<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13E-4/A
(AMENDMENT NO. 2)
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
THE MARQUEE GROUP, INC.
(Name of the Issuer)
THE MARQUEE GROUP, INC.
(Name of Person(s) Filing Statement)
WARRANTS
(Title of Class of Securities)
570906115
(CUSIP Number of Class of Securities)
ROBERT M. GUTKOWSKI, PRESIDENT
888 SEVENTH AVENUE, 37TH FLOOR
NEW YORK, NEW YORK 10019
(212) 977-0300
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of Person(s) Filing Statement)
Copy to:
AMAR BUDARAPU, ESQ.
BAKER & MCKENZIE
805 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 751-5700
JULY 23, 1997
(Date Tender Offer First Published, Sent or Given to Security Holders)
CALCULATION OF FILING FEE
TRANSACTION VALUATION(1) AMOUNT OF FILING FEE(2)
$10,845,988 $2,169.20
(1) Estimated solely for purposes of calculating the filing fee. Assumes
purchase of all 4,519,162 outstanding warrants at $2.40 per warrant.
(2) Calculated according to Rule 0-11(b)(1) under the Securities Exchange
Act of 1934, as amended, based upon the transaction valuation
multiplied by one fiftieth of one percent.
[X] Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
Amount Previously Paid: $2,033.62
Filing Party: THE MARQUEE GROUP, INC.
Form or Registration No.: SCHEDULE 13E-4
Date Filed: JULY 23, 1997
<PAGE>
This Amendment No. 2 to Schedule 13E-4 amends and supplements the Issuer
Tender Offer Statement on Schedule 13E-4 originally filed on July 23, 1997,
as amended by Amendment No. 1 to Schedule 13E-4 filed on August 21, 1997 (the
"Schedule 13E-4"). All capitalized terms not defined herein shall have the
meanings ascribed to them in the Statement.
ITEM 1. SECURITY AND ISSUER.
Item 1 of the Schedule 13E-4 is hereby supplemented and amended by adding the
following:
(c) The information set forth in "Amendment to Section 9" of the First
Supplement to Offer to Purchase attached hereto as Exhibit (a)(10)
(the "Supplement") is incorporated herein by reference.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
Item 2 of the Schedule 13E-4 is hereby supplemented and amended by adding the
following:
(a)-(b) The information set forth in "Amendment to Section 11" of the
Supplement is incorporated herein by reference.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
Item 3 of the Schedule 13E-4 is hereby supplemented and amended by adding the
following:
(a) The information set forth in "Amendment to Section 10" of the
Supplement is incorporated herein by reference.
(e) The information set forth in "Amendment to Section 11" of the
Supplement is incorporated herein by reference.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE ISSUER'S SECURITIES.
Item 5 of the Schedule 13E-4 is hereby supplemented and amended by adding the
following:
The information set forth in "Amendment to Section 11" of the Supplement
is incorporated herein by reference.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
Item 6 of Schedule 13E-4 is hereby supplemented and amended by adding the
following:
The information set forth in "Amendment to Section 14" of the Supplement
is incorporated herein by reference.
ITEM 7. FINANCIAL INFORMATION.
Item 7 of the Schedule 13E-4 is hereby supplemented and amended by adding the
following:
(a)-(b) The information set forth in "Amendment to Section 10" of the
Supplement and in the sections entitled "Unaudited Pro Forma
Condensed Combined Financial Statements" and "Index to Financial
Statements" contained in Exhibit (i) hereto is incorporated herein
by reference.
ITEM 8. ADDITIONAL INFORMATION.
Item 8 of the Schedule 13E-4 is hereby supplemented and amended by adding the
following:
(e) Reference is hereby made to the Supplement, a copy of which is
attached hereto as Exhibit (a)(10) and incorporated in its entirety
herein by reference.
2
<PAGE>
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a)(10) Form of First Supplement to Offer to Purchase dated August 26,
1997.
(a)(11) Letter to holders of Warrants dated August 26, 1997.
(a)(12) Form of press release dated August 26, 1997.
(b)(1) Bridge Financing Agreement, dated as of August 26, 1997, by and
among the Company, the Subsidiary Guarantors and The Huff
Alternative Income Fund, L.P.
(b)(2) Form of Bridge Financing Note between the Company and The Huff
Alternative Income Fund, L.P.
(b)(3) Form of Pledge and Security Agreement by and among the Company, the
Subsidiary Guarantors and The Huff Alternative Income Fund, L.P.
(b)(4) Option Agreement, dated August 26, 1997, between the Company and
The Huff Alternative Income Fund, L.P.
(b)(5) Registration Rights Agreement, dated August 26, 1997, between the
Company and The Huff Alternative Income Fund, L.P.
(i) Financial Information.
3
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and
correct.
August 26, 1997 THE MARQUEE GROUP, INC.,
a Delaware corporation
By: /s/ Jan E. Chason
--------------------------------
Jan E. Chason
Chief Financial Officer and
Treasurer
4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- -----------------------------------------------------------------------------------------
<S> <C>
(a)(10) Form of First Supplement to Offer to Purchase dated August 26, 1997.
(a)(11) Letter to holders of Warrants dated August 26, 1997.
(a)(12) Form of press release dated August 26, 1997.
(b)(1) Bridge Financing Agreement, dated as of August 26, 1997, by and among the Company, the
Subsidiary Guarantors and The Huff Alternative Income Fund, L.P.
(b)(2) Form of Bridge Financing Note between the Company and The Huff Alternative Income Fund, L.P.
(b)(3) Form of Pledge and Security Agreement by and among the Company, the Subsidiary Guarantors
and The Huff Alternative Income Fund, L.P.
(b)(4) Option Agreement, dated August 26, 1997, between the Company and The Huff Alternative
Income Fund, L.P.
(b)(5) Registration Rights Agreement, dated August 26, 1997, between the Company and The Huff
Alternative Income Fund, L.P.
(i) Financial Information.
</TABLE>
5
<PAGE>
THE MARQUEE GROUP, INC.
[MARQUEE GROUP, INC. LOGO]
FIRST SUPPLEMENT
TO
OFFER TO PURCHASE FOR CASH
ALL OUTSTANDING WARRANTS,
EACH EXERCISABLE AT $7.50 PER SHARE OF COMMON STOCK,
AT
$2.40 PER WARRANT
THE OFFER AND WITHDRAWAL RIGHTS HAVE BEEN EXTENDED TO EXPIRE AT
12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, SEPTEMBER 10, 1997, UNLESS
THE OFFER IS FURTHER EXTENDED.
The Marquee Group, Inc., a Delaware corporation (the "Company"), hereby
amends and supplements its Offer to Purchase dated July 23, 1997 (the "Offer
to Purchase"). The Company is offering to purchase all of its outstanding
redeemable warrants (the "Warrants"), at a price, net to the seller in cash,
of $2.40 per Warrant (the "Purchase Price"), upon the terms and subject to
the conditions set forth herein, in the Offer to Purchase (as amended hereby)
and in the related Letter of Transmittal (which together constitute the
"Offer"). Each Warrant entitles the holder thereof to purchase one share of
Common Stock, $.01 par value per share ("Common Stock"), of the Company at a
price of $7.50 per share, subject to adjustment, from the date of issuance
until December 4, 2001, unless redeemed earlier.
Capitalized terms used herein and not otherwise defined shall have the
respective meanings ascribed to such terms in the Offer to Purchase.
THE OFFER IS CONDITIONED UPON A MINIMUM OF 3,200,000 WARRANTS BEING
TENDERED AND NOT WITHDRAWN AND THE RECEIPT OF FUNDS UNDER THE BRIDGE FACILITY
(AS DEFINED IN SECTION 11). IN ADDITION, THE OFFER IS ALSO SUBJECT TO OTHER
CONDITIONS. SEE SECTION 8 AND SECTION 11.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR THE ADEQUACY
OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
The date of this First Supplement to Offer to Purchase is August 26, 1997.
<PAGE>
AMENDMENT TO SUMMARY
The "Summary" section of the Offer to Purchase is amended in its entirety
to read as follows:
This summary is provided solely for the convenience of the warrantholders and
is qualified in its entirety by reference to the full text and more specific
details contained in the Offer to Purchase, this First Supplement to Offer to
Purchase and the related Letter of Transmittal and any amendments hereto and
thereto.
The Company ................... The Marquee Group, Inc.
Warrants ...................... Each Warrant entitles the holder thereof to
purchase one share of Common Stock at a
price of $7.50 per share, subject to
adjustment, from the date of issuance until
December 4, 2001, unless redeemed earlier.
See Section 12.
Number of Warrants ............ 4,519,162 (all of the Warrants outstanding).
Purchase Price ................ $2.40 per Warrant, net to the seller in
cash, upon the terms and conditions set
forth herein and in the Letter of
Transmittal. See Section 8.
Expiration Date of Offer ...... September 10, 1997, at 12:00 midnight, New
York City time, unless further extended.
How to Tender Warrants ........ See Section 5. For further information, call
the Information Agent or consult your broker
for assistance.
Withdrawal Rights ............. Tendered Warrants may be withdrawn at any
time until the Expiration Date of the Offer,
and may also be withdrawn after September
18, 1997 unless previously accepted for
payment by the Company. See Section 4 and
Section 6.
Conditions to Offer ........... The Offer is conditioned upon a minimum
number of 3,200,000 Warrants tendered and
not withdrawn and the receipt of funds under
the Bridge Facility. In addition, the Offer
is also subject to other conditions. See
Section 8.
Purpose and Effects of Offer .. The Company is making the Offer to eliminate
the potential dilutive effect that would
occur if the Warrants were exercised by the
holders thereof on or before December 4,
2001, the expiration date of the Warrants.
The Offer also gives warrantholders the
opportunity to sell their Warrants at a
premium over the market price prevailing
prior to the announcement of the Offer and
without the usual transaction costs
associated with a market sale. See Section
1. The Company's purchase of Warrants
pursuant to the Offer will reduce the number
of warrantholders and the number of Warrants
outstanding, which may result in lack of
liquidity in the market for, and the
termination of the listing or quotation of,
any remaining Warrants.
2
<PAGE>
Market Price of Warrants ...... On August 25, 1997, the closing sales price
of the Warrants on the Nasdaq SmallCap
Market was $2.125 per Warrant. On July 22,
1997, the last day of trading before the
Company commenced the Offer, the closing
sales price of the Warrants on the Nasdaq
SmallCap Market was $1.88 per Warrant. See
Section 9. On August 25, 1997, the closing
sales price of the Company's Common Stock on
the Nasdaq SmallCap Market was $6.625 per
share. Warrantholders are urged to obtain a
current market quotation. See Section 1.
Brokerage Commissions ......... Not payable by warrantholders.
Stock Transfer Tax ............ None, except as provided in Instruction 3 of
the Letter of Transmittal and Section 7.
Payment Date .................. As soon as practicable after the Expiration
Date of the Offer.
Further Information ........... Any questions, requests for assistance or
requests for additional copies of the Offer
to Purchase, this First Supplement to Offer
to Purchase, the Letter of Transmittal or
other materials relating to the Offer may be
obtained by contacting the Information Agent
at the address and telephone number set
forth on the back cover of the Offer to
Purchase.
3
<PAGE>
AMENDMENT TO INTRODUCTION
The first three paragraphs of the Introduction in the Offer to Purchase
are amended in their entirety to read as follows:
The Marquee Group, Inc., a Delaware corporation (the "Company"), is
offering to purchase all of its outstanding redeemable warrants (the
"Warrants"), at a price, net to the seller in cash, of $2.40 per Warrant (the
"Purchase Price"), upon the terms and subject to the conditions set forth
herein, in the Offer to Purchase (as amended hereby) and in the related
Letter of Transmittal (which together constitute the "Offer"). Each Warrant
entitles the holder thereof to purchase one share of Common Stock, $.01 par
value per share ("Common Stock"), of the Company at a price of $7.50 per
share, subject to adjustment, from the date of issuance until December 4,
2001, unless redeemed earlier.
As of August 25, 1997, the Company had issued and outstanding 4,519,162
Warrants, which were held by 61 record holders and approximately 1,500
beneficial owners. The Warrants are quoted on the Nasdaq SmallCap Market
under the symbol "MRQEW" and listed on the Boston Stock Exchange under the
symbol "MRT.WS." On August 25, 1997, the closing sale price of the Warrants
on the Nasdaq SmallCap Market was $2.125 per Warrant. See Section 9.
WARRANTHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE
WARRANTS. As of August 25, 1997, approximately 3.7 million Warrants had been
tendered pursuant to the Offer and not withdrawn. However, holders of a
significant number of Warrants have informed the Company of their intent to
withdraw their previously tendered Warrants unless the Company increases the
Purchase Price. Accordingly, the Company has increased the Purchase Price to
$2.40 per Warrant.
THE OFFER IS CONDITIONED UPON A MINIMUM OF 3,200,000 WARRANTS BEING
TENDERED AND NOT WITHDRAWN AND THE RECEIPT OF FUNDS UNDER THE BRIDGE
FACILITY. IN ADDITION, THE OFFER IS ALSO SUBJECT TO OTHER CONDITIONS. SEE
SECTION 8 AND SECTION 11.
AMENDMENT TO SECTION 4
The first paragraph of Section 4 of the Offer to Purchase is amended in
its entirety to read as follows:
Upon the terms and subject to the conditions of the Offer, the Company
will accept for payment (and thereby purchase) all Warrants that are properly
tendered on or before the Expiration Date (and not withdrawn in accordance
with Section 6) at the Purchase Price. The term "Expiration Date" means 12:00
midnight, New York City time, on September 10, 1997, unless and until the
Company shall have further extended the period of time during which the Offer
is open, in which event the term "Expiration Date" shall refer to the latest
time and date at which the Offer, as so extended by the Company, shall
expire. See also Section 8 regarding certain conditions of the Offer.
AMENDMENT TO SECTION 8
Paragraph (b) of Section 8 of the Offer to Purchase is amended in its
entirety to read as follows:
(b) the Company shall not have received funds sufficient to consummate the
Offer pursuant to the Bridge Facility (see Section 11);
AMENDMENT TO SECTION 9
Section 9 of the Offer to Purchase is amended in its entirety to read as
follows:
The Warrants are traded on the Nasdaq SmallCap Market under the trading
symbol "MRQEW" and on the Boston Stock Exchange under the trading symbol
"MRT.WS." The following table sets forth, for each period shown, the high and
low bid information for the Warrants as reported by the Nasdaq SmallCap
Market. Bid quotations reflect inter-dealer prices, without retail markup,
markdown or commissions, and may not represent actual transactions. The
Warrants were first traded on the Nasdaq SmallCap Market in December 1996,
and on the Boston Stock Exchange in March 1997. The Company has applied to
the American Stock Exchange to list the Common Stock under the symbol "MRQ"
and
4
<PAGE>
expects to have the Common Stock listed thereon prior to the consummation of
the Offer. There can be no assurance that the Warrants will continue to be
traded on the Nasdaq SmallCap Market or the Boston Stock Exchange, will
qualify for listing on the American Stock Exchange or will trade elsewhere
upon the consummation of the Offer. See Section 1.
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ---- ---
<S> <C> <C>
Fourth Quarter (since December 13, 1996) $ 2.00 $ 2.00
1997
----
First Quarter ............................ $ 2.00 $ 2.00
Second Quarter ........................... 2.00 1.25
Third Quarter (through August 25, 1997) . 2.125 1.875
</TABLE>
On August 25, 1997, the closing sales price of the Warrants as reported by
the Nasdaq SmallCap Market was $2.125 per Warrant. On July 22, 1997, the last
day of trading before the Company commenced the Offer, the closing sales
price of the Warrants on the Nasdaq SmallCap Market was $1.88 per Warrant.
WARRANTHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE
WARRANTS. As of August 25, 1997, the Company had issued and outstanding
4,519,162 Warrants held by approximately 61 record holders and approximately
1,500 beneficial owners. As of August 25, 1997, approximately 3.7 million
Warrants had been tendered pursuant to the Offer and not withdrawn. However,
holders of a significant number of Warrants have informed the Company of
their intent to withdraw their previously tendered Warrants unless the
Company increases the Purchase Price. Accordingly, the Company has increased
the Purchase Price to $2.40 per Warrant.
AMENDMENT TO SECTION 10
The fourth paragraph under the heading "General" of Section 10 of the
Offer to Purchase is amended in its entirety to read as follows:
The Company has recently entered into an agreement with ProServ, Inc. and
ProServ Television, Inc. (collectively, "ProServ") and Donald L. Dell (the
"Dell Stock Purchase Agreement") and agreements with each of two other
stockholders of ProServ (collectively, the "ProServ Acquisition Agreements")
pursuant to which the Company will acquire approximately 94% of ProServ and
is currently negotiating to acquire the remaining shares of ProServ (the
"ProServ Acquisition"). If the Company is unable to acquire the remaining
shares of ProServ on satisfactory terms, the Company intends to obtain full
ownership of ProServ through a statutory merger. ProServ is an established
provider of international sports event management, television production,
marketing, talent representation and consulting services. In August, the Dell
Stock Purchase Agreement was amended to provide for the release to the
Company of $1.5 million previously placed in escrow pursuant to the Dell
Stock Purchase Agreement in exchange for the issuance of a $1.5 million
irrevocable letter of credit to Mr. Dell and the payment to Mr. Dell of an
additional 25,000 shares of Common Stock upon consummation of the ProServ
Acquisition. The aggregate purchase price pursuant to the ProServ Acquisition
Agreements, as amended, consists of approximately $10.1 million in cash and
250,000 shares of Common Stock. Upon consummation of the ProServ Acquisition,
Mr. Dell will continue to serve as chief executive officer of ProServ and
will become a director of the Company.
The information under the heading "Summary Consolidated Financial Data" of
Section 10 of the Offer to Purchase is amended in its entirety to read as
follows:
Summary Consolidated Financial Data. The Summary Consolidated Financial
Data of the Company as of June 30, 1997 and for the six months ended June 30,
1997 and 1996 have been derived from the unaudited financial statements and
notes thereto of the Company. The pro forma summary data as of June 30, 1997,
for the six months ended June 30, 1997 and for the year ended December 31,
1996 are derived from the unaudited pro forma condensed combined financial
statements which, in the opinion of the Company, reflect all adjustments
necessary for a fair presentation of the transactions for which such pro
forma financial information is given. Operating results for interim periods
are not necessarily indicative of the results that may be achieved for the
entire fiscal year. The Company had no operations
5
<PAGE>
during the period from July 11, 1995 (inception) through December 31, 1995.
The following data should be read in conjunction with the notes thereto and
the audited and unaudited financial statements and notes thereto.
The Company's unaudited financial statements and unaudited pro forma
condensed combined financial statements, along with audited financial
statements of the Company, ProServ and QBQ, are contained in Exhibit (i) to
the Company's Amendment No. 2 to Transaction Statement on Schedule 13E-3
filed with the Commission on August 26, 1997. More comprehensive financial
information is included in such exhibit and in other documents filed by the
Company with the Commission. The summary consolidated financial information
that follows is qualified in its entirety by reference to such exhibit,
including the financial statements and related notes contained therein. Such
exhibit may be examined and copies may be obtained from the offices of the
Commission as described in "--Additional Information."
CONSOLIDATED SUMMARY FINANCIAL DATA
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
YEAR ENDED DECEMBER 31, 1996 JUNE 30,
----------------------------------------------- ---------
PRO FORMA
FOR THE OFFER,
BRIDGE FACILITY,
STOCK OFFERING
PRO FORMA FOR AND RECENT AS
THE RECENT AND PENDING REPORTED
ACQUISITIONS(1) ACQUISITIONS(2)(3) 1996
AS REPORTED (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ------------- ---------------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................ $ 2,869 $ 15,185 $ 29,932 $ 801
Operating expenses .................. 2,564 9,486 19,377 667
General and administrative expenses 2,199 5,843 10,405 708
Restructuring costs ................. -- -- 565 --
Depreciation and amortization ...... 61 108 1,446 --
Operating loss ...................... (1,955) (252) (1,861) (574)
Net loss ............................ (2,411) (914) (2,519) (574)
Net loss applicable to common
stockholders ....................... $ (2,411) $ (914) $ (2,698) $ (574)
=========== ============ ============== ==========
Net loss per share applicable to
common stockholders................. $ (1.03) $ (0.12) $ (0.17) $ (0.28)
=========== ============ ============== ==========
Weighted average number of shares of
common stock outstanding(5) ........ 2,346,717 7,494,162 15,577,495 2,066,662
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
PRO FORMA
FOR THE OFFER,
BRIDGE FACILITY,
STOCK OFFERING
AS AND PENDING
REPORTED ACQUISITIONS(3)(4)
1997 1997
(UNAUDITED) (UNAUDITED)
--------- ----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................ 6,174 $ 13,625
Operating expenses .................. 2,901 7,510
General and administrative expenses 4,048 5,759
Restructuring costs ................. -- --
Depreciation and amortization ...... 104 772
Operating loss ...................... (879) (416)
Net loss ............................ (881) (374)
Net loss applicable to common
stockholders ....................... $ (881) $ (476)
========= ================
Net loss per share applicable to
common stockholders................. $ (0.12) $ (0.03)
========= ================
Weighted average number of shares of
common stock outstanding(5) ........ 7,494,162 15,577,495
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT JUNE 30, 1997
-------------------- -------------------------------
PRO FORMA FOR THE
OFFER, BRIDGE
FACILITY, STOCK
OFFERING AND
PENDING
AS REPORTED ACQUISITIONS(6)(7)
AS REPORTED (UNAUDITED) (UNAUDITED)
-------------------- ------------- -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash ............................................. $7,231 $ 688 $15,819
Current assets ................................... 9,085 4,117 23,866
Total assets ..................................... 9,361 8,704 50,274
Current liabilities .............................. 1,850 2,700 8,308
Long-term debt ................................... 1,759 1,138 2,204
Common Stock subject to put options in connection
with Pending Acquisitions(8) .................... -- -- 3,375
Total indebtedness ............................... 3,952 4,259 15,092
Stockholders' equity ............................. 5,409 4,445 35,182
Book value per common share ...................... 0.72 0.59 2.26
</TABLE>
(Footnotes on next page)
6
<PAGE>
- ------------
The pro forma information assumes the consummation of the Stock Offering, for
which there can be no assurance, and the repayment of the Bridge Facility.
The terms of the Bridge Facility provide for interest at the rate of 11.25%
per annum for the first 90 days with increases of 50 basis points for each 90
days thereafter. If the rate should exceed 14%, the Company, at its option,
may defer the excess of the interest rate over 14%; however, in such
instances the rate will increase by 75 basis points each 90 day period.
Therefore, in the event that the Company is unable to consummate the Stock
Offering, it will be required to raise additional capital, which may occur
through a new credit arrangement, the sale of securities or the disposition
of assets in order to repay the Bridge Facility and to consummate the Pending
Acquisitions. There can be no assurance that the Company will be able to
raise such additional capital on terms acceptable to the Company. In the
event the Company does not consummate the Pending Acquisitions, it would
forfeit an aggregate of $1.9 million in deposits related thereto and would be
subject to liquidated damages provisions of an additional $600,000.
(1) Gives effect to the IPO and acquisition of SMTI and A&A (the "Recent
Acquisitions"). The Company acquired SMTI and A&A on December 12, 1996
and included the results of their operations only from the acquisition
date in its consolidated results of operations for the year ended
December 31, 1996. Therefore, for pro forma purposes, the results of
operations of SMTI and A&A for the period prior to the acquisition date
are combined with the Company.
(2) Gives effect to (i) the IPO and Recent Acquisitions, (ii) the
completion of the Stock Offering at an assumed public offering price of
$6.00 per share and (iii) the Pending Acquisitions as if they had
occurred on January 1, 1996.
(3) Excludes charges related to the Bridge Facility, including interest,
fees and expenses aggregating $956,000. Assumes that the Bridge
Facility is repaid within 45 days.
(4) Gives effect to (i) the completion of the Stock Offering at an assumed
public offering price of $6.00 per share and (ii) the Pending
Acquisitions as if they had occurred on January 1, 1996.
(5) Gives effect to the IPO as if it occurred as of January 1, 1996 and
excludes 1,275,000 shares held in escrow in connection with the IPO.
The Pro Forma for the Offer, Bridge Facility, Stock Offering and Recent
and Pending Acquisitions excludes approximately 83,333 shares held in
escrow in connection with the QBQ Acquisition. Assumes a stock price of
$6.00 per share for purposes of determining the number of shares to be
issued in the QBQ Acquisition. See Note 6 to the Company's Financial
Statements contained in Exhibit (i) to the Company's Amendment No. 2 to
Transaction Statement on Schedule 13E-3 filed with the Commission on
August 26, 1997.
(6) Gives effect to (i) the completion of the Offer, assuming all Warrants
other than those held by directors and executive officers of the
Company are tendered at a price of $2.40 per Warrant, (ii) borrowing
under the Bridge Facility, (iii) the completion of the Stock Offering
at an assumed public offering price of $6.00 per share and (iv) the
application of the net proceeds from the Stock Offering to complete the
Pending Acquisitions and repay the Bridge Facility.
(7) Adjusted to give effect to the application of proceeds of the Stock
Offering to repay the Bridge Facility, including fees, expenses and
interest.
(8) Represents the Company's potential obligation to repurchase 562,499
shares to be issued in the Pending Acquisitions, of which 62,499 shares
are to be deposited into escrow in connection with the QBQ Acquisition.
These shares are not included in stockholders' equity. Assumes a price
of $6.00 per share for purposes of determining the number of shares to
be issued in the QBQ Acquisition.
The information under the heading "Capitalization" of Section 10 of the
Offer to Purchase is amended in its entirety to read as follows:
Capitalization. The following table sets forth (a) the actual
capitalization of the Company at June 30, 1997, (b) the pro forma
capitalization of the Company at June 30, 1997, giving effect to the
consummation of the Offer (assuming the tender of all Warrants not held by
directors and executive officers) using funds available pursuant to the
Bridge Facility, and (c) the pro forma capitalization of the Company at June
30, 1997, giving effect to the consummation of the Offer using funds
available pursuant to the Bridge Facility and the application of the
approximate net proceeds from the Stock Offering of $41.3 million (assuming a
public offering price of $6.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company) to complete the Pending Acquisitions and to repay the Bridge
Facility. The following table should be read in conjunction with the summary
financial information set forth above and the detailed information and
financial statements included in Exhibit (i) to the Company's Amendment No. 2
to Transaction Statement on Schedule 13E-3 filed with the Commission on
August 26, 1997 and is qualified in its entirety by reference thereto. Such
exhibit may be examined and copies may be obtained from the offices of the
Commission as described in "--Additional Information."
7
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------
(IN THOUSANDS)
PRO FORMA FOR THE
OFFER, BRIDGE FACILITY,
STOCK OFFERING AND
PENDING
ACTUAL ACQUISITIONS(1)
--------- -----------------------
<S> <C> <C>
Cash and cash equivalents ................................... $ 688 $15,819
========= =======
Acquisition indebtedness, net(2) ............................ 1,138 2,204
Common Stock subject to put options in connection with
Pending Acquisitions(3)..................................... -- 3,375
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding .............. -- --
Common Stock, $.01 par value, 25,000,000 shares authorized;
8,769,162 shares issued and outstanding; 16,935,828 pro
forma shares issued and outstanding for Stock Offering and
Pending Acquisitions(4) ................................... 88 164(5)
Additional paid-in capital .................................. 7,664 39,281(5)
Deferred compensation(6) .................................... (16) (16)
Accumulated deficit ......................................... (3,291) (4,247)
-------- --------
Total stockholders' equity .................................. 4,445 35,182
-------- --------
Total capitalization ...................................... $ 5,583 $40,761
========= ========
</TABLE>
- ------------
The pro forma information assumes the consummation of the Stock Offering, for
which there can be no assurance, and the repayment of the Bridge Facility.
The terms of the Bridge Facility provide for interest at the rate of 11.25%
per annum for the first 90 days with increases of 50 basis points for each 90
days thereafter. If the rate should exceed 14%, the Company, at its option,
may defer the excess of the interest rate over 14%; however, in such
instances the rate will increase by 75 basis points each 90 day period. See
Section 11. Therefore, in the event that the Company is unable to consummate
the Stock Offering, it will be required to raise additional capital, which
may occur through a new credit arrangement, the sale of securities or the
disposition of assets in order to repay the Bridge Facility and to consummate
the Pending Acquisitions. There can be no assurance that the Company will be
able to raise such additional capital on terms acceptable to the Company. In
the event the Company does not consummate the Pending Acquisitions, it would
forfeit an aggregate of $1.9 million in deposits related thereto and would be
subject to liquidated damages provisions of an additional $600,000.
(1) Gives effect to the application of proceeds of the Stock Offering,
including the repayment of the Bridge Facility and fees, expenses and
interest aggregating $956,000. Assumes that the Bridge Facility is
repaid within 45 days.
(2) Represents installment payments payable to certain officers and
directors of the Company in connection with the Recent Acquisitions,
net of imputed interest ($480) and the current installment payment
($333) and installment payments payable to the sole stockholder of QBQ
in connection with the QBQ Acquisition, net of imputed interest ($388)
and the current installment payment ($161). See Note 1 of the Notes to
the Company's Financial Statements, which are contained in Exhibit (i)
to the Company's Amendment No. 2 to Transaction Statement on Schedule
13E-3 filed with the Commission on August 26, 1997. Assumes that the
controlling stockholder of ProServ does not elect to receive a $3.0
million promissory note in lieu of cash.
(3) Represents the Company's potential obligation to repurchase 562,499
shares to be issued in the Pending Acquisitions, of which 62,499 shares
are to be deposited into escrow in connection with the QBQ Acquisition.
These shares are not included in stockholders' equity. Assumes a price
of $6.00 per share for purposes of determining the number of shares to
be issued in the QBQ Acquisition.
(4) Excludes up to (i) 4,519,162 shares issuable upon the exercise of the
Warrants outstanding prior to the consummation of the Offer, (ii)
670,000 shares issuable upon exercise of the IPO underwriters' options,
including shares issuable upon exercise of the Warrants contained
therein, (iii) 800,000 shares reserved for issuance under the Company's
1996 Stock Option Plan and 1997 Stock Option Plan, under which options
to purchase 237,500 shares are outstanding, (iv) 100,000 shares
issuable pursuant to an option granted to the lender under the Bridge
Facility, (v) 200,000 shares issuable pursuant to an option to be
granted to TSC in connection with the Offer and (vi) 1,125,000 shares
issuable upon exercise of the over-allotment option of the underwriters
in the Stock Offering.
(5) Excludes amounts applicable to Common Stock subject to put options in
connection with the Pending Acquisitions.
(6) Represents deferred compensation related to 50,000 shares issued to an
officer in partial consideration of such officer entering into an
employment agreement with the Company.
8
<PAGE>
AMENDMENT TO SECTION 11
Section 11 of the Offer to Purchase is amended in its entirety to read as
follows:
If the Company purchases 4,265,664 outstanding Warrants in the Offer
(assuming all Warrants not held by the Company's directors and executive
officers are tendered and not withdrawn), then the total amount required to
purchase these Warrants at $2.40 per Warrant and to pay related fees and
expenses in cash will be approximately $10.6 million. See Section 14.
On August 26, 1997, the Company entered into a loan agreement (the "Bridge
Facility") with The Huff Alternative Income Fund, L.P. ("Huff"). Pursuant to
the Bridge Facility, Huff agreed to loan up to $11.5 million to the Company
in order to allow the Company to purchase Warrants in the Offer and to pay
related fees and expenses. The Company anticipates that it will use
borrowings under the Bridge Facility to buy Warrants in the Offer and to pay
related fees and expenses. The Company anticipates repaying its borrowings
under the Bridge Facility with a portion of the net proceeds of the Stock
Offering, if successful. The Stock Offering is conditioned upon, among other
things, the consummation of the ProServ Acquisition. In the event the Company
is unable to consummate the Stock Offering, it would be required to raise
additional capital through a new credit arrangement, the sale of securities
or the disposition of assets to repay the Bridge Facility and to consummate
the ProServ Acquisition. There can be no assurance that the Company would be
able to raise such additional capital on terms acceptable to the Company. In
the event the money borrowed under the Bridge Facility is not timely repaid,
the interest payments due (as described below) will be significant and will
increase over time. In the event the Company does not consummate the Pending
Acquisitions, it would forfeit an aggregate of $1.9 million in deposits
related thereto and would be subject to liquidated damages provisions of an
additional $600,000.
Borrowings under the Bridge Facility bear interest at an annual rate of
11.25% for the first 90 days after the date of the borrowing. This rate will
increase by 0.50% every 90 days. If the rate exceeds 14.0%, the Company may
choose to defer any interest over 14.0%. If the Company defers any interest,
the rate will increase every 90 days by 0.75% rather than 0.50%. In addition,
during the pendency of any Event of Default (as defined in the Bridge
Facility), the applicable interest rate will be increased by 3.0% until such
Event of Default is cured or waived. Borrowings under the Bridge Facility
will become due on the earlier of (a) the consummation of the Stock Offering
or (b) the date 90 days after the borrowings were made. The Company's
obligation to repay its borrowings and interest is secured by all of the
capital stock of the Company's subsidiaries and by the Company's and its
subsidiaries' accounts receivable.
Simultaneously with entering into the Bridge Facility, the Company paid
Huff a commitment fee of $112,500. Upon the receipt of funds under the Bridge
Facility, the Company will issue to Huff an immediately exercisable option to
acquire 100,000 to 115,000 shares of Common Stock (depending on the amount of
funds borrowed) at an exercise price per share of $2.25 (the "Huff Option").
The Huff Option will have a term of 10 years. The Company must also pay
Huff's reasonable legal and other expenses relating to the Bridge Facility.
In addition, the Company must pay Huff a fee equal to 3.0% of the amount
borrowed under the Bridge Facility less $112,500. If the Company does not
borrow funds under the Bridge Facility by December 31, 1997, unless extended
by the parties the Company must pay Huff a termination fee of $112,500.
The obligation of Huff to lend funds to the Company pursuant to the Bridge
Facility is subject to certain conditions, including (i) no material adverse
change shall have occurred to the Company since December 31, 1996 and (ii) no
event or condition shall have occurred which materially and adversely affects
the likelihood that the Stock Offering will be consummated.
The Bridge Facility prohibits the Company and its subsidiaries from
borrowing funds from other sources, except that the Company may borrow up to
$750,000 on terms that are reasonably acceptable to Huff, if the loans are
subordinated to the Bridge Facility and convert into the Company's preferred
stock upon any bankruptcy filing of the Company. The Company's obligations
under the Bridge Facility are secured by the stock of (and are guaranteed by)
the Company's subsidiaries and by the Company's accounts receivable. The
Bridge Facility also contains other usual and customary covenants,
conditions,
9
<PAGE>
representations and warranties. Copies of the documents related to the Bridge
Facility have been filed as Exhibits (a)(1) to (a)(5) to the Company's
Amendment No. 2 to Transaction Statement on Schedule 13E-3 filed with the
Commission on August 26, 1997 and the foregoing description of the Bridge
Facility is qualified in its entirety by reference thereto.
AMENDMENT TO SECTION 14
Section 14 of the Offer to Purchase is amended and supplemented to add the
following:
The Company has retained Royce Investment Group, Inc. ("Royce"), an
investment banking firm that is the primary market maker in the Company's
securities and was a co-manager of the IPO, to advise the Company as to
certain terms of the Offer. Royce has not been retained to render, and has
not rendered, an opinion as to the fairness of the Offer and will not solicit
the tender of Warrants on the Company's behalf. In connection with such
services, Royce will receive a fee of $170,000.
AUGUST 26, 1997 THE MARQUEE GROUP, INC.
10
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Facsimile copies of the Letter of Transmittal, properly completed and duly
executed, will be accepted. The Letter of Transmittal, Warrants and any other
required documents should be sent or delivered by each warrantholder of the
Company or such holder's broker, dealer, commercial bank or trust company to
the Depositary at one of its addresses set forth below.
The Depositary for the Offer is:
Continental Stock Transfer & Trust Company
<TABLE>
<CAPTION>
<S> <C> <C>
By Mail, Hand or
By Facsimile Transmission: Overnight Delivery: For Information:
(212) 509-5150 Continental Stock Transfer & Trust Company (212) 509-4000 x535
Attn: Reorganization Department 2 Broadway, 19th Floor
New York, New York 10004
</TABLE>
Any questions or requests for assistance or for additional copies of the
Offer to Purchase, the First Supplement to Offer to Purchase or the Letter of
Transmittal may be directed to the Information Agent. Warrantholders may also
contact their broker, dealer, commercial bank, trust company or other nominee
for assistance concerning the Offer.
The Information Agent for the Offer is:
[GEORGESON & COMPANY LOGO]
Wall Street Plaza
New York, New York 10005
(212) 440-9800 (banks and brokers may call collect)
or
(800) 223-2064
<PAGE>
[THE MARQUEE GROUP, INC. LOGO]
THE MARQUEE GROUP, INC.
888 SEVENTH AVENUE
NEW YORK, NEW YORK 10019
AUGUST 26, 1997
Re: The Warrants of the Marquee Group, Inc.
Dear Warrantholder:
On July 23, 1997, The Marquee Group, Inc. (the "Company") commenced an
offer to purchase all of its outstanding redeemable warrants (the "Warrants")
upon the terms and subject to the conditions set forth in the Offer to
Purchase, dated July 23, 1997 (the "Offer to Purchase") and related Letter of
Transmittal (which together constitute the "Offer"). The Offer is
conditioned, among other things, upon a minimum of 3,200,000 Warrants being
tendered and not withdrawn. The Offer to Purchase and related Letter of
Transmittal were mailed on July 23, 1997 to all record holders of Warrants.
The Company is increasing the purchase price, net to the seller in cash,
from $2.25 to $2.40 per Warrant and is extending the Offer until 12:00
midnight, New York City time, on Wednesday, September 10, 1997. Enclosed is a
First Supplement to the Offer to Purchase (the "Supplement") reflecting these
changes. In addition, the Supplement contains certain additional information
regarding the Company, including updated financial information and details on
the bridge financing required to fund the Offer.
The Offer is explained in detail in the Offer to Purchase and Letter of
Transmittal which were previously delivered to you. Except as described in
the Supplement, all of the terms and conditions of the Offer remain
unchanged.
IF YOU HAVE ALREADY TENDERED YOUR WARRANTS, YOU DO NOT NEED TO TAKE ANY
ADDITIONAL ACTION AT THIS TIME. IF YOU HAVE NOT TENDERED WARRANTS AND WISH TO
DO SO, DETAILED INSTRUCTIONS ON HOW TO TENDER WARRANTS ARE INCLUDED IN THE
PREVIOUSLY DELIVERED MATERIALS.
We encourage you to read carefully the Offer to Purchase, the enclosed
Supplement, the Letter of Transmittal and the other materials before making
any decisions with respect to the Offer. Additional copies of the Offer to
Purchase, the Supplement, the Letter of Transmittal and all other materials
related to the Offer can be obtained from our information agent, Georgeson &
Company Inc., at 1-800-223-2064. Their representatives will be pleased to
answer your questions.
Very truly yours,
THE MARQUEE GROUP, INC.
By: /s/ Robert M. Gutkowski
------------------------------
Robert M. Gutkowski
President and Chief Executive
Officer
<PAGE>
FOR IMMEDIATE RELEASE
FROM: CONTACT:
The Marquee Group, Inc. Timothy J. Klahs
888 Seventh Avenue, 37th Floor Director, Corporate Communications
New York, New York 10019 The Sillerman Companies
150 East 58th Street, 19th Floor
New York, New York 10155
(212) 407-9126
THE MARQUEE GROUP, INC. ANNOUNCES
EXTENSION OF ITS OFFER TO PURCHASE
NEW YORK, August 26, 1997 -- The Marquee Group, Inc. (NASDAQ SmallCap: MRQE)
today announced that it is amending its recent tender offer to purchase all
of its outstanding warrants. This amendment increases the cash purchase price
from $2.25 per warrant to $2.40 per warrant and extends the offer to 12:00
midnight, New York City time, Wednesday, September 10, 1997, unless further
extended. Marquee's tender offer was previously scheduled to expire at 5:00
p.m., September 4, 1997. All other material terms and conditions of Marquee's
offer remain unchanged.
