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As filed with the Securities and Exchange Commission on April 4, 1997
Registration No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------------
MSH Entertainment Corporation
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(Exact name of registrant as specified in its charter)
Utah 94-3248713
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7812
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(Primary Standard Industrial Classification Code Number)
3330 Ocean Park Blvd., Santa Monica, CA 90405 (310) 664-1090
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(Address, including zip code, and telephone number, including area code, of
registrant; principal executive offices and principal place of business)
Robert Maerz
3330 Ocean Park Blvd., Santa Monica, CA 90405
(310) 664-1090
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(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to
Glenn L. Gearhart, Esq.
7222 Seaworthy Drive
Huntington Beach, California 92648 (714) 536-8045
Approximate date of proposed sale to the Public:
As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered registered offering price per unit aggregate offering price Registration fee
<S> <C> <C> <C> <C>
Common Stock $3,250,000 $ ------ $10,822,500 $3,278,00
</TABLE>
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Exhibit Index is located on sequentially numbered page ______.
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3,250,000 Shares
MSH ENTERTAINMENT CORPORATION
Common Stock
MSH ENTERTAINMENT CORPORATION, (the "Company"), a development stage Utah
Corporation, is offering 3,000,000 shares of common stock and 250,000 shares are
being offered by the Selling Stockholders. The Company will not receive any of
the proceeds from the sale of the shares by the Selling Stockholders. See
"Principal and Selling Stockholders." The Company is in the business of film,
video, music and television production and distribution, and computer software
development. Through recent acquisitions and strategic alliances the Company
intends to expand its business operations to include creating, developing,
producing, licensing, distributing and merchandising of entertainment media
products and software.
The Company's strategy for growth emphasizes the development of new products,
selected acquisitions and participation in strategic alliance agreements. The
Company commenced commercial production and sales of entertainment and
educational media products in 1983 and plans to utilize a substantial portion of
the proceeds from this offering to expand its business operations.
Prior to this offering there has been only a limited public market for the
Common Stock of the Company. There can be no assurance that any significant
trading market in these securities will develop hereafter, or that such market,
if developed, will continue.
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE, INVOLVE A HIGH DEGREE OF
RISK AND SUBSTANTIAL IMMEDIATE DILUTION. SEE "RISK FACTORS" FOR SPECIAL RISKS
CONCERNING THE COMPANY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
------------------------
Underwriter's Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions (1) Company (2) Shareholders (3)
-------- --------------- ------------ ----------------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total (4) $ $ $ $
</TABLE>
The date of this Prospectus is _________ __, 1997
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(1) The 3,000,000 shares of common stock are being offered on behalf of the
Company by the officers and directors of the Company, who will not be separately
compensated for such services. In addition, the Company may offer the shares
through broker-dealers who, in the USA, are members of the National Association
of Securities Dealers, Inc. ("NASD"), or outside of the USA, through broker-
dealers or others. If the Company makes such an arrangement with a
broker/dealer, this prospectus will be supplemented to disclose such
arrangement. If the shares are sold through broker-dealers, they may receive
commissions of up to 10% of the price of the shares sold by them. The table on
the cover page assumes that commissions will be paid with respect to all of the
shares being offered hereby.
(2) Before deducting expenses payable by the Company, estimated at $80,000.
(3) The Selling Shareholders have informed the Company that they intend to sell
the previously issued shares covered hereby, from time to time during the
Offering Period for their own respective accounts on the open market or in
individually negotiated transactions, at prevailing market prices or at such
prices as may be agreed upon. Although there are no current arrangements
therefor, commissions equal to or in excess of normal brokerage commissions may
be paid by the Selling Shareholders to brokerage firms in connection with such
sales. See "Plan of Distribution - Shares Offered by the Selling Shareholders."
The Company will not receive any part of the proceeds from the sale of any of
these Selling Shareholder shares. Certain of the Selling Shareholders may be
deemed "affiliates" of the Company as defined under the Securities Act of 1933,
as amended (the "Securities Act"), and therefore may be deemed "underwriters"
within the meaning of the Securities Act of the shares to be sold by them in
connection with this offering.
(4) There can be no assurance that any or all of the shares being offered will
be sold. Subscriptions may not be withdrawn once made. The Company personnel
authorized to administer this offering are Robert Maerz and Jonathan Stathakis,
who will not receive any separate compensation therefor. The proceeds will be
released to the Company upon receipt of the amount of the purchase price of an
offered amount and thereafter, while the offering continues will be delivered
directly to the Company for the remaining unsold shares. (See "Plan of
Distribution").
The Company is not currently a reporting company under the Securities Exchange
Act of 1934. The Company intends to furnish to its shareholders annual reports
containing financial statements audited by an independent public accounting firm
after the end of each fiscal year.
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SUMMARY
The following summary is qualified in its entirety by the detailed information
and financial data appearing elsewhere in this offering circular.
MSH ENTERTAINMENT CORPORATION, (the "Company"), a development stage Utah
Corporation, is offering 3,000,000 shares of common stock and 250,000 shares are
being offered by the Selling Stockholders. The Company will not receive any of
the proceeds from the sale of the shares by the Selling Stockholders. See
"Principal and Selling Stockholders." The Company is in the business of film,
video, music and television production and distribution, and computer software
development. The Company was organized in Utah in 1983 and through recent
acquisitions, new strategic alliances and the proceeds from this offering the
Company intends to expand its business operations to include creating,
developing, producing, licensing, distributing and merchandising of
entertainment media products and software.
The Company's business plan is focused toward the generation of profits and
equity growth by developing, producing and distributing both live action and
animated TV specials, TV movies, TV series, movies for broadcast TV, cable,
satellite and syndicated TV, and video cassettes. The Company also intends to
participate in revenue generated from music, software licensing and the
ancillary merchandising of toys and associated products which are related to the
Company's created works.
The Company's strategy for growth emphasizes the development of new products,
selected acquisitions and participation in strategic alliances. The new
consolidated Company plans to utilize a substantial portion of the proceeds from
this offering to expand its entertainment business operations.
During June 1996, in exchange for cash and a promissory note, the Company
acquired all of the rights and, assets of East End Communication Inc., East End
Productions Inc., and J.B. Dubs Inc., ("East End"), all of which were California
corporations. During September 1996, in conjunction with the execution of an
animated children's production agreement, the Company participated in the
formation of and received a 60% equity interest in Happy Zone Entertainment
Corporation (HZE), a California corporation. The other major HZE shareholder is
AGE, Inc. Through its ownership interest in HZE, the Company is participating in
the development, production and licensing of animated television programs and
televisions series. It is also pursuing opportunities in licensing of related
children's toys and merchandising. See "Business - HZE."
During November 1996 the Company entered into a strategic product development
agreement with Abrams/Gentile Entertainment Inc. (AGE). Under terms of the
agreement AGE acquired warrants to acquire up to 1,000,000 shares of Common
Stock of the Company and the Company acquired the rights to produce a new
children's TV series entitled "Vanpires" developed by AGE and scheduled to
commence network broadcast during fall 1997. The company also acquired an
interest in the potential revenue from toys and merchandising related to the new
series. See "Business - AGE Agreement."
During November 1996 the Company entered into a strategic marketing and product
development agreement with Intel Corporation (Intel). Under terms of the
agreement Intel acquired warrants to acquire 1,000,000 shares of Common Stock of
the Company and the Company acquired the rights to develop joint marketing and
awareness programs and a marketing and promotion plan for the Company's products
including its new animation production management system which is designed to
operate on Intel micro processors and Microsoft Windows NT. See "Business -
Intel Agreement."
The Company is proceeding with development and marketing of an advance
technology software program which utilizes the parallel processing capabilities
of the Intel MP platform and the related Intel computer chips to provide a
significant increase in the production performance in the creation, development
and rendering of computer animation products. The Company intends to begin
limited application testing of the software by Mid 1997 followed by the
licensing and distribution of this advanced software product to the
entertainment industry.
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The software technology provides efficient computerized management of the TV and
movie animation production process. Specifically the software technology is
designed to enhance the production of animated feature films, such as "Toy
Story," animated TV Series, such as the "Simpsons" and children's programs, such
as "Sky Dancers." The development and licensing of this advanced software
technology is being supported by Intel through the marketing and technology
development agreement and the AGE marketing and product development agreement.
The Company's headquarters are located at 3330 Ocean Park Boulevard, Santa
Monica, CA 90405. The Company has production studios, an animation and software
development center, and support facilities in San Francisco, California. The
Company also maintains an office in Houston, Texas.
Gross income from operations of the Company will depend upon a number of key
factors including but not limited to: sales; product sales mix; pricing;
production rates; distribution; merchandising; and other factors. Because the
Company has recently commenced significant expansion, an investment in the
shares of the Company involves risks. Accordingly, potential investors should
carefully review this entire prospectus and particularly the section entitled
"Risk Factors."
The Company is offering a maximum of 3,000,000 shares of common stock at a price
of $_____ per share. The shares are being offered on behalf of the Company by
the officers and directors of the Company, who will not be separately paid for
such services, on a "best efforts" basis with respect to all 3,000,000 shares.
There is no minimum number of shares that must be purchased. In addition, the
Company may offer the shares through broker-dealers who, in the USA, are members
of the National Association of Securities Dealers, Inc. ("NASD"), or outside of
the USA, through broker-dealers or others. If the shares are sold through
broker-dealers, they may receive commissions of up to 10% of the price of the
shares sold by them. The table on the cover page assumes a commission will be
paid with respect to all of the shares being offered hereby. There can be no
assurance that any or all of the shares being offered will be sold.
Subscriptions may not be withdrawn once made. The proceeds will be released to
the Company upon receipt and acceptance of subscriptions. See "Plan of
Distribution."
The Company has 50,000,000 shares of common stock authorized with a par value of
$0.001. As of September 30, 1996 the Company had 9,391,649 shares issued and
outstanding. Upon completion of the offering, with all options, all warrants and
all credit agreement conversions, at the estimated conversion rate, executed,
there will be 15,551,646 shares issued and outstanding, assuming all shares are
sold. The Company has 25,000,000 shares of preferred stock authorized, none are
issued or outstanding.
RISK FACTORS
In addition to the other information in this Prospectus, the following factors
should be carefully considered in evaluating an investment in the shares of
Common Stock offered hereby.
NEW BUSINESS VENTURE. Although the Company was organized in 1983, and has
pursued various business objectives, the current focus of the Company's business
plan is directed toward the entertainment products industry. In support of this
focus, during 1996 the Company has completed major acquisitions and entered into
two strategic relationships with major US companies. Although management of the
Company has spent several years in research, development and evaluation of the
entertainment market and the availability of products, the Company is
implementing a business plan focused toward family and children's entertainment,
and integrating the assets and capabilities of newly acquired resources into
business, and has only a very limited history of operations as a fully
integrated entertainment company. The Company incurred consolidated losses
through the calendar year 1994, and incurred consolidated losses through the end
of 1995 and for the nine months ended September 30, 1996. As of September 30,
1996, the Company had an unaudited accumulated deficit. Accordingly, it can be
expected that future operating results will continue to be subject to many of
the problems, expenses, delays and risks inherent in the establishment of a new
business enterprise, many of which the Company has no control over.
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There can be no assurance, therefore, that the Company will be able to achieve
or sustain profitability in future periods. Even if the Company's operations
prove to be marginally profitable, the value of the Company's Common Stock, and
the potential return to investors, could be substantially diminished.
Consequently, an investment in the Company is highly speculative and no
assurance can be given that purchasers of the shares of Common Stock offered
hereby will realize any return on their investment or that purchasers will not
lose their entire investment.
GENERAL RISKS OF BUSINESS; NO INDEPENDENT MARKETING STUDIES. The Company has
formulated its business plans and strategies based on certain assumptions of the
Company's management regarding the size of the market for its products, the
Company's anticipated share of the market for those products, the anticipated
availability and cost of production talent and supplies, and the estimated
prices for and acceptance of the Company's products. Although these assumptions
are based on the best estimates of management, there can be no assurance that
these assessments will prove to be correct.
No independent marketing studies have been conducted on behalf of or otherwise
obtained by the Company, nor are any such studies planned. Any future success
that the Company might enjoy will depend upon many factors, including factors
which may be beyond the control of the Company or which cannot be predicted at
this time. These factors may include increased levels of competition, including
the entry of additional competitors and increased success by existing
competitors, changes in general economic conditions, increases in operating
costs including costs of supplies, personnel, and equipment, reduced margins
caused by competitive pressures and other factors, and changes in environmental
regulation imposed under federal, state or local laws.
POSSIBLE DECLINE IN POPULARITY OF OTHER CURRENT PROGRAMS AND UNCERTAINTY OF
ACCEPTANCE OF NEW PROGRAMS. A portion of the Company's revenues are expected
to be derived from the creation, development, production, acquisition,
distribution, merchandising and other exploitation of family and children's
television properties. The success of each series depends upon unpredictable
and volatile factors beyond the Company's control, such as family and children's
preferences, competing programming and the availability of other entertainment
activities for children. A shift in children's interests could cause the
Company's current television programming to decline in popularity, which could
materially and adversely affect the Company's results of operations and
financial condition. The Company also intends to continue to produce or acquire
new properties, the success of which depends entirely upon market acceptance.
There can be no assurance as to the continuing commercial success of any of the
Company's current properties, or that the Company will be successful in
generating sufficient demand and market acceptance for its new properties. While
the Company is committed to the ongoing development and acquisition of family or
children's television programming, the inability of the Company to develop or
acquire new programs that are capable of achieving commercial success could
materially and adversely affect the Company's results of operations and
financial condition. The Company is also in the business of corporate
communications and entering the production of TV Commercials, international
distribution, music publication and related entertainment activities. Each of
these activities face competition, changes in consumer and customer preferences
and various economic factors all of which could materially and adversely affect
the Company's results of operations and financial conditions.
LIMITED PRODUCTION AND DISTRIBUTION EXPERIENCE. While the Company has
successfully produced and distributed entertainment media products on a limited
basis, it has not yet engaged in large-scale development, production,
distribution and merchandising operations. Once large-scale operations are
under way, it is possible that unanticipated problems might arise in the
operations process, due to the introduction of new equipment, new media's, new
distribution channels, or otherwise. Any such problems could result in delays
in the shipment of products to customers, resulting in postponements in the
recognition of revenues.
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LIMITED NUMBER OF TIME SLOTS FOR US FAMILY AND CHILDREN'S TELEVISION
PROGRAMMING. The Company is engaged in the creation, development and production
of family and children's television programming intended for broadcast on
various networks, and in syndication, in both the US and international markets.
The Company's products compete for time slots with a variety of companies which
produce animated or live-action television programming targeted at families and
children. The number of US outlets available to producers of family and
children's programming has expanded in the last decade due, in part, to the
growth in the number of broadcast and cable outlets. However, the number of time
slots currently allocated to general family and children's television
programming remains limited (a "slot" is typically a half hour broadcast time
period for a program that either airs five times per week -- Monday through
Friday -- or once per week, usually on the weekend). The success of the Company
will be materially dependent upon its ability to expand and continue to be
successful in producing TV programming which is accepted by the networks and
syndication markets.
COMPETITION. The businesses in which the Company engages are highly
competitive. Each of the Company's primary business operations is subject to
competition from companies which, in some instances, have greater production,
distribution and capital resources than the Company.
The Company competes on the basis of relationships and pricing for access to a
limited supply of facilities and talented creative personnel to produce its
programs and provide its services. The Company competes with other studios and
production companies for the services of writers, producers, animators, actors
and other creative personnel and specialized production facilities.
In the United States, the Company's products compete with the major studios and
other independents for time slots, ratings and related advertising revenues
The Company's products will be offered for sale to broadcast television networks
and cable television channels, such as Nickelodeon, USA Network, The Family
Channel, Discovery Networks, The Cartoon Network and other domestic broadcast
outlets for market acceptance of its programming and for viewership ratings.
The Company will also offer the products to broadcasters and distributors in the
foreign marketplace. In addition, The Walt Disney Company has recently
announced plans to launch an educational cable television channel for children
and Fox has announced the formation of Fox Kids World Wide, Inc. to expand its
children's programming world wide. Over the past five years, cable television
has captured an increasing market share while overall viewership of the
networks, and broadcast television in general, has declined. Further, the
Company's product vies for the children's audience with independent television
stations, suppliers of cable television programs, direct broadcast satellite and
other DTH systems, radio and other forms of media. As a result of heightened
competition for children in the 2-11 age category, virtually every major
broadcast network suffered a decline in ratings for each of the last two
television seasons, and there can be no assurance that such trend will not
continue. Internationally, the Company contends with a large number of US-based
and international distributors of family and children's programming, including
The Walt Disney Company, Fox and Warner Bros., with whom it must also compete in
the development or acquisition of programming properties expected to appeal to
international audiences. Such programming often must comply with foreign
broadcast rules and regulations which may stipulate certain local content
requirements.
DEPENDENCE ON KEY CONTRACTS. The Company has entered into a production
agreement with Abrams/Gentile Entertainment Inc. (AGE) pursuant to which the
Company has been granted the right to produce the new children's television
series, "Vanpires." Should the Company's agreements with AGE terminate, there
can be no assurance that the Company would be able to enter into production
agreements with other creative children's entertainment companies on terms
comparable to the AGE agreement. While the Company believes that its ability to
successfully develop future programming is not materially dependent on its
relationship with AGE, the possibility nonetheless exists that any change in the
Company's relationship with AGE, or the failure of AGE to perform its
obligations under the agreements with the Company, could have a material adverse
effect on the results of operations and financial condition of the Company.
