the
-4-
<PAGE>
execution of a definitive Acquisition Agreement or until 30 days after
termination of negotiations by Goldberg by written notice to Paradigm prior to
execution of a definitive Acquisition Agreement, whichever is the earliest,
Goldberg shall negotiate exclusively with Paradigm with respect to the proposed
acquisition and will not directly or indirectly through financial advisors,
brokers or other agents, solicit the submission of inquiries, proposals or
offers from any other person or entity relating to any sale of any material
portion of the assets of the ATN Business or any other form of business
combination involving the ATN Business (collectively, a "Business Combination")
or participate in any discussion or negotiations regarding any such Business
Combination or furnish to any other person or entity any information with
respect to the business or assets of the ATN Business for the purpose of
evaluating any potential Business Combination. Goldberg shall not authorize or
permit his financial or other advisors to violate the provisions of this
paragraph.
7. Closing. The parties will endeavor to negotiate and execute a Acquisition
Agreement as soon as practicable and to achieve a Closing by March 15, 1997.
8. Governing Law. This letter, to the extent binding upon the parties as
provided below, shall be governed by and interpreted in accordance with the laws
of the State of New York applicable to agreement made and to be performed
therein.
9. Binding Effect. This letter constitutes an expression of intent on the part
of the Paradigm and Goldberg and except as provided below shall not be binding
for any purpose unless and until a definitive Acquisition Agreement shall have
been executed between the parties; provided that the provisions of paragraph 6
are intended to be and shall be binding upon Goldberg in accordance with its
terms and the provisions of paragraph 10 are intended to be and shall be finding
upon Paradigm in accordance with its terms. No party is obligated to sign a
definitive Acquisition Agreement.
10. Expenses. Paradigm will reimburse Goldberg for up to $20,000 of legal and
accounting fees and expenses incurred by Goldberg in connection with the
negotiation and consummation of the transactions contemplated hereby, subject to
closing of such transactions. Subject to the preceding sentence, Paradigm and
Goldberg each agrees to bear all of its or his own expenses in connection with
the execution, delivery and performance of this letter of intent and the
consummation of the transaction herein contemplated, except as otherwise
provided in the Acquisition Agreement.
Please indicate your agreement to the foregoing by signing and
returning to the undersigned the enclosed copy of this letter. Upon receipt of
an executed copy of this letter
-5-
<PAGE>
signed by you, it shall become a binding agreement to the extent provided in
paragraph 9 and we shall proceed forward as contemplated in this letter.
Very truly yours,
PARADIGM MUSIC ENTERTAINMENT
COMPANY
By:_______________________________
Thomas McPartland, President & CEO
Agreed and Accepted
________________________________
Michael Goldberg
-6-
<PAGE>
EXHIBIT 11.1
PARADIGM MUSIC ENTERTAINMENT COMPANY, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Primary earnings
Loss from continuing operations ......... $(2,399,464) $ (131,749)
============ ==========
Shares:
Weighted average number of common shares
outstanding .......................... 2,090,707 2,090,707
============ ==========
Primary loss per common share ........... $ (1.15) $ (.06)
============ ==========
Fully diluted earnings *
Loss from continuing operations ......... $(2,399,464) $ (131,749)
============ ==========
Shares:
Weighted average number of common shares
outstanding .......................... 2,090,707 2,090,707
Release of Class A and Class B Common
Stock held in escrow and conversion of
Class E
Common Stock ......................... 1,799,385 1,799,385
------------ ----------
Weighted average number of common shares
outstanding as adjusted .............. 3,890,092 3,890,092
============ ==========
Fully diluted loss per common share ..... $ (.62) $ (.03)
============ ==========
</TABLE>
* This calculation is submitted in accordance with Securities Exchange Act of
1934 Release No. 9083 although it is contrary to footnote 2 to paragraph 14
of APB Opinion No. 15 because it produces an anti-dilutive result.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF
PARADIGM MUSIC ENTERTAINMENT COMPANY
1. SonicNet, Inc., a Delaware corporation
2. Purple Demon, Inc., a New York corporation. Also does business as Big Deal
Records.