According to Continental Stock Transfer & Trust Company, the Depositary
for Marquee's tender offer, as of 5:00 p.m., Monday, August 25, 1997,
approximately 3.7 million warrants were tendered in the Offer.
Additional information may be obtained from Marquee's information agent,
Georgeson & Company Inc. at 1-800-223-2064.
<PAGE>
BRIDGE FINANCING AGREEMENT
Dated as of August 26, 1997
by and among
THE MARQUEE GROUP, INC.,
THE SUBSIDIARY GUARANTORS
and
THE HUFF ALTERNATIVE INCOME FUND, L.P.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
ARTICLE I
DEFINITIONS..............................................................................................1
1.1 Definitions...................................................................................1
1.2 Accounting Terms..............................................................................6
1.3 Section References............................................................................6
ARTICLE II
AMOUNT AND TERMS OF THE LOAN; FEES; OPTION AGREEMENT.....................................................6
2.1 The Loan......................................................................................6
2.2 Fees..........................................................................................6
2.3 Bridge Financing Note; Interest and Maturity; Payment of Interest in Kind.....................7
2.4 Payments and Computations.....................................................................7
2.5 Payment on Non-Business Days..................................................................7
2.6 Use of Proceeds...............................................................................7
ARTICLE III
CLOSING; CONDITIONS TO CLOSING...........................................................................8
3.1 Closing.......................................................................................8
3.2 Conditions Precedent to Loan..................................................................8
(a) Documents Delivered...................................................................8
(b) Representations and Warranties True...................................................9
(c) No Default...........................................................................10
(d) Performance..........................................................................10
(e) No Material Adverse Change...........................................................10
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
SUBSIDIARY GUARANTORS...................................................................................10
Representations and Warranties of the Company and the Subsidiary Guarantors.............................10
4.1 Organization, Good Standing and Qualification................................................10
4.2 Capitalization...............................................................................11
4.3 Subsidiaries.................................................................................11
4.4 Authorization................................................................................11
4.5 Valid Issuance of Securities.................................................................12
4.6 Governmental Consents........................................................................12
4.7 Litigation...................................................................................12
4.8 Compliance with Other Instruments............................................................13
4.9 Disclosure...................................................................................13
4.10 SEC Documents................................................................................13
4.11 No Material Adverse Changes..................................................................14
4.12 Prior Registration Rights....................................................................14
i
<PAGE>
4.13 Financial Statements.........................................................................14
4.14 Compliance with Laws.........................................................................14
4.15 Insurance....................................................................................15
4.16 Transactions with Affiliates.................................................................15
4.17 Solvency.....................................................................................15
4.18 No Defaults..................................................................................15
4.19 Margin Regulations...........................................................................15
4.20 Contemplated Public Offering.................................................................15
4.21 Compliance with ERISA........................................................................15
4.22 Taxes........................................................................................16
4.23 Not an Investment Company....................................................................16
4.24 Leases.......................................................................................16
4.25 Environmental Matters........................................................................16
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE FUND..............................................................16
5.1 Authorization................................................................................16
5.2 Investment Intent............................................................................17
ARTICLE VI
COVENANTS...............................................................................................17
6.1 Affirmative Covenants........................................................................17
(a) Corporate Existence..................................................................17
(b) Maintenance of Property; Insurance...................................................17
(c) Compliance with Law..................................................................17
(d) Further Assurances...................................................................17
(e) Keeping of Books.....................................................................18
(f) Payment of Taxes, etc................................................................18
(g) Access to Records; Financial Statements..............................................18
(h) Notice of Certain Events.............................................................18
(i) Future Direct and Indirect Subsidiaries of the Company...............................19
(j) Consummation of the Acquisition and the Contemplated Public Offering
....................................................................................19
6.2 Negative Covenants...........................................................................19
(a) Operate Other Than in Ordinary Course................................................19
(b) Additional Indebtedness..............................................................19
(c) Investments, Loans and Advances......................................................19
(d) Dividends, Prepayments, etc..........................................................20
(e) Issuance of Capital Stock............................................................20
(f) Merger, Consolidation, Sale or Purchase of Assets....................................20
(g) Limitation on Payment Restrictions Affecting Subsidiaries............................20
(h) Liens................................................................................20
(i) Transactions with Affiliates and Officers............................................20
ii
<PAGE>
ARTICLE VII
EVENTS OF DEFAULT.......................................................................................21
7.1 Events of Default............................................................................21
ARTICLE VIII
MISCELLANEOUS...........................................................................................22
8.1 Amendments, etc..............................................................................22
8.2 No Waiver; Remedies..........................................................................23
8.3 Indemnification..............................................................................23
8.4 Termination..................................................................................23
8.5 Survival of Warranties.......................................................................24
8.6 Successors and Assigns.......................................................................24
8.7 Governing Law................................................................................24
8.8 Counterparts.................................................................................25
8.9 Titles and Subtitles.........................................................................25
8.10 Notices......................................................................................25
8.11 [Intentionally omitted.].....................................................................26
8.12 Expenses.....................................................................................26
8.13 Severability................................................................................26
8.14 Entire Agreement.............................................................................26
8.15 Submission to Jurisdiction...................................................................26
8.16 Waiver of Jury Trial.........................................................................26
Exhibits
Exhibit A: Bridge Financing Note
Exhibit B-1: Option Agreement
Exhibit B-2: Additional Option Agreement
Exhibit C: Guarantee, Pledge and Security Agreement
Exhibit D: Registration Rights Agreement
Exhibit E: Opinion of Baker & McKenzie
Exhibit F: Disclosure Schedule
</TABLE>
iii
<PAGE>
BRIDGE FINANCING AGREEMENT, dated as of August 26, 1997, by
and among THE MARQUEE GROUP, INC., a Delaware corporation (the "Company"),
each of the Subsidiaries of the Company identified under the caption
"SUBSIDIARY GUARANTORS" on the signature pages hereof (individually a
"Subsidiary Guarantor" and, collectively, the "Subsidiary Guarantors"), and
THE HUFF ALTERNATIVE INCOME FUND, L.P., a Delaware limited partnership (the
"Fund").
WITNESSETH:
WHEREAS, the Company desires to make the Tender Offer (as
hereinafter defined) for up to all of its outstanding Warrants (the
"Warrants") to purchase shares of the Company's Common Stock, par value $.01
per share (the "Common Stock");
WHEREAS, for the purpose of financing the Tender Offer on a
short term basis, the Company desires to borrow from the Fund, and the Fund
has agreed to provide financing to the Company, on the terms and subject to
the conditions set forth herein and in the Bridge Financing Note (as
hereinafter defined);
WHEREAS, the obligations of the Company under the Bridge
Financing Note and the other Loan Documents (as hereinafter defined) are to be
secured pursuant to the Guarantee, Pledge and Security Agreement (as
hereinafter defined);
WHEREAS, simultaneously herewith, in consideration of the
Fund's agreement to provide financing on the terms set forth herein, the
Company is paying to the Fund the Commitment Fee (as hereinafter defined) and
issuing the Options (as hereinafter defined) to the Fund pursuant to the
Option Agreement (as hereinafter defined) and the Company and the Fund are
entering into the Option Agreement and the Registration Rights Agreement (as
hereinafter defined);
WHEREAS, if the initial principal amount of the Loan exceeds
$10,000,000, the Company has agreed to issue, an additional option pursuant to
the Additional Option Agreement (as hereinafter defined);
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following
terms shall have the following meanings, whether or not such terms are also
defined elsewhere in this Agreement:
Acquisition: the purchase of the Warrants pursuant
to the Tender Offer.
<PAGE>
Additional Option: an option to purchase, on the
terms set forth in the Additional Option Agreement, up to a number of shares
of Common Stock equal to 1% of the excess of (a) the amount of the Loan over
(b) $10,000,000.
Additional Option Agreement: the Additional Option
Agreement, dated as of the Closing Date, from the Company to the Fund, in the
form of Exhibit B-2 hereto, to be entered into if the initial principal amount
of the Loan exceeds $10,000,000.
Additional SEC Documents: all documents filed by
the Company with the SEC after the date of this Agreement, including any
amendments to the 1997 SB-2 or the Schedule 13e-4.
Affiliate: with respect to any Person, any other
Person controlling, controlled by, or under common control with, such Person.
"Affiliate" with respect to the Company shall specifically include, without
limitation, Sillerman Communications Management Corporation, Robert F.X.
Sillerman ("Sillerman") and any Person more than 5% owned by Sillerman
directly or indirectly.
Bridge Financing Note: the Note of the Company,
substantially in the form of Exhibit A hereto, to be issued to evidence the
Loan.
Business Day: any day other than a Saturday, Sunday
or any other day on which commercial banks are required by law or authorized
to close in New York City.
Closing: has the meaning provided in Section 3.1.
Closing Date: has the meaning provided in Section
3.1.
Code: the Internal Revenue Code of 1986, as in
effect from time to time, and any successor thereto.
Commitment Fee: has the meaning provided in Section
2.2(a).
Common Stock: the common stock, par value $.01 per
share, of the Company.
Companies: the Company and each of its
Subsidiaries.
Company: The Marquee Group, Inc., a Delaware
corporation, and its successors and assigns.
Contemplated Public Offering: the proposed offering
of shares of Common Stock contemplated by the 1997 SB-2, the proceeds of which
will be used in part to repay the Loan, if not theretofore repaid.
2
<PAGE>
Default: any event or condition that, with notice
or lapse of time or both, would become an Event of Default.
Disclosure Schedule: has the meaning provided in
Article IV.
Environmental Laws: any federal, state, local or
foreign laws (including common law), statutes, codes, ordinances, rules,
regulations or other requirements relating to the environment, natural
resources, or public or employee health and safety and includes but is not
limited to, the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. ss.9601 et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. ss.1801 et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. ss.6901 et seq., the Clean Water Act, 33 U.S.C.
ss.1251 et seq., the Clean Air Act, 33 U.S.C. ss.2601 et seq., the Toxic
Substances Control Act, 15 U.S.C. ss.2601 et seq., the Federal Insecticide,
Fungicide, and Rodenticide Act, 7 U.S.C. ss.136 et seq., the Oil Pollution Act
of 1990, 33 U.S.C. ss.2701 et seq., Federal Safe Drinking Water Act, 42 U.S.C.
ss.300 F et seq., and the Occupational Safety and Health Act, 29 U.S.C. ss.651
et seq., as such laws have been amended or supplemented, and the regulations
promulgated thereto, and all analogous state or local statutes.
ERISA: the Employee Retirement Income Security Act
of 1974, as in effect from time to time, and any successor thereto.
ERISA Affiliate: each of the Companies, and any
other Person that, together with any of the Companies, would be treated as a
single employer under Section 414 of the Code.
Event of Default: any of the events specified as
such, and during the periods specified, in Article VII.
Funding Fee: has the meaning provided in Section
2.2(b).
Exchange Act: has the meaning provided in Section
4.10.
Financial Statements: has the meaning provided in
Section 4.13.
Fund: The Huff Alternative Income Fund, L.P., a
Delaware limited partnership.
Future Subsidiaries: has the meaning provided in
Section 6.1(i).
GAAP: generally accepted accounting principles in
the United States as in effect from time to time, applied on a consistent
basis.
Guarantee, Pledge and Security Agreement: the
Guarantee, Pledge and Security Agreement, dated as of the Closing Date, by and
among the Company, the Subsidiary Guarantors and the Fund, in substantially
the form of Exhibit C hereto.
3
<PAGE>
Indebtedness: without duplication (a) any liability
of any Person (i) for borrowed money, or for the deferred purchase price of
any property or services, including, without limitation, all obligations,
contingent or otherwise in connection with any reimbursement obligation
relating to a letter of credit, or (ii) evidenced by a bond, note, debenture
or similar instrument (including a purchase money obligation) given in
connection with the acquisition of any businesses, properties or assets of any
kind (other than a trade payable or other current liability arising in the
ordinary course of business) or (iii) for the payment of money relating to a
lease of real or personal property that is required to be classified and
accounted for as a capital lease obligation under GAAP; (b) any liability of
others described in the preceding clause (a) that the Person has guaranteed or
that is otherwise its legal liability, contingent or otherwise; and (c) any
amendment, supplement, modification, deferral, renewal, extension or refunding
of any liability of the types referred to in clauses (a) and (b) above.
Indemnified Parties: has the meaning provided in
Section 8.3.
Knowledge of the Company or Known to the Company:
anything actually known or which reasonably should have been expected to have
been known by an executive officer, director, shareholder, managerial employee
or Affiliate of the Company or any of the Subsidiary Guarantors.
Laws: federal, state, local and foreign statutes,
laws, ordinances, case law, license requirements, zoning requirements, rules,
regulations, directives and policies.
Lien: any lien, charge, claim, mortgage, security
interest or other similar encumbrance of any kind.
Loan: the loan to the Company provided for in
Section 2.1.
Loan Documents: this Agreement, the Bridge
Financing Note, the Option Agreement, the Additional Option Agreement (if the
amount of the Loan exceeds $10,000,000), the Guarantee, Pledge and Security
Agreement and the Registration Rights Agreement.
Multiemployer Plan: has the meaning given in ERISA
Section 3(37)(A).
Offering: the public or private offering of Common
Stock or other capital stock or securities of the Company.
Option Agreement: the Option Agreement, dated as of
the date hereof, from the Company to the Fund, in the form of Exhibit B-1
hereto.
Options: the options to purchase shares of Common
Stock on the terms set forth in the Option Agreement, and the Additional
Option Agreement..
Option Shares: has the meaning provided in Section
4.4.
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PBGC: the Pension Benefit Guaranty Corporation, or
any successor thereto.
Permitted Indebtedness: has the meaning provided in
Section 6.2(b).
Person: Any individual, corporation, partnership,
business trust, joint venture, association, joint stock company, trust,
unincorporated organization or government or agency or political subdivision
thereof.
Plan: has the meaning given in ERISA Section 3(3).
Registration Rights Agreement: the Registration
Rights Agreement, dated as of the date hereof, between the Company and the
Fund, in the form of Exhibit D hereto.
Schedule 13e-4: the Schedule 13e-4 filed by the
Company with respect to the Tender Offer.
SEC: the Securities and Exchange Commission.
SEC Documents: has the meaning provided in Section
4.10.
Securities Act: the Securities Act of 1933, as amended.
Solvent and Solvency: with respect to any Person on
a particular date, that on such date (i) the fair value of the property of
such Person is greater than the total amount of liabilities (including
contingent liabilities) of such Person, (ii) the present fair salable value of
the property of such Person is greater than the amount that will be required
to pay the probable liabilities of such Person on its debts as they become
absolute and matured, (iii) such Person is able to realize upon its assets and
pay its debts and other liabilities, including contingent liabilities, as they
mature and (iv) such Person does not have, and will not be left with, an
unreasonably small capital.
Subsidiary: with respect to any Person, means (i) a
corporation at least fifty percent of whose capital stock with voting power,
under ordinary circumstances, to elect directors is at the time, directly or
indirectly, owned by such Person, by such Person and one or more Subsidiaries
of such Person or by one or more Subsidiaries of such Person, (ii) a
partnership in which such Person or a Subsidiary of such Person is, at the
time, a general partner of such partnership, or (iii) any Person in which such
Person, one or more Subsidiaries of such Person, or such Person and one or
more Subsidiaries of such Person, directly or indirectly, at the date of
determination thereof has (x) at least a fifty percent ownership interest or
(y) the power to elect or direct the election of the directors or other
governing body of such Person.
Subsidiary Guarantors: each of the Subsidiaries of
the Company identified under the caption "SUBSIDIARY GUARANTORS" on the
signature pages hereof and each
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Future Subsidiary that the Company is obligated to make a Subsidiary Guarantor
under the terms of Section 6.1(i).
Tender Offer: the offer by the Company to purchase
up to all of its outstanding Warrants to purchase shares of its Common Stock.
Warrants: the warrants issued pursuant to the
Warrant Agreement, dated as of December 5, 1996, among the Company,
Continental Stock Transfer and Trust Company, Royce Investment Group, Inc. and
Continental Broker-Dealer Corporation.
1997 SB-2: has the meaning provided in Section 4.1.
1.2 Accounting Terms. All accounting terms not specifically
defined herein shall be constituted in accordance with GAAP.
1.3 Section References. All Section references are to
Sections of this Bridge Financing Agreement unless otherwise expressly provided.
ARTICLE II
AMOUNT AND TERMS OF THE LOAN; FEES; OPTION AGREEMENT
2.1 The Loan. The Fund agrees, upon the terms and conditions
hereinafter set forth and in reliance on the representations and warranties
made herein and in the other Loan Documents, to lend on a single occasion no
less than $5,000,000 nor more than $11,500,000 to the Company on the Closing
Date for the purpose of financing the Acquisition, including paying certain
fees and expenses incurred in connection with the Acquisition and documented
in such detail as may be reasonably requested by the Fund. No more than one
Loan will be made hereunder. No later than 10 calendar days prior to the
Closing Date, the Company will notify the Fund in writing of the Closing
Date and no later than two Business Days prior to the Closing Date the Company
will notify the Fund in writing of the exact amount of the Loan (but no less
than $5,000,000 nor more than $11,500,000). No later than 1:30 p.m. (New York
City time) on the Closing Date, if the applicable conditions set forth in
Article III have been completely fulfilled (without regard to materiality) or
waived in the sole discretion of the Fund, the Fund shall cause the proceeds
of the Loan (less the fees payable to described in Section 2.2(b)) to be made
available to the Company by wire transfer of immediately available funds to
the Company's bank account at The Chase Manhattan Bank, N.A..
2.2 Fees. (a) Concurrently with the execution hereof, the
Company has paid to the Fund a commitment fee of $112,500 (the "Commitment
Fee") and the Company and the Fund have entered into the Option Agreement and
the Registration Rights Agreement, all in consideration of the Fund's
agreement to provide financing on the terms set forth herein. The Commitment
Fee is non-refundable under any circumstances.
(b) Upon funding, the Company agrees to pay the Fund: (i)
through a deduction from the amount of the proceeds of the Loan, a funding fee
(the "Funding Fee") equal
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to the excess of (A) three percent (3%) of the total amount of the Loan, over
(B) $112,500; provided that the Funding Fee will not be less than $37,500; and
(ii) the Additional Option (if the initial amount of the Loan exceeds
$10,000,000).
(c) In the event that this Agreement is terminated pursuant
to Section 8.4, the Company will pay to the Fund a termination fee equal to
$112,500 in immediately available funds no later than the earlier of: (i) the
date the Company and the Fund terminate this Agreement pursuant to Section
8.4(a)(i); (ii) the date the Fund gives written notice to the Company pursuant
to Section 8.4(a)(ii) or 8.4(a)(iii); or (iii) the date the Company gives
written notice to the Fund pursuant to Section 8.4(a)(iv).
2.3 Bridge Financing Note; Interest and Maturity; Payment of
Interest in Kind. The Loan will be evidenced by the Bridge Financing Note. The
Company shall repay, and pay interest on, the principal amount of the Bridge
Financing Note as provided in the Bridge Financing Note. In the event that the
Company elects to pay interest in kind under the circumstances permitted in
the Bridge Financing Note, the Company will issue additional notes to the Fund
in the form of the Bridge Financing Note but in the amount of each interest
payment paid in kind.
2.4 Payments and Computations. The Company shall make each
payment under the Bridge Financing Note not later than 12:00 noon (New York
City time) on the day when due (subject to Section 2.5), in United States
dollars by wire transfer of immediately available funds to Summit Bank (ABA
021 202162) for the account of The Huff Alternative Income Fund L.P., account
number 0035257969 (except for interest paid-in-kind under the circumstances
contemplated by the Bridge Financing Note) to the holder of the Bridge
Financing Note. All computations of interest under the Bridge Financing Note
shall be made on the basis of a year of 360 days for the actual number of days
(including the first day and the last day) elapsed.
2.5 Payment on Non-Business Days. Whenever any payment to be
made under the Bridge Financing Note shall be stated to be due on any day
other than a Business Day, such payment shall be due on the following Business
Day; provided that such extension of time shall in such cases be included in
the computation of interest due on such date.
2.6 Use of Proceeds. The Company agrees that the proceeds of
the Loan shall be used only for the purpose of financing the Acquisition,
including paying certain fees and expenses incurred in connection with the
Acquisition and documented in such detail as may be reasonably requested by
the Fund.
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ARTICLE III
CLOSING; CONDITIONS TO CLOSING
3.1 Closing. The closing of the Loan and the other
transactions contemplated by the Loan Documents to take place on the Closing
Date (the "Closing") shall take place at the offices of Proskauer Rose LLP,
1585 Broadway, New York, New York 10036, on the closing date of the
Acquisition, or at such other time as the Company and the Fund may mutually
agree in writing (the "Closing Date"). No later than the tenth calendar day
prior to the Closing Date, the Company will give the Fund written notice of
such Closing Date.
3.2 Conditions Precedent to Loan. The obligation of the Fund
to make the Loan at the Closing is subject to the following conditions
precedent (unless and to the extent expressly waived in writing by the Fund):
(a) Documents Delivered. The Fund shall have received the
following documents, in each case in form and substance reasonably
satisfactory to it:
(i) The Bridge Financing Note, executed by the
Company, and the other Loan Documents, executed by the
parties thereto other than the Fund, including the
Additional Option Agreement (if the amount of the Loan
exceeds $10,000,000).
(ii) All documents required under the Guarantee,
Pledge and Security Agreement, including without limitation
(A) evidence of the establishment of the Collateral Account
(as defined in the Guarantee, Pledge and Security Agreement)
and irrevocable instructions with respect to such account in
accordance with the Guarantee, Pledge and Security
Agreement, (B) all UCC-1 financing statements called for by
the Guarantee, Pledge and Security Agreement and (C) stock
certificates (together with stock powers executed in blank)
evidencing all issued and outstanding shares of capital
stock of the Company's Subsidiaries.
(iii) An opinion of Baker & McKenzie, as
independent legal counsel to the Company and the Subsidiary
Guarantors, substantially in the form of Exhibit E hereto,
and as to such other matters as the Fund may reasonably
request.
(iv) A secretary's certificate of each of the
Company and the Subsidiary Guarantors, signed, respectively,
by its Secretary and its President or one of its Vice
Presidents, as to (A) its Certificate of Incorporation and
By-laws; (B) the resolutions of its Board of Directors
adopting and approving any agreements relating to the
Acquisition, the Contemplated Public Offering and the
transactions contemplated by this Agreement and the other
Loan Documents; and (C) the names, offices and signatures of
its officers executing any documents in
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connection with the Acquisition or the transactions
contemplated by this Agreement and the other Loan Documents.
(v) An officers' certificate or certificates signed
by the President or any Vice President and the chief
financial officer of each of the Company and the Subsidiary
Guarantors, with respect to the matters set forth in
Sections 3.2(b), 3.2(c) and 3.2(d) and stating that, to the
knowledge of such officers, no event or condition has
occurred since the date of this Agreement that materially
and adversely affects the likelihood that the Contemplated
Public Offering will occur.
(vi) An officer's certificate or certificates,
signed by the chief financial officer of each of the Company
and the Subsidiary Guarantors, confirming the Solvency of
the Company and each of the Subsidiary Guarantors upon the
making of the Loan and upon consummation of the Acquisition
and the transactions contemplated by this Agreement and the
other Loan Documents, setting forth in detail the
calculations on which such determination of Solvency is
based.
(vii) An opinion of Sillerman Communications
Management Corporation ("SCMC"), as financial advisor to the
Company, stating that SCMC has reviewed the calculations
used in the certificate or certificates referred to in
Section 3.2(a)(vi) and that SCMC is in agreement with such
calculations and the determinations set forth in such
certificate.
(viii) Copies of all authorizations, consents and
approvals of, evidence of other actions by, and notices and
filings with, all governmental authorities and regulatory
bodies that have theretofore been obtained in connection
with the Acquisition and the Contemplated Public Offering.
(ix) An officers' certificate or certificates,
signed by the President or any Vice President and the chief
financial officer of each of the Company and the Subsidiary
Guarantors, certifying that to such officers' knowledge,
there has not been, since December 31, 1996, a material
adverse change in the business, operations, properties,
prospects or condition (financial or otherwise) of the
Company and its Subsidiaries, considered as one enterprise.
(x) Such other financial statements, projections,
approvals, opinions or documents as the Fund may reasonably
request, in form and substance satisfactory to the Fund.
(b) Representations and Warranties True. The representations
and warranties made by the Company and each of the Subsidiary Guarantors
herein and in the other Loan Documents shall be true and correct in all
material respects at the Closing (except to the extent any such representation
or warranty was expressly made as of any other date, in which case such
representation or warranty shall have been true and correct at such date).
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<PAGE>
(c) No Default. No Event of Default or Default shall have
occurred and be continuing; there shall not exist any event of default, or any
event that with notice or lapse of time or both would constitute an event of
default, under any material mortgage, deed of trust, indenture or other
instrument or agreement to which any of the Companies is a party or by which
it or they may be bound or any of its or their property or assets may be
subject to; and none of the foregoing shall occur as a result of the Loan, the
Acquisition, the Contemplated Public Offering or any of the transactions
contemplated by the Loan Documents.
(d) Performance. Each of the Company and the Subsidiary
Guarantors shall have performed and complied with all agreements, covenants,
obligations and conditions contained in this Agreement and the other Loan
Documents.
(e) No Material Adverse Change. In the reasonable judgment
of the Fund, (i) no material adverse change shall have occurred since December
31, 1996 in the business, operations, properties, prospects or condition
(financial or otherwise) of the Company and its Subsidiaries, considered as
one enterprise, and (ii) no event or condition has occurred which materially
and adversely affects the likelihood that the Contemplated Public Offering
will be consummated.
(f) The Company shall have paid all fees of the Fund due at
or prior to Closing as provided in Section 2.2 (and in accordance with Section
8.12) and all expenses of the Fund through the Closing Date.
(g) The Company shall have caused all Liens, with the
exception of those Liens expressly permitted in Section 6.2(h), to be
canceled.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
SUBSIDIARY GUARANTORS
Representations and Warranties of the Company and the
Subsidiary Guarantors. Each of the Company and the Subsidiary Guarantors
hereby jointly and severally represents and warrants to, and agrees with, the
Fund that, except as set forth on the Disclosure Schedule furnished to the
Fund and attached hereto as Exhibit F (the "Disclosure Schedule"),
specifically identifying the relevant subsection hereof, which exceptions
shall be deemed to be representations and warranties as if made hereunder:
4.1 Organization, Good Standing and Qualification. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. Each of the Subsidiaries is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation. Each of the Companies has all
requisite power and authority to own, lease, license and use its properties
and assets and to carry on its business as now conducted and as proposed to be
conducted as described in the Company's Registration Statement on Form SB-2
filed with the SEC on July 23, 1997 (the "1997 SB-2").
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The Company and each of the Subsidiaries has all requisite power and authority
to enter into and perform this Agreement and the other Loan Documents to which
it is a party and the transactions contemplated hereby and thereby. Each of
the Companies is duly qualified to transact business and is in good standing
as a foreign corporation in each jurisdiction in which the failure so to
qualify would have a material adverse effect on its business, properties or
assets.
4.2 Capitalization. The authorized capital of the Company
consists of 25,000,000 shares of Common Stock, of which 8,769,162 shares are
issued and outstanding, 4,519,162 shares are reserved for issuance on the
exercise of the Warrants, 800,000 shares are reserved for issuance under the
Company's 1996 and 1997 Stock Option Plans, and 100,000 shares are reserved
for issuance on the exercise of the Options. Except for the 5,419,162 shares
authorized for the issuance under the Warrants, the 1996 and 1997 Stock Option
Plans and the Options and the 8,625,000 shares (including the over-allotment
option) which the Company plans to issue in the Contemplated Public Offering,
there are not outstanding (and the Company does not have any plan to, and will
not, issue, grant or enter into) any options, warrants, rights (including
conversion or preemptive rights), subscription or agreements for the purchase
or capital stock. There are no voting agreements, voting trust agreements,
shareholder agreements or other agreements relating to the capital stock of
the Company. No outstanding options, warrants or other securities exercisable
for or convertible into Common Stock require anti-dilution adjustments by
reason of the consummation of the transactions contemplated hereby.
4.3 Subsidiaries. The Disclosure Schedule correctly sets
forth all of the Subsidiaries of the Company, the place of incorporation of
each Subsidiary and its authorized capitalization, its shares of capital stock
outstanding, and the record and beneficial owner of those shares. There are
not outstanding (and neither the Company nor any Subsidiary has any plan to,
and will not, issue, grant or enter into) any options, warrants, rights
(including conversion or preemptive rights), subscriptions or agreements for
the purchase or acquisition from or by the Company or any Subsidiary of any
shares of capital stock of any Subsidiary. There are no voting agreements,
voting trust agreements, shareholder agreements or other agreements relating
to the capital stock of any of the Subsidiaries. Except for the Subsidiaries,
the Company does not presently own or control, or have the right to own or
control, directly or indirectly, any interest in any other corporation,
association, partnership, limited liability company or other entity.
4.4 Authorization. All corporate action on the part of the
Company, the Subsidiary Guarantors and their respective officers, directors
and shareholders necessary for the authorization, execution and delivery of
this Agreement and the other Loan Documents, the performance of all
obligations of the Company and the Subsidiary Guarantors hereunder and
thereunder and the authorization, sale, issuance (or reservation for issuance)
and delivery of the shares of Common Stock issuable pursuant to the Options
(the "Option Shares") has been taken. This Agreement, the Option Agreement and
the Registration Rights Agreement each constitute, and when executed and
delivered by the Company and the Subsidiary Guarantors, the other Loan
Documents will constitute, valid and legally binding obligations of the
Company and the Subsidiary Guarantors, enforceable in accordance with their
respective terms, except (i) as enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent conveyance,
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reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as enforceability may be
limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in the Registration Rights Agreement may
be limited by applicable federal or state securities laws.
4.5 Valid Issuance of Securities. (a) The Options have been,
and the Option Shares, when issued, sold and delivered in accordance with the
terms of the Option Agreement and, if applicable, the Additional Option
Agreement, will be, (i) duly and validly issued and fully paid and
nonassessable, (ii) free of any pledges, liens, security interests, claims or
other encumbrances of any kind, (iii) issued in compliance with all applicable
federal and state securities laws, and (iv) not issued in violation of any
preemptive rights of shareholders. The Option Shares have been duly and
validly reserved for issuance.
(b) The outstanding shares of Common Stock of the Company
and the capital stock of each Subsidiary are all duly and validly authorized
and issued, fully paid and nonassessable, and were issued in compliance with
all applicable federal and state securities laws.
4.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, designation, declaration or filing with,
any federal, state, local or foreign governmental authority on the part of any
of the Companies is required in connection with the consummation of the
Acquisition, the Contemplated Public Offering or any of the transactions
contemplated by this Agreement or the other Loan Documents.
4.7 Litigation. There is no action, suit, proceeding claim
or investigation pending or, to the Knowledge of the Company, currently
threatened against any of the Companies or their officers and directors (in
connection with their duties as officers and directors) (i) which questions
the validity of this Agreement, the other Loan Documents, the Acquisition or
the Contemplated Public Offering, or the right of the Company or any of the
Subsidiary Guarantors to enter into them, or to consummate the transactions
contemplated hereby, and thereby, (ii) which relates to any material violation
or alleged violation of any of the Laws or otherwise arises out of or relates
to services rendered to any customer or former customer of the Company or any
of the Subsidiaries, or (iii) which might result, either individually or in
the aggregate, in any material adverse change in the assets, condition,
affairs or prospects of any of the Companies, financially or otherwise, or any
change in the current equity ownership of any of the Companies, nor is the
Company or any of the Subsidiary Guarantors aware that there is any basis for
any of the foregoing. The foregoing includes, without limitation, actions
pending or, to the Knowledge of the Company, threatened (or any basis therefor
Known to the Company) involving the employment or prior employment of any of
the Companies' employees, their use in connection with the Companies'
businesses of any information or techniques allegedly proprietary to any of
their former employers, or their obligations under any agreements with prior
employers. None of the Companies is a party or subject to the provisions of
any order, writ, injunction, judgment or decree of any court or government
agency or
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instrumentality. There is no material action, suit, proceeding or
investigation by any of the Companies currently pending or which any of the
Companies intends to initiate.
4.8 Compliance with Other Instruments. None of the Companies
is in violation or default of, nor has any event occurred that with notice or
lapse of time or both would constitute an event of default under, (i) any
provisions of its certificate of incorporation, as amended, or by-laws, as
amended, or similar organizational documents (true and correct copies of each
of which have been furnished to the Fund), (ii) any judgment, order, writ or
decree or (iii) any contract or instrument to which any of the Companies is a
party or by which any of the Companies is or may become bound or to which any
of their properties or assets may become subject, if in the case of any
contract or instrument identified in this clause (iii), such violation,
default or other event could result in a material adverse change in the
assets, properties, business operations, condition (financial or otherwise) or
prospects of the Company or any of the Subsidiaries. The execution, delivery
and performance of this Agreement and the other Loan Documents, the
consummation of the transactions contemplated hereby and thereby and the
consummation of the Acquisition and the Contemplated Public Offering will not
result in a violation of, or be in conflict with, or constitute, with or
without the passage of time or the giving of notice or both, either a default
or event of default under any such provision, any applicable Laws or any
judgment, order, writ or decree or any contract or instrument, or require any
consent, waiver or approval thereunder, or give rise to a right to terminate
or accelerate the performance required by, or constitute an event which
results in the creation of any Lien, charge or encumbrance upon any asset of
any of the Companies. Each of the Company and the Subsidiary Guarantors
represents that it is not, and will not be, obligated for any finder's fee or
commission in connection with this transaction, except as disclosed in item
4.8 of the Disclosure Schedule.
The Fund will not be responsible for any finder's fee or commission.
4.9 Disclosure. The Company has fully provided the Fund or
its counsel with all the information which the Fund has requested for
evaluating an investment in the Company and all information which the Company
believes is reasonably necessary to enable the Fund to make such evaluation.
Neither this Agreement nor any other statements or certificates made or
delivered in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading.
4.10 SEC Documents. The Company has provided the Fund with
copies of its Annual Report on Form 10-KSB for the year ended December 31,
1996, its Quarterly Reports on Form 10-QSB for the quarters ended March 31,
1997 and June 30, 1997, the Schedule 13e-4 and the 1997 SB-2 (collectively,
the "SEC Documents"), each as filed with the SEC. As of the date of this
Agreement, such documents constitute all documents filed by the Company with
the SEC since December 31, 1996. The Company will promptly file with the SEC
all amendments to the SEC Documents, and any additional reports or other
documents that may be required under the rules and regulations promulgated by
the SEC. The Company will provide the Fund with copies of each Additional SEC
Document promptly upon the filing thereof. On the date of their respective
filings, the SEC Documents complied, and each Additional SEC Document will
comply, in all material respects with the requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). None of the SEC
Documents contained, and none of the
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Additional SEC Documents will contain, any untrue statement of a material fact
or omitted to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
In addition, the 1997 SB-2 complied in all material respects with the
requirements of the Securities Act on the date it was filed, and each
amendment filed thereto will comply in all material respects with the
requirements of the Securities Act on the date such amendment is filed. The
Company has complied, and will continue to comply, with all applicable
requirements of the Exchange Act and the rules and regulations promulgated
thereunder, with respect to the Tender Offer, and all applicable requirements
of the Exchange Act and the Securities Act with respect to the Contemplated
Public Offering.
4.11 No Material Adverse Changes. Since December 31, 1996,
there has been no material adverse change in the assets, properties, business,
operations, condition (financial or otherwise) or prospects of the Company or
any of the Subsidiaries and no event which is likely to result in any such
change is Known to the Company.
4.12 Prior Registration Rights. Except as provided on the
Disclosure Schedule and in the Registration Rights Agreement, the Company has
not granted or agreed to grant any registration rights, including piggyback
rights, to any person or entity.
4.13 Financial Statements. The Company has delivered to the
Fund its audited consolidated financial statements (consolidated balance sheet
and consolidated statements of operations, changes in stockholders' equity and
cash flows) at December 31, 1996 and for the year then ended and its unaudited
financial statements (consolidated balance sheet and consolidated statement of
operations) at and for the six-month period ended June 30, 1997 (collectively
the "Financial Statements"). The Financial Statements are complete and correct
in all material respects and have been prepared in conformity with GAAP, as in
effect at the date thereof, applied on a consistent basis throughout the
periods indicated. The Financial Statements accurately describe the financial
condition and operating results of the Companies as of the dates, and for the
periods, indicated therein, subject, in the case of the unaudited financial
statements, to normal year-end audit adjustments which will not in the
aggregate be material. Except as set forth in the Financial Statements, the
Companies have no liabilities, contingent or otherwise, other than (i)
liabilities incurred in the ordinary course of business subsequent to June 30,
1997 that are listed in item 4.13 of the Disclosure Schedule or that do not,
individually, exceed $50,000 and (ii) obligations under contracts and
commitments incurred in the ordinary course of business and not required under
GAAP to be reflected in the Financial Statements, which, individually and in
the aggregate, are not material to the financial condition or operating
results of the Companies. The Companies maintain and will continue to maintain
a standard system of accounting established and administered in accordance
with GAAP.
4.14 Compliance with Laws. The Companies have been and are
maintained and operated (and all operations thereof have been conducted) in
conformity with all applicable Laws, except for such minor violations as could
not, in the aggregate, result in a material adverse change in the assets,
properties, business, operations, condition (financial or otherwise) or
prospects of the Company or any of the Subsidiaries. Each of the Company and
its Subsidiaries
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holds all material licenses, franchises, permits and authorizations necessary
for the lawful conduct of its business. Each material license, franchise,
permit or authorization held by the Company or any of its Subsidiaries is
valid, and neither the Company nor any of its Subsidiaries has received any
notice that any federal, state, local or foreign governmental authority
intends to modify, suspend, cancel, terminate or not renew any such material
license, franchise, permit or authorization.
4.15 Insurance. The Disclosure Schedule attached hereto sets
forth a true and correct list of all insurance coverage maintained by or for
the benefit of the Companies, including, without limitation, with respect to
their operations or any incident, event or thing arising therefrom or relating
thereto, setting forth (a) the name of the carrier, (b) the nature and dollar
limits of the coverage, (c) the policy number and scheduled expiration date,
(d) the premium rate and date through which paid, (e) the named insureds
thereunder, and (f) the beneficiary, if any, named thereunder. All such
policies are in full force and effect; no notice of default or termination has
been given thereunder; and no event, occurrence or thing has occurred which,
with notice or the passage of time or both, could result in the early
termination thereof.
4.16 Transactions with Affiliates. Except for the agreements
listed in item 4.16 of the Disclosure Schedule, there are no agreements,
understandings, arrangements or proposed transactions between any of the
Companies and any director, officer or Affiliate thereof. Except as described
in item 4.16 of the Disclosure Schedule, no employment agreement or other
agreement with an Affiliate of the Companies contains any "change in control"
arrangement, or any other arrangement that would enable such employee or
Affiliate the right to compensation following voluntary or involuntary
termination of employment or the consummation of a change in control
transaction.
4.17 Solvency. The Company and its consolidated Subsidiaries
are, and immediately after the Closing will be, Solvent.
4.18 No Defaults. There does not exist any Event of Default
or Default.
4.19 Margin Regulations. No part of the proceeds of the Loan
will be used for any purpose that violates the provisions of any of
Regulations G, T, U or X of the Board of Governors of the Federal Reserve
System or any other regulation of such Board of Governors.