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The Company has entered into a strategic marketing and product development
agreement with Intel pursuant to which the Company has been granted conditional
rights to utilize certain Intel trademarks and to receive support from Intel in
the marketing and distribution of animation management software products and
entertainment products. While the Company believes that its ability to
successfully develop and market its products and is not naturally dependent on
its relationship with Intel, the possibility none the less exists that any
change in the Company's relationship with Intel or the failure of Intel to
perform its obligations under the agreements with the Company, could have a
material adverse effects on the results of operations and financial condition of
the Company.
The Company has entered into a product development support agreement with HZE
pursuant to which the Company will provide pre and post production and animation
services to HZE for the production of animated children's TV properties.
While the Company believes that its ability to successfully develop and market
its products and is not materially dependent on its relationship with HZE, the
possibility exists that any change in the Company's relationship with HZE or the
failure of HZE to perform its obligations under the agreements with the Company,
could have a material adverse effect on the results of operations and financial
conditions of the company.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent upon the continued service of its founders and the senior management
team. The loss of any of these parties at any time could have a material
adverse effect on the Company. The Company only maintains a "key-man" insurance
policy on the life of Christopher Haigh, but none of the other key personnel.
The Company also will depend on its ability to attract, retain and motivate such
additional qualified personnel as may be needed. The competition for such
personnel is intense. There can be no assurance that the Company will be
successful in retaining its existing key employees, and consultants, or in
attracting and retaining any additional personnel or consultants it requires.
See "Management."
DEPENDENCE ON NEW MATERIAL AND TALENT. The ability of the Company to create new
products is dependent upon the continued availability of new media material and
talent. The Company has no control over the availability of these items. The
supply of new materials and talent for the creation and development of programs
could be adversely affected by a number of factors, including the possible
introduction of more bidders for new materials, production talent, and actors,
all of which could result in less available product, or an increase in the
acquisition costs of new material. Any disruption or suspension in the supply
of these materials could adversely affect the ability of the Company to create
new products. An increase in costs of acquiring new materials could also
adversely affect the performance of the Company.
INTERNATIONAL SUBCONTRACTING OF ANIMATION. As with other producers of animated
programming, the Company may subcontract some of the less creative and more
labor-intensive components of its animation production process to studios
located in countries with relatively low-cost labor, primarily in the Far East
and Europe. With an increasing number of animated feature films and animated
television programs being produced in recent years, the demand for the services
of overseas studios has increased substantially. This increased demand may lead
overseas studios to increase their fees, which could result in increased
animated programming production costs incurred by the Company or the inability
of the Company to contract with its preferred overseas studios. No assurance
can be given that future subcontracting arrangements will be obtainable on terms
which are as favorable to the Company as its current arrangements.
DEPENDENCE ON DISTRIBUTION OUTLETS. The ability of the Company to distribute
its products is dependent upon the performance of the Company's distribution
division and the continued availability of distribution outlets for its media
products. The Company has no control over the availability of distribution
outlets. The supply of distribution outlets could be adversely affected by a
number of factors, including the possible merger or consolidation of
distribution channels, resulting in less outlets, the development of new media
formats which are not compatible with the Company's product, or the development
of customer viewing trends which are inconsistent with the Company's product,
resulting in the rejection of the Company's products by the distribution
networks. Any disruption or suspension in the distribution outlets could
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adversely affect the ability of the Company to distribute its products and may
reduce the value of the product library assets held by the Company.
OVERESTIMATION OF REVENUES OR UNDERESTIMATION OF COSTS. The Company follows
Financial Accounting Standards Board Statement No. 53, "Financial Reporting by
Producers and Distributors of Motion Picture Films," regarding revenue
recognition and amortization of production costs, in which the Company owns or
controls all applicable rights. All costs incurred in connection with an
individual program or film, including acquisition, development, production and
allocable production overhead costs and interest, are capitalized as television
and film costs. These costs are stated at the lower of unamortized cost or
estimated net realizable value. Estimated total production costs for an
individual program or film are amortized in the proportion that revenue realized
relates to management's estimate of the total revenues expected to be received
from such program or film. If revenue or cost estimates change with respect to
a program or film, the Company may be required to write down all or a portion of
the unamortized costs for such program or film. No assurance can be given that
such write-downs, if they occur, will not have a material adverse effect on the
Company's results of operations or financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
REVENUE VARIATIONS. Significant fluctuations in the Company's total revenues
and net income can occur from period to period depending upon availability dates
of programs, production schedules and other factors. Due, in part, to these
factors, the results of any one quarter are not necessarily indicative of
results for future periods, and cash flows may not correlate with revenue
recognition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
INTERNATIONAL SALES. As part of its business strategy, the Company intends to
expand its international program production and distribution activities, as well
as its worldwide merchandising, licensing and ancillary activities. The Company
is subject to the special risks inherent in international business activities,
including (i) general economic, social and political conditions in each country,
(ii) currency fluctuations, (iii) double taxation, (iv) unexpected changes in
applicable regulatory requirements and (v) compliance with a variety of
international laws and regulations. The results of the Company's international
operations may be measured, in part, in local currencies. For reporting
purposes, assets and liabilities are translated into US dollars using exchange
rates in effect at the end of each reporting period. Revenues and expenses are
translated into US dollars at the average exchange rates prevailing during the
period. As a result, the Company can expect to record foreign exchange losses
and gains in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
GOVERNMENT REGULATION. The Company's US children television productions must
comply with the provisions of the Children's Television Act of 1990 ("CTA") and
the rules and policies of the Federal Communications Commission ("FCC")
pertaining to the production and distribution of television programs directed to
children.
On August 8, 1996, the FCC amended its rules to establish a "processing
guideline" for broadcast television stations of at least three hours per week,
averaged over a six-month period, with "Core Programming" that furthers the
educational and informational needs of children 16 and under in any respect,
including the child's intellectual/cognitive or social/emotional needs. Core
Programming has been defined as educational and informational programming that,
among other things, (i) has served the educational and informational needs of
children "as a significant purpose", (ii) has a specified educational and
informational objective and a specified target child audience, (iii) is
regularly scheduled, weekly programming, (iv) is at least 30 minutes in length,
and (v) airs between 7:00 a.m. and 10:00 p.m. Any TV station that satisfies the
processing guideline by broadcasting at least three weekly hours of Core
Programming will receive FCC staff-level approval of the portion of its license
renewal application pertaining to the CTA. Alternatively, a station may qualify
for staff-level approval even if it broadcasts "somewhat less" than three hours
per week of Core Programming by demonstrating that it has aired a weekly package
of different types of educational and informational programming that is "at
least equivalent" to three hours of Core Programming. Non-core programming that
can qualify under this alternative includes specials, public service
announcements, short-form programs and regularly scheduled non-weekly programs,
which have "a significant purpose of
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educating and informing children." The adoption of the new quantitative
guideline could result in a material increase in demand for educational and
informational children's programming. There can be no assurance such increase
would result in a benefit to the Company's business.
The United States Congress and the FCC also currently have under consideration,
and may in the future adopt, new laws, regulations and policies regarding a wide
variety of matters which could, directly or indirectly, materially affect the
operations of the Company. The Company is unable to predict the outcome of
future federal legislation or the impact of any such laws or regulations on its
operations.
MANAGEMENT OF ANTICIPATED GROWTH. The net proceeds to the Company from this
offering will be used to support the continued development and growth of the
Company's operations. The anticipated development and expansion of the
Company's operations to be financed using the net proceeds from this offering
will place additional demands on the Company's management, and is likely to
require the Company to hire additional personnel, to implement additional
operating, production and financial controls, install additional reporting and
management information systems for order processing, system monitoring, customer
service and financial reporting, and otherwise to improve coordination between,
production, marketing, sales and other functions. The Company's future
operating results will depend on management's ability to manage future growth,
and there can be no assurance that efforts to manage future growth will be
successful. See "Management."
STRATEGIC RELATIONSHIPS WITH HZE, INTEL AND AGE. The Company has and continues
to have, a close strategic relationship with HZE, Intel and AGE and their
affiliated entities and believes that there relationships are materially
important to its business and business strategies. However, except as may be
provided in the agreements between them which are discussed elsewhere in this
Prospectus, none of the parties or their affiliated companies, nor the Company,
are obligated to engage in any business transactions or jointly participate in
any opportunities with the other, and the possibility exists that the current
strategic relationships between the parties could materially change in the
future. See "HZE Agreement," "Intel Agreement," and "AGE Agreement."
POSSIBLE NEED FOR ADDITIONAL CAPITAL. Developments in the Company's business
and possible expansions could indicate that the Company should expand its
business at a faster rate than that currently planned. In such event, it is
likely that the Company would attempt to raise additional capital to accelerate
its growth. Moreover, there can be no assurance that the Company will not
encounter unforeseen difficulties that may deplete its capital resources more
rapidly than anticipated, which would require that the Company seek additional
funds through equity, debt or other external financing. There can be no
assurance that any additional capital resources which the Company may need will
be available to the Company if and when required, or on terms that will be
acceptable to the Company. If additional financing is required, or desired, the
Company may be required to forego a substantial interest in its future revenues
or dilute the equity interests of existing shareholders, and a change in the
control of the Company may result.
TRADEMARKS AND PROPRIETARY RIGHTS. The Company's trademarks and rights to its
creative properties and characters are significant assets. As appropriate the
Company has files applications for copyright to its creative properties and
federal trademark registration for trademarks. The Company intends to, as
appropriate, file applications for trademark and copyright protection for each
of its new properties, featured characters and other creative properties. There
can be no assurance that any such application, when filed, will be approved, or
that the Company will have the financial and other resources necessary to
enforce its proprietary rights against infringement by others. The inability of
the Company to obtain adequate protection or to enforce its proprietary rights
could have a material adverse effect on the Company. See "Business."
TRANSACTIONS WITH STOCKHOLDERS AND THEIR AFFILIATES. The Company has in the
past entered into transactions and agreements, some of which are ongoing, with
officers and directors of the Company and with HZE, Intel and AGE and their
affiliated companies. In addition, the Company may in the future enter into
additional agreements and other transactions with certain of these affiliates.
Although the Company has adopted a policy that future transactions between the
Company and any of these affiliates or family
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<PAGE>
members must be approved by a majority of the Board of Directors of the Company,
including a majority of the disinterested members of the Board, there can be no
assurance that any such future transactions will prove to be favorable to the
Company. See "Certain Transactions."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. The Company intends to use the net
proceeds of the offering for general corporate purposes, including working
capital primarily to finance the Company's development, acquisition and
licensing of family and children's programming and its expansion in
international distribution. In addition, the Company may use a portion of the
net proceeds to acquire businesses, libraries, and other assets believed by the
Company to be complementary to the Company's current businesses or which support
the Company's strategic goals; although, except as described in this Prospectus,
the Company has no such commitments. As a result, a significant portion of the
net proceeds will be available for projects that are not yet identified, and
management will have broad discretion with respect to the application of such
proceeds. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results may vary
significantly due to a variety of factors, including changes in the availability
and cost of materials, the introduction of new products by the Company or its
competitors, the timing of the Company's marketing efforts, pricing pressures,
general economic and industry conditions that affect television, cable and home
video customer demand, and other factors.
LIMITED MARKET FOR THE COMMON STOCK; ARBITRARY DETERMINATION OF PRICE. There
has only been a limited public market for the Common Stock of the Company prior
to the effective date of the Registration Statement of which this Prospectus is
a part, and there can be no assurance that an active public market for the
Company's Common Stock will develop or be sustained in the foreseeable future.
In the absence of an active public market therefor, the public offering price of
the Common Stock was determined by the Company. The offering price was
determined without the assistance of any investment banking firm or other expert
in the valuation of businesses or securities, and is not necessarily related to
the Company's assets, book value, net worth or other criteria of value. Among
the factors considered by the Company's management in determining the public
offering price were the prospects for the Company, an assessment of the industry
in which the Company operates, past private and public sales of the Common
Stock, and the general condition of the securities markets. Accordingly, in no
event should the offering price set forth on the cover page of this Prospectus
be regarded as an indications of the actual value of the Company or the Common
Stock, or of any future market price of the Company's Common Stock. Moreover,
there can be no assurance that the market price of the Common Stock will not
decline following this offering, or that investors will be able to sell any of
the securities purchased hereunder at a price equal to or greater than the
prices paid therefor.
SUFFICIENCY OF PROCEEDS. Although this offering contemplates the sale of shares
in the aggregate maximum of $10,000,000, there is no assurance the Company
will receive the full subscription amount or any significant portion thereof.
The capital required by the Company for its operations is being sought
principally from the proceeds of this offering. The amount actually received
may be insufficient to permit the Company to adequately develop its business
activities. Should the Company need additional capital there is no assurance
that additional funding will be available on terms favorable to the Company.
POSSIBLE VOLATILITY OF STOCK PRICES; NO MARKET MAKERS. The over-the-counter
markets for securities such as the Company's Common Stock historically have
experienced extreme price and volume fluctuations during certain periods. These
broad market fluctuations and other factors, such as new product developments
and trends in the Company's industry and the investment markets generally, as
well as economic conditions and quarterly variations in the Company's results of
operations, may adversely affect the market price of the Company's Common Stock.
The Common Stock could become subject to rules adopted by the Securities and
Exchange Commission regulating broker-dealer practices in connection with
transactions in "penny stocks." Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on NASDAQ, provided that current price
and volume information with respect to transactions in such securities is
provided by the
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<PAGE>
exchange or the NASDAQ system). Unless an exemption from the definition of a
"penny stock" were available, any broker engaging in a transaction in the
Company's Common Stock would be required to provide any customer with a risk
disclosure document, disclosure of market conditions, if any, disclosure of the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly accounts showing the market values of the Company's Common Stock held in
the customers account. The bid and offer quotation and compensation information
must be provided prior to effecting the transaction and must be contained on the
customer's confirmation. It may be anticipated that a number of brokers may be
unwilling to engage in transactions in the Company's Common Stock because of the
need to comply with the "penny stock" rules, thereby making it more difficult
for purchasers of Common Stock offered hereby to dispose of their shares.
Various securities firms act as a "market maker" for the Company's Common Stock.
CONTROL BY EXISTING MANAGEMENT. Following this offering the current executive
officers and directors of the Company will continue to own beneficially at least
39% of the Company's outstanding Common Stock, exclusive of unexercised option
rights. Accordingly, it should be anticipated that the current executive
officers and directors of the Company will continue to have the ability to
significantly influence the outcome of elections of the Company's directors and
other matters presented to a vote of stockholders. See "Principal
Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE. As of the date of this Prospectus,
approximately 6,883,646 shares of Common Stock held by existing shareholders
constitute "restricted securities" as defined in Rule 144 under the Securities
Act, and may only be sold if such shares are registered under the Securities Act
or sold in accordance with Rule 144 or another exemption from registration under
the Securities Act.
In general, under Rule 144, a person (or group of persons whose shares are
aggregated) who has beneficially owned restricted securities for at least two
years, including persons who may be deemed "affiliates" (as defined in Rule 144)
of the Company, will be entitled to sell, within any three month period, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of the Common Stock or (ii) the average weekly trading volume
in the Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
Company. A person who has not been an "affiliate" of the Company for the 90
days preceding a sale and who has beneficially owned restricted securities for
at least three years is entitled to sell such shares in the public market
without restriction. Restricted securities properly sold in reliance upon Rule
144 are thereafter freely tradable without restrictions or registration under
the Securities Act, unless thereafter held by an "affiliate" of the Company.
The Securities and Exchange Commission (the "Commission") has proposed to reduce
the above-referenced two year holding period to one year and the above-
referenced three-year holding period to two years. Adoption of these proposed
Rule 144 changes may occur in the near future. Once the Rule 144 changes are
adopted and in effect, the reduced holding periods is expected to apply to all
restricted securities.
Any employee or consultant to the Company who acquires his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, under the Act, which permits non-affiliates to
sell their Rule 701 shares without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144, and permits
"affiliates" to sell their Rule 701 shares without compliance with Rule 144
holding period restrictions, in each case, commencing 90 days after the date of
this Prospectus.
DILUTION. Purchasers of the shares of Common Stock offered hereby will incur
immediate substantial book value dilution of approximately $______ per share, or
approximately _____% in the net tangible book value of their investment. The
net tangible book value per share of the Company's Common Stock as of September
30, 1996 was $_____ per share. See "Dilution."
NO DIVIDENDS. The Company has never paid any cash dividends on its Common Stock
and does not anticipate that it will pay dividends in the foreseeable future.
Instead, the Company intends to apply any earnings to the development and
expansion of its business.
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<PAGE>
EFFECT OF OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES. As of the
date of this Prospectus, the Company has, under a stock option plan, outstanding
options to purchase an aggregate of 910,000 shares of Common Stock at a price of
$0.10 per share; and, under two warrant agreements, Intel holds outstanding
warrant rights to purchase an aggregate of 1,000,000 shares of Common Stock and
AGE holds outstanding warrant rights to purchase an aggregate of 1,000,000
shares of Common Stock. Additionally, the Company has, under a convertible
credit agreement, outstanding rights to receive shares of Common Stock. The
exercise of the outstanding option rights, warrant rights, and convertible
securities rights will result in an immediate increase in the number of actual
outstanding shares of Common Stock and an immediate dilution to the shareholders
holding issued and outstanding shares. See "Dilution."