4.20 Contemplated Public Offering. The Company has no reason
to believe that it will be unable to consummate the Contemplated Public
Offering. The Company has neither withdrawn the Contemplated Public Offering
nor received notification from the Underwriters (as defined in the 1997 SB-2)
of any event that could adversely affect the Contemplated Public Offering.
4.21 Compliance with ERISA. Each ERISA Affiliate has
fulfilled its obligations under the minimum funding standards of ERISA and the
Code with respect to each Plan and is in compliance in all material respects
with the presently applicable provisions of ERISA and the Code with respect to
each Plan. No ERISA Affiliate has (i) sought a waiver of
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the minimum funding standard under Section 412 of the Code with respect to any
Plan, (ii) failed to make any contribution or payment to any Plan or
Multiemployer Plan or in respect of any other benefit arrangement, or made any
amendment to any Plan or other benefit arrangement, which has resulted or
could result in the imposition of a Lien or the posting of a bond or other
security under ERISA or the Code or (iii) incurred any liability under Title
IV of ERISA.
4.22 Taxes. All United States federal and state income tax
returns and all other material tax returns (including foreign tax returns)
which are required to be filed by or on behalf of any of the Companies have
been filed and all material taxes due pursuant to such returns or pursuant to
any assessment received by any of the Companies have been paid. The charges,
accruals and reserves on the books of the Companies in respect of taxes or
other governmental charges have been established in accordance with GAAP.
There are no examinations in progress or claims against the Company or any of
its Subsidiaries for any period or periods and no notice of any claim has been
received by any of the Companies. The federal tax returns of the Companies
have been audited through December 31, 1996, and no issues with respect to
such audits, or waivers of any statute of limitations, remain outstanding.
4.23 Not an Investment Company. None of the Companies is an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
4.24 Leases. Except as disclosed on the Disclosure Schedule,
neither the Company nor any Subsidiary is a party to any lease of real or
personal property.
4.25 Environmental Matters. The costs and liabilities
associated with Environmental Laws (including the cost of compliance
therewith) have not had, and are unlikely in the future to have a material
adverse effect on the business, operations, properties, prospects or condition
(financial or otherwise) of the Company and its Subsidiaries, considered as
one enterprise. The Company and its Subsidiaries conduct their businesses in
compliance in all material respects with all applicable Environmental Laws.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE FUND
5.1 Authorization. The Fund has all requisite power and
authority to enter into and perform this Agreement and the other Loan
Documents to which it is a party and the transactions contemplated hereby and
thereby. All organizational action on the part of the Fund necessary for the
authorization, execution and delivery of this Agreement and the other Loan
Documents to which the Fund is a party, and the performance of all obligations
of the Fund hereunder and thereunder have been taken. This Agreement and the
Registration Rights Agreement constitute, and when executed and delivered by
the Fund, the Guarantee, Pledge and Security Agreement will constitute, valid
and legally binding obligations of the Fund, enforceable in accordance with
their respective terms, except (i) as enforceability may be limited by
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other laws of general application affecting creditors' rights
generally, (ii) as enforceability may be
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limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies, and (iii) to the extent the
indemnification provisions in the Registration Rights Agreement may be limited
by applicable federal or state securities laws.
5.2 Investment Intent. The Fund is acquiring the Options to
be issued pursuant to the Option Agreement and, upon the Closing, will acquire
the Bridge Financing Note and any Additional Options for its own account, for
investment and not with a view to the distribution thereof. The Fund
understands that the Options, the Option Shares and the Bridge Financing Note
have not been registered under the Securities Act or any state securities law.
The Fund is an "accredited investor" as defined under the Securities Act.
ARTICLE VI
COVENANTS
6.1 Affirmative Covenants. So long as the Fund has any
obligation under Section 2.1, or any amount of principal or interest on the
Bridge Financing Note remains outstanding, or any fees payable and due under
Section 2.2, shall remain unpaid, each of the Company and the Subsidiary
Guarantors will:
(a) Corporate Existence. Preserve and maintain, and cause
each of its Subsidiaries to preserve and maintain, in full force and effect
its corporate existence and its rights (charter and statutory) and those of
each of its Subsidiaries.
(b) Maintenance of Property; Insurance. Except as provided
herein, preserve and maintain, and cause each of its Subsidiaries to preserve
and maintain, all of its properties, owned or leased, used or useful in the
conduct of its business in good working order and condition, ordinary wear and
tear excepted; and insure and keep insured, with financially sound and
reputable insurers, so much of its properties, in such amounts and against
such risks, as are usually and customarily insured by companies engaged in
similar businesses with respect to properties of similar character.
(c) Compliance with Law. Comply, and cause each of its
Subsidiaries to comply, in all material respects with all Laws to which it is
subject.
(d) Further Assurances. Execute, acknowledge, deliver, file
and register at its own expense all such future agreements, instruments and
documents, and perform such acts, as the Fund shall reasonably deem necessary
or appropriate to effect the purposes of this Agreement and each other Loan
Document, and promptly obtain or make from time to time and maintain in full
force and effect at its own expense all licenses, permits, consents,
authorizations, approvals and filings as may be necessary or appropriate to
enable the Company to effect the Contemplated Public Offering as soon as
practicable and to comply with its other obligations hereunder and under each
other Loan Document.
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(e) Keeping of Books. Keep proper books of record and
accounts, in which full and correct entries shall be made of all financial
transactions and the assets and business of the Company and its Subsidiaries
in accordance with GAAP.
(f) Payment of Taxes, etc. Pay and discharge, and cause each
of its Subsidiaries to pay and discharge, before the same shall become
delinquent (i) all taxes, assessments and governmental charges imposed upon it
or upon its property; (ii) all lawful claims which, if unpaid, might by law
become a Lien upon its property; provided, however, that neither the Company
nor any of its Subsidiaries shall be required to pay or discharge any such
tax, assessment, charge or claim that is being contested in good faith by
appropriate proceedings properly instituted and diligently conducted; and
(iii) maintain appropriate reserves in respect of taxes, assessments,
governmental charges and levies.
(g) Access to Records; Financial Statements. Provide the
Fund and its authorized representatives access to all books, records, offices
and other facilities and properties of the Company and its Subsidiaries, and
allow the Fund and such representatives to make such inspections thereof and
copies of and abstracts from such books and records, all during normal
business hours, as the Fund may request, and cause its officers to (i) make
themselves available to authorized representatives of the Fund to discuss the
business of the Company and its Subsidiaries and (ii) furnish the Fund and
such representatives with such financial and operating data, including all
monthly and quarterly financial statements used by the management of the
Company and its Subsidiaries, all reports and other information furnished to
members of the Company's Board of Directors and all other information with
respect to the financial condition, business and property of the Company and
its Subsidiaries, as the Fund may from time to time reasonably request. The
Company will provide the Fund with complete copies of all Additional SEC
Documents immediately upon the filing thereof.
(h) Notice of Certain Events. Promptly upon the Company
obtaining knowledge thereof, give notice to the Fund of (i) the occurrence of
any Default or Event of Default, (ii) any litigation, investigation or
proceeding affecting the Company or its Subsidiaries, or any default in any
obligation of the Company or any of its Subsidiaries, that in any such case
could reasonably be expected to have a material adverse effect either on the
Company's ability to perform any of its material obligations under this
Agreement or any of the Loan Documents or to consummate the Contemplated
Public Offering or on the business, operations, properties or condition
(financial or otherwise) of the Company and its Subsidiaries, considered as
one enterprise, or (iii) any event or matter that has resulted or may result
in a material adverse change either in the Company's ability to perform any of
its material obligations under this Agreement or any of the other Loan
Documents or to consummate the Contemplated Public Offering or in the
business, operations, properties or condition (financial or otherwise) of the
Company and its Subsidiaries, considered as one enterprise; and in each case
specified in clause (i), (ii) or (iii) promptly deliver an officers'
certificate, signed by the President or a Vice President and the Treasurer or
Secretary of the Company, specifying the nature of such event and the actions
that the Company has taken or proposes to take with respect thereto.
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(i) Future Direct and Indirect Subsidiaries of the Company.
The Company shall cause each of its future direct and indirect Subsidiaries
(the "Future Subsidiaries") to become a party to this Agreement and the
Guarantee, Pledge and Security Agreement, such that each Future Subsidiary
will become a Subsidiary Guarantor under this Agreement and the Guarantee,
Pledge and Security Agreement and be subject to all the conditions of this
Agreement and the Guarantee, Pledge and Security Agreement applicable to
Subsidiary Guarantors.
(j) Consummation of the Acquisition and the Contemplated
Public Offering. The Company will (i) promptly file such amendments as may be
required to the Schedule 13e-4 to take into account the transactions
contemplated by this Agreement and the other Loan Documents; (ii) as promptly
as reasonably practicable, proceed to the purchase of the Warrants tendered in
the Tender Offer; (iii) immediately upon receipt of the proceeds of the Loan,
apply such proceeds to the purchase of the Warrants tendered in the Tender
Offer and, to the extent permitted by Section 2.6, any fees payable with
respect thereto; (iv) promptly file with the SEC an amendment to the 1997 SB-2
to take into account the transactions contemplated by this Agreement and the
other Loan Documents and any other developments required to be reflected in
1997 SB-2; and (v) use its best efforts to cause the 1997 SB-2, as so amended,
to become effective no later than November 1, 1997.
6.2 Negative Covenants. So long as the Fund has any
obligation under Section 2.1 or any amount of principal or interest of the
Bridge Financing Note remains outstanding, or any fees payable under Section
2.2 shall remain unpaid, neither the Company nor any of the Subsidiary
Guarantors will, except as expressly contemplated by the terms of this
Agreement:
(a) Operate Other Than in Ordinary Course. Operate its
business other than in the ordinary and usual course; or engage in any line of
business, or permit any of its Subsidiaries to engage in any line of business,
materially different from the lines of business carried on by the Company and
its Subsidiaries on the date hereof.
(b) Additional Indebtedness. Create or suffer to exist, or
permit any of its Subsidiaries to create or suffer to exist, any Indebtedness
other than (i) Indebtedness under the Loan Documents and (ii) Indebtedness in
an amount not to exceed $750,000 in the aggregate, created or incurred on
terms reasonably acceptable to the Fund, so long as such Indebtedness
("Permitted Indebtedness") is (A) structurally subordinated and expressly
subordinated to the Bridge Financing Note and (B) the instrument or
instruments evidencing such Permitted Indebtedness expressly provide that such
Permitted Indebtedness will be converted into non-voting preferred stock of
the Company on any bankruptcy or reorganization of the Company.
(c) Investments, Loans and Advances. Make, or permit any of
its Subsidiaries to make, any advances or loans to, or investments (by way of
transfers of property, contributions to capital, acquisitions of stock,
securities or evidences of indebtedness or otherwise) in, any other Person
other than in the ordinary course of business, except that (i) direct and
indirect Subsidiaries of the Company may make loans, advances and other
transfers of assets to the Company and (ii) the Company and its Subsidiaries
may acquire and hold (A) securities issued or
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directly and fully guaranteed or insured by the government of the United
States or any agency or instrumentality thereof having maturities of not more
than six months from the date of acquisition, and (B) commercial paper rated
A-1 or the equivalent thereof by Standard & Poor's Corporation or P-1 or the
equivalent thereof by Moody's Funds Service, Inc. and in each case maturing
within six months after the date of acquisition.
(d) Dividends, Prepayments, etc. Declare or make any
dividend or other distribution on any shares of capital stock of the Company
or any class of capital stock of any direct or indirect Subsidiary of the
Company if less than a majority of the stock of such class is owned by the
Company or another Subsidiary of the Company; purchase, redeem, or otherwise
acquire for value (or permit any of its Subsidiaries to do so) any shares or
right to acquire shares of any capital stock of the Company (other than the
purchase of Warrants pursuant to the Tender Offer); make any voluntary
prepayment in respect of Indebtedness of the Company or any of its
Subsidiaries; or make any payment in respect of Indebtedness to an Affiliate,
including loans to the Company by Robert M. Gutkowski.
(e) Issuance of Capital Stock. Issue, or permit any
Subsidiary to issue, any capital stock or any warrants, rights or options to
acquire any such stock, except pursuant to the Contemplated Public Offering
and the exercise of outstanding Warrants and outstanding stock options granted
under the 1996 and 1997 Stock Option Plans.
(f) Merger, Consolidation, Sale or Purchase of Assets. Merge
or consolidate with or into any other Person; dissolve or liquidate; convey,
transfer, lease or otherwise dispose of any of its property or assets other
than in the ordinary course of business; or acquire any property or assets of
any other Person other than in the ordinary course of business; or cause or
permit any of its Subsidiaries to do any of the foregoing.
(g) Limitation on Payment Restrictions Affecting
Subsidiaries. Except as set forth on the Disclosure Schedule, create or
otherwise cause or suffer to exist or become effective (or permit any of its
Subsidiaries to do so) any Lien or other encumbrance or restriction of any
kind on the ability of any Subsidiary to (i) pay dividends or make any other
distributions on such Subsidiary's capital stock or pay any Indebtedness owed
to the Company or any other Subsidiary, (ii) make loans or advances to the
Company or any other Subsidiary or (iii) transfer any of its property or
assets to the Company or any other Subsidiary.
(h) Liens. Create, incur, assume or suffer to exist, or
permit any of its Subsidiaries to create, incur, assume or suffer to exist,
any Lien upon or with respect to any of its properties or assets, whether now
owned or hereafter acquired, other than (i) Liens arising by reason of (A)
taxes that are not yet due, or (B) security for payment of workmen's
compensation or insurance; and (ii) Liens of mechanics, materialmen, laborers,
employees or suppliers arising by operation of law incurred in the ordinary
course of business for sums that are not yet due.
(i) Transactions with Affiliates and Officers. Enter into,
or permit any of its Subsidiaries to enter into, any transaction or agreement
with any Affiliate or any officer or director of the Company or of any such
Affiliate; or enter into, renew or extend, or permit any of
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its Subsidiaries to enter into, renew or extend, any agreement relating to the
sale, purchase or lease of any assets, property or services with any Affiliate
of the Company (other than a wholly-owned Subsidiary of the Company).
ARTICLE VII
EVENTS OF DEFAULT
7.1 Events of Default. If any of the following events (each
an "Event of Default") shall occur and be continuing:
(a) The Company shall fail to pay any amount of principal of
the Bridge Financing Note or shall fail to pay any fee provided for in Section
2.2, when each such payment is due; or shall fail to pay any amount of
interest on the due date thereof or within three calendar days after written
or oral notice thereof following such due date; or shall fail to pay any other
fees or other amounts payable under any Loan Document within five Business
Days after receipt of written notice of the amount and request for payment; or
(b) Any representation or warranty by the Company or any of
the Subsidiary Guarantors (or any of their respective officers) under or in
connection with this Agreement or any other Loan Document shall prove to have
been incorrect when made or deemed made (i) after two calendar days' written
or oral notice thereof if such incorrect representation or warranty is of a
type that cannot be cured or (ii) after fifteen calendar days' written or oral
notice thereof if such incorrect representation or warranty is of a type that
can be cured but the Company or the Subsidiary Guarantor has failed to cure
such incorrect representation or warranty; or
(c) The Company or any Subsidiary Guarantor shall fail to
perform or observe any of their respective covenants, when such covenants are
in effect hereunder, contained in Section 6.1 or 6.2 (i) after two calendar
days' written or oral notice thereof if such failure to perform or observe a
covenant by its nature cannot be cured or (ii) after fifteen calendar days'
written notice if such failure to perform or observe a covenant by its nature
can be cured but the Company or the Subsidiary Guarantor has failed to do so;
or
(d) The Company or any Subsidiary shall fail (i) to pay any
Indebtedness in an aggregate outstanding principal amount of more than
$100,000, or any interest or premium thereon, when due (whether by scheduled
maturity, required prepayment, acceleration, demand or otherwise) and such
failure shall continue uncured or unwaived after the applicable grace period,
if any, specified in the agreement or instrument relating to such Indebtedness
or (ii) to perform or observe any term, covenant or condition on its part to
be performed or observed under any agreement or instrument relating to any
such Indebtedness when required to be performed or observed, and such failure
shall continue uncured or unwaived after the applicable grace period, if any,
specified in such agreement or instrument, if the effect of such failure to
perform or observe is to accelerate, or to permit the acceleration of, the
maturity of such Indebtedness; or any such Indebtedness shall be declared to
be due and payable, or required to be prepaid (other than by a regularly
scheduled required prepayment), prior to the stated maturity thereof; or
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(e) The Company or any of its Subsidiaries shall become not
Solvent or generally fail to pay, or admit in writing its inability to pay,
debts as they become due; or the Company or any of its Subsidiaries shall
apply for, consent to, or acquiesce in, the appointment of a trustee,
receiver, sequestrator, or other custodian for the Company or such Subsidiary
or any property of any thereof, or make a general assignment for the benefit
of creditors; or, in the absence of such application, consent or acquiescence,
a trustee, receiver, sequestrator, or other custodian shall be appointed for
the Company or any such Subsidiary or for a substantial part of the property
of any thereof and not be discharged within 60 days; or any bankruptcy,
reorganization, debt arrangement, or other case or proceeding under any
bankruptcy or insolvency law, or any dissolution, winding up, or liquidation
proceeding, shall be commenced in respect of the Company or any Subsidiary,
and, if such case or proceeding is not commenced by the Company or such
Subsidiary, such case or proceeding shall be consented to or acquiesced in by
the Company or such Subsidiary or shall result in the entry of an order for
relief or shall remain for 60 days undismissed; or the Company or any
Subsidiary shall take any corporate action to authorize, or in furtherance of,
any of the foregoing; or
(f) A final judgment shall be rendered against the Company
or any Subsidiary which, in whole or in part, is not fully covered by
insurance, and such uninsured portion, together with all other uninsured
portions of all other outstanding final judgments rendered against the Company
or any Subsidiary exceeds an aggregate of $250,000, and either, within 60 days
after entry thereof, such judgment shall not have been discharged or execution
thereof stayed pending appeal, or, within 60 days after the expiration of any
such stay, such judgment shall not have been discharged;
then, (i) in any such event, other than an Event of Default specified in
Section 7.1(e), the Fund may by notice to the Company declare the Bridge
Financing Note, all interest thereon and all other payments payable thereunder
and under each other Loan Document to be forthwith due and payable, whereupon
the Bridge Financing Note, all such interest and all such amounts shall become
and be forthwith due and payable, without presentment, demand, protest, or
further notice of any kind, all of which are hereby expressly waived by the
Company and each of the Subsidiary Guarantors and (ii) in any Event of Default
specified in Section 7.1(e), the Bridge Financing Note, all interest thereon
and all other payments thereunder and under each other Loan Document shall
ipso facto become and be forthwith due and payable without declaration or
other act on the part of the Fund.
ARTICLE VIII
MISCELLANEOUS
8.1 Amendments, etc. No amendment or waiver of any provision
of any Loan Document nor any consent to any departure by the Company or any of
the Subsidiary Guarantors therefrom shall in any event be effective unless the
same shall be in writing and signed by the Fund, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
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8.2 No Waiver; Remedies. No failure on the part of the Fund
to exercise, and no delay in exercising, any right hereunder or under any
other Loan Document shall operate as a waiver thereof; nor shall any single or
partial exercise of any right hereunder or under any other Loan Document
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
8.3 Indemnification. Each of the Company and the Subsidiary
Guarantors hereby jointly and severally agrees to indemnify the Fund and its
general partner, and each officer, director, employee, partner, agent and
Affiliate of the Fund and its general partner (the "Indemnified Parties") for,
and hold each Indemnified Party harmless from and against: (i) any and all
damages, losses, claims and other liabilities of any and every kind,
including, without limitation, judgments and costs of settlement, and (ii) any
and all out-of-pocket costs and expenses of any and every kind, including,
without limitation, reasonable fees and disbursements of one counsel for such
Indemnified Parties (selected by the Fund) (all of which expenses shall be
advanced to the Fund at such times as the Fund is presented with such
expenses), in each case, arising out of or suffered or incurred in connection
ahead with (A) any investigative, administrative or judicial proceeding or
claim brought or threatened relating to or arising out of the Fund's making of
the Loan pursuant to the Bridge Financing Note, or relating to or arising out
of this Agreement, or the other Loan Documents or the transactions
contemplated hereby and thereby, or (B) any material inaccuracy or alleged
inaccuracy in any representation or warranty of the Company or any of the
Subsidiary Guarantors made or incorporated by reference in this Agreement or
the other Loan Documents or any material breach or alleged breach by the
Company or any of the Subsidiary Guarantors of any covenant or agreement made
or incorporated by reference in this Agreement or the other Loan Documents.
8.4 Termination.
(a) This Agreement may be terminated at any time prior to
the Closing:
(i) by the mutual consent of the Fund and the
Company;
(ii) by the giving of notice by the Fund at any
time after December 31, 1997 (or such later date as shall
have been agreed to in writing by the parties hereto), if at
the time notice of such termination is given the Closing
shall not have been consummated;
(iii) by the Fund, if there has been a material
misrepresentation or material breach on the part of the
Company or any of the Subsidiary Guarantors in any of the
representations, warranties, covenants or agreements of the
Company or any of the Subsidiary Guarantors set forth herein
or in any other Loan Document, or if there has been any
material failure on the part of the Company or any of the
Subsidiary Guarantors to comply with its obligations
hereunder or in any other Loan Document; provided that the
Company has received written notice of any such alleged
misrepresentation or breach at least three Business Days
prior to the date of termination by the Fund; or
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(iv) by the Company if there has been a material
misrepresentation or material breach on the part of the Fund
in any of the representations, warranties, covenants or
agreements of the Fund set forth herein, or if there has
been any material failure on the part of the Fund to comply
with its obligations hereunder; provided that the Fund has
received written notice of any such alleged
misrepresentation or breach at least three Business Days
prior to the date of termination by the Company.
(b) In the event of termination of this Agreement pursuant
to Section 8.4 prior to the Closing, the Company and the Subsidiary Guarantors
will continue to be obligated to pay the fees provided for in Section 2.2(a)
and Section 2.2(c) and to pay the expenses of the Fund as provided in Section
8.12. The provisions of Section 8.3 of this Agreement will also survive any
termination pursuant to this Section 8.4.
8.5 Survival of Warranties. The warranties, representations,
covenants and agreements of the Company and the Subsidiary Guarantors and the
Fund contained in or made pursuant to this Agreement, including the provisions
of Section 8.3 and 8.12, shall survive the execution and delivery of this
Agreement and the Closing. The warranties, representations, covenants and
agreements of the Company and the Subsidiary Guarantors contained in Sections
4.4, 4.6, 4.8, 4.10, 4.17, 4.18, 4.19 and 4.23, the corresponding provisions
of any certificate or document delivered pursuant to Section 3.2(a) and the
provisions of Sections 8.3 and 8.12 shall survive the repayment of the Bridge
Financing Note and all amounts payable under this Agreement and the other Loan
Documents. Neither any investigation by or on behalf of the Fund nor the
receipt by the Fund of any data or information from the Company or any of the
Subsidiary Guarantors, shall in any way affect the right of the Fund to rely
on the representations, warranties, covenants and agreements of the Company or
any of the Subsidiary Guarantors or the right of the Fund to terminate this
Agreement as provided in Section 8.4(a)(iii).
8.6 Successors and Assigns. The Fund and each assignee of
the Fund may, without the consent of the Company or any of the Subsidiary
Guarantors, assign its rights under this Agreement, in whole or in part, in
connection with any sale or transfer to an affiliate or a partner, and,
following such assignment, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective successors and
assigns of the parties. Neither the Company nor any of the Subsidiary
Guarantors may assign any of their rights or obligations under this Agreement.
Nothing in this Agreement, express or implied, is intended to confer upon any
party other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
8.7 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of New York as applied to agreements
among New York residents entered into and to be performed entirely within New
York.
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8.8 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.
8.9 Titles and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
8.10 Notices. Unless otherwise provided, any notice required
or permitted under this Agreement shall be given in writing and shall be
deemed effectively given upon receipt by the party to be notified or five days
after deposit with the United States Post Office, by registered or certified
mail, postage prepaid and addressed to the party to be notified (i) if to the
Company or any of the Subsidiary Guarantors, at the following address:
The Marquee Group, Inc.
888 Seventh Avenue, 40th Floor
New York, New York 10019
(212) 977-4625
with a copy to:
Baker & McKenzie
805 Third Avenue
New York, New York 10022
Attn: Amar Budarapu, Esq.
(212) 759-9133
(ii) if to the Fund, at the following address:
The Huff Alternative Income Fund, L.P.
1776 On The Green
67 Park Place
Morristown, New Jersey 07960
Attn: General Partner
(201) 984-1196
with a copy to:
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Attn: Peter G. Samuels, Esq.
(212) 969-2900
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or at such other address as any of the parties may designate by 10 days'
advance written notice to the other parties.
8.11 [Intentionally omitted.]
8.12 Expenses. The Company agrees to pay upon presentation,
all out-of-pocket fees and reasonable expenses incurred by the Fund in
connection with this Agreement and the transactions contemplated hereby
(whether or not the transactions contemplated hereby are consummated)
including, without limitation, the reasonable fees and expenses of counsel for
the Fund incurred in connection with this Agreement and the other Loan
Documents and the transactions contemplated hereby and thereby (including the
reasonable fees and expenses of Proskauer Rose LLP; provided that such legal
fees are not to exceed $50,000). If the Fund shall employ attorneys, or incur
other costs and expenses for the collection of payments due or to become due,
or for the enforcement or performance or observance of any obligation or
agreement of the Company under this Agreement or the other Loan Documents, the
Company agrees that it will pay, on demand, the fees of such attorneys
together with all other costs and expenses incurred by the Fund in connection
with the collection of amounts due under this Agreement and the other Loan
Documents.
8.13 Severability. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of this Agreement shall
be interpreted as if such provision were so excluded and shall be enforceable
in accordance with its terms.
8.14 Entire Agreement. This Agreement, including the
Disclosure Schedule, Exhibits, and other documents referred to herein which
form a part hereof, constitutes the entire agreement between the parties
hereto and supersedes all prior agreements and understandings, oral and
written, between the parties hereto with respect to the subject matter hereof.
8.15 Submission to Jurisdiction. Each of the Company and the
Subsidiary Guarantors hereby irrevocably submits to the jurisdiction of any
state or federal court sitting in the County of New York, State of New York in
connection with any action or proceeding arising out of or relating to this
Agreement or any other Loan Document or the transactions contemplated hereby
or thereby.
8.16 Waiver of Jury Trial. Each of the Company and the
Subsidiary Guarantors hereby irrevocably waives all right to a trial by jury
in any action, proceeding or counterclaim arising out of or relating to this
Agreement or any other Loan Document or the transactions contemplated hereby
or thereby.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers there unto duly
authorized, as of the date first above written.
THE MARQUEE GROUP, INC.
By: /s/ Jan E. Chason
-----------------------------
Name: Jan E. Chason
Title: Chief Financial Officer
and Treasurer
SUBSIDIARY GUARANTORS
ATHLETES AND ARTISTS, INC.
By /s/ Jan E. Chason
-----------------------------
Title:
SPORTS MARKETING & TELEVISION
INTERNATIONAL, INC.
By /s/ Jan E. Chason
-----------------------------
Title:
THE HUFF ALTERNATIVE INCOME
FUND, L.P.
By /s/ Bryan E. Bloom
-------------------------------
Name: Bryan E. Bloom
Title: Attorney in Fact
<PAGE>
EXHIBIT A
BRIDGE FINANCING NOTE
$___________________ ______ __, 1997
THE MARQUEE GROUP, INC., a Delaware corporation
having a business address at 888 Seventh Avenue, 40th Floor, New York, NY
10019 (the "Borrower"), hereby promises to pay to the order of THE HUFF
ALTERNATIVE INCOME FUND, L.P. (the "Lender"), the principal sum of
___________________________________ ($___________)(the "Principal"), in lawful
money of the United States of America and in immediately available funds, on
the date(s) and in the manner provided in the Bridge Financing Agreement
described below. The Borrower also promises to pay interest on the unpaid
principal balance hereof, for the period such balance is outstanding, at said
principal office, in like money, at the rates of interest as provided for
below, on the date(s) and in the manner as provided for below (the
"Interest").
This Note is the Bridge Financing Note referred to in the
Bridge Financing Agreement dated as of August 26, 1997 between the Borrower
and the Lender (as amended from time to time the "Bridge Financing Agreement")
and evidences the Loan made by the Lender thereunder. All terms not defined
herein shall have the meanings given to them in the Bridge Financing
Agreement.
The Loan shall mature upon the earlier to occur of (i) the
closing of any Offering by the Borrower or (ii) 90 days from the Borrower's
receipt of the Loan (the "Maturity Date"). The Loan is due and payable on the
Maturity Date.
Both principal and interest are payable in lawful money of
the United States of America to the Lender at Summit Bank (ABA 021 202162) for
the account of the Lender, account number 0035257969 (or to such other account
as the Lender may hereafter specify to the Borrower by written notice), in same
day funds.
Accrued but unpaid Interest shall be paid on the Maturity
Date and at the end of each 90 day period following the Maturity Date if any
portion of this Note remains outstanding following the Maturity Date. Interest
shall be calculated as follows: (i) during the 90 days immediately following
the Borrower's receipt of the Loan (the "Initial 90 Day Period"), the interest
rate on the Loan shall be 11 1/4% per annum (the "Initial Interest Rate"); and
(ii) after the Initial 90 Day Period, the Initial Interest Rate of 11 1/4%
shall be increased by 50 basis points every 90 days until such time as the
Loan is satisfied. In the event that the interest rate exceeds 14%, the
Borrower shall have the option of paying in kind that amount of Interest which
exceeds 14%; provided, however, if the Borrower chooses to pay in kind any
portion of the Interest, the interest rate shall thereafter be increased by 75
basis points every 90 days. In addition, the interest rate shall be increased
by 300 basis points during the pendency of: (i) any Event of Default under
Section 7.1(e) of the Bridge Financing Agreement or (ii) any other Event of
Default if the Lender has by written notice to the Borrower declared this Note
immediately due and payable. Interest shall in no event exceed the maximum
amount permitted by law.
<PAGE>
The Bridge Financing Agreement provides for the acceleration
of the maturity of principal and Interest upon the occurrence of certain
Events of Default and for certain other terms and conditions as specified
therein.
The Borrower waives presentment, notice of dishonor, protest
and any other notice of formality with respect to this Note.
This Note shall be governed by, and interpreted and
construed in accordance with, the laws of the State of New York.
THE MARQUEE GROUP, INC.
By
--------------------------
Name:
Title:
<PAGE>
EXHIBIT C
GUARANTEE, PLEDGE AND SECURITY AGREEMENT
GUARANTEE, PLEDGE AND SECURITY AGREEMENT, dated as of
September __, 1997, among The Marquee Group, Inc., a corporation duly
organized and validly existing under the laws of the State of Delaware (the
"Pledgor"), each of the Subsidiaries of the Pledgor identified under the
caption "SUBSIDIARY GUARANTORS" on the signature pages hereof (individually a
"Subsidiary Guarantor" and, collectively, the "Subsidiary Guarantors" and,
together with the Pledgor, the "Obligors"), and The Huff Alternative Income
Fund, L.P., a Delaware limited partnership (the "Fund").
The Obligors and the Fund are parties to a Bridge Financing
Agreement, dated as of August 26,1997 (as modified and supplemented and in
effect from time to time, the "Bridge Financing Agreement"), providing,
subject to the terms and conditions thereof, for a loan to be made by the Fund
to the Pledgor in an aggregate principal amount of not less than $5,000,000
and not more than $11,500,000 (the "Loan").
To induce the Fund to enter into the Bridge Financing
Agreement and to lend money to the Pledgor thereunder, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Obligors have agreed to pledge and grant a security interest
in the Collateral (as hereinafter defined) as security for the Secured
Obligations (as so defined). Accordingly, the parties hereto agree as follows:
Section 1. Definitions. Terms defined in the Bridge
Financing Agreement are used herein as defined therein. In addition, as used
herein:
"Accounts" shall have the meaning ascribed thereto in
Section 4(d) hereof.
"Collateral" shall have the meaning ascribed thereto in
Section 4 hereof.
"Collateral Account" shall have the meaning ascribed thereto
in Section 5.01 hereof.
"Instruments" shall have the meaning ascribed thereto in
Section 4(e) hereof.
"Maturity Date" shall mean the earlier to occur of (i) the
closing of any Offering by the Pledgor or (ii) 90 days from the
Pledgor's receipt of the Loan.
"Permitted Investments" shall mean (i) securities issued or
directly and fully guaranteed or insured by the government of the
United States or any agency or instrumentality thereof having
maturities of not more than six months from the
<PAGE>
date of acquisition, and (ii) commercial paper rated A-1 or the
equivalent thereof by Standard & Poor's Corporation or P-1 or the
equivalent thereof by Moody's Funds Service, Inc. and in each case
maturing within six months after the date of acquisition.
"Pledged Stock" shall have the meaning ascribed thereto in
Section 3(a) hereof.
"Secured Obligations" shall mean, collectively, (a) the
principal of and interest on the Loan made by the Fund to the Pledgor
and all other amounts from time to time owing to the Fund by the
Pledgor under the Loan Documents including, without limitation, all
fees and reimbursement obligations and interest thereon, including
all Guaranteed Obligations and (b) all obligations of the Obligors to
the Fund hereunder.
"Stock Collateral" shall mean, collectively, the Collateral
described in clauses (a) through (c) of Section 4 hereof and the
proceeds of and to any such property and, to the extent related to
any such property or such proceeds, all books, correspondence, credit
files, records, invoices and other papers.
"Uniform Commercial Code" shall mean the Uniform Commercial
Code as in effect in the State of New York from time to time.
Section 2. The Guarantee.
2.01. The Guarantee. Each Subsidiary Guarantor hereby
guarantees to the Fund and its successors and assigns the prompt payment in
full when due (whether at stated maturity, by acceleration or otherwise) of
the principal of and interest on the Loan made by the Fund to, and the Bridge
Financing Note and all other amounts from time to time owing to the Fund by
the Company under the Bridge Financing Agreement and under the Bridge
Financing Note and all obligations and interest thereon, in each case strictly
in accordance with the terms thereof (such obligations being herein
collectively called the "Guaranteed Obligations"). Each Subsidiary Guarantor
hereby further agrees that if the Company shall fail to pay in full when due
(whether at stated maturity, by acceleration or otherwise) any of the
Guaranteed Obligations, such Subsidiary Guarantor will promptly pay the same,
without any demand or notice whatsoever, and that in the case of any extension
of time of payment or renewal of any of the Guaranteed Obligations, the same
will be promptly paid in full when due (whether at extended maturity, by
acceleration or otherwise) in accordance with the terms of such extension or
renewal.
2.02 Obligations Unconditional. The obligations of each
Subsidiary Guarantor under Section 2.01 hereof are absolute and unconditional
irrespective of the value, genuineness, validity, regularity or enforceability
of the Bridge Financing Agreement, the Bridge Financing Note or any other
agreement or instrument referred to herein or therein, or any substitution,
release or exchange of any other guarantee of or security for any of the
2
<PAGE>
Guaranteed Obligations, and, to the fullest extent permitted by applicable
law, irrespective of any other circumstance whatsoever which might otherwise
constitute a legal or equitable discharge or defense of a surety or guarantor,
it being the intent of this Section 2.02 that the obligations of each
Subsidiary Guarantor hereunder shall be absolute and unconditional under any
and all circumstances. Without limiting the generality of the foregoing, it is
agreed that the occurrence of any one or more of the following shall not alter
or impair the liability of each Subsidiary Guarantor hereunder which shall
remain absolute and unconditional as described above:
(i) at any time or from time to time, without
notice to such Subsidiary Guarantor, the time for any performance of
or compliance with any of the Guaranteed Obligations shall be
extended, or such performance or compliance shall be waived;
(ii) any of the acts mentioned in any of the
provisions of the Bridge Financing Agreement or the Bridge Financing
Note or any other agreement or instrument referred to herein or
therein shall be done or omitted;
(iii) the maturity of any of the Guaranteed
Obligations shall be accelerated, or any of the Guaranteed
Obligations shall be modified, supplemented or amended in any
respect, or any right under the Bridge Financing Agreement or the
Bridge Financing Note or any other agreement or instrument referred
to herein or therein shall be waived or any other guarantee of any of
the Guaranteed Obligations or any security therefor shall be released
or exchanged in whole or in part or otherwise dealt with; or
(iv) any lien or security interest granted to, or
in favor of, the Fund as security for any of the Guaranteed
Obligations shall fail to be perfected.
Each Subsidiary Guarantor hereby expressly waives diligence, presentment,
demand of payment, protest and all notices whatsoever, and any requirement
that the Fund exhaust any right, power or remedy or proceed against the
Company under the Bridge Financing Agreement or the Bridge Financing Note or
any other agreement or instrument referred to herein or therein, or against
any other Person under any other guarantee of, or security for, any of the
Guaranteed Obligations.
2.03 Reinstatement. The obligations of each Subsidiary
Guarantor under this Section 2 shall be automatically reinstated if and to the
extent that for any reason any payment by or on behalf of the Company in
respect of the Guaranteed Obligations is rescinded or must be otherwise
restored by any holder of any of the Guaranteed Obligations, whether as a
result of any proceedings in bankruptcy or reorganization or otherwise, and
each Subsidiary Guarantor agrees that it will indemnify the Fund on demand for
all reasonable costs and expenses (including, without limitation, fees of
counsel) incurred by the Fund in connection with such rescission or
restoration, including any such costs and expenses incurred in
3
<PAGE>
defending against any claim alleging that such payment constituted a
preference, fraudulent transfer or similar payment under any bankruptcy,
insolvency or similar law.
2.04 Remedies. Each Subsidiary Guarantor agrees that, as
between such Subsidiary Guarantor and the Fund, the obligations of the Company
under the Bridge Financing Agreement and the Bridge Financing Note may be
declared to be forthwith due and payable as provided in Section 7.1 of the
Bridge Financing Agreement (and shall be deemed to have become automatically
due and payable in the circumstances provided in Section 7.1(e) of the Bridge
Financing Agreement) for purposes of Section 2.01 hereof notwithstanding any
stay, injunction or other prohibition preventing such declaration (or such
obligations from becoming automatically due and payable) as against the
Company and that, in the event of such declaration (or such obligations being
deemed to have become automatically due and payable), such obligations
(whether or not due and payable by the Company) shall forthwith become due and
payable by such Subsidiary Guarantor for purposes of said Section 2.01.
2.05 Continuing Guarantee. The guarantee in this Section 2
is a continuing guarantee, and shall apply to all Guaranteed Obligations
whenever arising, until all such Guaranteed Obligations have been satisfied.
Section 3. Representations and Warranties. Each Obligor
represents and warrants to the Fund that:
(a) such Obligor is the sole beneficial owner of the
Collateral in which it purports to grant a security interest pursuant
to Section 4 hereof and no Lien exists or will exist upon any such
Collateral at any time (and no right or option to acquire the same
exists in favor of any other Person), except for Liens permitted
under Section 6.2(h) of the Bridge Financing Agreement and except for
the pledge and security interest in favor of the Fund created or
provided for herein, which pledge and security interest constitutes a
first priority perfected pledge and security interest in and to all
of such Collateral;
(b) the Pledged Stock evidenced by the certificates
identified under the name of each Subsidiary Guarantor in Annex 1
hereto is, and all other Pledged Stock in which any Subsidiary
Guarantor shall hereafter grant a security interest pursuant to
Section 4 hereof will be, duly authorized, validly issued, fully paid
and nonassessable and none of such Pledged Stock is or will be
subject to any contractual restriction, or any restriction under the
charter or by-laws of the respective issuers of such Pledged Stock,
upon the transfer of such Pledged Stock (except for any such
restriction contained herein);
(c) the Pledged Stock evidenced by the certificates
identified under the name of each Subsidiary Guarantor in Annex 1
hereto constitutes all of the issued and outstanding shares of
capital stock of the Subsidiary Guarantors on the date hereof and
4
<PAGE>
said Annex 1 correctly identifies, as at the date hereof, the
respective issuers of such Pledged Stock, the respective class and
par value of the shares comprising such Pledged Stock and the
respective number of shares (and registered owner thereof) evidenced
by each such certificate; and
(d) Annex 2 correctly sets forth all the Collateral other
than the Stock Collateral and upon the filing of a Form UCC-1 for
each of the locations set forth in Annex II the Fund will have a
perfected security interest in such Collateral.
Section 4. Collateral. As collateral security for the prompt
payment in full when due (whether at stated maturity, by acceleration or
otherwise) of the Secured Obligations, the Obligors hereby pledge and grant to
the Fund a security interest in all of the Obligors' right, title and interest
in the following property, whether now owned by the Obligors or hereafter
acquired and whether now existing or hereafter coming into existence, and
wherever located (all being collectively referred to herein as "Collateral"):
(a) the respective shares of stock of the Subsidiary
Guarantors evidenced by the certificates identified in Annex 1 hereto
under the names of the respective Subsidiary Guarantors, together
with in each case the certificates evidencing the same (collectively,
the "Pledged Stock");
(b) all shares, securities, moneys or property representing
a dividend on any of the Pledged Stock, or representing a
distribution or return of capital upon or in respect of the Pledged
Stock, or resulting from a split-up, revision, reclassification or
other like change of the Pledged Stock or otherwise received in
exchange therefor, and any subscription warrants, rights or options
issued to the holders of, or otherwise in respect of, the Pledged
Stock;
(c) without affecting the obligations of the Pledgor under
any provision prohibiting such action hereunder or under the Bridge
Financing Agreement, in the event of any consolidation or merger in
which any Subsidiary Guarantor is not the surviving corporation, all
shares of each class of the capital stock of the successor
corporation formed by or resulting from such consolidation or merger
(the Pledged Stock, together with all other certificates, shares,
securities, properties or moneys as may from time to time be pledged
hereunder pursuant to clause (a) or (b) above and this clause (c)
being herein collectively called the "Stock Collateral");
(d) all accounts (as defined in the Uniform Commercial Code)
of the Obligors constituting any right to the payment of money,
including (but not limited to) all moneys due and to become due to
the Obligors in respect of any loans or advances for the purchase
price of inventory or equipment or other goods sold or leased or for
services rendered, all moneys due and to become due to the Obligors
under any guarantee (including a letter of credit) of the purchase
price of inventory or equipment
5
<PAGE>
sold by the Obligors and all tax refunds (such accounts, general
intangibles and moneys due and to become due being herein called
collectively "Accounts");
(e) all instruments, chattel paper or letters of credit
(each as defined in the Uniform Commercial Code) of the Obligors
evidencing, representing, arising from or existing in respect of,
relating to, securing or otherwise supporting the payment of, any of
the Accounts, including (but not limited to) promissory notes,
drafts, bills of exchange and trade acceptances (herein collectively
called "Instruments");
(f) the balance from time to time in the Collateral Account,
and all other proceeds of Accounts and Instruments.
Section 5. Cash Proceeds of Collateral.
5.01 Collateral Account. On or before the date hereof, the
Fund has established at The Chase Manhattan Bank, N.A. a cash collateral
account (the "Collateral Account") in the name and under the control of the
Fund and the Company and each Obligor has delivered to the Fund, in escrow,
irrevocable instructions to its banks, account debtors and other Persons
obligated in respect of all Accounts to make all payments either directly to
the Fund or to the Collateral Account, as provided in Section 5.02 below. The
Fund will not release any such instructions except upon the occurrence of an
Event of Default, or any Default which by its nature cannot be cured. Upon the
occurrence of any Event of Default, or any Default which by its nature cannot
be cured, the Obligors will deposit in the Collateral Account the cash
proceeds of any Collateral (including proceeds of insurance thereon) and any
additional amounts which any of the Obligors wishes to pledge to the Fund as
additional collateral security hereunder. The balance from time to time in the
Collateral Account shall constitute part of the Collateral hereunder and shall
not constitute payment of the Secured Obligations until applied as hereinafter
provided. At any time following the occurrence and during the continuance of
an Event of Default, the Fund may in its discretion apply or cause to be
applied (subject to collection) the balance from time to time outstanding to
the credit of the Collateral Account to the payment of the Secured Obligations
in the manner specified in Section 6.09 hereof. The balance from time to time
in the Collateral Account shall be subject to withdrawal only as provided
herein.
5.02 Proceeds of Accounts. If the Loan is not satisfied on
or before the Maturity Date, each Obligor shall, as of the Maturity Date,
instruct all account debtors and other Persons obligated in respect of all
Accounts to make all payments in respect of the Accounts either (a) directly
to the Fund (by instructing that such payments be remitted to a post office
box which shall be in the name and under the control of the Fund) or (b) to
one or more other banks in the United States of America (by instructing that
such payments be remitted to a post office box which shall be in the name and
under the control of the Fund) under arrangements, in form and substance
satisfactory to the Fund pursuant to which such Obligor shall have irrevocably
instructed such other bank (and such other bank shall have agreed) to
6
<PAGE>
remit all proceeds of such payments directly to the Fund for deposit into the
Collateral Account. All payments made to the Fund, as provided in the
preceding sentence, shall be immediately deposited in the Collateral Account.
In addition to the foregoing, each Obligor agrees that if (after the Maturity
Date or during the pendancy of any Event of Default or Default which by its
nature cannot be cured) the proceeds of any Collateral hereunder (including
the payments made in respect of Accounts) shall be received by it, such
Obligor shall as promptly as possible deposit such proceeds into the
Collateral Account. Until so deposited, all such proceeds shall be held in
trust by such Obligor for and as the property of the Fund and shall not be
commingled with any other funds or property of such Obligor.
5.03 Investment of Balance in Collateral Account. Amounts on
deposit in the Collateral Account shall be invested from time to time in such
Permitted Investments as the Obligors through the Pledgor (or, after the
occurrence and during the continuance of a Default, the Fund) shall determine,
which Permitted Investments shall be held in the name and be under the control
of the Fund, provided that at any time after the occurrence and during the
continuance of an Event of Default, the Fund may in its discretion at any time
and from time to time elect to liquidate any such Permitted Investments and to
apply or cause to be applied the proceeds thereof to the payment of the
Secured Obligations in the manner specified in Section 6.09 hereof.
Section 6. Further Assurances; Remedies. In furtherance of
the grant of the pledge and security interest pursuant to Section 4 hereof,
the Obligors hereby jointly and severally agree with the Fund as follows:
6.01 Delivery and other Perfection. Each Obligor shall:
(a) if any of the above-described shares, securities or
monies required to be pledged by such Obligor under clauses (a), (b)
and (c) of Section 4 hereof are received by such Obligor, forthwith
either (x) transfer and deliver to the Fund such shares, securities
or monies so received by such Obligor (together with the certificates
for any such shares and securities duly endorsed in blank or
accompanied by undated stock powers duly executed in blank) all of
which thereafter shall be held by the Fund, pursuant to the terms of
this Agreement, as part of the Collateral or (y) take such other
action as the Fund shall deem necessary or appropriate to duly record
the Lien created hereunder in such shares, securities or monies
referred to in said clauses (a), (b) and (c);
(b) deliver and pledge to the Fund any and all Instruments,
endorsed and/or accompanied by such instruments of assignment and
transfer in such form and substance as the Fund may request;
provided, that so long as no Default shall have occurred and be
continuing, such Obligor may retain for collection in the ordinary
course any Instruments received by it in the ordinary course of
business and the Fund shall, promptly upon request of such Obligor
through the Pledgor, make appropriate
7
<PAGE>
arrangements for making any other Instrument pledged by such Obligor
available to it for purposes of presentation, collection or renewal
(any such arrangement to be effected, to the extent deemed
appropriate by the Fund, against trust receipt or like document);
(c) (i) concurrently herewith, file financing statements in
accordance with the UCC to evidence the Fund's Lien in the Collateral
as security of the Loan, in such jurisdictions as are necessary to
perfect such Lien; and (ii) on or after the Maturity Date, give,
execute, deliver, file and/or record any financing statement, notice,
instrument, document, agreement or other papers that may be necessary
or desirable (in the judgment of the Fund) to create, preserve,
perfect or validate any security interest granted pursuant hereto or
to enable the Fund to exercise and enforce its rights hereunder with
respect to such security interest, including, without limitation,
causing any or all of the Stock Collateral to be transferred of
record into the name of the Fund or its nominee (and the Fund agrees
that if any Stock Collateral is transferred into its name or the name
of its nominee, the Fund will thereafter promptly give to the
respective Obligor copies of any notices and communications received
by it with respect to the Stock Collateral pledged by such Obligor
hereunder), provided that notices to account debtors in respect of
any Accounts or Instruments shall be subject to the provisions of
clause (f) below;
(d) keep full and accurate books and records relating to the
Collateral, and stamp or otherwise mark such books and records in
such manner as the Fund may reasonably require in order to reflect
the security interests granted by this Agreement;
(e) permit representatives of the Fund, upon reasonable
notice, at any time during normal business hours to inspect and make
abstracts from its books and records pertaining to the Collateral,
and permit representatives of the Fund to be present at such
Obligor's place of business to receive copies of all communications
and remittances relating to the Collateral, and forward copies of any
notices or communications received by such Obligor with respect to
the Collateral all in such manner as the Fund may require; and
(f) upon the occurrence and during the continuance of any
Default, upon request of the Fund, promptly notify (and such Obligor
hereby authorizes the Fund so to notify) each account debtor in
respect of any Accounts or Instruments that such Collateral has been
assigned to the Fund hereunder, and that any payments due or to
become due in respect of such Collateral are to be made directly to
the Fund.
6.02 Other Financing Statements and Liens. Except as
otherwise permitted under Section 6.2(b) of the Bridge Financing Agreement,
without the prior written consent of the Fund, the Obligors shall not file or
suffer to be on file, or authorize or permit to be filed or
8
<PAGE>
to be on file, in any jurisdiction, any financing statement or like instrument
with respect to the Collateral in which the Fund is not named as the sole
secured party.
6.03 Preservation of Rights. The Fund shall not be required
to take steps necessary to preserve any rights against prior parties to any of
the Collateral.
6.04 Special Provisions Relating to Certain Collateral.
(a) Stock Collateral.
(1) The Obligors will cause the Stock Collateral to
constitute at all times 100% of the total number of shares of each class of
capital stock of each Obligor then outstanding.
(2) So long as no Event of Default shall have occurred and
be continuing, the Obligors shall have the right to exercise all voting,
consensual and other powers of ownership pertaining to the Stock Collateral
for all purposes not inconsistent with the terms of this Agreement, the other
Loan Documents, or any other instrument or agreement referred to herein or
therein, provided that the Obligors jointly and severally agree that they will
not vote the Stock Collateral in any manner that is inconsistent with the
terms of this Agreement, the Bridge Financing Agreement, or any such other
instrument or agreement; and the Fund shall execute and deliver to the
Obligors or cause to be executed and delivered to the Obligors all such
proxies, powers of attorney, dividend and other orders, and all such
instruments, without recourse, as the Obligors may reasonably request for the
purpose of enabling the Obligors to exercise the rights and powers which they
are entitled to exercise pursuant to this Section 6.04(a)(2).
(3) All dividends and other distributions on the Stock
Collateral shall be paid directly to the Fund and retained by it in the
Collateral Account as part of the Stock Collateral, subject to the terms of
this Agreement, and, if the Fund shall so request in writing, the Obligors
jointly and severally agree to execute and deliver to the Fund appropriate
additional dividend, distribution and other orders and documents to that end.
6.05 Events of Default, etc. During the period during which
an Event of Default shall have occurred and be continuing:
(i) each Obligor shall, at the request of the Fund, assemble
the Collateral owned by it at such place or places, reasonably
convenient to both the Fund and such Obligor, designated in the
Fund's request;
(ii) the Fund may make any reasonable compromise or
settlement deemed desirable with respect to any of the Collateral and
may extend the time of payment, arrange for payment in installments,
or otherwise modify the terms of, any of the Collateral;
9
<PAGE>
(iii) the Fund shall have all of the rights and remedies
with respect to the Collateral of a secured party under the Uniform
Commercial Code (whether or not said Code is in effect in the
jurisdiction where the rights and remedies are asserted) and such
additional rights and remedies to which a secured party is entitled
under the laws in effect in any jurisdiction where any rights and
remedies hereunder may be asserted, including, without limitation,
the right, to the maximum extent permitted by law, to exercise all
voting, consensual and other powers of ownership pertaining to the
Collateral as if the Fund were the sole and absolute owner thereof
(and each Obligor agrees to take all such action as may be
appropriate to give effect to such right);
(iv) the Fund in its discretion may, in its name or in the
name of the Obligors or otherwise, demand, sue for, collect or
receive any money or property at any time payable or receivable on
account of or in exchange for any of the Collateral, but shall be
under no obligation to do so; and
(v) the Fund may, upon 10 Business Days' prior written
notice to the Obligors of the time and place, with respect to the
Collateral or any part thereof which shall then be or shall
thereafter come into the possession, custody or control of the Fund,
sell, assign or otherwise dispose of all or any of such Collateral,
at such place or places as the Fund deems best, and for cash or on
credit or for future delivery (without thereby assuming any credit
risk), at public or private sale, without demand of performance or
notice of intention to effect any such disposition or of time or
place thereof (except such notice as is required above or by
applicable statute and cannot be waived) and the Fund or anyone else
may be the purchaser, lessee, assignee or recipient of any or all of
the Collateral so disposed of at any public sale (or, to the extent
permitted by law, at any private sale), and thereafter hold the same
absolutely, free from any claim or right of whatsoever kind,
including any right or equity of redemption (statutory or otherwise),
of the Obligors, any such demand, notice or right and equity being
hereby expressly waived and released. The Fund may, without notice or
publication, adjourn any public or private sale or cause the same to
be adjourned from time to time by announcement at the time and place
fixed for the sale, and such sale may be made at any time or place to
which the same may be so adjourned.
The proceeds of each collection, sale or other disposition under this Section
5.05 shall be applied in accordance with Section 6.09 hereof.
The Obligors recognize that, by reason of certain
prohibitions contained in the Securities Act of 1933, as amended, and
applicable state securities laws, the Fund may be compelled, with respect to
any sale of all or any part of the Collateral, to limit purchasers to those
who will agree, among other things, to acquire the Collateral for their own
account, for investment and not with a view to the distribution or resale
thereof. The Obligors acknowledge that any such private sales may be at prices
and on terms less favorable to the Fund than those obtainable through a public
sale without such restrictions, and,
10
<PAGE>
notwithstanding such circumstances, agree that any such private sale shall be
deemed to have been made in a commercially reasonable manner and that the Fund
shall have no obligation to engage in public sales and no obligation to delay
the sale of any Collateral for the period of time necessary to permit the
respective Obligor thereof to register it for public sale.
6.06 Deficiency. If the proceeds of sale, collection or
other realization of or upon the Collateral pursuant to Section 6.05 hereof
are insufficient to cover the costs and expenses of such realization and the
payment in full of the Secured Obligations, the Obligors shall remain jointly
liable for any deficiency.
6.07 Removals, etc. Without at least 30 days prior written
notice to the Fund, the Obligors shall not (i) maintain any of their books or
records with respect to the Collateral at any office or maintain their chief
executive office or their principal place of business at any place other than
at the address indicated beneath the signature of the Pledgor to the Bridge
Financing Agreement or at one of the locations identified in Annex 2 hereto
under their respective names or in transit from one of such respective
locations to another or (ii) change the respective corporate names, or the
respective names under which they do business, from the names shown on the
signature pages hereto.
6.08 Private Sale. The Fund shall incur no liability as a
result of the sale of the Collateral, or any part thereof, at any private sale
pursuant to Section 6.05 hereof conducted in a commercially reasonable manner.
The Obligors hereby waive any claims against the Fund arising by reason of the
fact that the price at which the Collateral may have been sold at such a
private sale was less than the price which might have been obtained at a
public sale or was less than the aggregate amount of the Secured Obligations,
even if the Fund accepts the first offer received and does not offer the
Collateral to more than one offeree.
6.09 Application of Proceeds. Except as otherwise herein
expressly provided, the proceeds of any collection, sale or other realization
of all or any part of the Collateral pursuant hereto, and any other cash at
the time held by the Fund under Section 5 hereof or this Section 6, shall be
applied by the Fund:
First, to the payment of the costs and expenses of such
collection, sale or other realization, including reasonable
out-of-pocket costs and expenses of the Fund and the fees and
expenses of its counsel, and all expenses, and advances made or
incurred by the Fund in connection therewith;
Next, to the payment in full of the Secured Obligations in
each case equally and ratably in accordance with the respective
amounts thereof then due and owing; and
Finally, to the payment to the respective Obligor, or its
successors or assigns, or as a court of competent jurisdiction may
direct, of any surplus then remaining.
11
<PAGE>
As used in this Section 6, "proceeds" of Collateral shall mean cash,
securities and other property realized in respect of, and distributions in
kind of, Collateral, including any thereof received under any reorganization,
liquidation or adjustment of debt of the Obligors or any obligor on any of the
Collateral.
6.10 Attorney-in-Fact. Without limiting any rights or powers
granted by this Agreement to the Fund while no Event of Default has occurred
and is continuing, upon the occurrence and during the continuance of any Event
of Default the Fund is hereby appointed the attorney-in-fact of the Obligors
for the purpose of carrying out the provisions of this Section 6 and taking
any action and executing any instruments which the Fund may deem necessary or
advisable to accomplish the purposes hereof, which appointment as
attorney-in-fact is irrevocable and coupled with an interest. Without limiting
the generality of the foregoing, so long as the Fund shall be entitled under
this Section 6 to make collections in respect of the Collateral, the Fund
shall have the right and power to receive, endorse and collect all checks made
payable to the order of any Obligor representing any dividend, payment, or
other distribution in respect of the Collateral or any part thereof and to
give full discharge for the same.
6.11 Perfection. Prior to or concurrently with the execution
and delivery of this Agreement, each Obligor shall (i) file financing
statements evidencing the security of the Loan in accordance with the UCC
and(ii) deliver to the Fund all stock certificates identified in Annex 1
hereto, accompanied by undated stock powers duly executed in blank.
6.12 Termination. When all Secured Obligations shall have
been paid in full, this Agreement shall terminate, and the Fund shall
forthwith cause to be assigned, transferred and delivered, against receipt but
without any recourse, warranty or representation whatsoever, any remaining
Collateral and money received in respect thereof, to or on the order of the
respective Obligors and to be released and canceled all licenses and rights
referred to in Section 6.04(b)(1) hereof. The Fund shall also execute and
deliver to the respective Obligors upon such termination such Uniform
Commercial Code termination statements, and such other documentation as shall
be reasonably requested by the respective Obligors to effect the termination
and release of the Liens on the Collateral.
6.13 Expenses. The Obligors jointly and severally agree to
pay to the Fund all out-of-pocket expenses (including reasonable expenses for
legal services of every kind)(all of which expenses periodically shall be
reimbursed as incurred) of, or incident to, the enforcement or protection of
any of the provisions of this Section 6, or performance by the Fund of any
obligations of the Obligors in respect of the Collateral which the Obligors
have failed or refused to perform, or any actual or attempted sale, or any
exchange, enforcement, collection, compromise or settlement in respect of any
of the Collateral, and for the care of the Collateral and defending or
asserting rights and claims of the Fund in respect thereof, by litigation or
otherwise, including expenses of insurance, and all such expenses shall be
Secured Obligations to the Fund secured under Section 4 hereof.
12
<PAGE>
6.14 Future Direct and Indirect Subsidiaries. The Company
will cause all of its future direct and indirect subsidiaries (the "Future
Subsidiaries") to become a party to this Agreement, such that each Future
Subsidiary will become a Subsidiary Guarantor under this Agreement and be
subject to the all the conditions of this Agreement applicable to Subsidiary
Guarantors.
6.15 Further Assurances. The Obligors agree that, from time
to time upon the written request of the Fund, the Obligors will execute and
deliver such further documents and do such other acts and things as the Fund
may reasonably request in order fully to effect the purposes of this
Agreement.
Section 7. Miscellaneous.
7.01 No Waiver. No failure on the part of the Fund, and no
course of dealing with respect to, and no delay in exercising, any right,
power or remedy hereunder shall operate as a waiver thereof; nor shall any
single or partial exercise by the Fund of any right, power or remedy hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy. The remedies herein are cumulative and are not
exclusive of any remedies provided by law.
7.02 Governing Law. This Agreement shall be governed by and
construed under the law of the State of New York as applied to agreements
among New York residents entered into and performed entirely within New York.
7.03 Notices. All notices, requests, consents and demands
hereunder shall be in writing and telecopied or delivered to the intended
recipient at its address or telecopy number specified pursuant to Section 8.10
of the Bridge Financing Agreement and shall be deemed to have been given at
the times specified in said Section 8.10.
7.04 Waivers, etc. The terms of this Agreement may be
waived, altered or amended only by an instrument in writing duly executed by
each Obligor and the Fund. Any such amendment or waiver shall be binding upon
the Fund, each holder of any Secured Obligation and the Obligors.
7.05 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the respective successors and assigns of each
Obligor, the Fund, and each holder of the Secured Obligations (provided,
however, that the Obligors shall not assign or transfer their rights hereunder
without the prior written consent of the Fund).
7.06 Counterparts. This Agreement may be executed in any
number of counterparts, all of which together shall constitute one and the
same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
13
<PAGE>
7.07 Agents. The Fund may employ agents and
attorneys-in-fact in connection herewith and shall not be responsible for the
negligence or misconduct of any such agent or attorneys-in-fact selected by it
in good faith and with reasonable care.
7.08 Severability. If any provision hereof is invalid and
unenforceable in any jurisdiction, then, to the fullest extent permitted by
law, (i) the other provisions hereof shall remain in full force and effect in
such jurisdiction and shall be liberally construed in favor of the Fund and
the Banks in order to carry out the intentions of the parties hereto as nearly
as may be possible and (ii) the invalidity or unenforceability of any
provision hereof in any jurisdiction shall not affect the validity or
enforceability of such provision in any other jurisdiction.
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Security Agreement to be duly executed as of the day and year first above
written.
THE MARQUEE GROUP, INC.
By_________________________________
Title:
SUBSIDIARY GUARANTORS
ATHLETES AND ARTISTS, INC.
By_________________________________
Title:
SPORTS MARKETING & TELEVISION
INTERNATIONAL, INC.
By_________________________________
Title:
THE HUFF ALTERNATIVE INCOME
FUND, L.P.
By_________________________________
Title:
15
<PAGE>
ANNEX 1
<TABLE>
<CAPTION>
LIST OF PLEDGED STOCK
ATHLETES AND ARTISTS, INC.
<S> <C> <C> <C>
Class of Registered
Stock Certificate Nos. Owner Number of Shares
- ----- ---------------- ----- ----------------
__________ The Marquee Group, Inc. 100 shares of common stock,
[no] par value [$__________]
SPORTS MARKETING & TELEVISION
INTERNATIONAL, INC.
Class of Registered
Stock Certificate Nos. Owner Number of Shares
- ----- ---------------- ----- ----------------
__________ The Marquee Group, Inc. 5,000 shares of common stock,
[no] par value [$__________]
</TABLE>
<PAGE>
[Name of Subsidiary Guarantor #3]
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class of Registered
Stock Certificate Nos. Owner Number of Shares
- ----- ---------------- ----- ----------------
Class # 1 __________ ____ ____ shares of
[common/preferred] stock,
[no] par value [$__________]
Class # 2 __________ ____ ____ shares of
[common/preferred] stock,
[no] par value [$__________]
Class # 3 __________ ____ ____ shares of
[common/preferred] stock,
[no] par value [$__________]
</TABLE>
2
<PAGE>
ANNEX 2
LIST OF LOCATIONS
THE MARQUEE GROUP, INC. 888 Seventh Avenue, 40th Floor
New York, New York 10019
ATHLETES AND ARTISTS, INC. 888 Seventh Avenue, 40th Floor
New York, New York 10019
SPORTS MARKETING & TELEVISION
INTERNATIONAL, INC. 888 Seventh Avenue, 40th Floor
New York, New York 10019
<PAGE>
EXHIBIT B-1
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR ANY STATE SECURITIES LAWS AND
NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR SUCH
LAWS AND RULES AND REGULATIONS THEREUNDER. THE ISSUER HAS UNDERTAKEN TO
REGISTER THE SHARES OF COMMON STOCK ISSUABLE HEREUNDER PURSUANT TO THAT
CERTAIN REGISTRATION RIGHTS AGREEMENT DATED AS OF AUGUST 26, 1997 BETWEEN THE
ISSUER AND THE HUFF ALTERNATIVE INCOME FUND, L.P.
OPTION AGREEMENT
OPTION TO PURCHASE SHARES OF COMMON
STOCK OF THE MARQUEE GROUP, INC.
This certifies that The Huff Alternative Income Fund, L.P.,
a Delaware limited partnership (the "Holder"), for value received, is entitled
to purchase from The Marquee Group, Inc., a Delaware corporation (the
"Company"), one hundred thousand (100,000) fully paid and nonassessable
shares of the Company's common stock, par value $.01 per share (the "Stock"),
at a price of $2.25 per share (the "Stock Purchase Price") at any time or from
time to time on or after the Commencement Date (as defined below) but not
later than 5:00 p.m. (New York time) on the Expiration Date (as defined below)
upon surrender to the Company at its principal office at 888 Seventh Avenue,
40th Floor, New York, New York 10019 Attention: ____________ (or at such other
location as the Company may advise Holder in writing) of a copy of the Form of
Subscription attached as Exhibit A hereto duly filled in and signed and (i)
upon payment by cash, certified or bank check or wire transfer of the
aggregate Stock Purchase Price for the number of shares for which this Option
is being exercised determined in accordance with the provisions hereof, or
(ii) upon payment by Cashless Exercise in accordance with the terms of Section
8 hereof. The Stock Purchase Price and the number of shares purchasable
hereunder are subject to adjustment as provided in Section 3 of this Option
Agreement. "Commencement Date" means August 26,1997. "Expiration Date" means
the earlier of (i) August 26, 2007, or (ii) the occurrence of an event which
causes termination of this Option under clause (d) of Section 3.6. This Option
is issued pursuant to the Bridge Financing Agreement, dated as of August 26,
1997, between the Company, the Subsidiary Guarantors (as defined in the Bridge
Financing Agreement) and the Holder (the "Bridge Financing Agreement").
<PAGE>
The option granted pursuant to this Option Agreement (this
"Option") is subject to the following terms and conditions:
1. Exercise; Issuance of Certificates; Payment for Shares.
This Option is exercisable at the option of Holder at any time or from time to
time on or after the but not later than the Expiration Date for all or a
portion of the shares of Stock which may be purchased hereunder. The Company
agrees that the shares of Stock purchased under this Option shall be and are
deemed to be issued to Holder as the record owner of such shares as of the
close of business on the date on which this Option shall have been surrendered
and payment made for such shares. Subject to the provisions of Section 2,
certificates for the shares of Stock so purchased, together with any other
securities or property to which Holder is entitled upon such exercise, shall
be delivered to Holder by the Company's transfer agent at the Company's
expense within a reasonable time (but in no event more than ten days) after
the rights represented by this Option have been exercised. Each stock
certificate so delivered shall be in such denominations of Stock as may be
requested by Holder and shall be registered in the name of Holder or such
other name as shall be designated by Holder, subject to the limitations
contained in Section 2. If, upon exercise of this Option, fewer than all of
the shares of Stock evidenced by this Option are purchased prior to the
Expiration Date, one or more new options substantially in the form of, and on
the terms in, this Options will be issued for the remaining number of shares
of Stock not purchased upon exercise of this Option.
2. Shares to be Fully Paid: Reservation of Shares. The
Company covenants and agrees that all shares of Stock which may be issued upon
the exercise of the rights represented by this Option (the "Option Shares")
will, upon issuance, be duly authorized, validly issued, fully paid and
nonassessable and free from all preemptive rights of any stockholder and free
of all taxes, liens and charges with respect to the issue thereof. The Company
further covenants and agrees that during the period within which the rights
represented by this Option may be exercised, the Company will at all times
have authorized and reserved, for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this Option, a sufficient
number of shares of authorized but unissued Stock for such exercise. The
Company will take all such action as may be necessary to assure that such
shares of Stock may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic
securities exchange or automated quotation system upon which the Stock may be
listed.
3. Adjustment of Stock Purchase Price; Number of Shares. The
Stock Purchase Price and the number of shares purchasable upon the exercise of
this Option shall be subject to adjustment from time to time upon the
occurrence of certain events described in this Section 3; provided, however,
that if a certain event shall cause the Stock Purchase Price to be adjusted to
a price less than the par value of the Stock, the Company prior to such event
shall decrease the par value of the Stock so that the Stock Purchase Price
shall not be less than the par value of the Stock following the occurrence of
such event. Upon each adjustment of the Stock Purchase Price, the holder of
this Option shall thereafter be entitled to purchase, at the Stock Purchase
Price resulting from such adjustment, the number of shares obtained by
2
<PAGE>
multiplying the Stock Purchase Price in effect immediately prior to such
adjustment by the number of shares purchasable pursuant hereto immediately
prior to such adjustment, and dividing the product thereof by the Stock
Purchase Price resulting from such adjustment.
3.1 Subdivision or Combination of Stock. In case
the Company shall at any time subdivide its outstanding shares of Stock into a
greater number of shares, the Stock Purchase Price in effect immediately prior
to such subdivision shall be proportionately reduced, and the number of shares
issuable upon exercise of this Option shall be proportionately increased.
Conversely, in case the outstanding shares of Stock of the Company shall be
combined into a smaller number of shares, the Stock Purchase Price in effect
immediately prior to such combination shall be proportionately increased and
the number of shares issuable upon exercise of this Option shall be
proportionately reduced.
3.2 Stock Dividend. In case the Company shall at
any time declare or pay a dividend upon its Stock payable in shares of Stock,
the Stock Purchase Price in effect immediately prior to such dividend shall be
proportionately reduced and the number of shares issuable upon exercise of
this Option shall be proportionately increased.
3.3 Dilutive Issuances. If the Company shall sell
or issue at any time after the date of this Option and prior to the
termination or expiration of this Option, shares of Stock without
consideration or for consideration per share less than, or Convertible
Securities or Convertible Securities or Rights with an exercise or conversion
price (the "Stock Issuance Price") lower than, the Stock Adjustment Price (as
hereinafter defined) in effect on the date of and immediately prior to such
sale or issuance, then, upon such sale or issuance (or deemed sale or
issuance), the Stock Purchase Price shall be reduced concurrently with such
sale or issuance by a percentage equal to the percentage decrease between the
Stock Adjustment Price and the Stock Issuance Price. The "Stock Adjustment
Price" shall be initially the lower of (a) $6.40 per share or (b) the issuance
price per share in any public offering of Common Stock by the Company
occurring within 90 days following the Commencement Date. The Stock Adjustment
Price will be adjusted in the same manner as the Stock Purchase Price pursuant
to Section 3.1 and 3.2 simultaneously with any adjustment to the Stock
Purchase Price pursuant to such Section 3.1 or 3.2 and will be adjusted in the
same manner as the adjustment to the Stock Purchase Price pursuant to this
Section 3.3 immediately following any adjustment to the Stock Purchase Price
pursuant to this Section 3.3.
3
<PAGE>
3.3.1 Definitions; Valuation. (a) For purposes of
this Section 3.3, the following definitions shall apply:
(i) "Convertible Securities" shall mean any
indebtedness, shares of stock or other securities convertible into or
exchangeable for Stock.
(ii) "Rights" shall mean any options, warrants or
other similar rights to subscribe for or purchase Stock or Convertible
Securities.
(b) Valuation. In the event that some or all of the
consideration to receive in connection with any issuance to which Section 3.3
applies is in a form other than cash, then such consideration will be valued
as follows: (i) if the consideration consists of actively traded securities,
then the value per security shall be the average closing price for such
security over the most recent fifteen trading days, or the closing bid if no
sales were reported on any day during such period, as quoted the National
Association of Securities Dealers, Inc. Automated Quotation System, or (ii) in
all other cases, the fair market of the consideration as determined by a
non-affiliated third party financial expert to be chosen by the Company.
3.3.2 No Impairment. The Company will not, by
amendment of its Certificate of Incorporation or through any reorganization,
transfer of assets, merger, dissolution, issue or sale of securities or any
other action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Section 3.3 by the Company,
but will at all times in good faith assist in the carrying out of all the
provisions of this Section 3.3 and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the-holders of the
Options against impairment. If any event shall occur as to which the
provisions of this Section 3 shall not be strictly applicable, but with
respect to which the failure to make any adjustment to the Stock Purchase
Price and the number of shares purchasable upon exercise of this Option would
not fairly protect the purchase rights represented by this Option in
accordance with the intent and principles of this Section 3, upon request of
the Holder of this Option, the Company shall appoint a firm of independent
public accountants reasonably acceptable to the Holder of this Option which
shall give its opinion upon the adjustments, if any, consistent with the
intent and principles established in this Section 3 necessary to preserve
without dilution the purchase rights represented by this Option. 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.
3.4 Excluded Events. Notwithstanding anything in
this Section 3 to the contrary, the Stock Purchase Price shall not be adjusted
by virtue of the issuance of Stock, Rights or Convertible Securities (i) to
employees, directors, or officers of the Company or any of its subsidiaries
pursuant to any currently outstanding stock grant, stock option, stock
purchase right, pension or profit sharing plan or other stock agreement or
arrangement for the
4
<PAGE>
benefit of the employees, directors, or officers of the Company which
currently is existing and (ii) to persons selling companies or businesses to
the Company in a transaction approved by the Holder.
3.5 Notice of Adjustment. Upon any adjustment of
the Stock Purchase Price or any increase or decrease in the number of shares
purchasable upon the exercise of this Option, the Company shall give written
notice thereof, by first class mail, postage prepaid, addressed to the
registered holder of this Option at the address of such Holder as shown on the
books of the Company. The notice shall be signed by the Company's chief
financial officer and shall state the effective date of the adjustment and the
Stock Purchase Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares purchasable at such price upon the
exercise of this Option, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
3.6 Other Notices. If at any time:
(a) the Company shall propose to declare any cash
dividend upon its Stock;
(b) the Company shall propose to declare or make
any dividend or other distribution to the holders of its Stock, whether in
cash, property or other securities;
(c) the Company shall propose to effect any
reorganization or reclassification of the capital stock of the Company or any
consolidation or merger of the Company with or into another corporation or any
sale, lease or conveyance of all or substantially all of the assets of the
Company; or
(d) the Company shall propose to effect a voluntary
or involuntary dissolution, liquidation or winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by certified
or registered mail, postage prepaid, addressed to the holder of this Option at
the address of such holder as shown on the books of the Company, (i) at least
30 days' prior written notice of any record date for any such cash dividend or
distribution and (ii) at least 60 days' written notice of any record date for
any other action described in clauses (a) through (d) of this Section 3.6 or
for a vote of the stockholders with respect to any such action. Upon the
occurrence of an event described in clause (c), the holder of this Option
shall be entitled thereafter to receive upon exercise of this Option the kind
and amount of consideration, whether cash, shares of stock or other securities
or assets, which the Holder would have been entitled to receive after the
occurrence of such event had this Option been exercised immediately prior to
such event; and in any such case in which cash is not the only consideration
to which the Holder is entitled upon the occurrence of such event, appropriate
provision shall be made with respect to the rights and interests of the holder
to the end that the provisions of this Option (including, without limitation,
provisions with respect to changes in and adjustments of the Stock Purchase
Price and the number of
5
<PAGE>
shares purchasable upon the exercise of this Option) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, or other
securities or assets, thereafter deliverable upon the exercise of this Option.
The Company will not effect any of the transactions described in clause (c)
above unless, prior to the consummation thereof, each person (other than the
Company) that may be required to deliver any cash, stock, securities or other
assets upon the exercise of this Option as provided herein shall assume, by
written instrument delivered to, and reasonably satisfactory to, the holder of
this Option, (x) the obligations of the Company under this Option (and if the
Company shall survive the consummation of any such transaction, such
assumption shall be in addition to, and shall not release the Company from,
any continuing obligations of the Company under this Option) and (y) the
obligation to deliver to such holder such cash, stock, securities or other
assets as such holder may be entitled to receive in accordance with the
provisions of this Section 3. Upon the termination of the Company pursuant to
an event described in clause (d), this Option shall terminate. The provisions
of this Section 3.6 shall similarly apply to successive transactions.
4. Issue Tax. The issuance of certificates for shares of
Stock upon the exercise of this Option shall be made without charge to the
Holder of this Option for any issue tax in respect thereof; provided, however,
that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the then holder of the Option being
exercised.
5. No Voting Rights; Limitation of Liability. Nothing
contained in this Option shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a stockholder
in respect of meetings of stockholders for the election of directors of the
Company or any other matters or any rights whatsoever as a stockholder of the
Company. No provisions hereof, in the absence of affirmative action by the
Holder to purchase shares of Stock, and no mere enumeration herein of the
rights or privileges of the Holder hereof, shall give rise to any liability of
such Holder for the Stock Purchase Price or as a stockholder of the Company
whether such liability is asserted by the Company, its stockholders or by its
creditors or any third parties.
6. Restrictions on Transferability of Securities; Compliance
With Securities Act.
6.1 Restrictions on Transferability. The Option and
the Option Shares (collectively, the "Securities"), shall not be transferable
in the absence of registration under the Securities Act of 1933, as amended
("the "Act") and applicable state securities laws or an exemption therefrom
under such Act.
6.2 Restrictive Legend. Each certificate
representing the Securities or any other securities issued in respect of the
Securities upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall be stamped or otherwise imprinted with a
legend substantially in the following form (in addition to any legend required
under applicable state securities laws):
6
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR ANY
STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY
INTEREST THEREIN MAY BE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR
SUCH LAWS AND RULES AND REGULATIONS THEREUNDER. THE ISSUER
HAS UNDERTAKEN TO REGISTER THE SHARES OF COMMON STOCK
ISSUABLE HEREUNDER PURSUANT TO THAT CERTAIN REGISTRATION
RIGHTS AGREEMENT DATED AS OF AUGUST 26, 1997 BETWEEN THE
ISSUER AND THE HUFF ALTERNATIVE INCOME FUND, L.P.
6.3 Effect of Transfer. Subject to the provisions
of Section 6.1 hereof and subject to the payment of any applicable transfer
taxes, the Holder may transfer all or any portion of this Option by
surrendering this Option to the Company together with a completed assignment
in the form attached hereto as Exhibit B. Upon such surrender, the Company
shall deliver a new Option or Options to the person or persons entitled
thereto and, if applicable, shall deliver to the Holder a new Option
evidencing the right of the Holder to purchase the balance of the Option
Shares subject to purchase hereunder. The term "Holder" as used herein shall
include any transferee to whom this Option has been transferred in accordance
with this Section 6.3.
7. Representations and Warranties; Covenants. The
representations and warranties set forth in Article IV of the Bridge Financing
Agreement are hereby incorporated herein by reference. Such representations
and warranties, and the representations, warranties, covenants and agreements
contained herein, shall, for purposes of this Option Agreement, survive the
exercise of this Option and the sale or other disposition of the Option
Shares.