AUTHORIZATION OF PREFERRED STOCK. The Company's Articles of Incorporation
authorize the issuance of preferred stock with such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without shareholder approval,
to issue preferred stock with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of the Company's Common Stock. In the event of issuance, the preferred
stock could also be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Although the Company has no intention as of the date of this Prospectus to issue
any shares of its preferred stock there can be no assurance that the Company
will not issue additional shares in the future. See "Description of Capital
Stock."
USE OF PROCEEDS
The estimated net proceeds from the maximum offering, $9,920,000, will be
applied according to the following estimated allocations. The net cash proceeds
are net of costs and expenditures relating to the offering, which are estimated
to be $80,000.
<TABLE>
<S> <C>
Capital Equipment $1,500,000
Operations 5,420,000
Marketing & Distribution 1,000,000
Capital Reserves 2,000,000
----------
Total $9,920,000
</TABLE>
The Company intends to utilize the $1,500,000 allocated to capital equipment to
enhance integration of the animation computer network with other computer
networks owned by the Company and to acquire additional office equipment. The
balance of the capital equipment funds raised will be utilized to acquire
additional video and production studio equipment.
The Company intends to use the remainder of the proceeds for general corporate
purposes, including working capital. Pending the use of funds the proceeds will
be invested in short-term, investment grade, interest bearing securities or
deposit accounts.
DIVIDEND POLICY
The Company has not paid dividends since its inception. The Company currently
intends to retain all earnings, if any, for use in the expansion of its business
and therefore does not anticipate paying any dividends in the foreseeable
future.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded in the US over-the-counter market and
reported on the NASD Bulletin Board system under the trading symbol "MSHE."
The following table sets forth, for the periods indicated below, the high and
low closing bid quotations for the Common Stock, as reported by the
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<PAGE>
company's market makers. The quotations represent quotations between dealers
without adjustments for retail markups, markdowns or commissions and may not
necessarily represent actual transactions. As of September 30, 1996, the Stock
Registrar and Transfer Agent reports there were approximately 252 record holders
of the Company's Common Stock. The Company believes that there are more
beneficial holders of the Company's Common Stock.
<TABLE>
<CAPTION>
Price
-----
Period High Low
------ ---- ----
<S> <C> <C>
First Quarter 1996 3.25 0.88
Second Quarter 1996 3.00 0.50
Third Quarter 1996 3.50 1.37
Fourth Quarter 1996 3.62 0.87
</TABLE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of December
31, 1995 and as adjusted to give the effect to the sale of the Common Shares
offered by the Company after deducting estimated offering expenses payable by
the Company. This table should be read in conjunction with the Company's
Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As of December 31, 1995
Actual As Adjusted
------ -----------
<S> <C> <C>
Shareholders' equity
Common Shares, par value $0.001
50,000,000 authorized;
___issued and outstanding
___issued and outstanding,
as adjusted
Preferred Shares, no par
25,000,000 authorized;
none issued and outstanding
Warrants to acquire common
convertible on a 1 to 1 basis
2,000,000 authorized;
2,000,000 issued and outstanding
Additional paid-in capital
Total shareholders' equity
Total capitalization
</TABLE>
DILUTION
The pro forma net tangible book value of the Company as of September 30, 1996
was $_____ or $ ______ per share. Net tangible book value per share represents
the Company's total tangible assets less its total liabilities divided by the
number of shares of Common Stock outstanding.
Pro forma net tangible book value dilution per share represents the difference
between the amount paid per share by purchasers of Common Stock in this offering
and the pro forma net tangible book value per share as adjusted to give effect
to this offering. After giving effect to the sale of the 3,000,000 shares of
Common Stock offered hereby at the public offering price of $___ per share
(after deducting the estimated offering expenses), the as adjusted net book
value of the Company as of September 30, 1996 would have been $ ____
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<PAGE>
or $ _____ per share. This represents an immediate increase in pro forma net
tangible book value of $ _____ per share to existing shareholders and an
immediate dilution of $______ per share to new investors in this offering. The
following table illustrates the dilution per share to new investors as of
September 30, 1996:
<TABLE>
<S> <C>
Initial public offering price per share $
Pro forma net tangible book value per share $
as of September 30, 1996
Increase in pro forma net tangible book value $
per share attributable to new shareholders
As adjusted net tangible book value per share after offering $
Dilution per share to new shareholders $
</TABLE>
The following table on a pro forma basis summarizes, as of September 30, 1996,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by existing shareholders and by new investors in this offering.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
---------------- ------------------- Per Share
Number Percent Amount Percent -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders $ $
New shareholders _____ _______ ______ ______ $
Total 100% $ 100%
</TABLE>
The outstanding shares of existing shareholders, as of September 30, 1996,
assumes the exercise of all warrants for stock, the conversion of all
outstanding convertible debt into common stock and sale of the maximum offering.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the Consolidated Pro
Forma Financial Statements of MSH Entertainment Corporation, the Consolidated
Financial Statements of MSH Entertainment Corporation, and the Consolidated
Financial Statements of East End, Notes to Financial Statements and other
financial information included herein. Certain statements set forth herein are
forward-looking and involve risks and uncertainties. For information regarding
potential factors that could have a material adverse effect on the Company's
business, operating results and financial condition refer to the "Risk Factors"
section.
OVERVIEW
The Company was organized in Utah in 1983. In 1994 the Company change its name
to MSH Entertainment Corporation and acquired all of the outstanding stock of
MSH Productions, Inc. and established it as a wholly owned subsidiary. In June
of 1996 the Company acquired substantially of the assets of East End
Communications, Inc., East End Productions, Inc. and J.B. Dubs Inc. (East End)
an established media production company. The Company has integrated the assets
and backlog of sales into the Company's operations. In conjunction with this
acquisition, the Company entered into employment agreements with Christopher R.
Haigh and Fred E. Aurelio. Under the terms of the acquisition the Company paid
$200,000 and entered into a promissory note in the amount of $865,000. In
addition to the referenced loan, as of September 30, 1996 the officers and
directors of the Company had outstanding loans to the Company in the amount of
$145,764.
During September 1996, in exchange for the first right of refusal on all
children's productions offered to the Company and a commitment to provide
production support services, the Company acquired a controlling equity interest
in Happy Zone Entertainment Corporation (HZE). HZE was established to produce
and
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<PAGE>
deliver animated television programs tailored to the children's market. Under
the terms of the agreement, the Company retains the rights to all non-children's
productions offered to the Company or to HZE, and the right to produce all
children's productions which are not selected for production by HZE.
During November 1996 the Company entered into a production agreement with AGE.
Under the terms of the agreement AGE acquired warrants to purchase 1,000,000
shares of Common Stock of the Company. In exchange the Company received rights
to produce a new children's TV series.
During November 1996, the Company entered into an agreement with Intel
Corporation. Under the terms of the agreement Intel acquired warrants to
purchase 1,000,000 shares of Common Stock of the Company. In exchange the
Company received rights to develop joint marketing and awareness programs for
its animation production management system and entertainment products.
1995 COMPARED TO 1994
Consolidated Pro Forma revenues during 1995 were $_____, which was $_____ less
than 1994. This reduction in revenue was due primarily to the results of the
activities associated with the development of the new direction and business
focus of the Company.
During 1995 the Company continued normal business operations. The Company also
implemented a market research study to identify future opportunities in the
entertainment media markets and develop a business plan to direct the Company to
these areas of opportunity.
During the second half of 1995 the Company ceased the production of low budget
films and focused upon the implementation of its revised business plan.
Significant activities included the review, diligence evaluation and
negotiations of potential mergers, and the acquisition of assets and properties
which would provide the Company with the resources and capabilities to fulfill
its business objectives.
Also during 1995, gross revenues at East End were less than 1994. This
reduction of revenues was due in part to the reduced revenues and downsizing of
a major client of East End. In response to this event East End expanded its
client base and took actions designed to reduce its dependence upon one major
client. Management of the Company believes the unification and integration of
assets of East End into the Company's operations will result in a broadening of
the client base and reduce the impact of one or two large revenue clients.
In conjunction with these activities the Company commenced acquiring technical
and managerial talent and began to market its new capabilities and to secure
contractual commitments for current and future production. The Company financed
these efforts through the private sale of shares of Common Stock and the
issuance of loans and loans convertible to shares of Common Stock.
FIRST QUARTER 1996
During the first quarter of 1996 the Company reviewed various acquisition
opportunities and entered into discussions for the acquisition of the assets of
East End.
SECOND QUARTER 1996
During the second quarter of 1996 the Company completed the acquisition of
substantially all of the assets of East End Communications, Inc., East End
Productions, Inc. and J.B. Dubs Inc. (East End). This acquisition included the
good will and backlog of sales of East End. In conjunction with the East End
acquisition a number of the key management and technical personnel joined the
Company. The Company believes the results of this acquisition will be a unified
business with the capability to offer existing clients and new clients a large
and diverse opportunity for professional media service capabilities.
THIRD QUARTER 1996
Activities which continued during the third quarter was the entry into a
strategic alliance agreements with AGE and Intel. Also the Company participated
in the establishment of Happy Zone Entertainment Corporation and obtained a
major equity interest in the new company. The Company continued to develop
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<PAGE>
new products. Management believes by third quarter of 1997 sales results will
begin to represent the benefits of the acquisition of East End.
FOURTH QUARTER 1996
During the fourth quarter the Company finalized a strategic alliance agreement
with Intel Corporation and entered into a co-production agreement with AGE, a
leading children's episodic TV and merchandising company. The Company also
presented demonstrations of Jethro, the Company's animated episodic TV
production management system. The Company signed agreements to rights to a
number of live action projects for TV.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception from the sale of shares
of common stock, borrowing, and cash flow from operations. The cash outflows
were primarily due to net losses caused by the research and development expenses
associated with the new animation technology, the formation and organizational
expenses associated with the assembly and unification of the Company,
acquisition expenses, and related marketing expenses associated with the
establishment of production, distribution and merchandising agreements. The
losses that the Company has experienced since inception have in various years
generated a tax net operating loss.
The Company has an outstanding secured promissory note in the principal amount
of $865,000 payable on December 1, 1996, with rights to extend to December 1,
1997. The note is held by Christopher R. Haigh, an executive of the Company.
Following this offering the Company anticipates repayment in full of this note.
The Company is dependent on the proceeds of this offering to repay certain
indebtedness, to fund new products and business development, and to expand
sales, distribution and marketing activities.
During the third quarters the Company leased an additional 6,200 sq. ft of
space in San Francisco, California. The lease is for a term of 5 years with
current payments of $5,890 monthly. The Company's headquarters in Santa
Monica, California is approximately 1,800 sq. ft. The current lease is for two
years at a rate of $2,754 per month.
The Company expects to continue making expenditures to acquire additional
computer hardware, software, furniture and fixtures and to lease additional
office space as it expands, although no material commitments other than those
previously described have been made.
The Company anticipates that its capital resources, including the proceeds from
this offering, cash flow from existing operations and co-funding of the
production development expenses of many of the Company's products will be
sufficient to satisfy its capital requirements for the next 18 to 24 months.
While it is anticipated that some or all of the planned products may involve
obtaining co-funding of the development expenses from other sources, there can
be no assurance that such contracts can be consummated and such co-funding of
production development expenses will be received.
The Company's ability to achieve positive cash flow after the next 18 months
depends on a variety of factors including continued co-funding of development
expenses, the timeliness and success of its production commitments, the costs of
developing, producing, marketing, distributing and merchandising of its products
and services, and various other factors, some of which may be beyond the
Company's control. Should the Company's loss be greater than currently
anticipated or its production and delivery of products is significantly delayed
or do not generate significant revenues, the company may require additional
capital, which it may seek through additional public or private financing or
other sources.
The Company's future capital requirements will be affected by, among other
things, the market acceptance of the Company's products and services, the timing
and costs of producing new titles, promotional and marketing expenses and
investments in technological and production process research.
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<PAGE>
If appropriate opportunities arise, a portion of the proceeds from this offering
may be used for selective acquisitions of businesses, products or technologies
that complement the Company's business. The Company has no present commitments
or understandings with respect to any acquisitions at this time.
INFLATION
The Company believes that inflation has not had a material impact on its
operations. Substantial increases in labor costs or distribution costs could
adversely affect the operations of the Company for future periods.
THE UNITED STATES TELEVISION INDUSTRY
The United States television market is served by network affiliated stations,
independent stations and local cable system operators. During "prime time"
hours (primarily 8 P.M. to 11 P.M. in the Eastern and Pacific time zones and 7
P.M. to 10 P.M. in the Central and Mountain time zones), network affiliates
primarily broadcast program produced for the network. In non-prime time,
network affiliates telecast network program, off-network program (reruns),
first-run program (program produced for distribution on a syndicated basis) and
local program produced by the local stations themselves. Independent television
stations, during both prime and non-prime time, produce their own programs,
telecast off-network programs or first-run programs acquired from independent
producers or Syndicators. Syndicators generally are companies that sell to
independent television stations, and network affiliates, programs produced or
acquired by the syndicator for distribution. Programs acquired by stations on a
syndicated basis are generally acquired for cash licensing fees or in exchange
for a certain amount of commercial advertising time within the program which is
retained by the syndicator for sale ("barter"), or for a combination of cash and
barter.
Barter syndication is the process whereby a syndicator obtains commitments
("clearances") from television stations to broadcast a program at a certain
time; retains advertising time in the program in lieu of receiving a cash
licensing fee and sells such retained advertising time for its own account to
national advertisers at rates based on projected ratings and viewer
demographics.
From time to time, certain stations may require cash consideration from a
syndicator, in addition to programming, in exchange for advertising time. By
clearing the program with television stations representing a penetration of 70%
or more of television households throughout the United States (calculated by
means of a generally recognized system as measured by A.C. Nielsen), the
syndicator creates an "ad hoc" television network. This enables the syndicator
to sell its inventory of advertising time to sponsors desiring national coverage
at rates per thousand viewers that are generally lower than those which networks
normally charge national advertisers for similar demographics.
The business of the television production industry may be broadly divided into
two major segments: production, involving the development, and making of the
television program; and distribution, involving the promotion and exploitation
of completed product in a variety of media.
Historically, the largest companies, the "Majors," have dominated the television
and motion picture industry by both in production and distribution. The Majors
include MCA Universal Pictures, Warner Bros. Pictures, Twentieth Century Fox
Film Corporation, Paramount Pictures Corporation, Sony Pictures Entertainment
(including Columbia Pictures, TriStar Pictures and the Walt Disney Company
(Buena Vista Pictures, Touchstone Pictures and Hollywood Pictures). Generally,
the Majors own their own production studios (including lots, sound stages and
post-production facilities), have a nationwide or worldwide distribution
organization.
Since the invention of the VHS in the early '70's; the explosive expansion of
broadcasting channels and networks in the US and foreign markets; coupled with
the universal acceptance of American produced product in the foreign
marketplace; has fueled the growth of the "Independent" marketplace. Companies
such as All American, Fremantle, King World, MTM, Tribune, Fox-Lorber, Polygram,
GRB, Camelot, etc., started as production and/or distribution companies. Over
time the independents then became one of the main sources of programming and
program formats for the networks, independent channels, cable channels
17
<PAGE>
cable broadcasters, pay-per-view and satellite channels for the entire world.
Today, the independents have had a significant impact on the studios control
over programming.
As broadcasting became more and more segmented there arose a need for producers
and distributors to fill specific niches to these new channel outlets. Some
examples of companies that specialize in the children's niche are Saban, Sunbow,
DIC, HIT, S4C, Bohbot, and others. We are now seeing segmentation of
programming targeted for broadcasters such as Discovery Channel, A&E, The
History Channel, USA Network, HBO, Showtime, etc. As the capacity for new
channels and delivery systems increases the result will be even narrower
segmentation. Certain programming is now geared to very targeted audiences
which deal in various tastes, lifestyles and hobbies. Such channels include
ESPN, E!, QVC, The Home Shopping Network, The Travel Channel, The Food Network,
Bravo, The Golf Network, etc. As channel capacity increases and television
stations become more segmented globally, independent producers and distributors
will have greater opportunity to fill the programming needs in a more efficient
and financially prudent manner than in any time in the past.
Some of the Majors have divisions which are promoted as Independent
distributors. These Independent divisions of Majors include Miramax Films (a
division of the Walt Disney Company) and Sony Classics (a division of Sony
Pictures). Independents engaged in the distribution of motion pictures produced
by companies other than the Majors include, among others, Trimark Holdings
(through Trimark Pictures and Vidmark Entertainment), Live Entertainment,
October Films, Republic Pictures (a division of Viacom), The Samuel Goldwyn
Company and Fine Line Pictures (a division of New Line Cinema).
TELEVISION PRODUCTION
The production of television programming involves the development of a format
based on a creative concept or literary property into a television script, the
hiring of talent, the filming or video taping of the program, and the technical
and post-production activities necessary to produce a finished program.
Television producers may originate projects internally or acquire them from
others. If a concept is deemed suitable for development, the producer
commissions and pays for a pilot episode prior to committing itself to the
production of a series. Once a script is approved by the producer, one or more
license agreements are negotiated with the potential broadcasters of such
program and pre-production and production activities commence. Such license
agreements provide a production order for such series and will establish the
license fee to be paid to the producer. A production order for a series is
generally for a specified number of episodes, with the licensee retaining an
option to renew the license. The ratings of the program usually determine
whether such option is exercised.