8. Cashless Exercise. The Holder of this Option shall have
the right, at its election, in lieu of delivering the Stock Purchase Price in
cash, to instruct the Company in the form of subscription to retain, in
payment of the Stock Purchase Price, the number of shares of Common Stock (the
"Payment Shares") equal to the quotient of (i) the aggregate Stock Purchase
Price of the shares as to which the Option is then being exercised divided by
(ii) the Fair Market Value (as hereinafter defined) per share and to deduct
the number of Payment Shares from the shares of Stock to be delivered to the
Holder. The "Fair Market Value" shall be, on any date, (i) the average closing
price for the Stock over the most recent fifteen trading
7
<PAGE>
days or the closing bid if no sales were reported on any day during such
period, as quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System or (ii) if (i) is not applicable, the most recent
sales price for the Stock in a bona fide arm's length transaction (if such a
transaction occurred within the last ten business days), or (iii) if neither
(i) nor (ii) are applicable, the fair market value of the Stock as determined
by a non-affiliated third party financial expert to be chosen by the Company.
9. Registration Procedures. The Option Shares constitute
"Registrable Securities" as defined in Section 1 of the Registration Rights
Agreement, dated as of August 26, 1997, and shall be entitled to registration
rights in accordance with such Agreement.
10. Modification and Waiver. This Option and any provision
hereof may be changed, waived, discharged or terminated only by an instrument
in writing signed by the party against which enforcement of the same is
sought.
11. Notices. Any notice, request or other document required
or permitted to be given or delivered to the Holder hereof or the Company
shall be personally delivered or shall be sent by certified or registered
mail, postage prepaid, to each such Holder at its address as shown on the
books of the Company or to the Company at the address indicated therefor in
the first paragraph of this Option. Any notice given by personal delivery
shall be deemed given upon receipt, and any notice given by certified or
registered mail shall be deemed given five days after registration or
certification thereof, as the case may be.
12. Descriptive Headings and Governing Law. The descriptive
headings of the several sections and paragraphs of this Option are inserted
for convenience only and do not constitute a part of this Option. This Option
shall be construed and enforced in accordance with, and the rights of the
parties shall be governed by, the laws of the State of New York, without
giving effect to rules governing conflicts of law.
13. Lost Options or Stock Certificates. The Company
represents and warrants to, and agrees with, the Holder that upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft,
destruction, or mutilation of any Option or stock certificate and, in the case
of any such loss, theft or destruction, upon receipt of an indemnity, or in
the case of any such mutilation, upon surrender and cancellation of such
Option or stock certificate, the Company at its expense will make and deliver
a new Option or stock certificate, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Option or stock certificate.
14. Fractional Shares. No fractional shares shall be issued
upon exercise of this Option. The Company shall, in lieu of issuing any
fractional share, pay the Holder entitled to such fraction a sum in cash equal
to such fraction multiplied by the Fair Market Value.
8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Option to be
executed by its officers, hereunto duly authorized this 26th day of August,
1997.
THE MARQUEE GROUP, INC.
By: /s/ Jan Chason
------------------------------
Name: Jan Chason
Title: Chief Financial Officer
9
<PAGE>
EXHIBIT A
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Option)
To: ___________________________
The undersigned, the holder of the within Option, hereby
irrevocably elects to exercise the purchase right represented by such Option
for, and to purchase thereunder, _____________________ (_______) shares of
Common Stock, par value $.01 per share (the "Stock"), of The Marquee Group,
Inc. (the "Company") and herewith : [cross out alternative not selected] (a)
makes payment of _____________________________ Dollars ($__________) therefor
or (b) requests the Company to retain, in payment of the Stock Purchase Price,
______ Payment Shares from the shares of Stock to be delivered pursuant
hereto. The undersigned hereby requests that the certificates for such shares
be issued in the name of, and delivered
to,_________________________________________________________________, whose
address is ____________________________________________.
The undersigned represents, unless the exercise of this
Option has been registered under the Securities Act of 1933, as amended (the
"Securities Act"), that the undersigned is acquiring such Stock for his own
account for investment and not with a view to or for sale in connection with
any distribution thereof (except for any resale pursuant to a Registration
Statement under the Securities Act).
DATED: _______________
---------------------------------------------------------
(Signature must conform in all respects to name of holder
as specified on the face of the Option)
---------------------------------------------------------
---------------------------------------------------------
(Address)
<PAGE>
EXHIBIT B
FORM OF ASSIGNMENT
(To be executed by the registered Holder if such Holder desires to transfer
the attached Option.)
FOR VALUE RECEIVED, ____________________________ hereby
sells, assigns, and transfers unto ___________________________ an Option to
Purchase ____________ shares of Common Stock, par value $.01 per share, of The
Marquee Group, Inc. (the "Company"), together with all right, title, and
interest therein, and does hereby irrevocably constitute and appoint
___________ attorney to transfer such Option on the books of the Company, with
full power of substitution.
Dated: ________________________
Signature __________________
NOTICE
This signature on the foregoing Assignment must correspond
to the name as written upon the face of this Option in every particular,
without alteration or enlargement or any change whatsoever.
<PAGE>
EXHIBIT B-2
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR ANY STATE SECURITIES LAWS AND
NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR SUCH
LAWS AND RULES AND REGULATIONS THEREUNDER. THE ISSUER HAS UNDERTAKEN TO
REGISTER THE SHARES OF COMMON STOCK ISSUABLE HEREUNDER PURSUANT TO THAT
CERTAIN REGISTRATION RIGHTS AGREEMENT DATED AS OF AUGUST 26, 1997 BETWEEN THE
ISSUER AND THE HUFF ALTERNATIVE INCOME FUND, L.P.
ADDITIONAL OPTION AGREEMENT
OPTION TO PURCHASE SHARES OF COMMON
STOCK OF THE MARQUEE GROUP, INC.
This certifies that The Huff Alternative Income Fund, L.P.,
a Delaware limited partnership (the "Holder"), for value received, is entitled
to purchase from The Marquee Group, Inc., a Delaware corporation (the
"Company"), [ ] fully paid and nonassessable shares of the Company's common
stock, par value $.01 per share (the "Stock"), at a price of $2.25 per share
(the "Stock Purchase Price") at any time or from time to time on or after the
Commencement Date (as defined below) but not later than 5:00 p.m. (New York
time) on the Expiration Date (as defined below) upon surrender to the Company
at its principal office at 888 Seventh Avenue, 40th Floor, New York, New York
10019 Attention: ____________ (or at such other location as the Company may
advise Holder in writing) of a copy of the Form of Subscription attached as
Exhibit A hereto duly filled in and signed and (i) upon payment by cash,
certified or bank check or wire transfer of the aggregate Stock Purchase Price
for the number of shares for which this Option is being exercised determined
in accordance with the provisions hereof, or (ii) upon payment by Cashless
Exercise in accordance with the terms of Section 8 hereof. The Stock Purchase
Price and the number of shares purchasable hereunder are subject to adjustment
as provided in Section 3 of this Option Agreement. "Commencement Date" means
the Closing Date as defined in the Bridge Financing Agreement. "Expiration
Date" means the earlier of (i) tenth anniversary of the Commencement Date, or
(ii) the occurrence of an event which causes termination of this Option under
clause (d) of Section 3.6. This Option is issued pursuant to the Bridge
Financing Agreement, dated as of August 26, 1997, between the Company, the
Subsidiary Guarantors (as
<PAGE>
defined in the Bridge Financing Agreement) and the Holder (the "Bridge Financing
Agreement").
The option granted pursuant to this Option Agreement (this
"Option") is subject to the following terms and conditions:
1. Exercise; Issuance of Certificates; Payment for Shares.
This Option is exercisable at the option of Holder at any time or from time to
time on or after the but not later than the Expiration Date for all or a
portion of the shares of Stock which may be purchased hereunder. The Company
agrees that the shares of Stock purchased under this Option shall be and are
deemed to be issued to Holder as the record owner of such shares as of the
close of business on the date on which this Option shall have been surrendered
and payment made for such shares. Subject to the provisions of Section 2,
certificates for the shares of Stock so purchased, together with any other
securities or property to which Holder is entitled upon such exercise, shall
be delivered to Holder by the Company's transfer agent at the Company's
expense within a reasonable time (but in no event more than ten days) after
the rights represented by this Option have been exercised. Each stock
certificate so delivered shall be in such denominations of Stock as may be
requested by Holder and shall be registered in the name of Holder or such
other name as shall be designated by Holder, subject to the limitations
contained in Section 2. If, upon exercise of this Option, fewer than all of
the shares of Stock evidenced by this Option are purchased prior to the
Expiration Date, one or more new options substantially in the form of, and on
the terms in, this Options will be issued for the remaining number of shares
of Stock not purchased upon exercise of this Option.
2. Shares to be Fully Paid: Reservation of Shares. The
Company covenants and agrees that all shares of Stock which may be issued upon
the exercise of the rights represented by this Option (the "Option Shares")
will, upon issuance, be duly authorized, validly issued, fully paid and
nonassessable and free from all preemptive rights of any stockholder and free
of all taxes, liens and charges with respect to the issue thereof. The Company
further covenants and agrees that during the period within which the rights
represented by this Option may be exercised, the Company will at all times
have authorized and reserved, for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this Option, a sufficient
number of shares of authorized but unissued Stock for such exercise. The
Company will take all such action as may be necessary to assure that such
shares of Stock may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic
securities exchange or automated quotation system upon which the Stock may be
listed.
3. Adjustment of Stock Purchase Price; Number of Shares. The
Stock Purchase Price and the number of shares purchasable upon the exercise of
this Option shall be subject to adjustment from time to time upon the
occurrence of certain events described in this Section 3; provided, however,
that if a certain event shall cause the Stock Purchase Price to be adjusted to
a price less than the par value of the Stock, the Company prior to such event
shall decrease the par value of the Stock so that the Stock Purchase Price
shall not be less than the
2
<PAGE>
par value of the Stock following the occurrence of such event. Upon each
adjustment of the Stock Purchase Price, the holder of this Option shall
thereafter be entitled to purchase, at the Stock Purchase Price resulting from
such adjustment, the number of shares obtained by multiplying the Stock
Purchase Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment, and
dividing the product thereof by the Stock Purchase Price resulting from such
adjustment.
3.1 Subdivision or Combination of Stock. In case
the Company shall at any time subdivide its outstanding shares of Stock into a
greater number of shares, the Stock Purchase Price in effect immediately prior
to such subdivision shall be proportionately reduced, and the number of shares
issuable upon exercise of this Option shall be proportionately increased.
Conversely, in case the outstanding shares of Stock of the Company shall be
combined into a smaller number of shares, the Stock Purchase Price in effect
immediately prior to such combination shall be proportionately increased and
the number of shares issuable upon exercise of this Option shall be
proportionately reduced.
3.2 Stock Dividend. In case the Company shall at
any time declare or pay a dividend upon its Stock payable in shares of Stock,
the Stock Purchase Price in effect immediately prior to such dividend shall be
proportionately reduced and the number of shares issuable upon exercise of
this Option shall be proportionately increased.
3.3 Dilutive Issuances. If the Company shall sell
or issue at any time after the date of this Option and prior to the
termination or expiration of this Option, shares of Stock without
consideration or for consideration per share less than, or Convertible
Securities or Convertible Securities or Rights with an exercise or conversion
price (the "Stock Issuance Price") lower than, the Stock Adjustment Price (as
hereinafter defined) in effect on the date of and immediately prior to such
sale or issuance, then, upon such sale or issuance (or deemed sale or
issuance), the Stock Purchase Price shall be reduced concurrently with such
sale or issuance by a percentage equal to the percentage decrease between the
Stock Adjustment Price and the Stock Issuance Price. The "Stock Adjustment
Price" shall be initially the lower of (a) $6.40 per share or (b) the issuance
price per share in any public offering of Common Stock by the Company
occurring within 90 days following the Commencement Date. The Stock Adjustment
Price will be adjusted in the same manner as the Stock Purchase Price pursuant
to Section 3.1 and 3.2 simultaneously with any adjustment to the Stock
Purchase Price pursuant to such Section 3.1 or 3.2 and will be adjusted in the
same manner as the adjustment to the Stock Purchase Price pursuant to this
Section 3.3 immediately following any adjustment to the Stock Purchase Price
pursuant to this Section 3.3.
3
<PAGE>
3.3.1 Definitions; Valuation. (a) For purposes of
this Section 3.3, the following definitions shall apply:
(i) "Convertible Securities" shall mean any
indebtedness, shares of stock or other securities convertible into or
exchangeable for Stock.
(ii) "Rights" shall mean any options, warrants or
other similar rights to subscribe for or purchase Stock or Convertible
Securities.
(b) Valuation. In the event that some or all of the
consideration to receive in connection with any issuance to which Section 3.3
applies is in a form other than cash, then such consideration will be valued
as follows: (i) if the consideration consists of actively traded securities,
then the value per security shall be the average closing price for such
security over the most recent fifteen trading days, or the closing bid if no
sales were reported on any day during such period, as quoted the National
Association of Securities Dealers, Inc. Automated Quotation System, or (ii) in
all other cases, the fair market of the consideration as determined by a
non-affiliated third party financial expert to be chosen by the Company.
3.3.2 No Impairment. The Company will not, by
amendment of its Certificate of Incorporation or through any reorganization,
transfer of assets, merger, dissolution, issue or sale of securities or any
other action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Section 3.3 by the Company,
but will at all times in good faith assist in the carrying out of all the
provisions of this Section 3.3 and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the-holders of the
Options against impairment. If any event shall occur as to which the
provisions of this Section 3 shall not be strictly applicable, but with
respect to which the failure to make any adjustment to the Stock Purchase
Price and the number of shares purchasable upon exercise of this Option would
not fairly protect the purchase rights represented by this Option in
accordance with the intent and principles of this Section 3, upon request of
the Holder of this Option, the Company shall appoint a firm of independent
public accountants reasonably acceptable to the Holder of this Option which
shall give its opinion upon the adjustments, if any, consistent with the
intent and principles established in this Section 3 necessary to preserve
without dilution the purchase rights represented by this Option. 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.
3.4 Excluded Events. Notwithstanding anything in this
Section 3 to the contrary, the Stock Purchase Price shall not be adjusted by
virtue of the issuance of Stock, Rights or Convertible Securities (i) to
employees, directors, or officers of the Company or any of its subsidiaries
pursuant to any currently outstanding stock grant, stock option, stock
purchase right, pension or profit sharing plan or other stock agreement or
arrangement for the
4
<PAGE>
benefit of the employees, directors, or officers of the Company which
currently is existing and (ii) to persons selling companies or businesses to
the Company in a transaction approved by the Holder.
3.5 Notice of Adjustment. Upon any adjustment of
the Stock Purchase Price or any increase or decrease in the number of shares
purchasable upon the exercise of this Option, the Company shall give written
notice thereof, by first class mail, postage prepaid, addressed to the
registered holder of this Option at the address of such Holder as shown on the
books of the Company. The notice shall be signed by the Company's chief
financial officer and shall state the effective date of the adjustment and the
Stock Purchase Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares purchasable at such price upon the
exercise of this Option, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
3.6 Other Notices. If at any time:
(a) the Company shall propose to declare any cash
dividend upon its Stock;
(b) the Company shall propose to declare or make
any dividend or other distribution to the holders of its Stock, whether in
cash, property or other securities;
(c) the Company shall propose to effect any
reorganization or reclassification of the capital stock of the Company or any
consolidation or merger of the Company with or into another corporation or any
sale, lease or conveyance of all or substantially all of the assets of the
Company; or
(d) the Company shall propose to effect a voluntary
or involuntary dissolution, liquidation or winding-up of the Company;
then, in any one or more of said cases, the Company shall give, by certified
or registered mail, postage prepaid, addressed to the holder of this Option at
the address of such holder as shown on the books of the Company, (i) at least
30 days' prior written notice of any record date for any such cash dividend or
distribution and (ii) at least 60 days' written notice of any record date for
any other action described in clauses (a) through (d) of this Section 3.6 or
for a vote of the stockholders with respect to any such action. Upon the
occurrence of an event described in clause (c), the holder of this Option
shall be entitled thereafter to receive upon exercise of this Option the kind
and amount of consideration, whether cash, shares of stock or other securities
or assets, which the Holder would have been entitled to receive after the
occurrence of such event had this Option been exercised immediately prior to
such event; and in any such case in which cash is not the only consideration
to which the Holder is entitled upon the occurrence of such event, appropriate
provision shall be made with respect to the rights and interests of the holder
to the end that the provisions of this Option (including, without limitation,
provisions with respect to changes in and adjustments of the Stock Purchase
Price and the number of
5
<PAGE>
shares purchasable upon the exercise of this Option) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, or other
securities or assets, thereafter deliverable upon the exercise of this Option.
The Company will not effect any of the transactions described in clause (c)
above unless, prior to the consummation thereof, each person (other than the
Company) that may be required to deliver any cash, stock, securities or other
assets upon the exercise of this Option as provided herein shall assume, by
written instrument delivered to, and reasonably satisfactory to, the holder of
this Option, (x) the obligations of the Company under this Option (and if the
Company shall survive the consummation of any such transaction, such
assumption shall be in addition to, and shall not release the Company from,
any continuing obligations of the Company under this Option) and (y) the
obligation to deliver to such holder such cash, stock, securities or other
assets as such holder may be entitled to receive in accordance with the
provisions of this Section 3. Upon the termination of the Company pursuant to
an event described in clause (d), this Option shall terminate. The provisions
of this Section 3.6 shall similarly apply to successive transactions.
4. Issue Tax. The issuance of certificates for shares of
Stock upon the exercise of this Option shall be made without charge to the
Holder of this Option for any issue tax in respect thereof; provided, however,
that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the then holder of the Option being
exercised.
5. No Voting Rights; Limitation of Liability. Nothing
contained in this Option shall be construed as conferring upon the Holder
hereof the right to vote or to consent or to receive notice as a stockholder
in respect of meetings of stockholders for the election of directors of the
Company or any other matters or any rights whatsoever as a stockholder of the
Company. No provisions hereof, in the absence of affirmative action by the
Holder to purchase shares of Stock, and no mere enumeration herein of the
rights or privileges of the Holder hereof, shall give rise to any liability of
such Holder for the Stock Purchase Price or as a stockholder of the Company
whether such liability is asserted by the Company, its stockholders or by its
creditors or any third parties.
6. Restrictions on Transferability of Securities; Compliance
With Securities Act.
6.1 Restrictions on Transferability. The Option and
the Option Shares (collectively, the "Securities"), shall not be transferable
in the absence of registration under the Securities Act of 1933, as amended
("the "Act") and applicable state securities laws or an exemption therefrom
under such Act.
6.2 Restrictive Legend. Each certificate
representing the Securities or any other securities issued in respect of the
Securities upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall be stamped or otherwise imprinted with a
legend substantially in the following form (in addition to any legend required
under applicable state securities laws):
6
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("ACT"), OR ANY
STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY
INTEREST THEREIN MAY BE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR
SUCH LAWS AND RULES AND REGULATIONS THEREUNDER. THE ISSUER
HAS UNDERTAKEN TO REGISTER THE SHARES OF COMMON STOCK
ISSUABLE HEREUNDER PURSUANT TO THAT CERTAIN REGISTRATION
RIGHTS AGREEMENT DATED AS OF AUGUST 26, 1997 BETWEEN THE
ISSUER AND THE HUFF ALTERNATIVE INCOME FUND, L.P.
6.3 Effect of Transfer. Subject to the provisions
of Section 6.1 hereof and subject to the payment of any applicable transfer
taxes, the Holder may transfer all or any portion of this Option by
surrendering this Option to the Company together with a completed assignment
in the form attached hereto as Exhibit B. Upon such surrender, the Company
shall deliver a new Option or Options to the person or persons entitled
thereto and, if applicable, shall deliver to the Holder a new Option
evidencing the right of the Holder to purchase the balance of the Option
Shares subject to purchase hereunder. The term "Holder" as used herein shall
include any transferee to whom this Option has been transferred in accordance
with this Section 6.3.
7. Representations and Warranties; Covenants. The
representations and warranties set forth in Article IV of the Bridge Financing
Agreement are hereby incorporated herein by reference. Such representations
and warranties, and the representations, warranties, covenants and agreements
contained herein, shall, for purposes of this Option Agreement, survive the
exercise of this Option and the sale or other disposition of the Option
Shares.
8. Cashless Exercise. The Holder of this Option shall have
the right, at its election, in lieu of delivering the Stock Purchase Price in
cash, to instruct the Company in the form of subscription to retain, in
payment of the Stock Purchase Price, the number of shares of Common Stock (the
"Payment Shares") equal to the quotient of (i) the aggregate Stock Purchase
Price of the shares as to which the Option is then being exercised divided by
(ii) the Fair Market Value (as hereinafter defined) per share and to deduct
the number of Payment Shares from the shares of Stock to be delivered to the
Holder. The "Fair Market Value" shall be, on any date, (i) the average closing
price for the Stock over the most recent fifteen trading
7
<PAGE>
days or the closing bid if no sales were reported on any day during such
period, as quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System or (ii) if (i) is not applicable, the most recent
sales price for the Stock in a bona fide arm's length transaction (if such a
transaction occurred within the last ten business days), or (iii) if neither
(i) nor (ii) are applicable, the fair market value of the Stock as determined
by a non-affiliated third party financial expert to be chosen by the Company.
9. Registration Procedures. The Option Shares constitute
"Registrable Securities" as defined in Section 1 of the Registration Rights
Agreement, dated as of August 26, 1997, and shall be entitled to registration
rights in accordance with such Agreement.
10. Modification and Waiver. This Option and any provision
hereof may be changed, waived, discharged or terminated only by an instrument
in writing signed by the party against which enforcement of the same is
sought.
11. Notices. Any notice, request or other document required
or permitted to be given or delivered to the Holder hereof or the Company
shall be personally delivered or shall be sent by certified or registered
mail, postage prepaid, to each such Holder at its address as shown on the
books of the Company or to the Company at the address indicated therefor in
the first paragraph of this Option. Any notice given by personal delivery
shall be deemed given upon receipt, and any notice given by certified or
registered mail shall be deemed given five days after registration or
certification thereof, as the case may be.
12. Descriptive Headings and Governing Law. The descriptive
headings of the several sections and paragraphs of this Option are inserted
for convenience only and do not constitute a part of this Option. This Option
shall be construed and enforced in accordance with, and the rights of the
parties shall be governed by, the laws of the State of New York, without
giving effect to rules governing conflicts of law.
13. Lost Options or Stock Certificates. The Company
represents and warrants to, and agrees with, the Holder that upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft,
destruction, or mutilation of any Option or stock certificate and, in the case
of any such loss, theft or destruction, upon receipt of an indemnity, or in
the case of any such mutilation, upon surrender and cancellation of such
Option or stock certificate, the Company at its expense will make and deliver
a new Option or stock certificate, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Option or stock certificate.
14. Fractional Shares. No fractional shares shall be issued
upon exercise of this Option. The Company shall, in lieu of issuing any
fractional share, pay the Holder entitled to such fraction a sum in cash equal
to such fraction multiplied by the Fair Market Value.
8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Option to be
executed by its officers, hereunto duly authorized this ____ day of September,
1997.
THE MARQUEE GROUP, INC.
By:______________________________
Name: Jan Chason
Title: Chief Financial Officer
9
<PAGE>
EXHIBIT A
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Option)
To: ___________________________
The undersigned, the holder of the within Option, hereby
irrevocably elects to exercise the purchase right represented by such Option
for, and to purchase thereunder, _____________________ (_______) shares of
Common Stock, par value $.01 per share (the "Stock"), of The Marquee Group,
Inc. (the "Company") and herewith : [cross out alternative not selected] (a)
makes payment of _____________________________ Dollars ($__________) therefor
or (b) requests the Company to retain, in payment of the Stock Purchase Price,
______ Payment Shares from the shares of Stock to be delivered pursuant
hereto. The undersigned hereby requests that the certificates for such shares
be issued in the name of, and delivered
to,_________________________________________________________________, whose
address is ____________________________________________.
The undersigned represents, unless the exercise of this
Option has been registered under the Securities Act of 1933, as amended (the
"Securities Act"), that the undersigned is acquiring such Stock for his own
account for investment and not with a view to or for sale in connection with
any distribution thereof (except for any resale pursuant to a Registration
Statement under the Securities Act).
DATED: _______________
--------------------------------------------------------
(Signature must conform in all respects to name of holder
as specified on the face of the Option)
--------------------------------------------------------
--------------------------------------------------------
(Address)
<PAGE>
EXHIBIT B
FORM OF ASSIGNMENT
(To be executed by the registered Holder if such Holder desires to transfer
the attached Option.)
FOR VALUE RECEIVED, ____________________________ hereby
sells, assigns, and transfers unto ___________________________ an Option to
Purchase ____________ shares of Common Stock, par value $.01 per share, of The
Marquee Group, Inc. (the "Company"), together with all right, title, and
interest therein, and does hereby irrevocably constitute and appoint
___________ attorney to transfer such Option on the books of the Company, with
full power of substitution.
Dated: ________________________
Signature __________________
NOTICE
This signature on the foregoing Assignment must correspond
to the name as written upon the face of this Option in every particular,
without alteration or enlargement or any change whatsoever.
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EXHIBIT D
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is
dated as of August 26, 1997 between The Marquee Group, Inc., a Delaware
corporation (the "Company") and The Huff Alternative Income Fund, L.P., a
Delaware limited partnership (the "Fund").
RECITALS:
A. This Agreement is entered into in connection with the
Option Agreement, dated of even date herewith, between the Company and the
Fund (the "Option Agreement"), which provides that the Fund has the option to
acquire from the Company one hundred thousand (100,000) shares, subject
to adjustment, of the Company's common stock, par value $.01 per share, at an
exercise price of $2.25 per share (the "Initial Option").
B. The Company has agreed to issue to the Fund under certain
circumstances an additional option to purchase up to 15,000 shares of Common
Stock at an exercise price of $2.25 per share (the "Additional Option" and,
together with the Initial Option, the "Options") pursuant to the terms of an
Additional Option Agreement (the "Additional Option Agreement") in the form of
Exhibit B-2 to the Bridge Financing Agreement, dated of even date herewith,
among the Company, the Subsidiary Guarantors identified therein, and the Fund
(the "Bridge Financing Agreement").
C. The Options granted to the Fund constitute a portion of
the Fees owed by the Company to the Fund pursuant to Section 2.2 of the Bridge
Financing Agreement. In order to induce the Fund to accept the Options as a
portion of the Fee, the Company has agreed to provide the registration rights
set forth in this Agreement for the benefit of the Fund and their direct and
indirect transferees and assigns.
NOW, THEREFORE, in consideration of the foregoing, the
parties agree as follows:
1. Definitions. For purposes of this Agreement:
(a) "Common Stock" means shares of common stock of
the Company.
(b) "Exchange Act" means the Securities Exchange
Act of 1934, as amended, and the rules and regulations of the SEC promulgated
thereunder.
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(c) "Exercise Date" means the first date on which
the Options are exercised.
(d) "Holder" means the Fund, or any assignee
thereof in accordance with Section 9(e).
(e) "Options" means the options issued by the
Company pursuant to the Option Agreement and the Additional Option Agreement.
(f) "Person" means any individual, partnership,
joint venture, corporation, association, trust or any other entity or
organization.
(g) "Prospectus" means the prospectus included in
any Registration Statement (including, without limitation, any prospectus
subject to completion and a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, and
all other amendments and supplements to the Prospectus, including
post-effective amendments, and all material incorporated by reference or
deemed to be incorporated by reference in such Prospectus.
(h) "Registration Statement" means any registration
statement of the Company filed with the SEC pursuant to the provisions of this
Agreement, including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits, and
all material incorporated by reference or deemed to be incorporated by
reference in such registration statement.
(i) "Registrable Securities" means (1) any Common
Stock issued upon exercise of the Option, (2) any Common Stock issuable or
issued upon conversion or exercise of any warrant, right or other security now
or hereafter owned by the Fund, and (3) any Common Stock issued as (or
issuable upon the conversion or exercise of any warrant, right or other
security which is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of, or upon conversion of, such Common
Stock, warrants, rights or other securities; provided, however, that any
Common Stock sold by a Person in a transaction in which such Person's rights
under this Agreement are not assigned pursuant to Section 9(e) below shall
cease to be Registrable Securities from and after the time of such sale.
(j) "Rule 144" means Rule 144 promulgated under the
Securities Act, as such Rule may be amended from time to time, or any similar
rule (other than Rule 144A) or regulation hereafter adopted by the SEC
providing for offers and sales of securities made in compliance therewith
resulting in offers and sales by subsequent holders that are not affiliates of
an issuer of such securities being free of the registration and prospectus
delivery requirements of the Securities Act.
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(k) "Rule 144A" means Rule 144A promulgated under
the Securities Act, as such Rule may be amended from time to time, or any
similar rule (other than Rule 144) or regulation hereafter adopted by the SEC.
(l) "Rule 415" means Rule 415 promulgated under the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the SEC.
(m) "SEC" means the Securities and Exchange
Commission.
(n) "Securities Act" means the Securities Act of
1933, as amended, and the rules and regulations of the SEC promulgated
thereunder.
(o) "Underwritten Offering" means a registration in
which securities of the Company are sold to an underwriter for reoffering to
the public.
2. Demand Registration Rights
(a) At any time prior to the one-year anniversary
of the expiration date of the Option, Holders holding at least a majority of
the Registrable Securities shall have the right on one occasion, by written
request to the Company (the "Registration Notice"), to require the Company to
effect a registration under the Securities Act of the Registrable Securities
and the Company shall cause, as expeditiously as practicable, the registration
under the Securities Act of all of the Registrable Securities. In connection
therewith, the Company shall be obligated to prepare and file a registration
statement (the "Demand Registration Statement") promptly upon receipt of any
such Registration Notice and shall be further obligated to use its best
efforts to cause such Demand Registration Statement to be declared effective
under the Securities Act and the rules and regulations promulgated thereunder
as soon as practicable after the filing date thereof. The Company shall be
required to effect only one such registration of Registrable Securities owned
by the Holders, and such obligation shall be deemed satisfied when one Demand
Registration Statement shall become effective pursuant to the request of the
Holders made pursuant to this Section 2, provided that the Company shall not
be deemed to have complied with its obligations under this Section 2 if the
registration statement does not remain effective for a period of at least 45
days (or such shorter period ending on the date the Holders whose Registrable
Securities are included in the registration statement complete their
distribution of Registrable Securities as contemplated by such registration
statement) or if within 45 days after such registration becomes effective (or
such shorter period referred to above) such registration is interfered with by
any stop order, injunction or other order or requirement of the SEC or other
governmental agency or court for any reason and any of the Registrable
Securities registered in connection therewith were not sold.
(b) Within ten days after receipt of any request by
the Holders holding at least a majority of the Registrable Securities pursuant
to Section 2 (a), the Company
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will give written notice to all other Holders, if any, and shall include in
the Demand Registration Statement all Registrable Securities with respect to
which the Company has received written requests for inclusion therein from the
Holders thereof with twenty days after the giving of such notice by the
Company.
(c) Supplements and Amendments. The Company shall
use its best efforts to supplement and amend the Demand Registration Statement
if required by the rules, regulations or instructions applicable to the
registration form used for such Demand Registration Statement, if required by
the Securities Act, or if reasonably requested by the Holders of a majority of
the shares of the Registrable Securities covered by such Registration
Statement or if reasonably requested by an underwriter, if any, of such
Registrable Securities.
(d) Suspension of Registration. The Company's
obligation to file and keep the Demand Registration Statement effective and
usable for offers and sales of the Common Stock may be suspended for up to
ninety days by the Company in good faith for valid business reasons,
including, without limitation, a pending acquisition or divestiture of assets.
Any such period during which the Company fails to keep the Demand Registration
Statement effective and usable for offers and sales of Common Stock is
referred to as a "Suspension Period." A Suspension Period shall commence on
and include the date of the Registration Notice (if no Demand Registration
Statement has been filed) or the date that the Company gives notice that the
Demand Registration Statement is no longer usable for offers and sales of
Common Stock and shall end on the date when each Holder of Common Stock
covered by such registration statement either receives notice that the Demand
Registration Statement has become effective or receives the copies of the
supplemented or amended prospectus contemplated by Section 2(c) hereof or is
advised in writing by the Company that use of the prospectus may be resumed.
During the pendency of any Suspension Period, the Company may not issue any
securities, whether or not in a public offering, except for issuances of
Common Stock pursuant to an acquisition or other business combination
transaction or upon exercise of options or warrants outstanding prior to such
Suspension Period.
3. Company Registration.
If (but without any obligation to do so) the
Company proposes to register (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
stock or other securities under the Securities Act in connection with the
public offering of such securities solely for cash (other than a registration
on Form S-8 relating solely to the sale of securities to participants in a
Company stock plan or to other compensatory arrangements to the extent
includable on Form S-8, or a registration on Form S- 4), the Company shall, at
such time, promptly give the Holders written notice of such registration. Upon
the written request of Holders holding two-thirds of the Registrable
Securities given within twenty (20) days after mailing of such notice by the
Company in accordance with Section 9(d), the Company shall use its best
efforts to cause to be registered under the Securities Act all of the
Registrable Securities that the Holders have requested to be registered. The
Company shall have no obligation under this Section 3 to make any offering of
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its securities, or to complete an offering of its securities that it proposes
to make, and shall incur no liability to the Holders for its failure to do so.
4. Registration Procedures
In connection with the filing of any Registration
Statement pursuant to Section 2 or 3 hereof, the Company shall effect such
registrations to permit the sale of the securities covered thereby in
accordance with the intended method or methods of disposition thereof, and
pursuant thereto and in connection with any Registration Statement filed by
the Company hereunder the Company shall:
(a) Prepare and file with the SEC prior to the
Filing Date, a Registration Statement, and use its best efforts to cause such
Registration Statement to become effective and remain effective as provided
herein; provided, however, that, before filing any Registration Statement or
Prospectus or any amendments or supplements thereto, the Company shall furnish
to and afford the Holders of the Registrable Securities covered by such
Registration Statement, their counsel and the managing underwriters, if any, a
reasonable opportunity to review copies of all such documents (including, if
requested in writing, copies of any documents to be incorporated by reference
therein and all exhibits thereto) proposed to be filed (in each case at least
five business days prior to such filing). The Company shall not file any
Registration Statement or Prospectus or any amendments or supplements thereto
if the Holders of a majority of shares of Registrable Securities covered by
such Registration Statement, their counsel, or the managing underwriters, if
any, shall reasonably object within two business days after the receipt
thereof. Notwithstanding anything to the contrary contained in this Agreement,
the Company shall not be required to engage in more than one Underwritten
Offering, if any, pursuant to this Agreement.
(b) Prepare and file with the SEC such amendments
and post-effective amendments to each Demand Registration Statement, as may
be necessary to keep such Registration Statement continuously effective for
the Effectiveness Period; cause the related Prospectus to be supplemented by
any Prospectus supplement required by applicable law, and as so supplemented
to be filed pursuant to Rule 424 (or any similar provisions then in force)
promulgated under the Securities Act; and comply with the provisions of the
Securities Act and the Exchange Act applicable to it with respect to the
disposition of all securities covered by such Registration Statement as so
amended or in such Prospectus as so supplemented.
(c) Notify the selling Holders of Registrable
Securities, their counsel and the managing underwriters, if any, reasonably
promptly (but in any event within five business days), and confirm such notice
in writing, (i) when a Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to a Registration
Statement or any post-effective amendment, when the same has become effective
under the Securities Act, (ii) of the issuance by the SEC of any stop order
suspending the effectiveness of
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a Registration Statement or of any order preventing or suspending the use of
any preliminary prospectus or the initiation of any proceedings for that
purpose, (iii) if at any time when a prospectus is required by the Securities
Act to be delivered in connection with sales of the Registrable Securities the
representations and warranties of the Company contained in any agreement
(including an underwriting agreement, if any), contemplated by Section 4(l)
hereof cease to be true and correct, (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of a Registration Statement or any of the Registrable
Securities for offer or sale in any jurisdiction, or the initiation or
threatening of any proceeding for such purpose, (v) of the happening of any
event, the existence of any condition or any information becoming known that
makes any statement made in such Registration Statement or related Prospectus
or any document incorporated or deemed to be incorporated therein by reference
untrue in any material respect or that requires the making of any changes in
or amendments or supplements to such Registration Statement, Prospectus or
documents so that, in the case of the Registration Statement, it will not
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, and that in the case of the Prospectus, it will not 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, in
the light of the circumstances under which they were made, not misleading and
(vi) of the Company's determination that a post-effective amendment to a
Registration Statement would be appropriate.
(d) Use its best efforts to prevent the issuance of
any order suspending the effectiveness of a Registration Statement or of any
order preventing or suspending the use of a Prospectus or suspending the
qualification (or exemption from qualification) of any of the Registrable
Securities for sale in any jurisdiction, and, if any such order is issued, to
use its best efforts to obtain the withdrawal of any such order at the
earliest possible moment.
(e) If requested by the managing underwriter or
underwriters (if any), or the Holders of a majority of shares of Registrable
Securities being sold in connection with an Underwritten Offering, if any, (i)
promptly incorporate in a prospectus supplement or post-effective amendment
such information as the managing underwriter or underwriters (if any), such
Holders, or its counsel determine is reasonably necessary to be included
therein and (ii) make all required filings of such prospectus supplement or
such post-effective amendment as soon as practicable after the Company has
received notification of the matters to be incorporated in such prospectus
supplement or post-effective amendment.
(f) Furnish to each selling Holder of Registrable
Securities who so requests in writing and to counsel and each managing
underwriter, if any, at the sole expense of the Company one conformed copy of
the Registration Statement or Registration Statements and each post-effective
amendment thereto, including financial statements and schedules, and, if
requested in writing, all documents incorporated or deemed to be incorporated
therein by reference and all exhibits.
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(g) Deliver to each selling Holder of Registrable
Securities, its respective counsel, and the underwriters, if any, at the sole
expense of the Company, as many copies of the Prospectus (including each form
of preliminary prospectus) and each amendment or supplement thereto and any
documents incorporated by reference therein as such Persons may reasonably
request in writing; and, subject to the last paragraph of this Section 4, the
Company hereby consents to the use of such Prospectus and each amendment or
supplement thereto by each of the selling Holders of Registrable Securities
and the underwriters or agents, if any, and dealers (if any), in connection
with the offering and sale of the Registrable Securities covered by, such
Prospectus and any amendment or supplement thereto.
(h) To the extent required by law, prior to any
public offering of Registrable Securities, to use its best efforts to register
or qualify, and to cooperate with the selling Holders of Registrable
Securities, the managing underwriter or underwriters, if any, and their
respective counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as any selling Holder, or the managing
underwriter or underwriters, if any, or their respective counsel may
reasonably request; provided, however, that where Registrable Securities are
offered other than through an Underwritten Offering, the Company agrees to
cause the Company's counsel to perform Blue Sky investigations, if necessary,
and file registrations and qualifications required to be filed pursuant to
this Section 4(h); keep each such registration or qualification (or exemption
therefrom) effective during the period such Registration Statement is required
to be kept effective and do any and all other acts or things reasonably
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by the Registration Statement; provided,
however, that the Company shall not be required to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction or be subject to taxation in any jurisdiction in which it is not
so subject.
(i) 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 representing
Registrable Securities to be sold, which certificates shall not bear any
restrictive legends and shall be in a form eligible for deposit with The
Depository Trust Company; and enable such Registrable Securities to be in such
denominations and registered in such names as the managing underwriter or
underwriters, if any, or Holders may reasonably request.
(j) Use its best efforts to cause the Registrable
Securities covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary to enable the seller or sellers thereof or the underwriter or
underwriters, if any, to consummate the disposition of such Registrable
Securities except as may be required solely as a consequence of the nature of
such selling Holder's business, in which case the Company will cooperate in
all reasonable respects with the filing of such Registration Statement and the
granting of such approvals.