TELEVISION DISTRIBUTION
Domestic and foreign television networks, independent television networks,
television stations, cable system operators, pay-per-view and satellite networks
generally license television series, specials, mini-series, events programming,
movie-of-the-week (MOW), and made-for-television (MFT) pursuant to agreements
with distributors or Syndicators that allow a fixed number of telecasts over a
prescribed period of time for a specified cash license fee or barter for
advertising time. The broadcasting venue chosen for showing the programming
generally determines the course of the negotiations and price.
HOME VIDEO
The home video distribution business involves the promotion and sale of
videocassettes and videodiscs to local, regional and national and international
video retailers (including video specialty stores, convenience stores, record
stores and other outlets), which then rent or sell the videocassettes and
videodiscs to consumers for private viewing. In the last decade, home video has
been one of the fastest growing distribution media. In terms of total
distribution revenues generated, the domestic home video market is currently
larger than the domestic theatrical exhibition market.
Videocassettes are generally sold to domestic wholesalers either on a unit basis
or pay-per-transaction basis. Unit based sales typically involve the sales of
individual videocassettes to wholesalers or distributors at prices which range
from $5 to $60 per unit and generally are rented by consumers for fees ranging
from $1 to $3 per day (with all rental fees retained by the retailer). Pay-per-
transaction based sales involve the sale
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of a videocassette at a nominal price of $1 to $10, with rental fees divided
between the video retailer and the video distributor.
Wholesalers who meet certain sales and performance objectives may earn rebates,
return credits and cooperative advertising allowances. Selected titles,
including certain made-for-video programs, are priced significantly lower to
encourage direct purchase by consumers. The market for direct sale to consumers
is referred to as the "priced-for-sale" or "sell-through" market.
According to available industry data, between 1990 and 1993 there was an
approximately 9% increase in the number of VCRs (from approximately 67% to 76%)
owned or maintained by households having televisions. As the number of
installed units increases, annual increases in VCR penetration levels are
expected to decline.
In 1993, based upon available industry data, consumers spent approximately $5.2
billion on the purchase of videocassettes and another $7.6 billion on rentals.
Based on total annual revenues, since 1990, the "sell-through" market has grown
more rapidly than the rental market for videocassettes.
Technological developments including videoserver and compression technologies,
which regional telephone, cable, and others companies, are developing could make
competing delivery systems economically viable and may significantly impact the
Company's home video revenues and overall business. The Company might be
required to develop and implement new operating strategies and distribution
capabilities.
PAY TELEVISION.
The domestic pay television industry currently consists of channels such as
HBO/Cinemax, Showtime/The Movie Channel and a number of regional pay services.
Pay television services are sold to cable and satellite system operators for a
monthly license fee based on the number of subscribers receiving the service.
These pay programming services are offered by cable system operators to
subscribers for a monthly subscription fee. The pay television networks
generally acquire their programming by purchasing the distribution rights from
motion picture distributors, and also for MFT productions.
PAY-PER-VIEW.
Pay-per-view television allows cable television subscribers to purchase
individual programs, primarily recently released theatrical motion pictures,
sporting events and music concerts, on a "per use" basis. The fee a subscriber
is charged is typically split among the program distributor, the pay-per-view
operator and the cable operator.
BROADCAST AND BASIC CABLE TELEVISION.
Television exhibition includes the exhibition by means of over-the-air
television available to viewers without charge, whether through national
networks or Independent television stations (referred to as "free television")
and cable transmitted television for which viewers pay a fee for the right to
receive a package of over-the-air and cable channels. United States television
includes the Major networks, ABC, CBS, NBC and Fox, and two newer networks, WB
and UPN, independent television stations, and cable and satellite networks and
stations. Cable television delivers multiple channels of entertainment, news,
sports and informational programming to subscribers who pay a monthly fee based
upon the type and number of services they receive. The increased channel
capacity and large base of subscribers that developed, and the recent
introduction of the digital satellite TV services, have made possible the
proliferation of a number of new cable satellite networks which have become
important purchasers of TV programming and motion picture rights.
In many cases, these networks have purchased the right to air pictures and TV
programming which traditionally would have been sold to the broadcast networks
or to independent television stations in the syndication market. Syndication is
the process of furnishing programming directly to television stations as opposed
to the network system for distribution to its affiliated stations. Syndicators
attempt to sell a
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program or film to a television station (which may or may not be an affiliate of
a network) in every major television market, seeking to achieve an audience as
large as the potential network audience.
INTERNATIONAL MARKETS.
The worldwide demand for entertainment is growing dramatically--as evidenced by
the development of new international markets and media. According to published
data for 1991, the fastest growing revenue source for publicly held media
companies during the years 1987 through 1991 was international sales, which grew
at approximately twice the rate of growth of aggregate revenues generated from
domestic theatrical exhibition, home video and pay and free television. This
growth is primarily driven by the overseas privatization of television stations,
introduction of direct broadcast satellite services, growth of home video and
increased cable penetration.
CHILDREN'S TELEVISION
The US television market is served principally by network-affiliated stations,
independent stations and cable or satellite television operators. Historically,
four major broadcast networks, ABC, CBS, NBC and Fox, collectively have been
watched by the vast majority of the television viewing audience. In recent
years UPN and WB have commenced national broadcast television networks.
Additional television entertainment options, including cable channels and DTH
satellite services, have also begun to deliver children's program.
The networks and cable channels have increased the amount of children's
television programming broadcast in recent years. Weekend morning children's
programming now airs on Fox Kids Network, ABC, CBS, UPN Kids and Kids WB. In
addition, Fox Kids Network and Kids WB broadcast animated and live-action
programming for children Monday through Friday mornings and afternoons. For the
1996-97 broadcast season, children's animated and live-action programming will
occupy approximately 40 hours of air time per week on the US broadcast
television networks. UPN and the USA cable network, as well as many first-run
Syndicators, provide children's programming blocks on Sunday mornings. Cable
channels which broadcast advertiser-supported children's programs include The
Cartoon Network, Nickelodeon, USA cable network and The Family Channel.
In the United States, an estimated $725 million was spent in the 1995-1996
broadcast season by advertisers on children, and expenditures have grown at an
average annual rate of 13% since 1990. For the period from September 1995
through May 1996, national advertiser expenditures on television commercials
targeting children, including major toy companies such as Mattel and Hasbro,
other children's consumer product companies such as Kellogg's and Quaker Oats,
and major fast food chains such as McDonald's, Burger King and Taco Bell were
over $230 million in the aggregate.
The growth in the number of international television outlets has created
additional global demand for children's programming. The privatization of the
international television industry has encouraged a ratings/revenue-oriented
focus among international broadcasters, increasing the demand for high-quality
television entertainment. Children's programs produced in the United States
have enjoyed wide acceptance internationally. In addition, the number of cable
and satellite programming services addressing the international community has
grown significantly in recent years. These added programming services have
created an opportunity for distributors, including the Company, to license
simultaneously both traditional broadcast and DTH satellite programming rights
within the same territory. International television, cable, DTH satellite and
home video sales of a children's program produced in the United States can
account for more than half of the revenue for a given program.
SUPPLIERS AND DISTRIBUTORS
Suppliers of television programming include the production divisions and
affiliated companies of the major motion picture studios, independent production
companies, Syndicators, broadcast television networks, station owners and
advertising agencies. These suppliers sell programming to broadcast networks or
television stations for a fixed cash fee per episode, by barter, or by a
combination of cash and barter. Virtually all children's programming sold
though syndication is sold by barter, where a syndicator obtains commitments
from television stations to broadcast a program at a certain time, retains a
portion of the
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advertising time in the program in lieu of receiving cash licensing fees and
sells the retained advertising time for its own account to national advertisers.
Broadcasters of children's television programming in the United States consist
primarily of networks (both over the air broadcast television networks and basic
cable networks) and independent television stations. Distributors of children's
programming generally sell television series to networks on a cash basis and
sell to independent television stations on a barter basis. Networks typically
pay a distributor a fixed cash license fee which entitles the network to a
number of runs of a series over a defined period of time. Networks are
generally entitled to retain 100% of the advertising revenues generated by the
broadcast of a series and sell advertising spots to national advertisers on the
basis of guaranteed ratings.
Independent television stations, which obtain series programming through barter
transactions, agree to provide a distributor with a certain number of
advertising spots during each broadcast of the series on the station in exchange
for the local broadcast rights. The advertising spots retained by the
independent station are sold by the station on a local basis. The advertising
spots retained by the distributor are sold to national advertisers on the basis
of guaranteed ratings. Nielsen periodically publishes data on the percentage of
viewers actually watching each program. If the actual viewership falls below
the guaranteed rating, the distributor or network, as the case may be, generally
provides the advertiser with "make-goods"--additional airings of the
advertiser's commercial in order to achieve the promised audience level-or in
some cases, cash refunds. When selling national advertising time, the network
or distributor typically holds back a certain number of advertising spots to be
used as future "make-goods." Since stations do not receive any compensation for
delivering ratings in excess of the guarantee, and "make-goods" lower the
inventory of available commercial time which can be sold on an up-front basis,
accurately predicting a series' rating is important to maximizing advertising
revenues.
LICENSING AND MERCHANDISING
In addition to utilizing television to advertise products to children, the
creation of children's programming itself provides broad licensing and
merchandising opportunities. Characters developed in a popular series, and
often the series themselves, achieve a high level of recognition and popularity
among children, making them valuable assets for the licensing and merchandising
market, where they can provide attractive "branding" opportunities. It is
reported that the children's market is one of the fastest growing segments in
licensed merchandising sales, with over 70% of the $6 billion spent in the
United States on entertainment and character-related properties in 1995 relating
to children-oriented products. Among the most popular licensed items are toys,
t-shirts, food, dinnerware/lunch boxes, watches and soft vinyl goods such as
boots, backpacks and raincoats. There are currently over 38 million children in
the United States between the ages of 2-11, with approximately 4.5 million
children entering the marketplace annually, and the average annual amount spent
on toy purchases for a child up to ten years of age is estimated at between $240
and $300.
BUSINESS
The Company is in the business of film, video, music, software development, and
television production and distribution. Its business operations include
creating, developing, producing, licensing, distributing and merchandising
entertainment media products. In addition to animated and live-action family
and children's TV productions, the company's products include infomercials,
product introductions, marketing roll-outs, prime time drama series, music
specials, record albums, music publishing and related services.
The continued advances in the computer and communications industries, and the
integration of these two industries with the entertainment industry is creating
significant opportunities for growth. Based upon the pursuit of this growth
opportunity the Company has proceeded with acquiring the assets and capabilities
to create, develop, produce, license, distribute and merchandise television
programs and televisions series programs for: (a) children and family audiences;
and (b) for the mature prime-time television and cable markets. The Company is
also pursuing opportunities in children's toys and merchandising as it relates
to Company produced programming.
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The Company's strategy for growth emphasizes the development of new properties,
selected acquisitions and participation in strategic alliance agreements. The
Company's business plan is focused toward the generation of profits and equity
growth by developing, producing and distributing both live action and animated
TV specials, TV movies, TV series, movies and commercials for broadcast TV,
cable, satellite and syndicated TV, and video cassettes. The Company also
intends to participate in revenue generated from software licensing, music
publishing and from ancillary merchandising of toys and associated products
which are related to the Company's created works. Additionally, within the next
12 to 18 months the Company intends to commence the marketing and licensing of
computer animation management software to the entertainment industry.
The Company views acquisitions and strategic alliance agreements as key vehicles
to the entry into new markets and the leveraging its existing infrastructure.
The Company's is aggressively establishing strategic alliance agreements and
management of the Company believes there will continue to be opportunities in
the markets in which it operates and will continue to engage in the review of
candidate opportunities for acquisition and, as appropriate, participation in
strategic alliances.
As part of the expansion of business operations, during June 1996, in exchange
for cash and a promissory note, the Company acquired substantially all of the
assets of East End Communication Inc., East End Productions Inc., and J.B. Dubs
Inc., ("East End"), all of which are California corporations.
During September 1996, in conjunction with the execution of an animated
children's production agreement, the Company participated in the formation of,
and received a 60% equity interest in, Happy Zone Entertainment Corporation
(HZE), California corporation. The other major HZE shareholder is AGE, and
minority interests are held by officers and directors of the Company.
During October 1996 the Company entered into a strategic product development
agreement with Abrams/Gentile Entertainment Inc., (AGE). Under terms of the
agreement AGE acquired warrants to acquire up to 1,000,000 shares of Common
Stock of the Company and the Company acquired the rights to produce a new
children's TV series entitled "Vanpires" developed by AGE and scheduled to
commence network broadcast during fall 1997. The Company also acquired an
interest in the potential revenue from toys and merchandising related to the new
TV series.
During November 1996 the Company entered into a strategic marketing and product
development agreement with Intel Corporation (Intel). Under terms of the
agreement Intel acquired warrants to acquire 1,000,000 shares of Common Stock of
the Company and the Company acquired the rights from Intel to develop joint
marketing and awareness programs and a marketing and promotion plan for the
Company's products.
Additionally, the Company provides various production services and distribution
services, both international and domestic, to both Major and independent
producers. The Company's headquarters is located in Los Angeles, California
with animation facilities, the software development center, production studio
and support facilities in San Francisco, California. The Company also maintains
an office in Houston, Texas.
MARKETING STRATEGY
The Company's primary strategy is to create, develop and produce products for
the television market in the United States, Europe and Asia, as well as home
videos for those markets. The Company will attempt to retain copyright
ownership of all its productions for the purpose of building a profitable
library for future exploitation in all media worldwide.
The potential markets for the products and services provided by the Company
include:
<TABLE>
<S> <C>
- Domestic television networks - Domestic television syndication
- Domestic home video - Domestic pay-cable
- Domestic basic cable networks - Foreign theatrical and home video
</TABLE>
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<TABLE>
<S> <C>
- Foreign television and pay cable - Music publishing
- Toys and merchandising - Contract production services
- Computer animation services - Contract post production services
- Record Album sales - Software licensing
</TABLE>
With the growth of interest in various ancillary elements of a property, the
Company will endeavor to incorporate these elements into each production
project. The integration of these ancillary elements into the project are
referred to as "synergistic" packaging. Synergistic packaging encompasses the
areas of video rights; multiple productions for the establishment of "library
packages" for ultimate syndication sales; television series; live action and/or
animation television specials for networks, cable networks and/or syndication;
character and/or product licensing; merchandising, promotional tie-ins and
considerations, corporate identity and sponsorship programs via product
placement; music sound track publishing; replay rights; music videos; literary
and educational publishing rights; and, in rare cases, the creation of theme
park rides and attractions based upon the subject and characters of the a
project.
CUSTOMERS
Over the last few years the Company has provided television, video and multi-
media productions and services to many high profile clients. Some of these
client's include:
<TABLE>
<S> <C>
Amdahl Corporation Bank America Corp.
Honeywell DDI Kawasaki Motor Corporation
Stanford University Tandem Computers
Apple Computer, Inc. Banana Republic
Hilton Hotels Intel Corporation
Omega Sun Microsystems
Hoffman LaRoche ITT Information Systems
Shaklee Corporation Supercuts
Ungerrnann-Bass VISA USA
Wells Fargo Bank World Savings & Loan
Hewlett-Packard Company Gap, Inc.
Cisco Systems, Inc. Seagate Technology
Sports Channel RSD Data Security, Inc.
Sybase, Inc. McGraw Hill
Charles Schwab & Co., Inc. San Francisco State University
</TABLE>
Organizations for which the Company's key personnel have created, developed or
staffed productions include:
<TABLE>
<S> <C>
A&M Records Odyssesy International
ABC Television Network Paramount Pictures
ASCAP Public Broadcast System (PBS)
All Girl Productions Playboy and Penthouse
Bantam Books Prism Pictures
The Beacon Group Radio City Music Hall Productions
BMI Radio Vision International
Dave Bell & Associates Realm Productions & Entertainment
Canon Films RCA
Canadian Broadcasting Company RKO
Carnegie Hall Showtime
CBS Television Network Sunshine KidVid Entertainment
CBS/Fox Home Video SONY Home Video
Columbia Pictures Television The Nashville Network
Dick Clark Productions Twentieth Century Fox
Disney/Touchstone Trimark/Vidmark
Featureline Films United Paramount Network (UPN)
First Choice Universal Pictures
</TABLE>
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<TABLE>
<S> <C>
The Robert Evans Company Universal Pay-TV
The Family Channel Warner Brothers
Fox/Lorber Warner Home Video
General Media International CVB-TV
Group W WOR-TV
Harmony Gold Young & Rubicam
HBO Viacom
Inter-American Films InterContinental Releasing
IRS Media ITC
J. Walter Thompson Lorimar
MCA Home Video MCA/Curb records
Miramax MTV
NBC New Line Cinema
Nickelodeon OAK Media
</TABLE>
PROFESSIONAL AWARDS
Awards won by members of the Company's creative and production team include:
<TABLE>
<CAPTION>
Quantity Awards
-------- ------
<S> <C>
1 Academy Award
5 EMMY Awards
5 ACE Awards
1 VIRA Award
1 Berlin Film Festival Award
1 Clio Award
1 New York Film Festival Award
7 ACE Award Nominations
11 EMMY Award Nominations
2 Chicago Film Festival Award Honorable Mentions
2 TONY nominations
4 Billboard Songwriting Awards
</TABLE>
BUSINESS STRATEGIES
The Company intends to continue to increase its presence in the family and
children's television entertainment business, with the goal of becoming a
recognized worldwide producer and distributor of family and children's
television programming, music publishing and software licensing. The principal
elements of the Company's strategies for achieving this objective is through the
production of strong identifiable characters and properties. Strong
identifiable characters and names not only dramatically improve the audience
acceptance and the longevity of the property but also increase the worldwide
distribution potential of programming. The Company intends to develop household
name "franchise values," with each of its characters which are then leveragable
into merchandising, movies and spin-off and sequel shows.
The Company intends to continue to create and develop new entertainment
properties with potential franchise value and to further build on its existing
programming, capitalizing on the popularity and recognition of its properties in
all media and markets, including toys, merchandising, home video and consumer
products.
The Company plans to seek to further improve, and to expand the reach of its
programming products, by continuing to develop acquire or license quality
programming which is attractive to families and children. The Company will
strive to increase the number of its owned programs. This integration of
ownership and distribution has the potential to enhance the profitability of the
Company's programming.
The Company foresees significant expansion opportunities in the international
television markets, where the Company believes that children's programming has
been relatively undeserved. With its new family and
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children's programming and half-hour episodes of children's programming, a
significant portion of which meet the "local content" requirement of various
European countries, the Company intends to focus significant resources on the
expansion of its international operations. The Company has an important
strategic advantage because of its current relationship with AGE, whose
experience and interests in international television distribution platforms will
be helpful in introducing the Company to the international markets.
The Company intends to continue to build its asset property library through
internal creation, development and production, and by pursuing co-production
arrangements with US and international partners and by acquiring properties and
libraries from third parties.
With the resources and capabilities to manage every stage of the family and
children's television business, from the creation and production of programming
to the worldwide licensing and merchandising of properties, the Company believes
it will be able to coordinate all forms of exploitation in tandem with the
timing of television broadcasts on a worldwide basis with the goal of maximizing
market reach and revenues.
CREATION AND DEVELOPMENT OF PROGRAMMING
The Company creates, produces and acquires quality animated and live-action
family and children's television programming. The principal programming
objective of the Company is to develop or acquire, on a cost-effective basis,
appealing characters and concepts that can be commercially exploited throughout
the world through television exhibition, home video sales, licensing and
merchandising.
One of the essential attributes of quality family and children's programming is
its "portability." Children's programming produced for exhibition in a
particular country is "portable" because it can generally be modified at a
modest cost and resold for exhibition in other countries through editing and
dubbing into other languages.
The Company has and will continue to pursue ideas and properties for original
production from a number of sources. For example, the Company may acquire
production, distribution and possibly other rights to an existing property or
series, develop internally a new property based on an existing public domain
property, or create or acquire an entirely new idea or character. The Company
has employees involved in programming development and currently has five
projects in various stages of active development. In general, production does
not commence without significant commitments for broadcasting by networks or
independent television stations. Typically, the Company has seven months to one
year to produce and deliver anywhere from 13 half-hour episodes (the typical
number of episodes ordered for a weekly series) to 65 half-hour episodes (the
typical maximum number of episodes ordered for a weekday series). The Company
attempts to produce programming in a cost-effective manner while maintaining
control over critical parts of the production process to ensure continued high
quality.
For example, with respect to programming in which the Company has assumed
responsibility for physical production, freelance script writers are utilized
but supervised by a Company production executive and certain labor-intensive
animation work may be subcontracted to countries with relatively low-cost labor,
while the Company handles or directly supervises both initial creative
development, on going activities, and all post-production work.
The Company has the capability to implement and directly supervises most aspects
of the creative development of a property from initial concept through the post-
production of a series, from the development of a story and writing of scripts
to the production of voices, music and special effects. The Company has the
capability to film live-action series at its production facilities in San
Francisco, California or at remote sites as appropriate. The Company also
maintains a post-production facility in San Francisco, California. The Company
maintains the capability to record all of the music for its programming, and
edits and adds audio and sound effects to its programming. The Company has a
full-service animation studio which develops programming containing content that
meets the content requirements of both US and foreign countries for local
broadcast television.
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The Company believes that by owning and controlling the international
distribution rights to its programming, it not only can generate significant
revenue from the sales of its programming, but can also establish an
international presence for the Company and its properties which should support
its international licensing and merchandising efforts. The Company also intends
to use its international presence to expand its operations in emerging
television markets.
PROJECTS IN DEVELOPMENT
The Company is continually evaluating project proposals and strategic alliance
opportunities and the following are active projects. Any of these may be
developed, placed on hold, released or canceled at any time. Furthermore, new
projects may be added at any time without notice.
Vanpires: An AGE created and developed project, "Vanpires" is an 3-D animated
- ---------
children's series and toy line aimed at young boys. The Galoob has signed a
master toy license for world-wide distribution of the toys and merchandising.
Summit Media is the distributor of the series. The series is scheduled to begin
network distribution during the fall 1997 season.
Vallas & Son: Created by a key member of the Company's management, "Vallas &
- -------------
Son" is based on a true life father and son team who are considered among the
world's best arson, bomb and terrorist experts. The made-for-television movie
and the 26 one hour episodes are all based on actual cases from their files and
each is unique and fascinating. A combination of "Colombo" and "Quincy" with a
dash of "NYPD Blue" thrown in, this project is being development by Sony
Entertainment's Columbia Pictures Television as a TV series for the 1997 season.
Arnold The Invincible: A children's animation project aimed at the largest
- ----------------------
children's television audience today, boys 6 to 11, is being developed for the
television marketplace, and for multiple toy licenses and merchandising
worldwide. The series is planned to be music driven, consisting of 3 to 4 new
original songs per episode. The new music is expected to open additional
markets for the series.
Christmas In July: "Christmas In July" is a made-for-television 2 hour movie
- ------------------
that will serve as the pilot for a proposed family television series whose theme
encompasses the current "hot" topic of angels, as is evident by a long running
successful network television series. The series is being structured as a
weekly one hour family oriented series that promotes positive family values.
Kickers: A live action family oriented television series centers on a kid's
- --------
soccer team from Europe that spends its summer in San Francisco playing a little
soccer, while also playing detective and solving one mystery after another. The
weekly plot will focus on good versus evil, right versus wrong, friendship,
teamwork, trust, family, soccer and adventure. Each story will carry a strong
message of good over evil. Wholesome family oriented values will be paramount
in each episode's theme. With a multi-national cast and interesting background
locations, this proposed series is designed to be a favorite for the whole
family.
Griffin Goes To...: The story of a 2 year old boy, Griffin, and his 9 year old
- -------------------
sister, Emily, who celebrate the world through exploration and discovery and
invite the viewer to go along. A live action children's series with a target
audience being ages 3 to 7, but something that all ages will find charming and
entertaining. Each 30 minute episode will take children on an exploration of a
world outside of their own neighborhood. Some of the places that will be
visited will be the White House, Yellowstone National Park, A Rain Forest,
Buckingham Palace, an Indian Reservation, The Great Barrier Reef, a dude ranch
and other places.
Earth Escapes: Music in High Places: This is a dynamic 60 minute weekly
- ------------------------------------
television music special and spin-off weekly series. It is the ultimate rock
and roll adventure show featuring heart-felt performances by some of the world's
most talented recording artists as they travel to the most mysterious and
exciting places on the planet. These breathtaking scenes serve as a backdrops
for "unplugged" musical concerts featuring talents such as Sting, Eric Clapton,
U2, REM, Peter Gabriel, Grath Brooks, Don Henley, Sade, and others. In addition
to the series there will be a series of books, home videos, and an Internet
series. The series is designed to be a rock and roll "National Geographic" for
the MTV generation.
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Tiny Tales: This is a series of 30 minute programs in the tradition of
- -----------
"Fantasia" that combine children's literature, famous artwork, animation and
music in meaningful tales for children. In each show the host, Mortimer,
welcomes a little boy and a little girl and introduces them to the great works
of literature, art and music by welcoming the creators of the works, to
"collaborate" in telling and illustrating a story accomplished by "Fantasia" -
like music and orchestrations. The little boy, Billy, and the little girl,
Laura, watch and participate as history and all the arts come together in a
group of tiny tales.
The Bridal Show: The Company owns a minor interest in Compass LP, a Florida
- ----------------
limited partnership formed to finance and produce a multi-series television show
which would address the many facets of the multi-billion dollar bridal industry.
Compass has created a pilot episode which is serving as the basis for a sales
promo which is currently being circulated.
Additional Properties: The Company has acquired ownership rights to additional
- ----------------------
scripts which are being evaluated as a source for the development of an original
made-for-pay and cable movies. Additionally, the Company is continuing an on-
going policy of evaluating and acquiring commercial properties to be developed
for network movies, co-ventures, and possible TV series.
MERCHANDISING AND LICENSING
Merchandising of character related products is conducted principally through the
grant of licenses to independent third parties who manufacture products
incorporating the Company's characters and distribute these products through
normal distribution channels. Generally, these licensees provide payment of
royalties to the Company based on specified percentages of the sales of licensed
products.
Royalty payments in the merchandising industry typically range of 5% to 15% of
gross sales. Merchandising products featuring the Company's characters may
included various types of toys, T-shirts, caps, trading cards, posters, buttons,
etc. The marketing and sales duration of a "hot" merchandising item is
typically 18 months to 30 months.
As the markets for multimedia and interactive entertainment products and
services continue to grow, the Company intends to develop and lease products for
the interactive multimedia markets. According to industry sources, in 1994
retail sales of new media in the form of video game cartridges, PC and Macintosh
floppy disk and PC and Macintosh CD-ROM games exceeded $5 billion, approximately
equivalent to box office gross receipts (estimated at $5.4 billion) for the
first time feature films. Industry sources expect growth of the new media
market to be in the 15 to 25% range per year as new high-performance platforms,
such as the Sony Playstation, are made available and as the on-line and
networked markets mature. The Company intends to actively pursue participation
in this market through licensing of characters and concepts.
The Company intends to capitalize on its characters and properties by entering
into licensing agreements with manufacturers and retailers of children's
products. By controlling licensing and merchandising rights, the Company
maintains the rights to earn revenue from the sale of products while limiting
the costs and risks associated with manufacturing, distributing and marketing
merchandise. The revenue derived from licensing and merchandising depends not
only on the success, recognition and appeal of a character, but also on the
quality and extent of the marketing efforts of the Company and its licensees.
Sales of licensed products also help the Company by promoting the Company's
characters and production capabilities. The following table sets forth examples
of the products for which some licensees have merchandised a children's
televisions character.
Plastic lunch kits
Toys including action figures and video games
Children's' books
Halloween costumes and sweatshirts
Colgate Plus toothbrush
Backpacks and other soft vinyl goods
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Girl's and boy's underwear
Frozen novelties
Games and puzzles
Belts, hats and other apparel
Children's' optical frames
Cookies and candy
Sheets and other bedding products
Fitness sets and remote control vehicles
Individual films and film viewers
Fishing rods, reels and fishing tackle
The Company also competes with hundreds of owners of creative content who seek
to license their characters and properties to a limited number of manufacturers
and distributors. The ability of the Company to successfully exploit the
merchandising opportunities afforded by its programs will continue to be
dependent on the favorable ratings of its programs and the ability of the
Company's characters to continue to provide attractive merchandising features to
its customers.
DISTRIBUTION
In the United States, the Company's products competes for time slots, ratings
and related advertising revenues. The Company currently competes, with other
production company who supply products to broadcast television networks, public
television and cable television channels, such as Nickelodeon, USA cable network
and The Cartoon Network for market acceptance of its programming and for
viewership ratings. The Walt Disney Company has recently announced its plans to
launch a 24-hour cable television children's channel. Further, the Company vies
for the family and children's audience with independent television stations,
suppliers of cable television programs, direct broadcast satellite and other DTH
satellite systems, radio and other forms of media. The Company also competes
with other syndicators on a market-by-market basis for time slots, coverage
commitments, ratings and advertising revenue. Internationally, the Company
contends with a large number of US-based and international distributors of
children's programming, with whom it must compete in the development or
acquisition of programming expected to appeal to international audiences. Such
programming often must amply with foreign broadcast rules and regulations which
may stipulate certain minimum local content requirements.
The Company's distribution business is being expanded to a full service content
provider for the television, home video and the animation marketplace. The
primary emphasis will be on distributing both in-house products and
independently produced entertainment products. Management's informal research
of the marketplace has indicated the existence of a number of independent
producers who are seeking access to a reliable distribution network. Servicing
these independent producers one of the key markets for the Company's expanded
distribution services.
Management believes the Company's established contacts and relationships in the
industry will be advantageous in the marketing and sales of the Company's
distribution services. In addition, as part of its ongoing business, the
Company will have access to many of the established distribution outlets
including: theatrical release, network television, home video, pay-for-view,
regular cable, pay-cable, syndicated television networks, the Internet, on-line
services, CD-ROM producers, toy manufacturers and merchandising syndicates.
Management believes it can arrange partnership relationships with major pay-
cable (such as HBO, Showtime) and network television broadcasters (such as CBS,
ABC, NBC, Fox) for the co-financing or complete financing of select projects.
Under this arrangement, the pay-cable and television network would finance
either the entire budget of the project or up to 50%, with the balance being
financed by the Company. The pay-cable or television network would have a
license arrangement to broadcast the completed production for a limited number
of runs (usually two for a made-for-television movie) within a short time frame
on domestic US television only.
Thereafter, all rights, title and claim to the production, including copyright
ownership, home video, CD-ROM, foreign broadcast and domestic re-run rights
would revert back to the Company. These reverted rights can then be marketed in
any and all markets throughout the world. The Company intends to market
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these products primarily in those market which were not included in the pay-
cable or network broadcast arrangement.
As the foregoing relationships are established, management believes the Company
may be able to internally generate revenues for the development, acquisition and
the production of four to six properties a year. The Company believes funding
for these project would be provided principally from the revenues earned from
previously released productions. Although the foregoing plan is based on
management's knowledge and experience in the entertainment industry no assurance
can be given that the Company will be able to generate revenues sufficient to
become self sustaining from the distribution of its own properties.
To enhance revenue potential in all markets around the world, the Company will
actively seek products for acquisition which already conform to pre-set business
and content parameters. The Company anticipates such services will result in
receipt of distribution fees of between 15.5% to 33% of the gross revenues of
each product. The Company presently owns the copyrights to its previously
produced films and scripts and will endeavor to own all or part of the
copyrights to any and all products it distributes in all media worldwide.
GOVERNMENT REGULATION
The Company's programming must comply with the provisions of the CTA and the
rules and policies of the FCC pertaining to the production and distribution of
television programs directed to children. With respect to programs originally
produced and broadcast primarily for children ages 12 and under, the CTA and FCC
rules, among other things, (i) limit the number of minutes of commercial matter
per hour, (ii) generally require that program material be clearly separated from
commercial matter, (iii) prohibit the broadcast within a program of commercials
for products associated with that program, and (iv) prohibit program
personalities, whether live or animated, from delivering commercials during, or
in close proximity to, programs in which the personalities appear or with which
they are associated. Failure to comply with the children's television
commercial limitations can result in the imposition of sanctions, including
substantial monetary fines, on a broadcast television station.
On August 8, 1996, the FCC amended its rules to establish a "processing
guideline" for broadcast television stations of at least three hours per week,
averaged over a six-month period, of "programming that furthers the educational
and informational needs of children 16 and under in any respect, including the
child's intellectual/cognitive or social/emotional needs." Core Programming has
been defined as educational and informational programming that, among other
things, (i) has served the educational and informational needs of children "as a
significant purpose," (ii) has a specified educational and informational
objective and a specified target child audience, (iii) is regularly scheduled,
weekly programming, (iv) is at least 30 minutes in length, and (v) airs between
7:00 a.m. and 10:00 p.m. Any station that satisfies the processing guideline by
broadcasting at least three weekly hours of Core Programming will receive FCC
staff-level approval of the portion of its license renewal application
pertaining to the CTA. Alternatively, a station may qualify for staff-level
approval even if it broadcasts "somewhat less" than three hours per week of Core
Programming by demonstrating that it has aired a weekly package of different
types of educational and informational programming that is "at least equivalent"
to three hours of Core Programming. Non-core programming that can qualify under
this alternative includes specials, public service announcements, short-form
programs and regularly scheduled non-weekly programs, "with a significant
purpose of educating and informing children."
A licensee that does not meet the processing guideline under either of these
alternatives will be referred by the FCC's staff to the Commissioners of the
FCC, who will evaluate the licensee's compliance with the CTA on the basis of
both its programming and its other efforts related to children's educational and
informational programming, e.g., its sponsorship of Core Programming on other
stations in the market, or non-broadcast activities "which enhance the value" of
such programming.
A television station ultimately found not to have complied with the CTA could
face sanctions including monetary fines and the possible non-renewal of its
broadcast license. The adoption of the new quantitative guideline could result
in a material increase in the amount of educational and informational children's
programming broadcast; and it is unclear what impact, if any, such a result
would have on the Company's
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business.
Pursuant to the 1992 Cable Act, the FCC substantially deregulated the cable
television industry in various areas, including rate regulation, competitive
access to programming, "must-carry" and retransmission consent for broadcast
stations, and customer service regulations. These rules, among other things,
restrict the extent to which a cable system may profit from (or recover the
costs associated with) adding new program channels, impose certain carriage
requirements with respect to television broadcast stations, limit exclusivity
provisions in programming contracts, and require prior notice for channel
additions, deletions and changes.