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(k) Upon the occurrence of any event contemplated
by Section 4(c)(v) or 4(c)(vi) hereof, as promptly as practicable prepare and
(subject to Sections 3(d) and 4(a) hereof) file with the SEC, at the sole
expense of the Company, a supplement or post-effective amendment to the
Registration Statement or a supplement to the related Prospectus or any
document incorporated or deemed to be incorporated therein by reference, or
file any other required document so that, as thereafter delivered to the
purchasers of the Registrable Securities being sold thereunder, any such
Prospectus will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(l) In connection with an Underwritten Offering, if
any, of Registrable Securities pursuant to a Shelf Registration, enter into an
underwriting agreement as is customary in Underwritten Offerings of securities
similar to the Common Stock and take all such other actions as are reasonably
requested by the managing underwriter or underwriters in order to expedite or
facilitate the registration or the disposition of such Registrable Securities
and, in such connection, (i) make such representations and warranties to, and
covenants with, the underwriters with respect to the business of the Company
and its subsidiaries (including any acquired business, properties or entity,
if applicable) and the Registration Statement, Prospectus and documents, if
any, incorporated or deemed to be incorporated by reference therein, in each
case, as are customarily made by issuers to underwriters in Underwritten
Offerings of securities similar to the Common Stock, and confirm the same in
writing if and when requested; (ii) obtain the written opinion of counsel to
the Company and written updates thereof in form, scope and substance
reasonably satisfactory to the managing underwriter or underwriters, addressed
to the underwriters covering the matters customarily covered in opinions
requested in Underwritten Offerings of securities similar to the Common Stock
and such other matters as may be reasonably requested by the managing
underwriter or underwriters; (iii) if entitled, obtain "cold comfort" letters
and updates thereof in form, scope and substance reasonably satisfactory to
the managing underwriter or underwriters from the independent certified public
accountants of the Company (and, if necessary, any other independent certified
public accountants of any subsidiary of the Company or of any business
acquired by the Company for which financial statements and financial data are,
or are required to be, included or incorporated by reference in the
Registration Statement), addressed to each of the underwriters, such letters
to be in customary form and covering matters of the type customarily covered
in "cold comfort" letters in connection with Underwritten Offerings of
securities similar to the Common Stock and such other matters as reasonably
requested by the managing underwriter or underwriters; and (iv) if an
underwriting agreement is entered into, the same shall contain indemnification
provisions and procedures in customary form and covering matters customarily
covered in connection with Underwritten Offerings of securities similar to the
Common Stock (or such other provisions and procedures acceptable to Holders of
a majority of shares of Registrable Securities covered by such Registration
Statement and the managing underwriter or underwriters or agents) with respect
to all parties to be indemnified pursuant to said Section. The above shall be
done at each closing under such underwriting agreement, or as and to the
extent required thereunder.
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(m) Make available for inspection by any selling
Holder of such Registrable Securities being sold, an underwriter, if any,
participating in any such disposition of Registrable Securities, and any
attorney, accountant or other agent retained by any such selling Holder or
underwriter (collectively, the "Inspectors"), at the offices where normally
kept, during reasonable business hours, all financial and other records,
pertinent corporate documents and instruments of the Company and its
subsidiaries (collectively, the "Records") as shall be reasonably necessary to
enable them to exercise any applicable due diligence responsibilities, and
cause the officers, directors and employees of the Company and its
subsidiaries to supply all information reasonably requested by any such
Inspector in connection with such Registration Statement. Records that the
Company determines, in good faith, to be confidential and any Records that it
notifies the Inspectors are confidential shall not be disclosed by the
Inspectors unless upon five business days prior written notice and (i) the
disclosure of such Records is necessary to avoid or correct a misstatement or
omission in such Registration Statement, (ii) the release of such Records is
ordered pursuant to a subpoena or other order from a court of competent
jurisdiction, (iii) disclosure of such information is, in the reasonable
opinion of counsel for any Inspector, necessary or advisable in connection
with any action, claim, suit or proceeding, directly or indirectly, involving
or potentially involving such Inspector and arising out of, based upon,
relating to, or involving this Agreement or any transactions contemplated
hereby or arising hereunder or (iv) the information in such Records has been
made generally available to the public (other than as a result of an
impermissible disclosure or failure to safeguard by the Inspectors) . Each
selling holder of such Registrable Securities will be required to agree that
information obtained by it as a result of such inspections shall be deemed
confidential and shall not be used by it as the basis for any market
transactions in the securities of the Company unless and until such
information is generally available to the public (other than as a result of an
impermissible disclosure or failure to safeguard by such person). Each selling
Holder of such Registrable Securities will be required to further agree that
it will, upon learning that disclosure of such Records is sought in a court of
competent jurisdiction, give notice to the Company and allow the Company to
undertake appropriate action to prevent disclosure of the Records deemed
confidential at the Company's sole expense.
(n) Comply with all applicable rules and
regulations of the SEC and make generally available to its security holders
earning statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder (or any similar rule promulgated under
the Securities Act) no later than 45 days after the end of any 12-month period
(or 90 days after the end of any 12-month period if such period is a fiscal
year) commencing on the first day of the first fiscal quarter of the Company
after the effective date of a Registration Statement, which statements shall
cover said 12-month periods.
(o) Cooperate with each seller of Registrable
Securities covered by any Registration Statement and each underwriter, if any,
participating in the disposition of such Registrable Securities and their
respective counsel in connection with the filings, if any, required to be made
with the National Association of Securities Dealers, Inc. (the "NASD").
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(p) Use its best efforts to take all other steps
necessary or advisable to effect the registration of the Registrable
Securities covered by a Registration Statement contemplated hereby.
The Company may require each seller of Registrable
Securities as to which any registration is being effected to furnish to the
Company such seller's name, number of shares and plan of distribution. The
Company may exclude from such registration the Registrable Securities of any
seller who fails to furnish such information within a reasonable time (but in
no event later than 20 business days) after receiving such request. Each
seller as to which any Shelf Registration is being effected agrees to furnish
promptly to the Company all information required to be disclosed in order to
make the information previously furnished to the Company by such seller not
materially misleading.
Each Holder of Registrable Securities agrees by
acquisition of such Registrable Securities, that, upon actual receipt of any
notice from the Company of the happening of any event of the kind described in
Section 4(c)(ii), 4(c)(iv), 4(c)(v) or 4(c)(vi) hereof, such Holder will
forthwith discontinue disposition of such Registrable Securities covered by
such Registration Statement or Prospectus to be sold by such Holder until such
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 4(k) hereof, or until it is advised in writing (the
"Advice") by the Company that the use of the applicable Prospectus may be
resumed, and has received copies of any amendments or supplements thereto.
5. Registration Expenses
(a) All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not a Registration Statement is filed or becomes
effective. Notwithstanding the foregoing, the Holders of any shares of Common
Stock being registered shall pay all underwriting discounts, commissions and
placement agent fees attributable to the sale of such securities.
(b) The Company shall reimburse the Holders of the
Registrable Securities being registered on a Registration Statement for the
reasonable fees and disbursements of not more than one counsel to the Holders;
provided that such fees and expenses shall not exceed $15,000.
6. Indemnification
(a) The Company agrees to indemnify and hold
harmless each Holder of shares of Registrable Securities, the officers and
directors of each such Person, and each Person, if any, who controls any such
Person within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act (each, a "Participant"), from and against any
and all losses, claims, damages and liabilities (including, without
limitation, the reasonable legal fees and other expenses actually incurred in
connection with any suit, action or
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proceeding or any claim asserted)(all of which expenses shall be advanced to
the Participant at such times as the Participant is presented with such
expenses) caused by, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement (or any amendment thereto) or Prospectus (as amended or supplemented
if the Company shall have furnished any amendments or supplements thereto) or
any preliminary prospectus, or caused by, arising out of or based upon any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except insofar
as such losses, claims, damages or liabilities are caused by any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information relating to any Participant furnished
to the Company in writing by such Participant expressly for use therein;
provided, however, that the Company will not be required to indemnify a
Participant if such untrue statement or omission or alleged untrue statement
or omission was contained or made in any preliminary prospectus and corrected
in the Prospectus or any amendment or supplement thereto and it is established
in the related proceeding that such Participant failed to deliver or provide a
copy of the Prospectus (as amended or supplemented) to such Person with or
prior to the confirmation of the sale of such Registrable Securities sold to
such Person if required by applicable law, unless such failure to deliver or
provide a copy of the Prospectus (as amended or supplemented) shall have been
determined by a court of competent jurisdiction by final and non-appealable
judgment (or stipulated in a settlement agreement reached by all parties
involved in any action or proceeding related to such claim) to have been the
result of noncompliance by the Company with Section 4 of this Agreement.
(b) Each Participant agrees, severally and not
jointly, to indemnify and hold harmless the Company, its directors and
officers who sign the Registration Statement and each Person who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act to the same extent as the foregoing indemnity from the
Company to each Participant, but only (i) with reference to information
relating to such Participant furnished to the Company in writing by such
Participant expressly for use in any Registration Statement or Prospectus, any
amendment or supplement thereto, or any preliminary prospectus or (ii) with
respect to any untrue statement or representation made by such Participant in
writing to the Company. The liability of any Participant under this paragraph
shall in no event exceed the proceeds received by such Participant from sales
of Registrable Securities giving rise to such obligations.
(c) If any suit, action, proceeding (including any
governmental or regulatory investigation), claim or demand shall be brought or
asserted against any Person in respect of which indemnity may be sought
pursuant to either of the two preceding paragraphs, such Person (the
"Indemnified Person") shall promptly notify the Person against whom such
indemnity may be sought (the "Indemnifying Person") in writing, and the
Indemnifying Person, upon request of the Indemnified Person, shall retain
counsel reasonably satisfactory to the Indemnified Person to represent the
Indemnified Person and any others the Indemnifying Person may reasonably
designate in such proceeding and shall pay the reasonable fees and
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expenses actually incurred by such counsel related to such proceeding;
provided, however, that the failure to so notify the Indemnifying Person shall
not relieve it of any obligation or liability which it may have hereunder or
otherwise (unless and to the extent such Indemnifying Person has been
materially prejudiced by such failure, including, without limitation, that
such failure results in the forfeiture by the Indemnifying Person of
substantial rights and defenses). In any such proceeding, any Indemnified
Person shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Person
unless (i) the Indemnifying Person and the Indemnified Person shall have
mutually agreed in writing to the contrary, (ii) the Indemnifying Person has
failed to retain counsel reasonably satisfactory to the Indemnified Person or
(iii) the named parties in any such proceeding (including any impleaded
parties) include both the Indemnifying Person and the Indemnified Person and
the Indemnified Person shall have been advised by counsel that representation
of both parties by the same counsel would be inappropriate under applicable
standards of professional conduct due to differing interests between them. It
is understood that, unless there exists a conflict among Indemnified Persons,
the Indemnifying Person shall not, in connection with any one such proceeding
or separate but substantially similar related proceeding 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 (in addition
to any local counsel) for all Indemnified Persons, and that all such fees and
expenses shall be reimbursed promptly as they are incurred. Any such separate
firm for the Participants and such control Persons of Participants shall be
designated in writing by Participants who sold a majority of shares of
Registrable Securities sold by all such Participants and any such separate
firm for the Company, its directors, its officers and such control Persons of
the Company shall be designated in writing by the Company. The Indemnifying
Person shall not be liable for any settlement of any proceeding effected
without its prior written consent (which consent shall not be unreasonably
withheld or delayed), but if settled with such consent or if there be a final
non-appealable judgment for the plaintiff for which the Indemnified Person is
entitled to indemnification pursuant to this Agreement, the Indemnifying
Person agrees to indemnify and hold harmless each Indemnified Person from and
against any loss or liability by reason of such settlement or judgment. No
Indemnifying Person shall, without the prior written consent of the
Indemnified Person, effect any settlement or compromise of any pending or
threatened proceeding in respect of which any Indemnified Person is or could
have been a party, or indemnity could have been sought hereunder by such
Indemnified Person, unless such settlement (A) includes an unconditional
written release of such Indemnified Person, in form and substance reasonably
satisfactory to such Indemnified Person, from all liability on claims that are
the subject matter of such proceeding and (B) does not include any statement
as to an admission of fault, culpability or failure to act by or on behalf of
any Indemnified Person.
(d) If the indemnification provided for in the
first and second paragraphs of this Section 6 is for any reason unavailable
to, or insufficient to hold harmless, an Indemnified Person in respect of any
losses, claims, damages or liabilities referred to therein, then each
Indemnifying Person under such paragraphs, in lieu of indemnifying such
Indemnified Person thereunder and in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such
Indemnified Person as a result of such losses,
12
<PAGE>
claims, damages or liabilities in such proportion as is appropriate to reflect
(i) the relative benefits received by the Indemnifying Person or Persons on
the one hand and the Indemnified Person or Persons on the other from the
offering of the Common Stock or (ii) if the allocation provided by the
foregoing clause (i) is not permitted by applicable law, not only such
relative benefits but also the relative fault of the Indemnifying Person or
Persons on the one hand and the Indemnified Person or Persons on the other in
connection with the statements or omissions or alleged statements or omissions
that resulted in such losses, claims, damages or liabilities (or actions in
respect thereof) as well as any other relevant equitable considerations. The
relative fault of the parties shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or such Participant or
such other Indemnified Person, as the case may be, on the other, the parties'
relative intent, knowledge, access to information and opportunity to correct
or prevent such statement or omission, and any other equitable considerations
appropriate in the circumstances.
(e) The parties agree that it would not be just and
equitable if contribution pursuant to this Section 6 were determined by pro
rata allocation (even if the Participants were treated as one entity for such
purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Person as a result of
the losses, claims, damages and liabilities referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any reasonable legal or other expenses actually incurred by such
Indemnified Person in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 6, in no event
shall a Participant be required to contribute any amount in excess of the
amount by which proceeds received by such Participant from sales of
Registrable Securities exceeds the amount of any damages that such Participant
has otherwise been required to pay or has paid by reason of such untrue or
alleged untrue statement or omission or alleged omission. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
(f) The indemnity and contribution agreements
contained in this Section 6 will be in addition to any liability that the
Indemnifying Persons may otherwise have to the Indemnified Persons referred to
above.
7. Rules 144 and 144A
So long as any shares of Registrable Securities are
outstanding, the Company will provide to holders of the Registrable Securities
and file with the Commission copies of the annual reports and any of the
information, documents and other reports that the Company would have been
required to file with the Commission pursuant to Sections 13 or 15(d) of the
Exchange Act regardless of whether the Company is obligated to file such
reports. The Company further covenants for so long as any Registrable
Securities remains outstanding
13
<PAGE>
and in the event that the Company is not subject to the reporting requirements
of Section 13 or Section 15(d) of the Exchange Act, to make available to any
Holder or beneficial owner of Registrable Securities in connection with any
sale thereof and any prospective purchaser of such Registrable Securities from
such Holder or beneficial owner, the information required by Rule 144A(d)(4)
under the Securities Act in order to permit resales of such Registrable
Securities pursuant to Rule 144A.
8. Representations and Warranties; Covenants. The representations and
warranties set forth in Article IV of the Bridge Financing Agreement are
hereby incorporated herein by reference. Such representations and warranties,
and the representations, warranties, covenants and agreements contained
herein, shall, for purposes of this Registration Rights Agreement, survive the
sale or other disposition of the Registrable Securities.
9. Miscellaneous
(a) No Inconsistent Agreements. The Company shall
not, after the date of this Agreement, enter into any agreement with respect
to any of its securities that conflicts with the provisions hereof. The
Company has not granted more favorable registration rights to any party.
(b) Adjustments Affecting Registrable Securities.
The Company shall not, directly or indirectly, take any action with respect to
the Registrable Securities as a class that would adversely affect the ability
of the Holders of Registrable Securities to include such Registrable
Securities in a registration undertaken pursuant to this Agreement.
(c) Amendments and Waivers. The provisions of this
Agreement may not be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may not be given, otherwise
than with the prior written consent of the Holders of not less than a majority
of the then outstanding shares of Registrable Securities; provided, however,
that Section 9 and this Section 9(c) may not be amended, modified or
supplemented without the prior written consent of each Holder (including any
person who was a Holder of Registrable Securities disposed of pursuant to any
Registration Statement). Notwithstanding the foregoing, a waiver or consent to
depart from the provisions hereof with respect to a matter that relates
exclusively to the rights of Holders of Registrable Securities whose
securities are being sold pursuant to a Registration Statement and that does
not directly or indirectly affect, impair, limit or compromise the rights of
other Holders of Registrable Securities may be given by Holders of at least a
majority of shares of the Registrable Securities being sold by such Holders
pursuant to such Registration Statement; provided, however, that the
provisions of this sentence may not be amended, modified or supplemented
except in accordance with the provisions of the immediately preceding
sentence.
(d) Notices. All notices and other communications
provided for or permitted hereunder shall be made in writing by hand-delivery,
registered first-class mail,
14
<PAGE>
next-day air courier or facsimile to the addresses set forth on the signature
page hereof, or to any substitute address hereafter furnished by notice to the
other party.
All such notices and communications shall be deemed
to have been duly given: when delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
one business day after being timely delivered to a next-day air courier; and
when receipt is acknowledged by the addressee, if sent by facsimile.
(e) Successors and Assigns. This Agreement shall
inure to the benefit of and be binding upon the successors and assigns of each
of the parties hereto, including the Holders; provided, however, that this
Agreement shall not inure to the benefit of or be binding upon a successor or
assign of a Holder unless and to the extent such successor or assign holds
Registrable Securities.
(f) Counterparts. This Agreement may be executed in
any number of counterparts and by the parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS
APPLIED TO CONTRACTS MADE AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO
AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN
ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.
(i) Severability. If any term, provision, covenant
or restriction of this Agreement is held by a court of competent jurisdiction
to be invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated, and
the parties hereto shall use their reasonable best efforts to find and employ
an alternative means to achieve the same or substantially the same result as
that contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and
restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.
(j) Securities Held by the Company. Whenever the
consent or approval of Holders of a specified percentage of shares of
Registrable Securities is required
15
<PAGE>
hereunder, Registrable Securities held by the Company or its subsidiaries
shall not be counted in determining whether such consent or approval was given
by the Holders of such required percentage.
(k) Third Party Beneficiaries. Holders of
Registrable Securities and Participants are intended third party beneficiaries
of this Agreement and this Agreement may be enforced by such Persons.
(l) Entire Agreement. This Agreement, together with
the Option Agreement and the Bridge Financing Agreement, is intended by the
parties as a final and exclusive statement of the agreement and understanding
of the parties hereto in respect of the subject matter contained herein and
therein and any and all prior oral or written agreements, representations, or
warranties, contracts, understandings, correspondence, conversations and
memoranda between the Fund on the one hand and the Company on the other, or
between or among any agents, representatives, parents, subsidiaries,
affiliates, predecessors in interest or successors in interest with respect to
the subject matter hereof and thereof are merged herein and replaced hereby.
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
Address: "COMPANY"
888 Seventh Avenue
40th Floor THE MARQUEE GROUP, INC.
New York, NY 10019
By: /s/ Jan E. Chason
-----------------------------
Name: Jan E. Chason
Title: Chief Financial Officer
and Treasurer
Address: "FUND"
1776 On the Green
67 Park Place THE HUFF ALTERNATIVE INCOME FUND,L.P.
Morristown, NJ 07960
By: /s/ Bryan E. Bloom
-----------------------------
Name: Bryan E. Bloom
Title: Attorney in Fact
17
<PAGE>
EXHIBIT (I)
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Certain capitalized terms used but not defined in this Exhibit (i) have
the meanings ascribed in the Offer to Purchase, as supplemented by the First
Supplement to Offer to Purchase.
The following Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1996 gives effect to the following
transactions and adjustments as if they had occurred as of January 1, 1996:
(i) the completion of the IPO and the Recent Acquisitions, (ii) the Pending
Acquisitions and related contractually required reductions in personnel,
officers' salaries and employee benefits and (iii) the completion of the
Stock Offering.
The following Unaudited Pro Forma Condensed Combined Statement of
Operations for the six months ended June 30, 1997 gives effect to the
following transactions and adjustments as if they had occurred as of January
1, 1996: (i) the Pending Acquisitions and related contractually required
reductions in personnel, officers' salaries and employee benefits and (ii)
the completion of the Stock Offering.
The following Unaudited Pro Forma Condensed Combined Balance Sheet at June
30, 1997 gives effect to the following transactions and adjustments as if
they had occurred as of June 30, 1997: (i) the Pending Acquisitions, (ii) the
completion of the Stock Offering and (iii) the completion of the Tender
Offer.
The Unaudited Pro Forma Condensed Combined Financial Statements are based
upon, and should be read in conjunction with, the historical audited and
unaudited financial statements and the respective notes thereto of the
Company, ProServ and QBQ. The Recent Acquisitions have been reflected in the
Unaudited Pro Forma Condensed Combined Financial Statements as a
consolidation at historical cost due to the significance of the equity
interests in the Company held by the stockholders of SMTI and A&A. The
Pending Acquisitions have been reflected in the Unaudited Pro Forma Condensed
Combined Financial Statements using the purchase method of accounting. In the
opinion of management, all adjustments necessary to fairly present this pro
forma information have been made. The pro forma information does not purport
to be indicative of the results that would have been reported had such events
actually occurred on the dates specified, nor is it indicative of the
Company's future results if the transactions are completed. The Company
cannot predict whether the consummation of the Pending Acquisitions will
conform to the assumptions used in the preparation of the Unaudited Pro Forma
Condensed Combined Financial Statements. The Unaudited Pro Forma Statements
of Operations data include adjustments to operating expenses to reflect
anticipated savings that management believes it will be able to achieve
through the implementation of its operating strategy. However, there can be
no assurance that the Company will be able to achieve such savings.
The following financial statements and notes thereto contain
forward-looking statements that involve risks and uncertainties. The actual
results of the Company may differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are
not limited to, risks and uncertainties relating to the revenues of the
businesses owned and to be acquired, the integration of the businesses
acquired and management of growth and the ability of the Company to achieve
cost savings. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made
to reflect any future events or circumstances.
<PAGE>
THE MARQUEE GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
MARQUEE RECENT PRO FORMA RECENT PROSERV PRO FORMA
AS REPORTED ACQUISITIONS(1) ADJUSTMENTS ACQUISITIONS ACQUISITION ADJUSTMENTS
<S> <C> <C> <C> <C> <C> <C>
----------- ------------- ----------- ------------ ----------- -----------
Revenues........................... $ 2,869 $ 12,316 -- $ 15,185 $13,388 --
Operating expenses................. 2,564 6,922 -- 9,486 10,131 $ 514 (4)
General and administrative
expenses.......................... 2,199 3,644 -- 5,843 4,725 871 (4)
Restructuring costs................ -- -- -- -- 565
Depreciation and amortization ..... 61 47 -- 108 276 (674)(5)
----------- ------------- ----------- ------------ ----------- -----------
Operating income (loss)............ (1,955) 1,703 -- (252) (2,309) 711
Interest expense (income).......... 283 (12) $ (98)(2) 369 208 208 (6)
Financing expense ................. 193 -- -- 193 -- --
----------- ------------- ----------- ------------ ----------- -----------
Income (loss) before income taxes . (2,431) 1,715 (98) (814) (2,517) 919
Income taxes provision (benefit) .. (20) 341 (221)(3) 100 240 (240)(7)
----------- ------------- ----------- ------------ ----------- -----------
Net income (loss).................. (2,411) 1,374 123 (914) (2,757) 1,159
Accretion of obligation related to
the option issued in connection
with the ProServ acquisition ..... -- -- -- -- -- (179)(8)
----------- ------------- ----------- ------------ ----------- -----------
Net income (loss) applicable to
common stockholders .............. $ (2,411) $ 1,374 $ 123 $ (914) $(2,757) $ 980
=========== ============= =========== ============ =========== ===========
Net loss per share applicable to
common stockholders............... $ (1.03) $ (0.12)
=========== ============
Weighted average number of shares
of common stock outstanding(12) .. 2,346,717 7,494,162
=========== ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA FOR THE STOCK PRO FORMA FOR THE STOCK
OFFERING AND RECENT OFFERING AND RECENT
AND PROSERV QBQ PRO FORMA AND PENDING
ACQUISITIONS (13) ACQUISITION ADJUSTMENTS ACQUISITIONS (13)
<S> <C> <C> <C> <C>
----------------------- ----------- ----------- -----------------------
Revenues........................... $ 28,573 $1,359 -- $ 29,932
Operating expenses................. 19,103 274 -- 19,377
General and administrative
expenses.......................... 9,697 931 $ 223(9) 10,405
Restructuring costs................ 565 -- 565
Depreciation and amortization ..... 1,058 38 (350)(10) 1,466
----------------------- ----------- ----------- -----------------------
Operating income (loss)............ (1,850) 116 (127) (1,861)
Interest expense (income).......... 369 12 16 (11) 365
Financing expense ................. 193 -- -- 193
----------------------- ----------- ----------- -----------------------
Income (loss) before income taxes . (2,412) 104 (111) (2,419)
Income taxes provision (benefit) .. 100 12 (12)(7) 100
----------------------- ----------- ----------- -----------------------
Net income (loss).................. (2,512) 92 (99) (2,519)
Accretion of obligation related to
the option issued in connection
with the ProServ acquisition ..... 179 -- -- 179
----------------------- ----------- ----------- -----------------------
-- --
Net income (loss) applicable to
common stockholders .............. $ (2,691) $ 92 $ (99) $ (2,698)
======================= =========== =========== =======================
Net loss per share applicable to
common stockholders............... $ (0.18) $ (0.17)
======================= =======================
Weighted average number of shares
of common stock outstanding(12) .. 15,244,162 15,577,495
======================= =======================
</TABLE>
- ------------
(1) The Company acquired SMTI and A&A on December 12, 1996 and included the
results of their operations only from the acquisition date in its
consolidated results of operations for the year ended December 31,
1996. Therefore, for pro forma purposes, the results of operations of
SMTI and A&A for the period prior to the acquisition date are presented
separately.
(2) To record imputed interest expense on the indebtedness to the
stockholders of SMTI and A&A incurred in connection with the Recent
Acquisitions.
(3) To record income taxes as if SMTI had not been an S corporation and to
record the pro forma tax benefit for the separate net loss of the
Company.
(4) To reduce expenses to reflect contractually agreed to reductions in
personnel, officers' salaries and employee benefits and other costs
provided in the Dell Stock Purchase Agreement, but excludes $1,435
related to personnel and benefit costs incurred in 1996 which will be
eliminated in future periods as a result of the restructuring of
ProServ's operations and other cost reduction programs initiated by
ProServ.
(5) To record the amortization of the excess of the purchase price over net
assets acquired associated with the acquisition of ProServ over 20
years.
(6) To reduce interest expense of ProServ to reflect use of proceeds of the
Stock Offering.
(7) To record the tax benefit of consolidated net losses.
(8) To record the expense related to the accretion of the put option over
the two year option period. See "Agreements related to the Pending
Acquisitions--ProServ Acquisition."
(9) To reduce general and administrative expenses to reflect contractually
agreed to reductions in officers' salaries and employee benefits.
(10) To record the amortization of the excess of the purchase price over net
assets acquired associated with the acquisition of QBQ over 20 years.
(11) To record interest income on note receivable ($105) net of imputed
interest expense ($89) on the indebtedness related to the QBQ
Acquisition.
(12) Gives effect to the IPO as if it occurred as of January 1, 1996 and
excludes 1,275,000 IPO Escrow Shares. The Pro Forma net loss applicable
to common stockholders per share for the Recent Acquisitions, Offering
and Pending Acquisitions excludes 83,333 QBQ Escrow Shares. Assumes a
price of $6.00 per share of Common Stock for purposes of determining
the number of shares to be issued in the QBQ Acquisition. Shares of
Common Stock underlying outstanding Warrants or options are not
included in the weighted average number of shares of common stock
outstanding.
(13) Excludes charges related to the Bridge Facility fees and expenses of
$956,000, including interest, based upon the assumption that the
borrowings under the Bridge Facility will be outstanding for 45 days.
<PAGE>
THE MARQUEE GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA FOR
THE STOCK OFFERING
MARQUEE PROSERV PRO FORMA AND PROSERV
AS REPORTED ACQUISITION ADJUSTMENTS ACQUISITION
----------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
Revenues............................ $ 6,174 $ 6,438 -- $ 12,612
Operating expenses.................. 2,901 4,740 $ 258(1) 7,383
General and administrative
expenses........................... 4,048 1,778 418(1) 5,408
Depreciation and amortization ...... 104 143 (337)(2) 584
----------- ----------- ----------- ------------------
Operating income (loss)............. (879) (223) 339 (763)
Other income ....................... -- -- -- --
Minority interest .................. -- 24 24 --
Interest (income) expense........... 2 71 71 (3) 2
----------- ----------- ----------- ------------------
Income (loss) before income taxes .. (881) (318) 434 (765)
Income taxes provision (benefit) ... -- 109 (109)(6) --
----------- ----------- ----------- ------------------
Net income (loss)................... (881) (427) 543 (765)
Accretion of obligation related to
the put option issued in
connection with the ProServ
Acquisition........................ -- -- (102)(7) 102
----------- ----------- ----------- ------------------
Net income (loss) applicable to
common stockholders ............... $ (881) $ (427)$ 441 $ (867)
=========== =========== =========== ==================
Net loss per share applicable to
common stockholders ............... $ 0.12 $ 0.06
Weighted average number of shares
of common stock outstanding (8) .. 7,494,162 15,244,162
=========== ==================
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA FOR
THE STOCK OFFERING
AND THE
QBQ PRO FORMA PENDING
ACQUISITION ADJUSTMENTS ACQUISITIONS(9)
----------- ----------- ------------------
<S> <C> <C> <C>
Revenues............................ $ 1,013 -- $ 13,625
Operating expenses.................. 127 -- 7,510
General and administrative
expenses........................... 457 $ 106(4) 5,759
Depreciation and amortization ...... 13 (175)(2) 772
----------- ----------- ------------------
Operating income (loss)............. 416 (69) (416)
Other income ....................... (25) -- (25)
Minority interest .................. -- -- --
Interest (income) expense........... (3) (16)(5) (17)
----------- ----------- ------------------
Income (loss) before income taxes .. 444 (53) (374)
Income taxes provision (benefit) ... 42 (42)(6) --
----------- ----------- ------------------
Net income (loss)................... 402 (11) (374)
Accretion of obligation related to
the put option issued in
connection with the ProServ
Acquisition........................ -- -- 102
----------- ----------- ------------------
Net income (loss) applicable to
common stockholders ............... $ 402 $ (11) $ (476)
=========== =========== ==================
Net loss per share applicable to
common stockholders ............... $ 0.03
Weighted average number of shares
of common stock outstanding (8) .. 15,577,495
=========== ==================
</TABLE>
- ------------
(1) To reduce expenses to reflect contractually agreed to reductions in
personnel, officers' salaries and employee benefits and other costs
provided in the Dell Stock Purchase Agreement, but excludes $80 related
to personnel and benefit costs incurred by ProServ in the three-month
period which will be eliminated in future periods as a result of the
restructuring of ProServ's operations and other cost reduction programs
initiated by ProServ.
(2) To record the amortization of the excess of the purchase price over net
assets acquired associated with the Pending Acquisitions over 20 years.
(3) To reduce ProServ interest expense to reflect use of the proceeds from
the Stock Offering.
(4) To reduce general and administrative expenses to reflect contractually
agreed to reductions in personnel, officers' salaries and employee
benefits.
(5) To record interest income on note receivable ($53) net of imputed
interest expense ($38) on the indebtedness related to the QBQ
Acquisition.
(6) To record the tax benefit of consolidated net losses.
(7) To record the expense related to accretion of the put option over the
two year option period.
(8) Excludes 1,275,000 IPO Escrow Shares. In addition, the pro forma for
the Stock Offering and the Pending Acquisitions excludes approximately
83,333 QBQ Escrow Shares. Assumes a price of $6.00 per share of Common
Stock for purposes of determining the number of shares to be issued in
the QBQ Acquisition.
(9) Excludes charges related to the Bridge Facility fees, expenses of
$956,000, including interest, based upon the assumption that the
borrowings under the Bridge Facility will be outstanding for 45 days.
<PAGE>
THE MARQUEE GROUP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA FOR
THE STOCK OFFERING,
OFFER
MARQUEE PROSERV PRO FORMA AND PROSERV
AS REPORTED ACQUISITION ADJUSTMENTS ACQUISITION
------------- ------------- ------------- -------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets................ $ 4,117 $ 5,795 $ 41,300 (1) $28,614
(9,434)(2)
(1,975)(3)
(11,189)(4)
Excess of purchase price over -- -- 13,480 (2) 13,480
net assets acquired..........
Noncurrent assets............. 4,587 1,659 (300)(2) 4,446
(1,500)(2)
------------- ------------- ------------- -------------------
Total assets................. $ 8,704 $ 7,454 $ 30,382 $46,540
============= ============= ============= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities........... $ 2,700 7,223 200 (2) $ 8,148
(1,975)(3)
Noncurrent liabilities........ 1,559 777 2,336
Common stock subject to put 1,500 (2) 1,500
option ......................
Stockholders' equity.......... 4,445 (546) 41,300 (1) 34,556
546 (2)
(11,189) (4)
------------- ------------- ------------- -------------------
Total liabilities and $ 8,704 $ 7,454 $ 30,382 $46,540
stockholders' equity........
============= ============= ============= ===================
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA FOR
THE STOCK OFFERING,
BRIDGE FACILITY,
QBQ PRO FORMA OFFER AND PENDING
ACQUISITION ADJUSTMENTS ACQUISITIONS
------------- ------------- -------------------
<S> <C> <C> <C>
ASSETS
Current assets................ $ 1,322 $(3,253)(5) $23,866
(1,317)(5)
(1,500)(6)
Excess of purchase price over -- 6,996 (5) 20,476
net assets acquired..........
Noncurrent assets............. 86 1,500 (6) 5,932
(100)(5)
------------- ------------- -------------------
Total assets................. $ 1,408 $ 2,326 $50,274
============= ============= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities........... $ 1,134 $(1,135)(5) $ 8,308
161 (5)
Noncurrent liabilities........ 7 1,066 (5) 3,409
Common stock subject to put 1,875 (5) 3,375
option ......................
Stockholders' equity.......... 267 (266)(5) 35,182
625 (5)
------------- ------------- -------------------
Total liabilities and $ 1,408 $ 2,326 $50,274
stockholders' equity........
============= ============= ===================
</TABLE>
- ------------
(1) To reflect the estimated net proceeds from the Stock Offering of
7,500,000 shares of Common Stock at $6.00 per share:
<TABLE>
<CAPTION>
<S> <C>
Offering............ $45,000
Less: Fees and
expenses........... 3,700
---------
Net proceeds from
the Stock
Offering........... $41,300
=========
</TABLE>
(2) To reflect the acquisition of ProServ and the preliminary allocation of
the purchase price:
<TABLE>
<CAPTION>
<S> <C> <C>
Cash portion of purchase price
Dell Stock Agreement (includes $1,500 deposit paid in June 1997) ....... $6,500
Non-Employee Stock Purchase Agreement................................... 3,000
Certain Minority Stockholders........................................... 1,214 (a) $10,714
----------
Issuance of 250,000 shares of Common Stock under Dell Stock Agreement
which are subject to a put option....................................... 1,500
Fees and expenses including TSC fees of $300 which will be offset
against amounts previously advanced..................................... 520
Assumption of severance liability........................................ 200
---------
Total acquisition cost................................................ 12,934
Deficiency in net assets acquired........................................ 546
---------
Excess of purchase price over net assets acquired........................ $13,480
=========
</TABLE>
(a) Assumes purchase of the remaining minority interests in ProServ
on terms similar to those contained in the Allard Stock
Purchase Agreement. The preliminary allocation of purchase
price may change upon final determination of the fair value of
the net assets acquired.
(3) To reflect the payment of the ProServ indebtedness of $1,975 from the
proceeds of the Stock Offering.
(4) To reflect (i) the repayment of the indebtedness under the Bridge
Facility incurred to purchase 4,265,664 outstanding Warrants (all
outstanding Warrants except those held by executive officers and
directors of the Company) in the Tender Offer (including fees and
expenses of the Tender Offer of $370), (ii) the issuance of an option
to TSC to purchase 200,000 shares of Common Stock at an assumed
exercise price of $6.00 per share and (iii) fees, interest and expenses
related to the Bridge Facility of $956, including the issuance of an
option to the lender to purchase 100,000 shares of Common Stock, at the
exercise price of $2.25 per share.
<PAGE>
(5) To reflect the acquisition of QBQ and the preliminary allocation of the
purchase price:
<TABLE>
<CAPTION>
<S> <C> <C>
Cash portion of purchase price .................................................. $3,103
Issuance of 416,666 shares (including 83,333 QBQ Escrow Shares) of Common Stock,
of which 312,499 shares are subject to a put option ($1,875) ................... 2,500
Acquisition indebtedness of $1,615 less imputed interest of $388 (current
portion of $161)................................................................ 1,227
Fees and expenses including TSC fees of $150 of which $100 will be applied
against amount previously advanced.............................................. 250
--------
Total acquisition cost .......................................................... 7,080
--------
Net assets at June 30, 1997...................................................... 266
Less: Current assets not acquired................................................ (1,317)
Add: Current liabilities not acquired............................................ 1,135 84
--------- --------
Excess of purchase price over net assets acquired ............................... $6,996
========
</TABLE>
A deposit of $400 in cash was paid to QBQ in July 1997 and will be applied
towards the purchase price.
The preliminary allocation of purchase price may change upon final
determination of the fair value of the net assets acquired.
(6) To reflect the non-recourse loan of $1,500 by the Company to the sole
stockholder of QBQ.
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
----------------------------------------
Report of Independent Auditors ................................................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) .............. F-3
Consolidated Statements of Operations for the period from July 11, 1995 (inception) to
December 31, 1995 and for the year ended December 31, 1996 and for the six months ended June
30, 1997 and 1996 (unaudited) ................................................................. F-4
Consolidated Statements of Stockholders' Equity for the period from July 11, 1995 (inception)
to December 31, 1995 and for the year ended December 31, 1996 and for the six months ended
June 30, 1997 (unaudited) ..................................................................... F-5
Consolidated Statements of Cash Flows for the period from July 11, 1995 (inception) to
December 31, 1995 and for the year ended December 31, 1996 and for the six months ended June
30, 1997 and 1996 (unaudited) ................................................................. F-6
Notes to Consolidated Financial Statements ..................................................... F-8
PROSERV, INC. AND SUBSIDIARIES
- ------------------------------
Report of Independent Accountants .............................................................. F-17
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) .............. F-18
Consolidated Statements of Operations for the years ended December 31, 1996 and 1995 and for
the six months ended June 30, 1997 and 1996 (unaudited) ....................................... F-19
Consolidated Statements of Stockholders' Equity/(Deficit) for the years ended December 31,
1996 and 1995 and for the six months ended June 30, 1997 (unaudited) .......................... F-20
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995 and for
the six months ended June 30, 1997 and 1996 (unaudited) ....................................... F-21
Notes to Consolidated Financial Statements ..................................................... F-22
QBQ ENTERTAINMENT, INC.
- -----------------------
Report of Independent Auditors ................................................................. F-35
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) ........................... F-36
Statements of Operations for the years ended December 31, 1996 and 1995 and for the six
months ended June 30, 1997 and 1996 (unaudited) ............................................... F-37
Statements of Stockholder's Equity (Deficiency) for the years ended December 31, 1996 and
1995 and the six months ended June 30, 1997 (unaudited) ....................................... F-38
Statements of Cash Flows for the years ended December 31, 1996 and 1995 and for the six
months ended June 30, 1997 and 1996 (unaudited) ............................................... F-39
Notes to Financial Statements .................................................................. F-40
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of The Marquee Group, Inc.