Cable operators and satellite cable or satellite broadcast programmers in which
cable operators have attributable interests are prohibited from using unfair
methods of competition or unfair acts or deceptive acts or practices, the
purpose or effect of which is to hinder significantly or prevent any
multichannel video programming distributor from providing satellite cable or
satellite broadcast programming to customers. A cable operator with an
attributable interest (defined as five percent equity or five percent voting
control) in a satellite cable or satellite broadcast programmer must not
improperly influence the programmer's decision to sell programming to an
unaffiliated multichannel video programming distributor (or the terms and
conditions of such a sale).
Similarly, a satellite cable programmer in which a cable operator has an
attributable interest may not discriminate among competing cable systems or
other multichannel video programming distributors in the prices, terms and
conditions of sale or delivery of programming. Such programmers may offer
discounts, however, based on actual cost savings. Exclusive contracts between
affiliated cable operators and programmers are prohibited for areas not served
by the cable operator as of October 1992. In areas served by the affiliated
cable operator, exclusive contracts are prohibited unless the FCC makes a prior
determination that such a contract would serve the public interest.
Multichannel video programming distributors are generally prohibited from
restraining the ability of unaffiliated programmers to compete fairly by
discriminating in the selection, terms or conditions of carriage of programming
services based on affiliation. It is not possible to predict at this time the
impact, if any, that these rules may have on the Company's plans to distribute
programming through cable and DTH satellite systems, some of which could be
deemed to be affiliated with the Company.
The United States Congress and the FCC also currently have under consideration,
and may in the future adopt, new laws, regulations and policies regarding a wide
variety of matters which could, directly or indirectly, materially adversely
affect the operations of the Company. The Company is unable to predict the
outcome of future federal legislation or the impact of any such laws or
regulations on its operations. The Company is also subject to local content and
quota requirements in international markets which, although a significant
portion of the Company's library meets current European and French requirements,
effectively limits access to particular markets.
ANIMATION MANAGEMENT PRODUCTION
The Company has designed an advanced software program for management of
animation productions- the Jethro Animation Control System. This advanced
technology provides many schedule and costs advantages over the conventional
methods of the development and production of animated television specials,
episodic TV series and movies. Three features of the advanced software and the
Company's animation development center include: Motion Capture, Production
Management and an Asset Library.
The conventional method in the development of computer animation production
requires the artist to create each individual cell. The cell is layered onto
one or more backgrounds, which is then photographed as a single frame. The cell
method of developing an animated production is time consuming and costly. The
Company's Motion Capture system is a tetherless system which is capable of
capturing 3D movement of interacting multiple characters; such as fight scenes
and action scenes. The system also provides for motion capture from a large
variety of angles. Typically, actors are placed into a snug fitting tight suit
which is fitted with a large number of light reflecting sensors. As the actors
perform to the script, and the follow the guidance of the director, one or more
of the Company's high-speed cameras record the
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movement of light which is reflecting from each of the reflective sensors. The
digitally captured action of the recorded events of each of the actors motion is
transferred into the Company's computer animation production data bases. Upon
entry of this basic character motion data into the computerized representation
of the actor, and the combining of multiple characters into the scene, the
rendering of each of the scenes proceeds under the direction of a computer
graphics artist. The Company's computer artists have access to many
sophisticated computer software animation and rendering tools to create and
transforms the scenes into the final product.
In addition to Motion Capture capabilities, the Company has created an advanced
animation development Production Management system. The System is designed to
aid in the efficient allocation of resources, the timely completion of tasks and
the control of costs and delivery schedules. The technique allows action
sequences to be divided into work packages or sequence segments. Each segment
is traceable as to schedule, computer graphic artists assignment, and other
management parameters. The System also aids in the timely integration of the
various sequence segments into an integrated, unified complete animated
production.
Another significant feature of the Company's animation production capabilities
is the digital Asset Library. The Asset Library is the central depository for
each of the characters, motions, lighting, shading, background and other
descriptive features which describe a animation frame, or sequence of frames.
These items are retained and stored, in digital format, in the Asset Library.
Since all of the characters and their movement is created and stored as an
accessible item, over time a large number of production components become
available which can be utilized in future productions. Because the Motion
Capture system allows 3D cutting and pasting from virtually any viewing angle,
the library data becomes a major factor in the potential reduction in scheduled
production time and the reduction in episodic animation production costs.
Assuming in the creation of one action sequence in one episode of an animated TV
series the subject character is required to be running. In an episode produced
three weeks later the same character, in a action sequence, is running. The
motion capture sequence in the library can be pulled, cut and pasted into the
sequence. The pasting can be for a different character shot from a completely
different angle. This provides a significant savings because the motion capture
activities are not required to be repeated for this sequence of the new episode.
As the magnitude of the items stored in the depository grows, the need to
perform motion capture is reduced.
MUSIC PUBLISHING
The Company intends to retain the rights to many of the songs and music
developed as part of its media production activities. The re-playing of these
songs and music in the TV, radio and other distribution media will result in
royalty payments to the Company. The Company has established a Music Publishing
group to manage these assets and to acquire, as appropriate, additional music
rights for publication. The ownership of music publishing rights for MSHE will
generate income well into the future. MSHE also contemplates forming its own
record label, MSH Records.
The music industry rivals the film and television industry around the world for
size, importance and profitability. In 1994, the music industry reported, on a
worldwide basis, Forty Billion Dollars in sales. Since 1994, the independents
as a group have begun to outdistance some of the "majors" including MCA,
Capitol-EMI and PolyGram. Today, the independents as a group, of which MSH
Music will be a member, are finishing second in revenues, right behind
Warner/Elektra/Atlanta (WEA). By 1997 the independents are expected to surpass
the majors.
MSH Music is concentrating on publishing. Publishing is the anchor, the
cornerstone, of a successful music operation. Music publishing generates income
from five different categories of usage of the music. The five categories
include: Mechanical License Fee; Public (TV plays) Performance; Print Rights;
Synchronization Rights; and Miscellaneous Rights. Other potential revenues are
derived from soundtrack albums of its programs.
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INFLATION AND SEASONALITY
Although the Company cannot accurately determine the precise effects of
inflation, it does not believe inflation has a material effect on sales or
results of operations. The Company considers its business to be somewhat
seasonal and expects net revenues to be generally higher during the second and
fourth quarters of each fiscal year as a result of the general industry practice
of paying royalties semi-annually.
AGE AGREEMENT
The Company has entered into a strategic product development agreement with
Abrams/Gentile Entertainment Inc. Under terms of the agreement AGE acquired
warrants to acquire up to 1,000,000 shares of Common Stock of the Company and
the Company acquired the rights to produce a new children's TV series entitled
"Vanpires" developed by AGE and scheduled to commerce network broadcast during
fall 1997. The Company also acquired an interest in the potential revenue from
toys and merchandising related to the new series.
As a strategic partner the experience and accomplishments of AGE presents a
major benefit to the Company. In the North American toy market, AGE's toy
"Skydancer" has become a favorite toy among young girls. The toy is being
marketed worldwide by Galoob, which also markets AGE's other toy line, "Happy
Ness." Happy Ness is based upon the successful children's animated television
series "Happy Ness, Secret of The Loch," which has recently awarded The Family
Channel Seal of Quality. Additional AGE toy products include: Power Glove,
Teen Talk Barbie, and Popcorn Pretties for Mattel Toys; Nitro-Bat for Whammo
Toys; Baby Sweet Surprise, Bucky O'Hare, Fazz and Visionaries for Hasbro/Kenner
Toys; Creepy Crawlers, Incredible Edibles, Everglo and Photo Doh for Toymax;
Rambo for Coleco Toys; Drastic Elastic, Comic Campus, Spiral Shop and Boomer
Tube for Just Toys; the personality dolls Marilyn Monroe, James Dean, Cher and
Farrah Fawcett; and licensed properties including Star Trek, Planet Of The Apes,
Baywatch and Marvel Super Heroes.
For television, AGE has created and produced over fifty hours of Saturday
morning animation. Two of AGE's television shows, "Visionaries" and "Bucky
O'Hare" were rated Number 1 in their respective time slots during their initial
runs. During 1996 AGE had "Happy Ness - The Secret Of The Lock" and "Jelly Bean
Jungle" and "Skydancer" and "Dragon Flyz" airing on television. In the theme
park arena, AGE is a creative and technical consultant to the proposed SCI-COM-
CITY theme park in Osaka, Japan.
During the previous seven years AGE has continued research and exploitation of
the new virtual reality (VR) technology. Their "Power Glove" was a
revolutionary video game licensed to Mattel Toys who marketed it for use with
the Nintendo Entertainment System in 1989. Power Glove was one of the First VR
products to be produced for the consumer market. Worldwide gross sales were
reported to exceed $80 million. The success of Power Glove elevated it to the
status of pop video culture and it has been showcased in such major motion
pictures as "The Wizard," "Freddy's Dead," and "Nightmare On Elm Street, VT."
INTEL AGREEMENT
The Company has entered into a strategic marketing and product development
agreement with Intel Corporation. Under terms of the agreement Intel acquired
warrants to acquire 1,000,000 shares of Common Stock of the Company and the
company acquired the rights from Intel to develop joint marketing and awareness
programs and a marketing and promotion plan for the company's products.
The Intel agreement supports the Company's development of a software program
which enables an animation production company to monitor all resources, compare
individual animators' daily delivery against projected delivery quotas and red
flag the art director when additional resources are needed to bring the ongoing
work flow back on schedule. The software program is an episodic television and
movie management system for high quality animation projects using the Intel MP
platform.
In addition to utilization of the software program by the Company, the Company
is evaluating potential markets for the program and presently plans to commence
the licensed distribution of the program during late 1997. As the distribution
and marketing plans for the software program are currently under
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development, the Company is unable to define whether the software product will
be sold and licensed, the potential economic benefit from such sales and
licensing, if any, nor the release schedule, if any.
HZE AGREEMENT
The Company has entered into a strategic product development agreement with
Happy Zone Entertainment Inc. Under terms of the agreement HZE agrees to engage
the Company from time to time to develop, create, test, and deliver certain
programming materials and to provide various facilities and services to HZE. The
Company will receive compensation for such services. In exchange for these
access rights and the first right of refusal for all children's projects
presented to the Company or HZE, and extending credit to HZE under a credit
agreement, the Company received a sixty percent equity ownership interest in
HZE. Under the terms of the agreement, the Company retains the rights to all
non-children's productions offered to the Company or to HZE, and the right to
produce all children's productions which are not selected for production by HZE.
DEVELOPMENT OF STRATEGIC PARTNERSHIPS
The Company intends to actively seek strategic partners who offer rights,
development capabilities and projects which can be packaged, distributed and
licensed. By joining with domestic and international strategic alliance
partners the Company gains the capability to allocate a portion of a projects
development costs among the partners and the opportunity to derive revenues
from: the sale of the product; a distribution fee; and equity participation in
the revenues.
COMPETITION
Motion picture and television programming production and distribution is a
highly competitive business. The Company faces competition from large
integrated motion picture and television production and distribution companies
as well as with numerous other motion picture and television production
companies, networks and pay cable systems. The Company's distribution
operations compete with many of such firms for distribution rights, placement of
films with exhibitors and the purchase of advertising in various media. Most of
these companies have substantially greater marketing, distribution, technical
and financial resources than the Company, with proven operating histories and
long-standing relationships in the motion picture and television industry.
Competition for the acquisition of television programming is based primarily on
the amount of the advance which the distributor is willing to pay to the
producer, as well as the distributor's marketing capabilities, its commitment to
market television programming in a certain minimum number of markets, and its
reputation in accounting to and consulting with producers. The Company through
acquisitions and strategic relationships has recently attempted to offset the
greater purchasing power of these competitors.
The Company believes that several competitive factors work to the Company's
advantage including its relationships with Intel and AGE. The Company also
offers producers the capacity to distribute a film or television programming,
which the Company believes is often a primary objective of a producer who is
marketing a film or TV series. With the additional capital resources provided
by this offering, and the higher profile provided by being a public company, the
Company expects to be able to compete more effectively in the marketplace than
it has in the past.
Several companies have announced they are developing other technologies,
including videoserver and compression technologies, which will provide movies
"on demand" and directly to consumer homes over cable lines. As these and other
new technologies are introduced on a wide scale basis, the Company's home video
revenues and overall business could be significantly impacted; and the Company
might be required to develop and implement new operating strategies and
distribution capabilities in order for its business to remain viable.
The software development, sales and licensing business is competitive and
characterized by rapid technology changes and entry into the field of large
recognized and well-capitalized companies as well as smaller competitors.
Although the Company is unaware of any software product which currently is
directly competitive with the Company's episodic television and movie management
system, should the Company
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decide to sell and license its software program, it may face competition from
such established software development and marketing companies as Microsoft,
Corel, Adobe, Sunsoft, Silicon Graphics and others.
REGULATION
Distribution rights to TV series, special events, mini-series, pay-per-view,
satellite, infomercials MOW, MFT videos and other media are granted legal
protection under the copyright laws of the United States and most foreign
countries, which provide substantial civil and criminal sanctions for
unauthorized duplication and exhibition of programs. The Company plans to take
all appropriate and reasonable measures itself or through licensees to secure
and maintain copyright protection for all media under the laws of all applicable
jurisdictions.
The Code and Ratings Administration of the Motion Picture Association of
America, an industry trade association, assigns ratings for age-group
suitability for viewing of motion pictures. As part of its total business
activities, the Company's intends to produce and distribute "PG" rated motion
pictures. The US television industry instituted a rating system for television
viewing. The Company's products comply with these new ratings. Many of the
major participants who provided data and programming to the Internet and World
Wide Web are exploring methods to implement a content rating system.
In addition to movie and video rating, the United States television stations,
networks and cable and satellite services are preparing a rating system for
delivery of television programs. Some foreign governments impose additional
restrictions on the content of motion pictures, videos and entertainment media
which is distributed to their audiences and may restrict, in whole or in part,
delivery of the Company's product to the market in a particular territory.
There can be no assurance that current or future restrictions on the content of
Company films, videos and media may not limit or affect the Company's ability to
distribute certain of its products in such media or markets.
TRADEMARK AND COPYRIGHT PROTECTION
Rights to scripts, television and movie productions, musical works, sound
recordings, art work, photography, animation characters, computer programs and
other intellectual properties are granted legal protection under the trademark
and copyright laws of the United States and other foreign countries. These laws
provide civil and criminal sanctions for unauthorized duplication, exhibition or
commercial exploitation of the property.
The Company plans as appropriate to secure and maintain protection of the rights
to all of its properties under the laws of applicable jurisdictions including
the United States Copyright Act of 1976. The Company's film scripts have been
registered with the Copyright Division of the Library of Congress, and its
television properties will also be registered here as well as the equally strong
Writers Guild of America ("WGA"). By effecting these registrations, the Company
has utilized the traditional safeguards employed in the entertainment industry
to protect the concepts and titles to properties.
No assurance can be given, however, that others will not infringe upon the
Company's property rights, in which event, the Company may not have sufficient
resources to enforce or defend its rights. Illegal copying and other forms of
exploitation are rampant, in some foreign countries and especially in the video
industry. The continued failure of governments and regulator agencies to
enforce trademark and copyright laws could have an adverse impact on the
Company.
FACILITIES
The Company's headquarters are located at 3330 Ocean Park Boulevard, Santa
Monica, CA 90405. The Company has production studios, an animation and software
development center, and support facilities in San Francisco, California. The
Company also maintains an office in Houston, Texas. As required to support a
specific Company project, the Company intends to rent additional production,
filming, sound, recording and other facilities. The Company believes its
headquarters, production studios, animation facilities and other facilities will
provide adequate space for office, product, and the distribution through this
calendar year and that suitable additional space is available to accommodate
planned expansion.
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EMPLOYEES
The Company has been successful in its efforts to recruit qualified employees
and consultants and anticipates sufficient qualified employees and consultants
will be available to fulfill the future staffing needs of the Company. On
December 31, 1996 the Company had a total of 10 full-time employees, and 16
consultants. The Company's present employees are not subject to collective
bargaining agreements. The Company believes that relations with its employees
are excellent. The Company intends to utilize, as appropriate, consultants,
under work-for-hire agreements, to support development and production of various
programs and products.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
MANAGEMENT
The Executive Officers, Directors, Key Employees of the Company include:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert P. Maerz, J.D. 46 Chairman and Chief Executive Officer
Jonathan G. Stathakis 50 Director and President, COO
Al Morgan 72 Director
Christopher R. Haigh 46 Director, Executive Vice President
Samuel Cable 53 Director, Vice President
Chuck Walker 40 Director, Vice President
Dennis Olle 45 Director
Andrew Steiner 33 Senior Vice President
Fred E. Aurelio 72 Chief Financial Officer
Richard Schulenberg 56 Executive Vice President, MSH Music
</TABLE>
ROBERT P. MAERZ is Chairman of the Board and Chief Executive Officer of the
Company. Mr. Maerz has been the Chairman of the Board and the CEO of Company
since August 1994 and MSH Productions Inc., a wholly owned subsidiary, since its
inception in January 1993. Since 1990, Mr. Maerz has been involved with film
and television industry. Mr. Maerz has arranged the financing and assisted in
the production of six feature length films for the Company. He established an
investment company in 1988 which has been instrumental in organizing and seeking
financing for small companies and entertainment properties.
From 1985 to 1988, Mr. Maerz was employed by the following New York Stock
Exchange member firms: Harris Financial Company; and Legg, Mason, Wood, Walker,
Inc. From 1980 to 1984, Mr. Maerz was a principal in Talent Management, Inc., a
corporation that represented musicians and athletes in contract negotiations
with sports franchises and record companies. From 1981 to 1984, he helped
organize and produce video production for various entertainment groups. He is a
graduate of the University of North Florida and has a law degree from Woodrow
Wilson College of Law, Atlanta, Georgia.
JONATHAN G. STATHAKIS is a Director and President of the Company. With over 18
years in the entertainment industry, Mr. Stathakis began his career in the
television and film industries by writing episodes, story treatments and scripts
for numerous television specials, series and low budget feature films. He was
then chosen to produce "Dreamland," a made-for-television movie and,
subsequently, he produced scores of television movies, specials and series. In
Boston, Mr. Stathakis was nominated for an EMMY Award for his work as the
producer and co-writer of the WCVB-TV (ABC affiliate) series "Park Street Under"
which served as the basis for the highly successful NBC series "Cheers." He was
also selected by the United Nations to write and direct the first television
program specifically produced for mainland China. He went on to create, produce
and write a number of TV series, specials and films, receiving 5 ACE Award
nominations, winning 2 ACE Awards, plus winning a VIRA Award for Best Children's
Home Video of the Year, and received 2 Honorable Mentions at the Chicago
Children's Film Festival.
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On the corporate level, Mr. Stathakis was Vice-President of Acquisitions and
Sales for InterAmerican Productions, Inc.; Executive Vice-President In-Charge-
Of-Production for InterCommunications, LTD; Executive Vice-President In-Charge-
Of-Operations and Production for Television Theater Company (TTC); Director of
Movie Development for the CBN Producers Group; Director of West Coast Operations
for NorthStar Entertainment Group, the in-house production arm and wholly owned
subsidiary of The Family Channel; President of Greenwich Films, Inc.; and Head
of Acquisitions and Creative Director of Featureline Films, Vancouver, Canada.
Mr. Stathakis was also a professional photographer, shooting high profile
concerts like Woodstock and MTV events. He also worked for renowned performers
including Jimi Hendrix and The Grateful Dead.
Mr. Stathakis' credits as a producer are numerous and include 5 made-for-pay-
cable children's television movies for MCA/Universal; 13 MTV concert specials;
and, most recently, "Exit," a feature film for IRS Media and Republic Pictures;
"Yahoo BugaBoos," a pilot for a children's series which has been selected for
distribution by SONY's Columbia-TriStar Television. He recently produced a
children's series, "Jelly Bean Jungle," airing every Saturday morning on ABC and
Fox Television Network stations. Mr. Stathakis is a member of the National
Academy of Television Arts & Sciences; the Association of Independent Video &
Filmmakers; the National Academy of Cable Programmers; the Independent Feature
Projects/West (IFP/West); the National Academy of Program Television Executives;
and the Producers Guild of America.
AL MORGAN is a Director of the Company. Mr. Morgan, who is fluent in Japanese,
German and French, is a Professor of Finance at South Connecticut State
University. Mr. Morgan is a graduate of Harvard University. He was a
consultant and a teacher at Hofstra University School of Business before
becoming President of Peachtree Ventures, Inc. Other positions Mr. Morgan has
held throughout his career include: Corporate and Securities Analyst/Portfolio
Manager for Lehman Brothers and Lehman Corporation; Director of Development for
Fairbanks, Whitney Corp., now known as Colt Industries; Manager of Research and
New Business for Hill, Darling, Grimm (NYSE); and a Partner and Manager of
Research for Federman, Stonehill (NYSE).
Mr. Morgan also has extensive experience with investment firms and
mergers/acquisitions; financing of established companies including private
placements and public underwriting (e.g., Capital Airlines/United Airlines
merger, Suburu of America); revival of bankrupt companies (e.g., Transmedia
Network, Inc. and Resources Exploration Oil, Inc.). Mr. Morgan was a director
of the following publicly traded companies: In-Flight Movies, Inc., Magic Marker
Pens, Inc., Resource America Oil and a former director and principal shareholder
of Transmedia Network, Inc.
Mr. Morgan's publications include the Wharton School Journal of Business
Venturing, "The Public Shell for Venture Financing," 1987; Bankers Magazine,
"Who Moves the Prime and Why?" August, 1987; United States Investor, "Stock for
the Conservative Investor," October, 1995; and Hofstra University with Long
Island Cablevision, tape on "Understanding Stock Investing." Mr. Morgan is a
member of the New York Securities Analysts Society and a member of the United
States Commerce Department, District Export Count.
CHRISTOPHER R. HAIGH is a Director and Executive Vice President of Creative
Development. Over 17 years ago, Mr. Haigh founded East End Communications,
whose assets were acquired by the Company in July 1996. His company was
involved in film, video, slides, interactive multimedia, computer animation,
live theater, to television broadcast entertainment. More recently, Mr. Haigh's
focus has been to develop quality entertainment for commercial television, cable
and feature film.
Mr. Haigh has been on assignment in many parts of the world directing and
producing documentaries and commercials for many of the biggest Fortune 500
companies and television networks. His career also includes being an actor and
Stage Manager for the world renowned and prestigious Royal Shakespeare Company.
Also for several years he was a producer and a director of over a dozen
television programs for the BBC.
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<PAGE>
SAMUEL CABLE is a Director and Vice President of the Company. Mr. Cable served
as the executive producer for each of the Company's low budget feature film
projects, "Portrait of a Nightmare," "Louisiana Conspiracy," "Rings, An Olympic
Story," and, most recently, "God of Rockabilly." He also has experience in
motion picture production and distribution. Prior to entering the film
industry, in 1987, he produced live professional boxing events in the Houston
area. Mr. Cable also produced the "Textel Championship Boxing" broadcast on the
Houston NBC affiliate.
CHUCK WALKER is a Director and Vice President of the Company. Mr. Walker was a
creative director of the Company's four low budget feature films, having
directed "Portrait of a Nightmare" and "Rings, An Olympic Story." He also wrote
the screenplays and acted in "Rings" and in "God of Rockabilly." Mr. Walker
created the basic concept for "Boy From The Bayou."
Throughout his career, Mr. Walker has also been involved in various stage plays
including "Eight To Zero," for which he wrote the script, and he has done many
mystery scenarios for the Houston based "Murder, Inc." During the early days of
his career, he operated the Chuck Walker Theatrical Dance Center in Phoenix,
Arizona and also ran his own professional dance company which performed
throughout the Southwest. As a dancer he has performed solo on numerous
occasions on The Ted Mack Show and Merv Griffin's Dance Fever, produced by
T.A.V. studios in Hollywood. He has also choreographed stage productions and
numerous national dance programs on local cable and syndicated television.
Mr. Walker co-produced and served as the commentator and writer for "Textel
Championship Boxing" broadcast on the NBC affiliate in Houston. Mr. Walker also
served as a location scout and production coordinator for production shooting in
the Montgomery County (Texas) area, and starred in a motion picture filmed there
in 1990 entitled "Open Season." Mr. Walker also participated in "You Wouldn't
Understand" and "YZ," a film trailer. He appeared in "Used Cars," with Kurt
Russell, "The Last Chance," with Lee Majors, "Assault on Paradise," with Oliver
Reed, and a starring role in the documentary, "Arid Motion Picture Production,"
from Apacheland Movie Studios in Arizona. Mr. Walker has written a total of
fourteen scripts now under assignment to Company. In addition to his
entertainment career, Mr. Walker was a member of 1976 Olympic Boxing Team.
DENNIS OLLE is a Director of the Company. Mr. Olle has practiced law for twenty
years in Miami, Florida. He has been the President and a principal shareholder
of Olle, Macaulay & Zorrilla, P.A. (Miami, Florida), since April 1989. He is a
graduate of Rice University (B.A.) and Columbia University School of Law (J.D.),
where he was a Harlan Fiske Stone Scholar and a participant in the Accelerated
Interdisciplinary Legal Education Program between Rice and Columbia. He
specializes in general corporate, securities, and commercial transaction law.
ANDREW STEINER is a Senior Vice President of the Company. Mr. Steiner was
formally Vice President in charge of the Entertainment Division of General Media
International. His responsibilities included management of all distribution and
marketing for feature films, television programming, sell-through home video and
interactive gaming. Mr. Steiner was responsible for opening distribution of
General Media products into twenty-one foreign territories in all media
including video, satellite, terrestrial television, pay-per-view television and
theatrical. He also managed domestic distribution including distributions
through such companies as Warner Vision, a subsidiary of Time-Warner., New Line
Cinema and others.
Prior to joining General Media, Mr. Steiner served as the Vice President of
International Sales and Marketing at Intercontinental Releasing Corporation
where he was responsible for all theatrical, video and television sales. Mr.
Steiner also worked for Communications and Entertainment Corp. where he secured
more than $10 million in sales and directed marketing and promotional campaigns
designed for each picture. He was also in charge of operations, distribution,
marketing and contract administration.
Prior to his involvement in the entertainment industry, Mr. Steiner worked for
Avis and was responsible for corporate business development, marketing and
licensing of franchises for Avis Service, Inc. He established the west coast
sales office and sold over seventy franchises which gross over $75 million. Mr.
37
<PAGE>
Steiner is a graduate of the State University of New York at Oswego, with a B.A.
in Communications; Broadcast, Marketing.
FRED E. AURELIO is Chief Financial Officer of the Company. He is also the
founding partner of Sierra Resource Group, a media consulting firm. Mr. Aurelio
was Vice President of Corporate Development for Pan American World Airways;
President of Simi Winery in Sonoma County, California; and Senior Vice-President
and Chief Financial Officer of Sky Chefs, Inc., a subsidiary of American
Airlines, Inc. As a corporate officer and a consultant, Mr. Aurelio has media
business experience which includes assignments throughout North and South
America, Europe and West Africa. Mr. Aurelio attended Villanova University and
is a graduate of Ohio State University with a degree in Accounting.
RICHARD SCHULENBERG is Executive Vice President of the Company's MSH Music
Group. Mr. Schulenberg has been a music entertainment attorney for over 30
years, involved daily with negotiations, drafting, and dealing with
entertainment contracts and various aspects of the entertainment business. His
music law experience is both from the record company's standpoint and as a
private practitioner representing artists, producers, record companies,
managers, agencies, songwriters, and publishers.
Mr. Schulenberg began his music career as an attorney in the legal department of
Capitol Records in 1965. He left there in 1969 to become Director of Business
Affairs for CBS Records, a position he held until 1972 when he was hired by
Paramount Pictures Corporation as General Counsel of its Music Division to
establish a legal department for them. Prior to Mr. Schulenberg joining
Paramount, all legal work for the music division was done by outside counsel.
His main area of focus was managing and overseeing the operation of the legal
and business of the record, publishing and soundtrack divisions of Paramount
Pictures. Mr. Schulenberg entered private practice in 1980 with the firm of
Schulenberg & Warren.
Mr. Schulenberg is a Senior Instructor for UCLA Extension, teaching classes
entitled, "Legal and Practical Aspects of the Recording and Publishing
Industries" and "Film Music - Found Money." He is also a Lecturer for the USC
Graduate School of Business and guest lecturer of Loyola University School of
Law. He was named "Outstanding Teacher of Music" at UCLA Extension.
Mr. Schulenberg has been a contributor to national magazines in excess of
fifteen articles on copyrights and legal aspects of the entertainment industry
and music. He is author of a book on the practical and legal aspects of the
entertainment industry entitled "Living in the Material World." He is also co-
author of the book "Film Music/Found Money." Mr. Schulenberg has served as the
Chairman of the Curriculum Committees for the Conference of Personal Managers
and the UCLA Department of the Arts, Recording Arts Program. He also served as
Co-chairman of the Dutch-American Film Conference and on the Board of Advisors
of the Soviet-American Film Institute.
Representative music clients include Kenny Loggins, Marty Balin, Gary Busey, two
time Academy Award winning screen composers Leonard Rosenman and Al Kasha, and
numerous other musicians, composers and record companies. His film and
television clients have included Sid Caesar, Republic Pictures International,
director Jeannot Szwarc ("Jaws 2," "Supergirl," "Somewhere In Time"), producer-
director Paul Bartel ("Eating Raoul," "Death Race 2000," etc.), Daniel Mann
(director of "Butterfield 8," "The Rose Tattoo," "Come Back Little Sheba,"
"Teahouse of the August Moon," etc.), John DeLorean, Kaye Ballard, His
Holiness, the Dali Lama of Tibet, and Mother Teresa (her television
documentary), and Ben Cross ("Chariots of Fire").
Presently Mr. Schulenberg is the head of Veridian Productions, a music company
active in the creation of motion picture and television soundtracks: the head of
International Royalty Management which acts as a worldwide administrator of
music copyrights for both publishers and writers as well as entertainment
companies, producers, Syndicators and distributors; serves on the Board of
Directors of the Shakespeare Globe Center; is the music consultant to the Family
Channel; and is founder of the Drones Club of Beverly Hills, California. Mr.
Schulenberg received his Bachelor of Arts degree from the University of
California, Los Angeles, and his law degree (J.D.) from the University of
California School of Law, Los Angeles.
38
<PAGE>
RECRUITMENT
The Company has been successful in its efforts to recruit qualified employees
and consultants. None of the Company's present employees are subject to
collective bargaining agreements. The Company believes that relations with its
employees and consultants are excellent. The Company maintains a key man
insurance policy in the amount of $500,000 on Mr. Christopher Haigh.
MANAGEMENT COMPENSATION
The following table sets forth certain information with respect to the annual
and long-term compensation earned for the fiscal year ended December 31, 1996,
1995 and 1994 for the Company's Chief Executive Officer and the two most highly
compensated executive officers other than the Chief Executive Officer, the
"Named Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION
-------------------
RESTRICTED SECURITIES
NAME AND STOCK UNDERLYING
POSITION YEAR SALARY ($) BONUS ($) OTHER (4) AWARDS (#) OPTIONS (#)
- ------------------------------- ------------ ---------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Maerz 1996 72,000 18,000 15,000 100,000 250,000
Chief Executive Officer (1) 1995 25,000 378,500
1994 -- 371,500
Jonathan G. Stathakis 1996 60,000 100,000 350,000
President (2) 1995 -- 50,000
1994 --
Christopher R. Haigh 1996 75,000 9,000 400,000
Executive Vice President (3) 1995 --
1994 --
</TABLE>
(1) The Company entered into an Employment Agreement with Robert P. Maerz on
July 1, 1996. The term of this agreement is three and one half years with an
option for extension. The annual compensation is $72,000 during 1996 with bonus
performance incentives. See "Management Compensation" for additional details.
Mr. Maerz has deferred receipt of some compensation. As of September 30, 1996,
the total amount of such deferred compensation and loans to the Company were
$62,451. The 250,000 in stock options are earned upon the performance of
certain events which as of the date of this offering have not been completed.
(2) During 1995 and 1996 Jonathan G. Stathakis provided services to the Company
under a consulting contract. The Company entered into an Employment Agreement
with Jonathan G. Stathakis on January 1, 1997. The term of this agreement is
three years. See "Management Compensation" for additional details. Mr.
Stathakis has deferred receipt of some compensation. As of September 30, 1996,
the total amount of such deferred compensation was $13,000. Of the 350,000 in
stock options, 250,000 are earned upon the performance of certain events which
as of the date of this offering have not been completed.
(3) The Company entered into an Employment Agreement with Christopher R. Haigh
on June 7, 1996. The term of this agreement is three years. Mr. Haigh's annual
base salary is $150,000 and he retains rights to royalties for certain software
which the Company is currently developing. As of the date of the offering no
royalties have been earned and the Company is at this time unable to determine
the amount of any future royalties, if any. See "Management Compensation" for
additional details. Mr. Haigh has deferred receipt of some compensation. As
of September 30, 1996, the total amount of such deferred compensation was
$46,875. During 1994, 1995 and through June 7, 1996 Mr. Haigh was the Chief
Executive Officer of East End and was not an employee of the Company.
(4) The amounts listed under "Other" consist of an automobile allowance, housing
allowance and other related allowances. In additions to the referenced
compensation some of the officers may act as Executive Producer, Project
Director, or Producer of one or more of the Company's projects. In such cases,
the party will receive a fee for such services over and above their salaries.
Management of the Company intends that such fees will be no greater than those
the Company would be required to pay unaffiliated third parties in the industry
for such services. As of the date
39
<PAGE>
of the offering no officer has received or earned such compensation and the
Company is at this time unable to determine the amount of any future
compensation which may be earned under this compensation plan, if any.
The following table contains information concerning the grant of stock options
made during 1996 to each of the Named Executives Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES PRICE EXPIRATION GRANT DATE
GRANTED (1) IN YEAR ($/SH) DATE PRESENT VALUE ($) (1)
---------- ---------- -------- ------------- ---------------------
<S> <C> <C> <C> <C> <C>
Robert P. Maerz 250,000 29.4 0.10 6/2001 400,000
Jonathan G. Stathakis 250,000 29.4 0.10 6/2001 400,000
Christopher R. Haigh none
</TABLE>
(1) The grant date present values are based upon a sales price of $1.60 per
share.
The following table sets forth certain information with respect to the value of
options held at December 31, 1996 by the Named Executive Officers who held
options during 1996. The Named Executive Officers did not exercise any options
to purchase Common Stock during 1996.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT YEAR END(#) AT YEAR END($)(1)
-------------------------- --------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert P. Maerz 250,000 375,000
Jonathan G. Stathakis 100,000 250,000 150,000 375,000
Christopher R. Haigh none
</TABLE>
(1) Prior to this offering, the Common Stock has had a limited public market and
is quoted on the OTC Bulletin Board under the symbol MSHE. Given the limited
market, the Board of Directors, in connection with grants of stock options from
time to time, determines the fair market value of the Restricted Common Stock as
of the grant date. For the purpose of calculating the value recognized at the
year end, of the restricted shares, the Board of Directors has used $0.10 per
share. In the money values are based upon a sales price of $1.60 per share.