We have audited the accompanying consolidated balance sheet of The Marquee
Group, Inc. and Subsidiaries (the "Company"), as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1996 and for the period from July 11,
1995 (Inception) to 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 audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company
at December 31, 1996, and the consolidated results of its operations and its
cash flows for the year ended December 31, 1996 and for the period from July
11, 1995 (Inception) to December 31, 1995, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
February 14, 1997
F-2
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 7,230,526 $ 688,005
Accounts receivable......................................... 1,295,894 2,902,001
Due from related parties.................................... 138,699 245,573
Due from Celebrity Golf Championship, LLC................... 169,100 --
Prepaid expenses and other current assets................... 250,363 281,707
----------------- ---------------
Total current assets......................................... 9,084,582 4,117,286
Property and equipment, net.................................. 218,604 1,449,324
Loan receivable--non current ................................ -- 335,112
Deposits and other costs related to pending acquisitions and
tender offer................................................ -- 2,045,000
Other assets................................................. 57,612 757,612
----------------- ---------------
Total assets................................................. $ 9,360,798 $ 8,704,334
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................... $ 1,134,692 $ 1,863,095
Distribution payable to stockholders........................ 382,311 382,311
Loan payable to officer/stockholder......................... -- 121,615
Acquisition indebtedness--current portion................... 332,500 332,500
----------------- ---------------
Total current liabilities.................................... 1,849,503 2,699,521
Loan payable to officer/stockholder.......................... 121,615 --
Acquisition indebtedness--stockholders....................... 1,637,500 1,137,500
Other liabilities............................................ 343,000 422,739
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized,
no shares issued ..........................................
Common stock, $.01 par value; 25,000,000 shares authorized,
8,769,162 shares issued and outstanding.................... 87,692 87,692
Additional paid-in capital.................................. 7,795,199 7,664,071
Deferred compensation....................................... (63,334) (15,838)
Accumulated deficit......................................... (2,410,377) (3,291,351)
----------------- ---------------
5,409,180 4,444,574
----------------- ---------------
Total liabilities and stockholders' equity................... $ 9,360,798 $ 8,704,334
================= ===============
</TABLE>
See accompanying notes.
F-3
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD SIX MONTHS ENDED
FROM JULY 11, 1995 JUNE 30,
YEAR ENDED (INCEPTION) TO -------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995 1997 1996
----------------- ------------------ ------------ ------------
<S> <C> <C> <C> <C>
Commissions and fee income.......... $ 2,868,788 $ -- $6,174,087 $ 800,895
Operating expenses.................. 2,563,682 -- 2,900,732 666,796
General and administrative
expenses........................... 2,259,760 -- 4,152,511 707,600
----------------- ------------------ ------------ ------------
Loss from operations................ (1,954,654) -- (879,156) (573,501)
Interest expense (income)........... 283,222 -- 1,818 --
Financing expense................... 192,501 -- -- --
----------------- ------------------ ------------ ------------
Loss before income taxes............ (2,430,377) -- (880,974) (573,501)
Income tax benefit.................. 20,000 -- -- --
----------------- ------------------ ------------ ------------
Net loss............................ $ (2,410,377 ) $ -- $ (880,974) $ (573,501)
================= ================== ============ ============
Net loss per share.................. $ (1.03) $ -- $ (.12) $ (.28)
================= ================== ============ ============
Weighted average common stock
outstanding........................ 2,346,717 2,066,662 7,494,162 2,066,662
================= ================== ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL DEFERRED ACCUMULATED
SHARES STOCK PAID-IN CAPITAL COMPENSATION DEFICIT TOTAL
----------- --------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common
stock--July 1995 .......... 1,938,462 $19,385 $ 595 $ -- $ -- $ 19,980
----------- --------- --------------- -------------- -------------- --------------
Balance--December 31, 1995 . 1,938,462 19,385 595 -- -- 19,980
Issuance of common stock:
Issuance to employee....... 50,000 500 118,750 (118,750) -- 500
Conversion of Debentures .. 666,662 6,667 1,993,333 -- -- 2,000,000
Public offering, net of
offering costs............ 3,852,500 38,525 15,547,001 -- -- 15,585,526
Acquisition of
Subsidiaries.............. 2,261,538 22,615 1,487,831 -- -- 1,510,446
Distribution to acquired
companies' stockholders ... -- -- (10,970,000) -- -- (10,970,000)
S corporation dividend of
subsidiary................. -- -- (382,311) -- -- (382,311)
Amortization of deferred
compensation............... -- -- -- 55,416 -- 55,416
Net loss for the year ended
December 31, 1996.......... -- -- -- -- (2,410,377) (2,410,377)
----------- --------- --------------- -------------- -------------- --------------
Balance--December 31, 1996 . 8,769,162 87,692 7,795,199 (63,334) (2,410,377) 5,409,180
Offering costs.............. -- -- (131,128) -- -- (131,128)
Amortization of deferred
compensation............... -- -- -- 47,496 -- 47,496
Net loss for the six months
ended June 30, 1997........ -- -- -- -- (880,974) (880,974)
----------- --------- --------------- -------------- -------------- --------------
Balance--June 30, 1997
(unaudited)................ 8,769,162 $87,692 $ 7,664,071 $ (15,838) $(3,291,351) $ 4,444,574
=========== ========= =============== ============== ============== ==============
</TABLE>
See accompanying notes.
F-5
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM SIX MONTHS ENDED
JULY 11, 1995 JUNE 30,
YEAR ENDED (INCEPTION) TO --------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995 1997 1996
----------------- ----------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................. $(2,410,377) $ -- $ (880,974) $(573,501)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation............................ 5,620 -- 18,836 --
Non-cash compensation................... 55,416 -- 84,596 500
Deferred income taxes................... (40,000) -- 79,739 --
Changes in operating assets and
liabilities:
Accounts receivable.................... 974,169 -- (1,606,107) --
Due from related parties............... (67,810) -- (39,986) --
Due from Celebrity Golf Championship,
LLC .................................. -- -- 169,100 --
Prepaids and other current assets ..... (178,318) -- (31,344) --
Accounts payable and accrued
liabilities........................... (192,630) -- 713,503 70,000
Income taxes payable................... 20,250 -- -- --
Other liabilities ..................... -- -- -- --
----------------- ----------------- ------------- ------------
Net cash used in operating activities .... (1,833,680) -- (1,492,637) (503,001)
----------------- ----------------- ------------- ------------
INVESTING ACTIVITIES
Purchase of fixed assets.................. (122,422) -- (1,249,556) --
Employee loan............................. -- -- (424,200) --
Deposits and other costs related to
acquisitions............................. -- -- (1,550,000) --
Security Deposits......................... (44,760) -- (700,000) --
----------------- ----------------- ------------- ------------
Net cash used in investing activities .... (167,182) -- (3,923,756) --
----------------- ----------------- ------------- ------------
FINANCING ACTIVITIES
Proceeds from loans payable to related
parties.................................. 766,718 -- -- 587,000
Repayments of loans payable to related
parties.................................. (200,000) -- -- --
Proceeds from private placement........... 1,554,897 -- -- --
Payment of acquistion indebtedness ....... -- -- (500,000) --
Issuance of common stock, net of offering
costs.................................... 15,586,026 19,980 (131,128) --
Distribution to Subsidiary stockholders .. (9,000,000) -- -- --
Cash acquired through acquisition of
Subsidiaries............................. 503,767 -- -- --
Costs related to Tender Offer............. -- -- (495,000) --
----------------- ----------------- ------------- ------------
Net cash provided by financing
activities............................... 9,211,408 19,980 (1,126,128) 587,000
Increase (decrease) in cash and cash
equivalents.............................. 7,210,546 19,980 (6,542,521) 83,999
Cash and cash equivalents at beginning of
period................................... 19,980 -- 7,230,526 19,980
----------------- ----------------- ------------- ------------
Cash and cash equivalents at end of
period................................... $ 7,230,526 $19,980 $ 688,005 $ 103,979
================= ================= ============= ============
</TABLE>
F-6
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM SIX MONTHS ENDED
JULY 11, 1995 JUNE 30,
YEAR ENDED (INCEPTION) TO -----------------------
DECEMBER 31, 1996 DECEMBER 31, 1995 1997 1996
----------------- ----------------- ----- ----- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Exchange of loans payable--related
parties for debentures................... $ 445,103 $-- $ -- $--
================= ================= =========== ===========
Conversion of debentures to common stock . $2,000,000 $-- -- --
================= ================= =========== ===========
Issuance of acquisition
indebtedness--stockholders............... $1,970,000 $-- -- --
================= ================= =========== ===========
S Corporation dividend payable............ $ 382,311 $-- -- --
================= ================= =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes............................. $ -- $-- $268,250 --
================= ================= =========== ===========
Interest................................. $ 254,000 $-- -- --
================= ================= =========== ===========
</TABLE>
See accompanying notes.
F-7
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND ORGANIZATION
The Marquee Group, Inc. (the "Company"), which began operations in 1996,
was organized in the State of Delaware on July 11, 1995 for the purpose of
providing integrated event management, televised production, marketing,
talent representation and consulting services in the sports, news and other
entertainment industries.
On December 12, 1996, the Company acquired by merger, concurrently with
the closing of its initial public offering ("IPO"), Sports Marketing &
Television International, Inc. ("SMTI") which provides production and
marketing services to sporting events, sports television shows and
professional and collegiate leagues and organizations and, Athletes and
Artists, Inc. ("A&A"), a sports and media talent representation firm. The
SMTI stockholders received cash of $6,500,000 from the proceeds of the IPO,
an additional $1,500,000 payable in five equal installments over five years
and 1,292,307 shares of the Company's common stock. The A&A stockholders
received cash of $2,500,000 from the proceeds of the IPO, miscellaneous
reimbursements of $80,000, an additional $1,000,000 payable in five equal
installments over five years and 969,231 shares of the Company's common
stock.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its Subsidiaries from and after December 12, 1996. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL STATEMENTS
The unaudited interim information as of June 30, 1997 and for the six
months ended June 30, 1996 and 1997 has been prepared on the same basis as
the annual financial statements and, in the opinion of the Company's
management, reflects normal recurring adjustments necessary for a fair
presentation of the information for the periods presented. Interim results
are not necessarily indicative of results for a full year. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted.
REVENUE RECOGNITION
Fee revenue from television production services is recognized when the
program is available for broadcast. Licensing, sponsorship and merchandise
revenues are recognized for guaranteed amounts when contractual obligations
are met (subsequent royalties are recorded when received). Fee revenue from
advertising services is recognized in the month the advertisement is
broadcast or printed. Consulting revenue is recognized as services are
provided.
The Company recognizes talent representation commissions as income when
they become due to the Company under terms of the Company's representation
agreements with its clients. Generally, commissions are payable by clients
upon their receipt of payments for performance of services or upon the
delivery or use of material created by them. Commissions on profit or gross
receipt participations are recorded upon determination of the amounts.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives ranging from five to
seven years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining lease term.
F-8
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
The Company accounts for income taxes using the liability method.
CASH EQUIVALENTS
The Company considers all highly liquid financial instruments with a
maturity of three months or less when purchased to be cash equivalents.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and
trade accounts receivable.
At December 31, 1996, 90% of the Company's cash and cash equivalents was
invested with one financial institution.
Concentrations of credit risk with respect to trade accounts receivable
are limited due to the large number of entities comprising the Company's
client base.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Loan payable to officer stockholder: The carrying amount of the Company's
borrowings under its long-term debt agreement approximates fair value.
Acquisition indebtedness--stockholders: The carrying amount of the
Company's borrowings under its long-term debt agreement approximates fair
value.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based upon net income (loss) divided by
weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Shares of common stock placed in
escrow upon completion of the IPO described in Note 6, which are common stock
equivalents, have been excluded from the calculation of earnings per share.
The shares of common stock issued upon the automatic conversion of the
debentures (see Note 5) are considered outstanding for all periods presented.
In addition, all shares have been adjusted to give effect to the stock split
discussed in Note 4.
Supplementary net loss per share would have been $(.83) for the year ended
December 31, 1996 if the debentures had been converted at the beginning of
the year.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be adopted in
December 1997. At that time the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. The impact of Statement No. 128 on earnings per share is not
expected to be material.
F-9
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- -----------
(UNAUDITED)
<S> <C> <C>
Furniture and fixtures.................... $118,172 $ 211,122
Leasehold improvements.................... 79,413 1,236,019
Vehicles.................................. 26,639 26,639
-------------- -----------
224,224 1,473,780
Accumulated depreciation and
amortization............................. 5,620 24,456
-------------- -----------
$218,604 $1,449,324
============== ===========
</TABLE>
3. RELATED PARTY TRANSACTIONS
At June 30, 1997 and December 31, 1996, the Company has a loan payable of
$121,615 to an officer/stockholder which is due on January 1, 1998 with
interest at 12% per annum.
The Company provided services as a subcontractor for SMTI aggregating
$724,000, for the period from January 1, 1996 to December 12, 1996 (see Note
1), which are included in revenues in the accompanying consolidated statement
of operations.
In April 1997, in connection with the employment of an officer of the
Company, the Company loaned the officer $424,000 which loan by its terms may
be forgiven. In addition, the officer will over a three year period beginning
with his date of employment receive $100,000 payable in shares of Common
Stock.
4. STOCKHOLDERS' EQUITY
COMMON STOCK
On July 17, 1996, the Board of Directors and stockholders of the Company
approved an increase in the authorized capitalization of the Company to
25,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share. Furthermore, in August
1996 the Board of Directors and the stockholders of the Company approved a
stock split whereby 999 shares of the 1,000 shares of common stock
outstanding at that time were split on the basis of approximately 1,940-for-1
and the remaining one share of common stock outstanding at that time was
split on the basis of 50,000-for-1. All share information in the financial
statements has been restated to reflect such stock split.
5. PRIVATE PLACEMENT
In August 1996, the Company issued debentures (the "Debentures"), in the
aggregate principal amount of $2,000,000, each Debenture consisted of $50,000
principal amount of 10% Convertible Debentures. Interest on the Debentures of
$254,000 was calculated for the period from the final closing of the Private
Placement to a date one year from the effective date of the Company's IPO.
The Debentures were automatically converted into units (see Note 6) identical
in all respects to those offered in the IPO at a rate of one unit for each
$3.00 principal amount of Debentures.
Stockholders of the Company and stockholders of the Subsidiaries purchased
an aggregate of $750,000 principal amount of Debentures, of which $445,103
was in exchange for existing indebtedness of the Company to such
stockholders. In addition, the Company repaid $125,000 to one of the officer/
stockholders from the proceeds of the private placement.
6. INITIAL PUBLIC OFFERING AND ACQUISITIONS
In December 1996, the Company closed its IPO of 3,852,500 units (the
"Units"), each unit consisting of one share of common stock and one
redeemable warrant, at a price of $5.00 per Unit. Each warrant
F-10
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
6. INITIAL PUBLIC OFFERING AND ACQUISITIONS (Continued)
entitles the holder to purchase one share of common stock at an exercise
price of $7.50, subject to adjustment, at any time until December 4, 2001.
The warrants are redeemable by the Company under certain circumstances at a
redemption price of $.05 per warrant.
The Company also granted to the underwriters or their designees options
(the "IPO Options") to purchase up to 335,000 Units. The Units purchaseable
upon exercise of the IPO Options are identical to the Units described above,
except that the underlying warrants are redeemable only by the Company under
limited circumstances. The IPO Options are exercisable during a three-year
period commencing two years from the date of the public offering at an
exercise price of $8.25, subject to adjustment in certain events.
Certain of the Company's stockholders and the stockholders of the
Subsidiaries have placed an aggregate of 1,275,000 of their shares of common
stock in escrow. These shares will not be assignable or transferable (but may
be voted) until such time as they are released from escrow based upon the
Company meeting certain annual earnings levels or the common stock attaining
certain price levels. All reserved shares remaining in escrow on March 31,
2000 will be forfeited and contributed to the Company's capital. In the event
the Company attains any of the earnings thresholds or stock prices providing
for the release of the escrow shares to the stockholders, the Company will
recognize compensation expense at such time based on the then fair market
value of the shares.
The acquisition by merger of the Subsidiaries was accounted for as a
consolidation at historical cost due to the significance of the equity
interests in the Company to be held by the stockholders of the Subsidiaries
following completion of the acquisitions. Accordingly, the acquired assets
and liabilities of the Subsidiaries were recorded at their historical
amounts. The capital stock of the Subsidiaries was included in additional
paid-in capital. In addition, the cash paid to the Subsidiaries' stockholders
was recorded as a dividend charged to additional paid-in capital.
SMTI was an S Corporation prior to the merger. The SMTI stockholders will
receive a distribution of $382,000 which represents 40% of the taxable
earnings of SMTI prior to the merger.
The following unaudited pro forma information presents the results of
operations of the Company as though the aforementioned acquisitions and the
completion of the IPO had occurred as of the beginning of 1996 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Pro forma revenue..................... $15,184,589 $10,341,827
============= =============
Pro forma net income (loss)........... $ (913,005) $ 789,773
============= =============
Pro forma net income (loss) per
share................................ $ (.12) $ .10
============= =============
Pro forma weighted average shares .... 7,494,162 7,494,162
============= =============
</TABLE>
F-11
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
6. INITIAL PUBLIC OFFERING AND ACQUISITIONS (Continued)
Included in the above unaudited pro forma information are the historical
results of operations of SMTI and A&A for the years ended December 31, 1996
and 1995 as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
---------------------------
SMTI A&A
------------- -------------
<S> <C> <C>
Revenues................... $ 9,193,000 $ 4,103,000
Costs and expenses......... (8,055,000) (3,625,000)
------------- -------------
Income before income
taxes..................... 1,138,000 478,000
Income tax provision....... (112,000) (229,000)
------------- -------------
Net income................. $ 1,026,000 249,000
============= =============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
---------------------------
SMTI A&A
------------- -------------
<S> <C> <C>
Revenues................... $ 6,495,000 $ 3,846,000
Costs and expenses......... (6,402,000) (3,770,000)
------------- -------------
Income before income
taxes..................... 93,000 76,000
Income tax provision....... (9,000) (77,000)
------------- -------------
Net income (loss).......... $ 84,000 $ (1,000)
============= =============
</TABLE>
In addition, the pro forma information for the years ended December 31,
1996 and 1995, include adjustments for the following transactions, as if they
had each occurred on January 1, 1995.
o The terms of new employment contracts with key executives of SMTI and
A&A provide for salaries which are $1,345,000 less than their
historical salaries for the year ended December 31, 1995 and the
reduction of benefit expenses of $140,000 for the termination of the
employee benefit plans. Pursuant to the acquisition agreements, the key
executives of SMTI and A&A have reduced their salaries and committed to
terminate the employee benefit plans for the year ended December 31,
1996 (therefore no pro forma adjustment is required); and
o At December 12, 1996, the date of the consummation of the IPO, the
status of SMTI as an S Corporation was terminated and accordingly, SMTI
is subject to federal and local income taxes. The pro forma statement
of operations reflect income taxes based upon the income of SMTI, as if
SMTI had not been an S Corporation.
7. INCOME TAXES
The income tax benefit for the year ended December 31, 1996 consists of:
<TABLE>
<CAPTION>
<S> <C>
Current:
Federal.......... $ --
State and local . $(20,000)
-----------
$(20,000)
-----------
Deferred:
Federal ......... 30,000
State and local 10,000
-----------
$ 40,000
-----------
$ 20,000
===========
</TABLE>
F-12
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
7. INCOME TAXES (Continued)
A reconciliation of the federal statutory tax rate to the actual
effective rate for the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Statutory rate ....................................... (34.0)%
State and local income taxes, net of federal benefit .4
Valuation allowance................................... 31.8
Permanent differences................................. 1.0
---------
(.8)%
=========
</TABLE>
The net deferred tax liabilities is comprised of the following at December
31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Cumulative effect of change in tax accounting basis ... $ (343,000)
Compensation expense deducted for tax purposes, not
for financial reporting purposes...................... (29,000)
Net operating losses................................... 1,051,000
Valuation allowance.................................... (1,022,000)
-------------
$ (343,000)
=============
</TABLE>
8. STOCK OPTION PLAN
The Company's Board of Directors has adopted and the stockholders have
approved the Company's 1996 Stock Option Plan (the "Plan"). The Plan provides
for the grant, at the discretion of the Board of Directors, of (i) options
that are intended to qualify as incentive stock options within the meaning of
Section 422A of the Internal Revenue Code to certain employees and
consultants and (ii) options not intended to so qualify. The total number of
shares of common stock for which options may be granted under the Plan is
500,000 shares. In October 1996, options to purchase an aggregate of 230,000
shares of common stock were granted under the Plan. Of such options, 100,000
were granted to 14 employees of the Company and have an exercise price of $5
per share, and 130,000 were granted to the Company's executive officers and
directors and have an exercise price of $6.25 per share. The options vest in
annual installments over the three to five year period commencing one year
from the date of grant. In June 1997, the Company granted an executive
officer options to purchase 7,500 shares of Common Stock at a price of $5.875
which vest over a three year period and expire in June 2002.
The Plan is administered by a Stock Option Committee (the "Committee")
which is appointed by the Board of Directors. The Committee determines who
among those eligible will be granted options, the time or times at which
options will be granted, the terms of the options, including the exercise
price, the number of shares subject to the options and the terms and
conditions of exercise.
The Company has elected to follow Accounting Principles Board opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires
use of options valuation models that were not developed for use in valuing
employee stock options. The exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant
and, therefore, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of
grant using a
F-13
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
8. STOCK OPTION PLAN (Continued)
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates ranging from 5.45% to 6.18% and a
volatility factor of the expected market price of the Company's common stock
of .718. The weighted-average expected life of the options is 3.6 years.
Dividends are not expected in the future.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information for the year ended December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Pro forma net loss .......... $ (2,453,995)
===============
Pro forma net loss per
share....................... $ (1.05)
===============
</TABLE>
The weighted average fair value of options granted during 1996 is $2.57.
The exercise prices for options outstanding as of December 31, 1996 ranged
from $5.00 to $6.25. The weighted average remaining contractual life of those
options is 9.75 years. At December 31, 1996 none of the options are
exercisable.
9. COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases which expire
through 2008. These operating leases provide for basic annual rents plus
escalation charges. The aggregate future minimum lease payments required
under these leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997......... $ 135,000
1998......... 404,000
1999......... 672,000
2000......... 696,000
2001......... 719,000
Thereafter .. 4,515,000
-----------
$7,141,000
===========
</TABLE>
The Company also rents office space on a month-to-month basis. Rent
expense amounted to $45,000, $23,000, and $158,561, respectively, for the
year ended December 31, 1996, for the six months ended June 30, 1996 and
1997.
During March 1996, the Company entered into a five-year employment
agreement with a key executive that provides for an annual base salary plus
bonus aggregating $475,000. During December 1996 the Company entered into
five-year employment agreements with four key executives that provide for an
annual base salaries aggregating $1,075,000.
During May 1996, the Company entered into a three-year employment
agreement with a key executive that provides for an annual base salary
ranging from $250,000 to $350,000. Upon entering into the employment
agreement, the Company issued one share of common stock to this employee.
F-14
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
9. COMMITMENTS AND CONTINGENCIES (Continued)
Furthermore, the Company agreed that prior to the IPO the employee's one
share would be converted into 50,000 shares of common stock, contingent upon
the employee remaining with the Company for fifteen months. The Company will
recognize non-cash compensation expense of $118,750 over the vesting period.
The Company recognized non-cash compensation expense of $55,416 in 1996,
which is included in general and administrative expense in the accompanying
consolidated statement of operations.
During August 1996, the Company entered into a six-year consulting
agreement with Sillerman Communications Management Corporation ("SCMC"),
which is controlled by Robert F.X. Sillerman, the Chairman of the Company and
the controlling stockholder of The Sillerman Companies, Inc., a principal
stockholder of the Company, that provides for a monthly fee of $30,000
commencing in September 1997. The monthly fee shall be increased annually by
the percentage increase in the consumer price index.
In February 1997, the Company paid $400,000 to The Sillerman Companies
("TSC"), a company controlled by Robert F. X. Sillerman, the Chairman of the
Company, as an advance against advisory services to be provided. The advance
will be applied against amounts which will be payable to TSC in connection
with the consummation of the Pending Acquisition and tender offer mentioned
in Notes 2 and 3 above.
In March 1997, SCMC assigned its rights, obligations, and duties under the
consulting agreement to The Sillerman Companies, Inc.
The Company is subject to certain legal proceedings and claims which have
arisen in the ordinary course of its business. In the opinion of management,
settlement of these actions, when ultimately concluded, will not have a
material adverse effect on the results of operations, cash flows or the
financial condition of the Company.
10. INVESTMENT IN JOINT VENTURE
SMTI and NBC formed a limited liability corporation, Celebrity Golf
Championship, LLC ("CGC") the purpose of which is to conduct the annual
golfing tournament currently known as The Celebrity Golf Championship.
Earnings are allocated 75% to NBC and 25% to SMTI in accordance with the LLC
agreement. All profits from CGC are distributed.
Condensed financial information of CGC at December 31, 1996 is as follows:
Cash.......... $ 169,100
===========
Due to SMTI .. $(169,100)
===========
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenues........... $ 2,743,700 $ 2,875,600
Costs and
expenses.......... (2,067,400) (1,928,300)
------------- -------------
Net income......... $ 676,300 $ 947,300
============= =============
</TABLE>
11. SUBSEQUENT EVENTS (UNAUDITED)
In June and July 1997, the Company entered into agreements (the "ProServ
Acquisition Agreements") to acquire approximately 94% of ProServ, Inc. and
ProServ Television, Inc. (collectively, "ProServ") and is currently
negotiating to acquire the remaining minority interests in ProServ. If the
Company is unable to acquire the remaining minority interests in ProServ on
satisfactory terms, the Company intends to obtain full ownership of ProServ
through a statutory merger. ProServ is an established provider of
international sports event management, television production, marketing,
talent representation and consulting services. The aggregate purchase price
pursuant to the ProServ Acquisition
F-15
<PAGE>
THE MARQUEE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
11. SUBSEQUENT EVENTS (UNAUDITED) (Continued)
Agreements consists of approximately $10.1 million in cash and 250,000 shares
of Common Stock. The Company anticipates purchasing the remaining minority
interests for approximately $609,000. In connection with the acquisition of
Pro Serv, in June 1997, the Company deposited $1.5 million of the purchase
price in escrow.
The Company has also entered into an agreement pursuant to which Marquee
Music, Inc. ("Marquee Music"), a wholly-owned subsidiary of the Company, will
acquire the assets of QBQ Entertainment, Inc. ("QBQ"), a company that books
tours and appearances for a variety of entertainers. The aggregate purchase
price for the acquisition of QBQ consists of approximately $3.1 million in
cash, $1.6 million payable in annual installments over eight years and up to
$2.5 million payable in shares of Common Stock, of which shares relating to
up to $500,000 are subject to an escrow agreement. In connection with the
acquisition of QBQ, in July 1997, the Company deposited $400,000 of the
purchase price in escrow.
In July 1997, the Company commenced a tender offer to purchase up to all
(but not less than 3,200,000, representing 70.8%) of the 4,519,162
outstanding warrants at a cash purchase price of $2.40 per warrant. The
Company, through its principal financial advisor, is currently negotiating a
short-term loan (the "Bridge Facility") to fund the purchase of the Warrants
which the Company intends to repay with a portion of the proceeds from the
Offering (as described herein). There can be no assurance that the Company
will obtain such financing.
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 in July 1997 in order to register for
sale 8,625,000 shares of its common stock including 1,125,000 shares for
Underwriter's over-allotment (the "Offering"). The proceeds of the proposed
stock offering will be used to fund the cash portion of the acquisitions
described in Note 2, repay certain debt, payment of the Bridge Facility,
working capital and other general corporate purposes. The offering is
conditional on the completion of the tender offer mentioned above and the
concurrent closing of the ProServ Acquisition.
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
ProServ, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of ProServ,
Inc. and Subsidiaries as of December 31, 1996 and the related consolidated
statements of operations, stockholders' equity (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 the 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 consolidated financial position of ProServ,
Inc. and Subsidiaries as of December 31, 1996, and the consolidated results
of their operations and their cash flows for the years ended December 31,
1996 and 1995, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Washington, D.C.
June 25, 1997
F-17
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997
-------------- ---------------
1996 (UNAUDITED)
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 168,295 $ 1,181,889
Restricted cash............................................. -- 254,401
Accounts receivable, net.................................... 3,241,184 4,099,189
Prepaid expenses and other current assets................... 158,364 259,944
-------------- ---------------
Total current assets......................................... 3,567,843 5,795,423
Property and equipment, net ................................. 468,444 450,949
Noncurrent accounts receivable............................... 1,228,206 1,158,819
Other assets................................................. 76,426 49,019
-------------- ---------------
Total assets................................................. $ 5,340,919 $ 7,454,210
============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of notes payable............................ $ 900,000 $ 2,175,000
Accounts payable............................................ 1,104,623 2,330,864
Accrued expenses............................................ 1,003,968 554,250
Income tax payable.......................................... 48,290 156,207
Production rights payable................................... 42,741 370,588
Accounts payable--clients................................... -- 254,401
Deferred revenue............................................ 659,386 1,098,213
Deferred income taxes....................................... 259,000 259,000
-------------- ---------------
Total current liabilities.................................... 4,018,008 7,198,523
Notes payable................................................ 650,000 --
Deferred rent................................................ 875,778 776,726
Minority interest ........................................... -- 24,683
-------------- ---------------
Total liabilities............................................ 5,543,786 7,999,932
-------------- ---------------
Commitments and contingencies
Stockholders' deficit:
Class A preferred stock, $1,000 par value--2,000 shares
authorized; 600 shares issued and outstanding.............. 600,000 600,000
Common stock, $1.00 par value--20,000 shares authorized;
1,250 shares issued and outstanding ....................... 1,250 1,250
Additional paid-in capital.................................. 3,571,692 3,571,692
Unearned compensation....................................... (341,369) (258,475)
Accumulated deficit......................................... (4,232,051) (4,659,107)
Cumulative translation adjustment........................... 197,611 198,918
-------------- ---------------
Total stockholders' deficit.................................. (202,867) (545,722)
-------------- ---------------
Total liabilities and stockholders' deficit.................. $ 5,340,919 $ 7,454,210
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------- --------------------------
1996 1995 1997 1996
-------------- -------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenue....................... $13,387,810 $17,792,247 $6,438,343 $ 5,253,016
Operating expenses...................... 10,130,353 11,926,379 4,739,531 4,872,175
General and administrative expenses .... 5,000,927 6,581,388 1,921,300 2,481,005
Restructuring costs..................... 565,000 -- -- --
Legal settlement........................ -- 300,000 -- --
Loss on sublease........................ -- 293,832 -- --
-------------- -------------- ------------ -------------
Loss from operations.................... (2,308,470) (1,309,352) (222,488) (2,100,164)
Interest expense, net................... 208,691 190,967 71,368 124,438
Equity in loss of joint venture......... -- (6,927) -- --
Gain on sale of joint venture interest -- 67,763 -- --
Minority interest....................... -- -- 24,683 --
-------------- -------------- ------------ -------------
Loss before income taxes................ (2,517,161) (1,439,483) (318,539) (2,224,602)
Provision (benefit) for income taxes ... 239,824 (1,126) 108,517 2,003
-------------- -------------- ------------ -------------
Net loss................................ $(2,756,985) $(1,438,357) $ (427,056) $(2,226,605)
============== ============== ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
PREFERRED COMMON PAID-IN TREASURY UNEARNED ACCUMULATED TRANSLATION
STOCK STOCK CAPITAL STOCK COMPENSATION DEFICIT ADJUSTMENT TOTAL
----------- ---------------------- ----------- ---------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995................... $600,000 $1,000 $ 248,041 $(218,020) $ (59,778)$ (36,709) $141,468 $ 676,002
Net loss................ -- -- -- -- -- (1,438,357) -- (1,438,357)
Treasury stock reissued
under restricted
purchase............... -- -- -- 218,020 (218,020) -- -- --
Amortization of unearned
compensation........... -- -- -- -- 164,937 -- -- 164,937
Foreign currency
translation adjustment. -- -- -- -- -- -- 107,332 107,332
----------- ---------------------- ----------- ---------------------- ----------- -----------
Balance, December 31,
1995 .................. 600,000 1,000 248,041 -- (112,861) (1,475,066) 248,800 (490,086)
Net loss................ -- -- -- -- -- (2,756,985) -- (2,756,985)
Issuance of stock
options................ -- -- 323,901 -- (323,901) -- -- --
Issuance of common
stock.................. -- 250 2,999,750 -- -- -- -- 3,000,000
Amortization of unearned
compensation........... -- -- -- -- 95,393 -- -- 95,391
Foreign currency
translation adjustment. -- -- -- -- -- -- (51,189) (51,189)
----------- ---------------------- ----------- ---------------------- ----------- -----------
Balance, December 31,
1996 .................. 600,000 1,250 3,571,692 -- (341,369) (4,232,051) 197,611 (202,867)
Net loss................ -- -- -- -- -- (427,056) -- (427,056)
Amortization of unearned
compensation........... -- -- -- -- 82,894 -- -- 82,894
Foreign currency
translation adjustment. -- -- -- -- -- -- 1,307 1,307
----------- ---------------------- ----------- ---------------------- ----------- -----------
Balance, June 30, 1997
(unaudited)............ $600,000 $1,250 $3,571,692 $ -- $(258,475)$(4,659,107) $198,918 $ (545,722)
=========== ====================== =========== ====================== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------
1996 1995 1997 1996
-------------- -------------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................... $(2,756,985) $(1,438,357) $ (427,056) $(2,226,605)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation .............................................. 181,048 152,349 51,408 60,111
Deferred income taxes ..................................... 77,000 (288,119) -- --
Provision for bad debts ................................... 537,820 385,616 -- --
Amortization of unearned compensation ..................... 95,393 164,937 82,894 35,000
Equity in loss of investee ................................ -- 6,927 -- 10,836
Gain on distribution from joint venture ................... -- (67,763) -- --
Realized gain on sale of marketable securities ........... -- (4,511) -- --
Minority interest ......................................... -- -- 24,683 --
Changes in assets and liabilities:
Restricted cash .......................................... (332,999) (31,886) (260,238) (303,193)
Accounts receivable ...................................... (256,278) 466,686 (964,658) (862,833)
Income tax receivable .................................... 83,175 143,959 -- 83,175
Prepaid expenses and other current assets ................ 233,664 (74,220) (112,525) (63,933)
Noncurrent accounts receivable ........................... 410,016 445,949 69,387 --
Other assets ............................................. (6,202) 37,275 (37,195) 13,791
Accounts payable ......................................... (702,583) 212,128 1,466,375 1,798,750
Accrued expenses ......................................... 21,551 35,000 (315,592) (278,124)
Income tax payable ....................................... (47,869) 96,159 107,917 (16,754)
Production rights payable ................................ (12,573) (522,327) 327,847 540,732
Deferred revenue ......................................... (211,276) (1,109,279) 442,410 840,737
Deferred rent ............................................ (172,879) 263,036 (99,052) (339,969)
Accounts payable-clients ................................. 332,999 31,886 260,238 303,193
-------------- -------------- ------------ --------------
Net cash (used in) provided by operating activities .... (2,526,978) (1,094,555) 616,843 (405,086)
-------------- -------------- ------------ --------------
Cash flows from investing activities:
Proceeds from sale of marketable securities ................ -- 216,590 -- --
Purchases of property and equipment......................... (74,297) (142,609) (5,001) (14,770)
Investment in joint venture ................................ (10,836) (89,164) -- (10,836)
-------------- -------------- ------------ --------------
Net cash used in investing activities ................... (85,133) (15,183) (5,001) (25,606)
-------------- -------------- ------------ --------------
Cash flows from financing activities:
Proceeds from issuance of capital stock .................... 3,000,000 -- -- --
Proceeds from notes payable ................................ 1,250,000 2,460,000 425,000 957,500
Payments on notes payable .................................. (1,800,000) (1,822,500) -- --
-------------- -------------- ------------ --------------
Net cash provided by financing activities ............... 2,450,000 637,500 425,000 957,500
-------------- -------------- ------------ --------------
Effect of exchange rate changes on cash and cash equivalents 47,626 30,090 (23,248) 1,194
-------------- -------------- ------------ --------------
Increase (decrease) in cash and cash equivalents ........... (114,485) (442,148) 1,013,594 528,002
Cash and cash equivalents, beginning of period .............. 282,780 724,928 168,295 282,780
-------------- -------------- ------------ --------------
Cash and cash equivalents, end of period .................... $ 168,295 $ 282,780 $1,181,889 $ 810,782
============== ============== ============ ==============
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes, net of refunds $ 127,518 $ 61,930 $ -- $ --
============== ============== ============ ==============
Cash paid during the year for interest ..................... $ 224,461 $ 181,106 $ 71,368 $ 124,438
============== ============== ============ ==============
Noncash investing and financing activities:
Issuance of treasury stock for restricted stock award ..... $ -- $ 218,020 $ -- $ --
============== ============== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
ProServ, Inc. and Subsidiaries (the Company) is an international
corporation operating as one segment in the business of sports marketing. The
Company provides career management and advisory services to professional
athletes and also engages in sports event management and promotion,
production and distribution of television sports broadcasting, and corporate
sports consulting. The Company conducts its business principally in North
America and Europe.
The Company experienced negative cash flow from operations during the
years ended December 31, 1996 and 1995, and the Company has been reliant on
financing activities to fund its operations. As further described in Note 4,
the Company has certain lines of credit available to fund working capital
through May 31, 1998. In management's opinion, the Company has sufficient
financing available to meet its current obligations as they come due.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company's wholly-owned subsidiaries and a partially owned subsidiary in which
the Company has a controlling financial interest through its direct and
indirect ownership. The following entities are included in the consolidated
financial statements:
o ProServ, Inc.
o ProServ Europe
o ProServ, U.K.
o ProServ Financial Services, Inc.
o ProServ Television, Inc.
The above subsidiaries are wholly-owned except for ProServ Television,
Inc. (ProServ TV), which is 49% owned by the Company and 51% owned by an
officer/majority shareholder of the Company. The 51% ownership is accounted
for as a minority interest in the accompanying consolidated financial
statements. As of December 31, 1996, there was no minority interest
liability. All significant intercompany balances and transactions have been
eliminated in consolidation.
INVESTMENT IN JOINT VENTURE
The Company accounts for its investment in joint venture (see Note 9)
under the equity method. Under this method, the original investment is
recorded at cost and adjusted by the Company's share of undistributed
earnings of the joint venture. The investment balance is further adjusted for
additional investments in and cash distributions from the joint venture.
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 reported amounts of assets and liabilities and
disclosures of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
REVENUE RECOGNITION
The Company's revenues arise primarily from a percentage fee or
commissions received for performing services. The Company recognizes revenue
when services have been performed. Fees or
F-22
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
commissions collected in advance for services to be performed in subsequent
years are recorded on the accompanying consolidated balance sheets as
deferred revenue. Deferred revenue is recognized when the event is held or
the Company's client performs under the related contract. Revenue associated
with television event production is recorded net of fees payable to the
related events. All recognized but unpaid fees are included in the
accompanying consolidated balance sheets as production rights payable. The
Company manages or represents various sporting events and has an ownership
interest in certain of these events. Revenues and expenses from these events
are recognized on the accrual basis.
CASH EQUIVALENTS
Short-term investments with an original maturity of three months or less
are considered to be cash equivalents.
RESTRICTED CASH
The Company collects endorsement fees, special appearance fees, and
tournament earnings on behalf of its clients. These funds are held in
separate bank accounts pending disbursement to the individual clients. These
cash balances are reflected separately on the accompanying consolidated
balance sheets as restricted cash with a corresponding accounts payable to
clients.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded net of an allowance for doubtful accounts
of $577,650 and $569,559 at December 31, 1996 and June 30, 1997,
respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. The Company deposits its cash and cash equivalents
in two financial institutions which are insured by the Federal Depository
Insurance Corporation (FDIC). The Company has not experienced any losses on
these balances to date. In addition, the Company maintains a repurchase
agreement with one of the financial institutions, in which excess funds are
deposited by the financial institution in an overnight investment account.
The Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific clients, historical trends and other
information.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, restricted cash, accounts receivable, notes payable and accounts
payable approximate fair value as of December 31, 1996 because of the
relatively short maturity of these instruments. The carrying value of
noncurrent receivables approximates fair value as of December 31, 1996 based
on discounted future cash flows using a discount rate that approximates the
current interest rate available from the Company's financial institutions.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from five to fifteen years. Leasehold improvements are amortized over
the remaining lease term using the straight-line method. Upon retirement or
disposition of property and equipment, the cost and accumulated depreciation
are removed from the accounts and any resulting gain or loss is reflected in
operations.
F-23
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
INCOME TAXES
ProServ, Inc. and ProServ Financial Services, Inc. file a consolidated
Federal income tax return. ProServ TV files separate Federal and state
returns and ProServ Europe and ProServ U.K. file separate tax returns in
their respective tax jurisdictions. The Company accounts for income taxes
utilizing the liability method. Deferred income taxes are recognized for the
tax consequences in future years for differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year
end, based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. The provision for income taxes
is the current tax expense for the period plus the change during the period
in deferred tax assets and liabilities.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 123 is effective for the year
ended December 31, 1996. SFAS 123 permits companies to account for stock
based compensation based on the provisions prescribed in SFAS 123 or based on
the authoritative guidance in Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees." The Company has
elected to continue to account for its stock based compensation in accordance
with APB 25, however, as required by SFAS 123, the Company has disclosed the
pro forma impact on the financial statements assuming the recognition
provisions of SFAS No. 123 had been adopted.
CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiaries are
translated at the exchange rates in effect on the reporting date and revenues
and expenses are translated at the weighted average exchange rate in effect
during the period. Adjustments resulting from these translations are included
as a separate component of stockholders' equity.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information as of June 30, 1997 and for the six
months ended June 30, 1997 and 1996 is unaudited. The unaudited interim
financial statements reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to fairly present
the results of operations, changes in cash flows and financial position as of
and for the periods presented. The unaudited interim financial information
should be read in conjunction with the audited financial statements and
related notes thereto. The results for the interim periods presented are not
necessarily indicative of results to be expected for the full year.
F-24
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Office equipment ................................ $ 1,651,915 $ 1,570,645
Leasehold improvements .......................... 264,639 225,351
Tape library .................................... 229,813 229,813
-------------- -------------
2,146,367 2,025,809
Less: accumulated depreciation and amortization (1,677,923) (1,574,860)
-------------- -------------
$ 468,444 $ 450,949
============== =============
</TABLE>
Depreciation and amortization expense was $181,048 and $152,349 for the
years ended December 31, 1996 and 1995, respectively and $51,408 and $60,111
for the six months ended June 30, 1997 and 1996, respectively.
3. NONCURRENT ACCOUNTS RECEIVABLE
Noncurrent accounts receivable include certain contractually earned
amounts for which there is no future performance required by the Company and
outstanding loans that will not be collected within one year from the balance
sheet date. Amounts to be collected during the twelve months subsequent to
December 31, 1996 are included in accounts receivable. The noncurrent
accounts receivable are reflected at the present value of future receipts
based on the discount rate prevailing on the date upon which the earnings
process is complete and are recorded net of an unamortized discount of
approximately $872,000 and $837,000 as of December 31, 1996 and June 30,
1997, respectively. Interest resulting from the amortization of the discount,
which is included in operating revenues, was approximately $80,000 and
$129,000 for the years ended December 31, 1996 and 1995, respectively and
approximately $35,000 and $50,000 for the six months ended June 30, 1997 and
1996, respectively. Based on the present value at December 31, 1996 of future
cash receipts, the noncurrent accounts receivable will be realized over the
next five years and thereafter as follows as of December 31, 1996 and June
30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- -----------
<S> <C> <C>
1997.................. $ 482,559 $ 482,559
1998.................. 534,836 465,449
1999.................. 52,695 52,695
2000.................. 11,724 11,724
2001.................. 12,566 12,566
Thereafter............ 616,385 616,385
-------------- -----------
1,710,765 1,641,378
Less: current
portion.............. (482,559) (482,559)
-------------- -----------
Total................ $1,228,206 $1,158,819
============== ===========
</TABLE>
F-25
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
4. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Lines of credit....... $1,450,000 $ 2,150,000
Term notes payable ... 100,000 25,000
-------------- -------------
Total notes payable . 1,550,000 2,175,000
Less: current
portion.............. (900,000) (2,175,000)
-------------- -------------
Noncurrent portion .. $ 650,000 $ --
============== =============
</TABLE>
LINES OF CREDIT
The Company maintains three lines of credit providing an aggregate working
capital facility of $1,850,000 and $2,100,000 at December 31, 1996 and June
30, 1997, respectively, of which $1,450,000 and $1,950,000 was outstanding as
of December 31, 1996 and June 30, 1997, respectively. Specific descriptions
of these lines of credit are set forth below.
The Company maintains two of its lines of credit with one financial
institution for an aggregate working capital facility of up to $1,100,000.
Total amounts outstanding under these lines of credit were $700,000 and
$1,100,000 at December 31, 1996 and June 30, 1997, respectively. Interest
payments are due monthly on these facilities at the bank's prime rate (8.25%
at December 31, 1996 and 8.5% at June 30, 1997). These lines of credit are
collateralized by substantially all of the Company's assets and certain
future contract rights and are guaranteed by a shareholder of the Company.
One of the lines maintained by ProServ TV is also guaranteed by ProServ, Inc.
The line of credit agreements contain certain restrictive covenants,
including a minimum cash flow coverage requirement, a minimum net worth
requirement and restrictions on incurring additional indebtedness and issuing
shares of common stock. As of December 31, 1996, the Company was not in
compliance with these covenants but received a waiver from the bank related
to each covenant violation. These facilities expired on May 31, 1997. On June
17, 1997, the Company renegotiated these lines of credit. The lines were
combined into one $1,100,000 line of credit with a maturity date of May 31,
1998. The revised line of credit agreement requires a principal payment of
$550,000 on the earlier of October 15, 1997 or the closing of a definitive
purchase and sale agreement (the Agreement) between the majority shareholder
of the Company and The Marquee Group (see Note 10) and a principal payment on
the earlier of October 30, 1997 or 15 days after the closing of the
Agreement. All other terms of the previous lines of credit remain the same.
The Company has an additional line of credit at another bank that provides
for a working capital facility of up to $750,000 and $1,000,000 at December
31, 1996 and June 30, 1997, respectively, of which $750,000 and $850,000 was
outstanding as of December 31, 1996 and June 30, 1997, respectively.
Interest payments were due monthly on this facility at the prime rate as
published in the Wall Street Journal (8.25% at December 31, 1996 and 9.5% at
June 30, 1997). This line of credit expired on December 31, 1996. The Company
subsequently renegotiated this line of credit, and the resulting new terms
include a scheduled principal payment of $150,000 on or before September 30,
1997 with the remaining outstanding balance due May 31, 1998. The terms of
the renegotiated line of credit terms included an increase in the maximum
principal available on the line of credit to $1,000,000 and an increased
interest rate of prime (as published in the Wall Street Journal) plus 1%.
This line is collateralized by the rights to the Company's earnings generated
by an agreement related to a specific Company sponsored event, earnings
generated from certain ongoing management contracts, the rights to certain
cash flow generated from the Company's team sports operations and certain
royalties received by the Company pursuant to a specific contract. The line
is also guaranteed by a shareholder of the Company. The line contains certain
restrictive covenants,
F-26
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
4. NOTES PAYABLE (Continued)
including a requirement that the Company maintain thirty consecutive days
with a zero balance on this line. The Company was not in compliance with this
covenant as of December 31, 1996, but received a waiver from the bank related
to this covenant violation.
During 1996, the Company borrowed an additional $482,500 from this
financial institution. Interest payments were due monthly on this facility at
the prime rate (as published in the Wall Street Journal) plus 2%. This loan
was repaid in full during July 1996.
The majority shareholder of the Company also entered into a line of credit
agreement with a third financial institution during 1996. This line provides
the Company with up to $600,000 in borrowings, none of which was outstanding
at December 31, 1996 and $200,000 of which was outstanding at June 30, 1997.
Interest payments are due monthly at the bank's prime rate (8.50% at December
31, 1996 and 9% at June 30, 1997) plus 50%, and this line expired July 31,
1997. This line is collateralized by the majority shareholder's primary
residence. The line was subsequently renewed through December 31, 1997 with
all of the terms remaining the same.
The weighted average interest rate on short term borrowings was
approximately 8.75% and 9.25% for the years ended December 31, 1996 and 1995,
respectively and approximately 9% and 8.5% for the six months ended June 30,
1997 and 1996, respectively.
TERM NOTES PAYABLE
The Company maintains a term note payable with a financial institution
with quarterly principal payments and monthly interest payments at the bank's
prime rate (8.25% at December 31, 1996). The note is collateralized by
substantially all of the Company's assets as well as certain future contract
rights and is guaranteed by a shareholder of the Company. This note expired
on July 31, 1997 and was repaid in full at that time. The term notes payable
agreement contained certain restrictive covenants including a minimum cash
flow coverage requirement, a minimum net worth requirement, and restrictions
on incurring additional indebtedness and issuing common stock. As of December
31, 1996, the Company was not in compliance with these covenants but received
a waiver from the bank related to each covenant violation.
5. INCOME TAXES
The components of the provision (benefit) for income taxes were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS
31, ENDED JUNE 30,
---------------------- -------------------
1996 1995 1997 1996
---------- ----------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal .. $123,116 $ 220,340 $ 74,117 $1,903
State...... 39,708 41,313 13,100 100
Foreign.... -- 25,340 21,300 --
---------- ----------- ---------- --------
162,824 286,993 108,517 2,003
---------- ----------- ---------- --------
Deferred
Federal.... -- (276,119) -- --
State...... -- (12,000) -- --
Foreign.... 77,000 -- -- --
---------- ----------- ---------- --------
77,000 (288,119) -- --
---------- ----------- ---------- --------
Total..... $239,824 $ (1,126) $108,517 $2,003
========== =========== ========== ========
</TABLE>
F-27
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
5. INCOME TAXES (Continued)
Although the Company has a loss before income taxes on a consolidated
basis for the years ended December 31, 1996 and 1995, ProServ TV has
generated taxable income for both of those years, giving rise to the current
provision. The Company's consolidated provision (benefit) for income taxes
differs from the provision (benefit) that would have resulted from applying
the federal statutory rates to net income before taxes. The reasons for these
differences are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ------------------------
1996 1995 1997 1996
------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
(Benefit) provision based upon Federal
statutory rate of 34%................... $ (855,835) $(489,424) $(99,911) $(756,365)
State tax provision--ProServ TV.......... 20,000 28,432 13,000 --
IRS contingency (see Note 7)............. -- 57,000 -- --
Increase in deferred tax asset valuation
allowance............................... 1,054,000 312,000 220,000 746,868
French tax audit (see Note 7)............ 77,000 -- -- --
Other.................................... (55,341) 90,866 24,572 11,500
------------ ------------ ----------- ------------
$ 239,824 $ (1,126) $108,517 $ 2,003
============ ============ =========== ============
</TABLE>
The sources and tax effects of temporary differences which give rise to
deferred tax assets (liabilities) are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards.................... $ 1,244,000 $ 1,464,000
AMT credit carryforwards......... 109,000 109,000
Deferred rent.................... 333,000 310,000
Accrued liabilities.............. 302,000 300,000
Foreign tax credit
carryforwards.................... 360,000 360,000
-------------- -------------
2,348,000 2,543,000
Less: valuation allowance........ (1,726,000) (1,946,000)
-------------- -------------
Total deferred tax assets........ 622,000 597,000
-------------- -------------
Deferred tax liabilities:
Property and equipment........... (80,000) (80,000)
Accounts receivable.............. (535,000) (510,000)
IRS contingency.................. (182,000) (182,000)
French Tax Audit................. (77,000) (77,000)
Other............................ (7,000) (7,000)
-------------- -------------
Total deferred tax liabilities .. (881,000) (856,000)
-------------- -------------
Net deferred tax liability ...... $ (259,000) $ (259,000)
============== =============
</TABLE>
As of December 31, 1996 and June 30, 1997, the Company had foreign tax
credit carryforwards (FTC's) of $360,000 expiring in 1997. Utilization of the
FTC's is subject to certain limitations, including the generation of future
foreign source taxable income, the effective tax rate on such income and the
amount of future U.S. taxable income. Based on the expiration of the FTC's in
1997, their recoverability is doubtful; therefore, a valuation allowance has
been established for the full amount of these FTC's at December 31, 1996 and
June 30, 1997. The $1,054,000 and $320,000 increases in the valuation
allowance at December 31, 1996 and June 30, 1997, respectively, relate
primarily to the Company's net operating loss carryforwards generated during
1996 and 1997.
F-28
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
5. INCOME TAXES (Continued)
The Company has approximately $3,054,000 in domestic net operating loss
carryforwards and approximately $220,000 in foreign net operating loss
carryforwards. The realizability of the deferred tax asset generated from
these operating loss carryforwards is dependent upon future taxable income
generated by the entity to which the operating loss carryforwards relate. The
Company's net operating loss carryforwards expire as follows:
2010... $1,324,000
2011... 1,950,000
------------
$3,274,000
============
6. RESTRUCTURING COSTS
During 1996, the Company incurred $565,000 in restructuring costs related
to closing down the Paris office of ProServ Europe. Included in these costs
were approximately $432,000 in severance, resulting from the termination of
16 employees and $133,000 in other miscellaneous costs. There were no
significant accrued expenses resulting from this restructuring included in
the consolidated balance sheet as of December 31, 1996.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company rents all of its space under operating leases, primarily a
twelve-year lease that expires in May 2001. The terms of this lease included
a waiver of rental payments for the first year of the lease term and
scheduled rent increases at specified intervals during the twelve year term
of the lease. The Company is recognizing rent expense on a straight-line
basis over the life of the lease, giving rise to deferred rent. The rental
payments prescribed in the lease are also subject to changes resulting from
changes in the consumer price index. During 1995, the Company entered into an
agreement with the lessor resulting in a reduction of the space under lease
and a corresponding reduction in annual rental payments. In connection with
this agreement and in connection with a sublease entered into during 1995,
the Company recorded a non-cash loss of $293,832 in the consolidated
statement of operations for the year ended December 31, 1995. The loss
reflects the Company's future lease commitments for space for which no future
benefit to the Company is anticipated. Aggregate future minimum rental
payments, net of noncancelable subleases, greater than one year as of
December 31, 1996, are as follows:
<TABLE>
<CAPTION>
RENTAL SUBLEASE
PAYMENTS INCOME NET
------------ ---------- -----------
<S> <C> <C> <C>
1997 ... $ 825,501 $169,057 $ 656,444
1998 ... 838,869 182,511 656,358
1999 ... 847,086 186,161 660,925
2000 ... 844,548 189,884 654,664
2001 ... 351,895 80,166 271,729
------------ ---------- -----------
$3,707,899 $807,779 $2,900,120
============ ========== ===========
</TABLE>
Rent expense, net of sublease income of $160,902 and $11,572, was $740,444
and $1,321,612 for the years ended December 31, 1996 and 1995, respectively.
Rent expense, net of sublease income of $81,612 and $74,870, was $244,553 and
$305,305 for the six months ended June 30, 1997 and 1996, respectively.
F-29
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (Continued)
OTHER CONTRACTUAL COMMITMENTS
The Company has entered into employment agreements with certain key
officers of the Company. These employment agreements set forth salary terms
and provide for the issuance of restricted common stock of the Company that
will be released to the officers at specified dates if the officers remain
with the Company. Unearned compensation, representing the difference between
the price of the restricted stock issued to the officers and the estimated
fair value of the stock on the effective date of the agreements, is amortized
over the stated period of performance. Amortization of unearned compensation,
which represents a non-cash charge, was $95,393 and $164,937 for the years
ended December 31, 1996 and 1995, respectively, and $82,894 and $35,000 for
the six months ended June 30, 1997 and 1996, respectively.
During 1996, one of the employment agreements with an officer of the
Company was revised. The terms of this revised agreement include a reduction
in the period of performance associated with the restricted common stock
mentioned above and certain bonus provisions based on the achievement of
specific criteria set forth in the agreement. Additionally, the officer was
granted options to purchase 50 shares of the Company's common stock at an
exercise price of $2,585 per share. Twenty-five of these options will vest on
December 31, 1997 and the remaining 25 options will vest on December 31,
1998. All 50 options were outstanding and there were none exercisable as of
December 31, 1996. The fair value of these options, which was determined
using the Black-Scholes Valuation method, was $10,042 per share on the date
of grant, and the assumptions used to estimate the fair value were as
follows: risk-free interest rate 5.71%; expected term of 5 years; expected
volatility of 0%; and dividend yield of 0%. The remaining contractual life of
these options was 4.8 years as of December 31, 1996. Had the recognition
provisions of SFAS 123 been implemented and this compensation cost recorded
based on the fair value of the stock options at the date of grant, the
Company's net loss would have been $(2,771,000).
Subsequent to December 31, 1996, an employment agreement with a second key
officer was revised. This revised employment agreement included the grant of
options to purchase 30 shares of the Company's common stock that will vest at
specified dates in 1997 and 1998 based on the achievement of certain
performance criteria.
In the normal course of business, the Company enters into certain
contracts in which specified revenue levels are guaranteed to its clients.
Any material known future losses related to these guarantees are recorded in
the period in which the losses are determined.
CONTINGENCIES
The Company was a party to a suit filed by a former client alleging legal
and investment advisory wrongdoing on the part of the Company and several
other named parties. Pursuant to an agreement dated May 28, 1996, the Company
and the other named parties reached a settlement with the former client.
Under the terms of the agreement, the Company is required to pay $300,000 in
aggregate from March 1997 through March 1999 in three annual installments.
Additionally, the Company could be liable for recapture taxes due by the
former client on any passive income to be generated by certain of the
investments in question. The Company's potential liability related to these
recapture taxes is not presently estimable. The Company's payments related to
this settlement agreement are guaranteed by a shareholder of the Company. As
a result of the settlement agreement, the Company recorded a one-time expense
of $300,000 in the consolidated statement of operations for the year ended
December 31, 1995. The related liability is recorded in accrued expenses as
of December 31, 1996 and June 30, 1997.
The Company, a former employee (current business associate) and a former
client have been named as defendants in a lawsuit, in which the plaintiff
alleges that the Company's former client breached a contract to act in a
motion picture and that the Company and the former employee tortiously
interfered with the former client's contractual relations to the plaintiff.
The Company, the former employee and its
F-30
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (Continued)
former client have each filed motions for summary judgment, requesting the
dismissal of the complaint. The Company is not presently able to determine
the likelihood of any exposure resulting from this lawsuit.
The Company, a former employee (current business associate) and a client
are defendants in a lawsuit. The plaintiff alleges that the Company's client
breached a contract to act in a motion picture and the former employee
(current business associate) and the Company tortiously interfered with the
client's contractual relations with the plaintiff. The plaintiff seeks
unspecified damages. The parties are engaging in discovery. The Company is
not presently able to determine the likelihood of any exposure resulting from
this lawsuit.
In connection with examinations of the consolidated federal tax returns of
ProServ, Inc. and ProServ Financial Services, Inc. for the years 1990 through
1993, the Internal Revenue Service (IRS) has raised questions regarding the
tax treatment of certain significant transactions. Although the Company
believes it has valid defenses to defeat any tax assessment, the Company has
accrued $182,000, reflected in deferred income taxes (see Note 5), for this
contingency, representing the best estimate of the exposure to the Company as
of December 31, 1996 and June 30, 1997.
The French taxing authorities are conducting an audit of ProServ Europe's
tax returns for the years 1993 through 1995. The Company has accrued $77,000,
reflected in deferred income taxes (see Note 5), for this contingency,
representing the best estimate of the exposure to the Company as of December
31, 1996 and June 30, 1997.
In the normal course of business, the Company is involved in various
lawsuits. Management is of the opinion that any liability or loss resulting
from such litigation will not have a material adverse effect on the
consolidated financial statements.
8. EMPLOYEE BENEFIT PLAN
The Company sponsors a qualified defined contribution plan under section
401(k) of the Internal Revenue Code. The defined contribution plan enables
all full time employees who have completed one year of service with the
Company to make voluntary contributions to the plan of up to 15% of their
compensation not to exceed the dollar limits prescribed by the IRS.
Additional contributions to be made by the Company are prescribed in the
Plan, subject to certain limitations. The Company's expense related to the
plan totaled approximately $35,000 and $45,000 for the years ended December
31, 1996 and 1995, respectively.
9. AGREEMENT AND MEMORANDUM OF UNDERSTANDING
In January 1992, an Agreement and Memorandum of Understanding was executed
with a former officer of the Company under which the former officer
represents, through a separate company, certain former clients of the
Company. Under the terms of the agreements, the revenue on certain playing
and endorsement contracts was divided between the companies based on varying
percentages and terms, including dates of execution, renegotiations and
renewals of such playing and endorsement contracts. Net revenue recognized
under this agreement was approximately $694,000 and $1,228,000 for the years
ended December 31, 1996 and 1995, respectively and $81,000 and $184,000 for
the six months ended June 30, 1997 and 1996, respectively.
10. INVESTMENT IN JOINT VENTURE
On March 30, 1995, the Company and a former executive of the Company
formed a corporate joint venture to produce sports and entertainment events
for television. Under the terms of the original joint
F-31
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
10. INVESTMENT IN JOINT VENTURE (Continued)
venture agreement, the Company invested $48,000 in cash, certain contracts
and events with a fair value of $400,000, and $52,000 in professional
service, valued at cost, to be contributed over a one year period,
collectively representing a 50% interest in the joint venture. The fair value
of the contracts and events was agreed upon by both original shareholders of
the joint venture. As of December 31, 1996 and 1995, the Company had incurred
$52,000 and $41,000, respectively, of the professional services as part of
the Company's investment in the joint venture.
In December 1995, the joint venture entered into an agreement with a third
investor for the purchase of a 20% ownership interest in the joint venture
for $550,000 in cash. The agreement stipulated that each previously existing
shareholder in the joint venture would receive a $150,000 payment as a result
of this cash infusion. Upon completion of this transaction, the Company's
interest in the joint venture was reduced to 40%
The Company's basis in the contracts and events that were contributed to
the joint venture was $0 upon the initial contribution. The Company is
amortizing the resulting basis difference over the seven year estimated life
of the related contracts and events.
The joint venture allocates and distributes income and losses in
proportion to each shareholders' percentage ownership. The following
represents a rollforward of the investment in joint venture for the years
ending December 31, 1996 and 1995:
<TABLE>
<CAPTION>
<S> <C> <C>
Balance, January 1, 1995 ...................... $ --
Cash investment ............................... 48,000
Professional services ......................... 41,164
Equity in loss of investee:
Share of investee net loss ................... (52,165)
Amortization of basis difference ............. 45,238
----------
(6,927)
Reduction of investment based on sale of joint
venture interest ............................. (82,237)
----------
Balance, December 31, 1995 .................... --
Professional services ......................... 10,836
Equity in loss of investee:
Amortization of basis difference ............. 57,142
Share of investee net loss ................... (67,978)
----------
(10,836)
----------
Balance December 31, 1996 ..................... $ --
==========
</TABLE>
The Company's proportionate share of the joint venture's net loss for the
year ended December 31, 1996 and the six month period ended June 30, 1997 was
approximately $72,000 and $89,000, respectively; however, since the
investment in joint venture balance is $0, these losses were only recognized
to the extent of the amortization of the basis difference in the contracts
and events and the professional services contributed to the joint venture.
F-32
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
10. INVESTMENT IN JOINT VENTURE (Continued)
Summarized unaudited financial information of the joint venture are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------- ---------------------------
1996 1995 1997 1996
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Operating revenues....... $ 910,000 $ 505,000 $ 828,000 $ 713,000
Operating expenses....... (1,090,000) (609,000) (1,051,000) (1,039,000)
------------- ------------- ------------- -------------
Net loss................. $ (180,000) $ (104,000) $ (223,000) $ (326,000)
============= ============= ============= =============
BALANCE SHEET
Total assets............. $ 1,266,000 $ 904,000
Total liabilities ....... (301,000) (132,000)
------------- -------------
Shareholders' equity .... $ 965,000 $ 772,000
============= =============
</TABLE>
11. FINANCIAL INFORMATION BY GEOGRAPHIC AREA
Operating revenue, (loss) income from operations and identifiable assets
for the Company's North America and European operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------- ---------------------------
1996 1995 1997 1996
-------------- -------------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenue
North America................ $10,910,000 $14,551,000 $5,472,071 $ 4,369,182
Europe....................... 2,478,000 3,241,000 966,272 883,834
-------------- -------------- ------------ --------------
Total....................... $13,388,000 $17,792,000 $6,438,343 $ 5,253,016
============== ============== ============ ==============
(Loss) income from operations
North America................ $(1,465,000) $(1,421,000) $ (257,554) $(1,337,216)
Europe....................... (843,000) 112,000 35,066 (762,948)
-------------- -------------- ------------ --------------
Total....................... $(2,308,000) $(1,309,000) $ (222,488) $(2,100,164)
============== ============== ============ ==============
Identifiable assets
North America................ $ 4,786,000 $ 5,384,000 $5,598,000
Europe....................... 555,000 1,604,000 1,856,000
-------------- -------------- ------------
Total....................... $ 5,341,000 $ 6,988,000 $7,454,000
============== ============== ============
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
The majority shareholder of the Company has entered into a Purchase and
Sale Agreement dated as of June 25, 1997 with The Marquee Group, Inc.
("Marquee"), pursuant to which he has agreed to sell 70.4% of the outstanding
common stock and 100% of the outstanding preferred stock of ProServ, Inc. and
51% of the outstanding capital stock of ProServ TV, the remainder of which is
owned by ProServ, Inc. Pursuant to the agreement, the aggregate purchase
price is $6.5 million, subject to certain adjustments, and 225,000 shares of
common stock of Marquee. The majority shareholder of the Company has the
option to receive the $6.5 million in cash or $3.5 million in cash and a $3.0
million promissory note payable on January 2, 1998. Marquee has deposited
$1.5 million of the purchase price in escrow to secure its obligations under
the purchase agreement.
F-33
<PAGE>
PROSERV, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND 1996 IS UNAUDITED)
12. SUBSEQUENT EVENTS (UNAUDITED) (Continued)
Marquee has also entered into a Stock Purchase Agreement dated as of July
2, 1997 (the "Non-Employee Stock Purchase Agreement") with the holder of 250
shares of the Company's common stock, pursuant to which Marquee has agreed to
purchase the shares held for an aggregate purchase price of $3.0 million. The
consummation of the purchase will take place concurrently with the
consummation of the purchase of the majority shareholders' shares.
On July 18, 1997, Marquee entered into an agreement with one of the
Company's stockholders to purchase his 50 shares of the Company's common
stock and options to purchase 20 shares of the Company's common stock for an
aggregate purchase price of $605,000 in cash.
F-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder
of QBQ Entertainment, Inc.
We have audited the accompanying balance sheet of QBQ Entertainment, Inc.
as of December 31, 1996, and the related statements of operations,
stockholder's equity (deficiency) and cash flows for each of the two years in
the period ended December 31, 1996. 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 the 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 QBQ Entertainment, Inc.
as of December 31, 1996, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, the Company changed
its method of computing rent expense and depreciation and amortization of
property and equipment in 1995.
David Berdon & Co. LLP
New York, New York
June 13, 1997
F-35
<PAGE>
QBQ ENTERTAINMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................. $323,237 $1,243,145
Accounts receivable........................................ 27,634 39,880
Prepaid expenses .......................................... 6,070 5,189
Loan receivable--stockholder............................... 60,936 33,820
----------------- ---------------
TOTAL CURRENT ASSETS...................................... 417,877 1,322,034
PROPERTY AND EQUIPMENT--NET ................................ 82,235 69,391
CASH--RESTRICTED............................................ 17,554 16,287
----------------- ---------------
$517,666 $1,407,712
================= ===============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accrued expenses and other liabilities..................... $130,005 $ 84,774
Loan payable--bank......................................... 170,000 --
Clients' deposits payable.................................. 266,610 1,049,651
----------------- ---------------
TOTAL CURRENT LIABILITIES................................. 566,615 1,134,425
----------------- ---------------
DEFERRED LEASE OBLIGATION................................... 10,736 6,709
----------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY (DEFICIENCY)
Common stock--no par value; 100 shares authorized, issued
and outstanding........................................... 100 100
Additional paid-in capital................................. 900 900
Accumulated earnings (losses).............................. (60,685) 265,578
----------------- ---------------
TOTAL STOCKHOLDER'S EQUITY (DEFICIENCY)................... (59,685) 266,578
----------------- ---------------
$517,666 $1,407,712
================= ===============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-36
<PAGE>
QBQ ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- ------------------------
1996 1995 1997 1996
------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Commissions.................. $1,358,922 $1,495,245 $1,013,115 $ 468,137
------------ ------------ ------------ -----------
EXPENSES
Operating.................... 274,224 299,484 126,963 122,671
General and administrative .. 930,815 1,071,657 457,246 437,433
Depreciation and
amortization................ 38,043 49,398 12,844 28,212
------------ ------------ ------------ -----------
TOTAL EXPENSES.............. 1,243,082 1,420,539 597,053 588,316
------------ ------------ ------------ -----------
INCOME (LOSS) FROM
OPERATIONS................... 115,840 74,706 416,062 (120,179)
------------ ------------ ------------ -----------
OTHER INCOME (EXPENSE)
Interest income.............. 12,329 13,764 7,863 4,901
Interest expense............. (24,329) (1,797) (5,404) (19,663)
Gain on sale of automobile . -- -- 25,000 --
------------ ------------ ------------ -----------
TOTAL OTHER INCOME
(EXPENSE).................. (12,000) 11,967 27,459 (14,762)
------------ ------------ ------------ -----------
INCOME (LOSS) BEFORE INCOME
TAXES........................ 103,840 86,673 443,521 (134,941)
PROVISION FOR STATE AND
LOCAL INCOME TAXES........... 12,521 15,140 41,680 120
------------ ------------ ------------ -----------
NET INCOME (LOSS)............. $ 91,319 $ 71,533 $ 401,841 $(135,061)
============ ============ ============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-37
<PAGE>
QBQ ENTERTAINMENT, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- ADDITIONAL ACCUMULATED
NUMBER OF PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (LOSSES) TOTAL
-------------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE--JANUARY 1, 1995 as previously
reported................................ 100 $100 $900 $ 193,484 $ 194,484
Prior period adjustments................. -- -- -- (41.410) (41,410)
-------------- ------------ ------------- ----------- -----------
BALANCE--JANUARY 1, 1995 as restated .... 100 100 900 152,074 153,074
Net income for the year ended
December 31, 1995....................... -- -- -- 71,533 71,533
Distribution to stockholder.............. -- -- -- (282,033) (282,033)
-------------- ------------ ------------- ----------- -----------
BALANCE--DECEMBER 31, 1995............... 100 100 900 (58,426) (57,426)
Net income for the year ended
December 31, 1996....................... -- -- -- 91,319 91,319
Distribution to stockholder.............. -- -- -- (93,578) (93,578)
-------------- ------------ ------------- ----------- -----------
BALANCE--DECEMBER 31, 1996............... 100 100 900 (60,685) (59,685)
Net income for the six months ended June
30, 1997 ............................... -- -- -- 401,841 401,841
Distribution to stockholder ............. -- -- -- (75,578) (75,578)
-------------- ------------ ------------- ----------- -----------
BALANCE--JUNE 30, 1997
(Unaudited) ............................ 100 $100 $900 $ 265,578 $ 266,578
============== ============ ============= =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-38
<PAGE>
QBQ ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- -------------------------
1996 1995 1997 1996
----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ 91,319 $ 71,533 $ 401,841 $ (135,061)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................... 38,043 49,398 12,844 28,212
(Gain) on sale of automobile ................... -- -- (25,000) --
Decrease (increase) in:
Accounts receivable............................ 1,639 19,879 (12,246) 16,138
Prepaid expenses .............................. 8,936 (9,556) 881 (3,626)
Increase (decrease) in:
Accrued expenses and other liabilities ........ 37,185 (40,650) (45,231) (21,619)
Clients' deposits payable...................... 222,035 (21,400) 783,041 1,591,665
Deferred lease obligation...................... (6,385) (3,052) (4,027) (2,359)
----------- ----------- ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ 392,772 66,152 1,112,103 1,473,350
----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............... (34,440) (21,682) -- (19,288)
Proceeds from sale of automobile ................. -- -- 25,000 --
(Increase) decrease in loans to stockholder ...... (5,034) (55,902) 27,116 143,029
----------- ----------- ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES....................................... (39,474) (77,584) 52,116 123,741
----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of loan payable--bank.................. (300,000) -- (170,000) --
(Increase) decrease in restricted cash............ (898) (864) 1,267 (461)
Distributions to stockholder...................... (93,578) (282,033) (75,578) --
Proceeds from loan payable--bank.................. 170,000 300,000 -- --
----------- ----------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES....................................... (224,476) 17,103 (244,311) (461)
----------- ----------- ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........ 128,822 5,671 919,908 1,596,630
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD ... 194,415 188,744 323,237 194,415
----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS--
END OF PERIOD.................................... $ 323,237 $ 194,415 $1,243,145 $1,791,045
=========== =========== ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest ...................................... $ 23,479 $ 379 $ 6,253 $ 10,596
=========== =========== ============ ============
Income taxes .................................. $ 558 $ 64,307 $ 4,104 $ 565
=========== =========== ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-39
<PAGE>
QBQ ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 1 -- ORGANIZATION
QBQ Entertainment, Inc. (the "Company") was incorporated and commenced
operations in April 1986 as a booking agent in the music and entertainment
industry.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue Recognition
The Company receives advance deposits, on behalf of its clients, in the
ordinary course of business, to book an artist/entertainer for a future event
(i.e., concert). Commission income is recognized when the event takes place.
The funds held on behalf of the Company's clients are held in a separate bank
account.
(b) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, and accounts receivable. The Company places its cash and cash
equivalents, which at times exceed federally insured amounts, with a major
financial institution.
Commissions earned during 1996 includes approximately $521,000 from two
clients, which represents approximately 38% of revenue earned during the year
ended December 31, 1996. Commissions earned during 1995 includes
approximately $875,000 from three clients, which represents approximately 58%
of revenue earned during the year ended December 31, 1995.
Commissions earned during the six months (unaudited) ended June 30, 1997
includes approximately $534,000 from one client and accounts for
approximately 53% of the commissions earned. Commissions earned during the
six months (unaudited) ended June 30, 1996 includes approximately $369,000
from five clients and account for approximately 79% of the commissions
earned.
(c) Income Taxes
The Company has elected "S" corporation status under the applicable
provisions of the Internal Revenue Code and New York State tax law. The
Company will be treated for federal and New York State income tax purposes
substantially as if it were a partnership while a valid election is in
effect, and the stockholder's respective share in the net income (loss) of
the Company will be reportable on his individual returns. The Company remains
liable for New York City general corporation tax and certain New York State
corporate income taxes.
(d) Property and Equipment
Property and equipment are stated at cost and are being depreciated under
the straight-line method over the estimated useful lives of the related
assets, which range from 3-1/2 to 7 years.
(e) Use of Estimates in Financial Statement Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at December 31, 1996 and June
30, 1997, and the reported amounts of revenues and expenses during the two
years ended December 31, 1996, and the six months ended June 30, 1997 and
1996. Actual results could differ from those estimates.
(f) Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers as
cash equivalents all highly liquid investments with a maturity of three
months or less when purchased.
F-40
<PAGE>
QBQ ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
(g) Accounts Receivable
The Company has deemed all receivables collectible at December 31, 1996
and June 30, 1997 (unaudited) and does not anticipate any additional probable
material losses as at those dates.
NOTE 3 -- PRIOR PERIOD ADJUSTMENTS
The Company has changed its method of accounting in computing rent expense
and depreciation and amortization of property and equipment in 1995 as a
result of the misapplication of accounting principles prior to the year ended
December 31, 1995. Accordingly, accumulated earnings has been reduced by
$41,410 as of January 1, 1995 for the cumulative effect of these prior period
adjustments. The Company has not determined the effect of these changes on
income as previously reported for the year ended December 31, 1994.
NOTE 4 -- LOAN RECEIVABLE -- STOCKHOLDER
At December 31, 1996 and June 30, 1997 (unaudited), $60,936 and $33,820,
respectively, were due from the Company's sole stockholder. These amounts
represent noninterest-bearing demand loans made to the stockholder.
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment--net consists of the following at December 31,
1996 and June 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
-------------- -----------
(UNAUDITED)
<S> <C> <C>
Furniture and fixtures.......................... $ 70,770 $ 70,770
Equipment....................................... 170,053 170,053
Automobiles..................................... 108,235 --
Leasehold improvements.......................... 6,138 6,138
-------------- -----------
355,196 246,961
Less, accumulated depreciation and
amortization................................... 272,961 177,570
-------------- -----------
$ 82,235 $ 69,391
============== ===========
</TABLE>
NOTE 6 -- LOAN PAYABLE -- BANK
Loan payable--bank at December 31, 1996, amounting to $170,000,
represents borrowings by the Company under a $300,000 unsecured grid demand
promissory loan agreement ("grid loan"). These borrowings were repaid by the
Company during the six months ended June 30, 1997.
Interest charged under the grid loan is payable monthly at the rate of
1% above the bank's reference rate. Interest expense on the grid loan amounted
to $24,329 and $1,797 for the years ended December 31, 1996 and 1995,
respectively, and $5,404 and $19,663 for the six months (unaudited) ended
June 30, 1997 and 1996, respectively.
All borrowings under the grid loan are guaranteed by the Company's
stockholder.
F-41
<PAGE>
QBQ ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996 IS UNAUDITED)
NOTE 7 -- LEASE COMMITMENT
The Company occupies premises for its office facilities under a
noncancelable operating lease agreement which commenced on May 15, 1993 and
expires on May 14, 1998. Minimum lease payments required under the terms of
such lease agreement at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997.... $65,625
1998.... 21,875
---------
Total... $87,500
=========
</TABLE>
The lease also requires payment of additional sums under escalation
clauses. Rent expense, which is reflected on a straight-line basis over the
term of the lease, amounted to $51,948 for the years ended December 31, 1996
and 1995, and $25,956 for the six months (unaudited) ended June 30, 1997 and
1996. Obligations of $10,736 and $6,709, representing pro-rata future
payments, are reflected in the accompanying December 31, 1996 and June 30,
1997 (unaudited) balance sheets, respectively.
The Company is contingently liable for a standby letter of credit, in the
sum of $15,156, given to its landlord in lieu of a security deposit. This
letter of credit is secured by a certificate of deposit that matures on April
14, 1998.
NOTE 8 -- RETIREMENT PLANS
The Company has two defined contribution plans, a profit sharing plan and
a money purchase plan, both of which cover all eligible employees.
Contributions to the profit-sharing plan are based on 0% to 15% of eligible
employees' annual salaries. Contributions to the money purchase plans are
based on 5% of eligible employees' annual salaries. Costs of the plans
charged to operations for the years ended December 31, 1996 and 1995 amounted
to $74,951 and $67,165, respectively, and $37,476 and $33,582 for the six
months (unaudited) ended June 30, 1997 and 1996, respectively.
NOTE 9 -- SUBSEQUENT EVENTS
(a) On July 3, 1997, the Company received approximately $2,959,000 from a
promoter of one of the Company's clients as an advance deposit for a series
of concerts beginning in March 1998. The Company has placed this deposit into
an interest-bearing escrow account, in which the promoter is entitled to the
interest earned.
(b) In July 1997, the Company entered into an agreement with the Marquee
Group, Inc. and Subsidiaries ("Purchaser") to sell substantially all its
assets for an aggregate purchase price of $7.2 million, of which $3.1 million
is payable at closing, $1.6 million is payable over eight years and $2.5
million is payable in shares of common stock of the Purchaser.
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