The Company on July 1, 1996 entered into an employment with Robert Maerz that
provides for employment of Mr. Maerz as Chief Executive Officer and Chairman of
the Board of Directors of the Company for three and one half years. The
agreement provides for an annual salary of $ 72,000 during 1996; $59,000 during
1997; and $84,000 in years 1998 and 1999. In addition, Mr. Maerz is entitled to
receive an annual incentive compensation equal to twenty-five percent of the
annual salary and a automobile allowance of $500 per month and a living
allowance of $2,500 per month and a signing bonus of $25,000.
The Company on January 1, 1997 entered into an employment with Jonathan
Stathakis that provides for employment of Mr. Stathakis as Chief Operating
Officer and President of the Company for three years. The agreement provides
for an annual salary of $59,000 during 1997; and $84,000 in years 1998 and
1999. In
40
<PAGE>
addition, Mr. Stathakis is entitled to receive an annul incentive compensation
equal to twenty-five percent of the annual salary and a automobile allowance of
$500 per month, a living allowance of $2,500 per month and a signing bonus of
$25,000.
The Company on June 7, 1996 entered into an employment with Christopher R. Haigh
that provides for employment of Mr. Haigh as an executive of the Company for
three years. The agreement provides for an annual salary of $150,000 and he
retains rights to royalties for certain software which the Company is currently
developing. As of the date of the offering no royalties have been earned and
the Company is at this time unable to determine the amount of any future
royalties, if any.
As part of the compensation agreements with both employees and consultants the
Company is implementing those policies and procedures which, in its sole
discretion, are deemed prudent to protect the property rights and other assets
of the Company. These may include covenants not to compete, trade secret
covenants, work-for-hire agreements, and other covenants which are designed to
benefit the Company.
CONFLICTS OF INTEREST
The Company's Officers are actively participating in other projects and
activities. These actual and potential transactions raise two issues which
potential investors must consider before investing: (a) possible conflict of
interest, and (b) non-arm's length transactions. The Company's Officers and
Directors have agreed, where a potential conflict exist, to disclose such
potential conflict to the Board and to abstain from voting on the proposition to
which the potential conflict relates, and in situations where a non arm's length
transaction occurs, to accept terms and conditions which are no more
advantageous than those which would be imposed on the Company by unaffiliated
third parties. Given the implementation of these policies there can be no
assurance that management will resolve conflict of interest issue or non-arm's
length transactions to the benefit of the Company.
CERTAIN TRANSACTIONS
LOANS
As of June 21, 1996, as part of the acquisition of the assets of East End the
Company incurred an indebtedness to Christopher Haigh of $865,000 due December
1, 1996 with the right to extend to December 1, 1997. In addition to the
referenced loan, as of September 30, 1996 the officers and directors of the
Company had outstanding loans to the Company in the amount of $145,764.
AFFILIATED TRANSACTIONS
The Company follows a policy under which all material affiliated transactions
and loans will be made or entered into on terms no less favorable to the Company
than those that can be obtained from unaffiliated third parties. As part of
this policy all material affiliated transactions and loans, and any forgiveness
of loans, must be approved by a majority of the members of the Company's Board
of Directors who do not have an interest in the transaction.
PRINCIPAL SHAREHOLDERS AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock as of September 30, 1996, and as adjusted
to reflect the sale of the shares offered hereby (i) by each person known to the
Company to beneficially own more than 5% of the outstanding shares of Common
Stock, (ii) by each of the Company's directors, (iii) by each of the Company's
named executive officers and (iv) by all identified directors and executive
officers of the Company as a group. Assuming the sale of the maximum of this
offering, the total issued and outstanding shares will be 12,391,646.
41
<PAGE>
<TABLE>
<CAPTION>
BEFORE OFFERING AFTER OFFERING (2)
--------------- ------------------
NUMBER OF PERCENT NUMBER OF PERCENT
NAME OF OWNER(1) SHARES (#) OWNED(%) SHARES(#) OWNED(%)
- ----------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Robert P. Maerz 1,127,751 12.0 1,127,751 9.1
Jonathan G. Stathakis 650,000 6.9 650,000 5.2
Sam Cable 1,062,500 11.3 1,062,000 8.5
Chuck Walker 1,062,500 11.3 1,062,000 8.5
Christopher R. Haigh 400,000 4.3 400,000 3.2
Fred E. Aurelio 50,000 -- 50,000 --
Andrew Steiner 300,000 3.2 300,000 2.4
Al Morgan 100,000 1.1 100,000 0.8
Richard Schulenberg 25,000 -- 25,000 --
All directors and executive
officers as a group (9 persons) 4,777,751 50.8 4,777,751 38.6
</TABLE>
(1) Unless otherwise indicated, the stockholder's address is at the Company's
principal executive offices.
(2) Based on sale of the maximum offering. As of September 30, 1996, assuming
no conversion of the authorized stock options, and no exercising of the
authorized warrants, there were 9,391,647 shares of common stock outstanding.
The selling shareholder is Robert Posner. Mr. Posner, who is receiving
registration rights under a credit agreement with the Company, is not an officer
or director of the Company. (See "Plan of Distribution").
DESCRIPTION OF CAPITAL STOCK
The Company's authorized stock consists of 50,000,000 shares of common stock,
with a $0.001 par value. The shares of common stock are equal in all respects.
Each issued and outstanding share is entitled to one vote for the election of
Directors and upon each matter submitted to the vote of the stockholders. The
Company has 25,000,000 shares of preferred stock authorized, none of which are
issued or outstanding.
Cumulative voting in the election of directors is not authorized, which means
that holders of a majority of the outstanding shares of Common Stock voting for
the election of Directors will be able to elect all members of the Board of
Directors. A majority vote will also be sufficient for other actions that
require the vote or concurrence of shareholders. The common stock contains no
pre-emptive, subscription, or conversion rights, redemption privileges or
sinking fund provisions. The shares have equal rights on liquidation.
Dividends may be paid as and when declared by the directors out of funds legally
available, although dividends have not been declared or paid by the Company
since inception. All of the outstanding shares are, and the shares offered
hereby will be upon issuance, fully paid and non-assessable. Upon completion of
the offering, with all options, all warrants and all credit agreement
conversions, at the estimated conversion rate, executed, as of December 31,
1996, there will be 15,551,646 shares issued and outstanding, assuming all
shares are sold.
With respect to the result of the disallowance of cumulative voting by
shareholders in the election of directors, the following should be noted. The
current shareholders of the Company have acquired a majority interest in the
outstanding shares. Accordingly, even if all of the 1,000,000 shares offered
hereby are sold, the Company's major shareholders will own or control the
majority voting of the Company's then to be outstanding stock and will be in a
position to control the election of the Board of Directors of the Company,
which, in turn, appoints all of the Company's officers.
The Board of Directors has the authority to issue preferred stock and to
determine the rights, preferences, privileges and restrictions, including the
dividend rights, voting rights, terms of redemption (including sinking fund
provisions), liquidation preferences and the number of shares constituting any
series and the
42
<PAGE>
designation thereof, without any further vote or action by the shareholders. The
transfer agent and registrar for the shares of common stock is Pacific Stock
Transfer, Las Vegas, Nevada.
One of the effects of the existence of unissued and unreserved Common Stock and
undesignated Preferred Stock may be to enable the Board of Directors to render
more difficult or to discourage an attempt to obtain control of the Company by
means of a merger, tender offer, proxy contest or otherwise, and thereby to
protect the continuity of the Company's management. If, in the due exercise of
its fiduciary obligations, for example, the Board of Directors were to determine
that a takeover proposal was not in the Company's best interest, such shares
could be issued by the Board of Directors without shareholder approval in one or
more private placements or other transactions that might prevent or render more
difficult or costly the completion of the takeover transaction by diluting the
voting or other rights of the proposed acquiror or insurgent shareholder group,
by creating a substantial voting block in institutional or other hands that
might undertake to support the position of the incumbent Board of Directors, by
effecting an acquisition that might complicate or preclude the takeover, or
otherwise. In this regard, except with respect to voting rights, the Company's
Amended Articles of Incorporation grants the Board of Directors broad power to
establish the rights and preferences of the authorized and unissued Preferred
Stock, including the power to convert Preferred Stock into a large number of
shares of Common Stock or other securities, to demand redemption at a specified
price under prescribed circumstances related to a change of control, or to
exercise other powers to impede a takeover. The issuance of shares of Preferred
Stock pursuant to the Board of Directors authority described above may adversely
affect the rights of the holders of the Common Stock.
On June 1, 1996, the Company adopted a stock option plan which authorizes the
Company to grant options to purchase an aggregate of up to 3,000,000 shares of
common stock from the Company's authorized and unissued shares. Under this plan
the Company has issued options to purchase an aggregate of 850,000 shares of
common stock in the Company. Of these 850,000 shares under option, 350,000
shares are under exercisable options and 500,000 are performance based options
which are currently unexercisable. An additional 60,000 shares remain
unexercised from a prior stock option plan. Therefore, the total shares
available for acquisition under option as of December 31, 1996 was 910,000
shares.
During November 1996 the Company granted warrant rights to Intel and AGE. Each
party received warrant rights to acquire 1,000,000 shares of common stock. As
of December 31, 1996 the Company had warrant rights outstanding which provided
for the acquisition of 2,000,000 shares of common stock.
Additionally, the Company has, under a convertible credit agreement, granted
rights to purchase shares of the Company's Common Stock. The actual number of
shares purchasable under this agreement is a function of a number of events.
Currently the Company estimates the number of shares to be issued under this
agreement will not exceed 250,000 shares.
The offering price of the shares being offered hereby has been determined
arbitrarily by the Company. There currently is only a limited public market for
the common stock of the Company, and there is no assurance an active public
market will develop following the offering. In determining the prices and the
number of shares to be offered, the Company considered such matters as the
number of shares outstanding, the dilution to the new investors in this
offering, the financial condition of the Company, the Company's management, and
its perceived acceptance in the market. Accordingly, the offering price should
not be considered an indication of the actual value of the Company or of its
securities. All subscriptions accepted by the Company may be used immediately.
To the extent that sales are made through broker-dealers, the net proceeds will
be reduced by the amount of the commissions paid and be deducted first from the
proceeds allocated to capital reserves.
In addition to this offering of securities the Company may raise additional
capital through the sale of its common shares and possibly preferred shares of
stock. There can be no assurance the Company will not make offers at a lower
price per share or that the Company will not offer preferred shares which have
priority rights over these offered shares.
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<PAGE>
PLAN OF DISTRIBUTION
The Company's Shares are being offered by the Company through its officers and
directors, who will not receive any separate compensation therefor. The
Company's shares will continue to be offered until the earlier of the sale of
all of the Shares being offered or termination of the offering.
The price at which the shares are offered hereby has been arbitrarily set by the
Company's management, and has no relationship to the book value per share,
current earnings of the Company, or other generally accepted measurement of
value.
The shares are offered subject to prior sale, and the Company reserves the right
to reject any offer in whole or in part. The Company will send written
confirmations by US mail to notify subscribers of the acceptance of their
subscriptions within ten days of their acceptance. Common Stock certificates
will be delivered to investors within two weeks after the minimum offering has
been sold, and thereafter within thirty days of acceptance of the subscription
by the Company.
An additional number of shares of Common Stock (the "Selling Stockholders
Securities") have been registered pursuant to the Registration Statement under
the Securities Act, of which this prospectus forms a part, for sale by the
holders thereof (the "Selling Stockholders"). The Company will not receive
proceeds from the sale of the Selling Stockholder Securities. All of the
Selling Stockholder Securities have been registered, at the Company's expense,
under the Securities Act and are expected to become tradable on or about the
date of this Prospectus. Sales of Selling Stockholders Securities or even the
potential of such sales could have an adverse effect on the market of the Common
Stock and the Warrants. The Selling Shareholder acts as a market-maker of the
Company's Stock. Other than this, there are no material relationships between
any of the Selling Stockholders and the Company, nor have any such material
relationships existed within the past three years.
The sale of the Securities by the Selling Stockholders may be effected from time
to time in transactions (which may include block transactions by or for the
account of the Selling Stockholders ) in the over-the-counter market or in
negotiated transactions, a combination of such methods of sell or otherwise.
Sales may be made at fixed prices which may be changed, at market prices
prevailing at the time of sale, or at negotiated prices.
Selling Stockholders may effect such transactions by selling their securities
directly to purchasers, through broker-dealers acting as agents for the Selling
Stockholders or to broker-dealers how may purchase shares as principals and
thereafter sell the securities from time to time in the over-the-counter market,
in negotiated transactions or otherwise. Such broker-dealers, if any, may
receive compensation in the form of discounts, concessions or commissions from
the Selling Stockholders and/or the purchasers for whom such broker-dealer may
act as agents or to whom the may sell as principals or otherwise (which
compensation as to a particular broker-dealer may exceed customary commissions).
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the shares
of Common Stock offered hereby will be passed upon for the Company by Glenn L.
Gearhart, Attorney at Law, Huntington Beach, California. Mr. Gearhart is the
beneficial owner of 394,050 shares of Common Stock of the Company.
EXPERTS
The Consolidated Pro Forma Financial Statements, and the East End Inc. Financial
Statements included in this Prospectus and elsewhere in the Registration
Statement have been audited by Fox & Fox, independent Certified Public
Accountants, to the extent and for the period indicated in their report
appearing elsewhere herein. The Pro Forma Consolidated Financial Statements of
the Company and the East End Inc. Financial Statements included herein are
included in reliance upon the report of Fox & Fox given upon the authority of
said firm as experts in auditing and accounting.
44
<PAGE>
The Financial Statements of MSH Entertainment Corporation, for the years 1994
and 1995, included in this Prospectus and elsewhere in the Registration
Statement have been audited by Hacker, Johnson, Cohen & Grieb, independent
Certified Public Accountants, to the extent and for the period indicated in
their report appearing elsewhere included in reliance upon the report of
Hacker, Johnson, Cohen & Grieb given upon the authority of said firm as experts
in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, a
Registration Statement on Form S-1 under the Securities Act of 1933, as amended,
with respect to the Common Stock being offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain items of which are omitted in accordance
with the rules and regulations of the Commission.
Statements contained in this Prospectus concerning the provisions of documents
filed with Registration Statement as exhibits are necessarily summaries of such
documents, and each such statement is qualified in its entirely by reference to
the copy of the applicable document filed as an exhibit the Registration
Statement. In addition, the Company is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith files reports and other information with the Commission.
Such reports and other information concerning the Company and the Registration
Statement can be inspected without charge and copied upon payment of the
prescribed fees at the office of he Securities and Exchange Commission, 450
Fifth Street, N. W., Washington, D. C. 20549.
For further information with respect to the Company and the Common Stock being
offered hereby, reference is made to the Registration Statement, including the
exhibits thereto and the financial statements, notes and schedules filed
therewith.
The Company intends to furnish to its stockholders annual reports containing
audited financial statements and quarterly reports containing unaudited interim
financial information for the first three fiscal quarters of each fiscal year of
the company.
MSH ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
Report of Independent Public Accountants .......
Pro Forma Consolidated Balance Sheet - unaudited as of December 31, 1995.
Pro Forma Consolidated Statement of Income - unaudited
as of December 31, 1995 and unaudited as of September 30,
1996.......
Pro Forma Notes to Consolidated Financial Statements ...........
INDEX TO MSH ENTERTAINMENT CORPORATION FINANCIAL STATEMENTS
Balance Sheet - unaudited as of September 30, 1996.......
Statement of Income Deficit - unaudited as of September 30,
1996...
Statement of Cash Flow - unaudited as of September 30, 1996.......
Statement of Shareholders' Equity - unaudited as of September 30, 1996.....
Report of Independent Public Accountants...........
Balance Sheet - audited as of December 31, 1994 and 1995 .......
Statement of Operations and Retained Deficit - audited as of December 31, 1994
and 1995 ...
Statement of Shareholders' Equity - audited as of December 31, 1994 and 1995
......
Statement of Cash Flow - audited as of December 31, 1994 and 1995 .......
Notes to Financial Statements ...........
45
<PAGE>
INDEX TO EAST END FINANCIAL STATEMENTS
Report of Independent Public Accountants .........
Balance Sheet - audited as of September 30, 1994 and 1995 and June 30, 1996 ..
..
Combined Statement of Operations and Retained Deficit - audited as of
September 30, 1994 and 1995 and June 30, 1996 .. ..
Combined Statement of Shareholders' Equity - audited as of
September 30, 1994 and 1995 and June 30, 1996 .. ..
Combined Statement of Cash Flow - audited as of
September 30, 1994 and 1995 and June 30, 1996 .. ..
Notes to Combined Financial Statements .......
46
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On June 21, 1996, the Company acquired the assets of East End Communications,
East End Productions, and J.B. Dubbs, Inc. ("East End") for cash and a
promissory note, in a business combination accounted for as a purchase. East
End are producers of communications and promotional media. The purchase price
of $ 1,065,000 exceeded the fair market value of the net assets of East End by
$815,837, which will be amortized on the straight line method over 14 years.
The accompanying condensed consolidated financial statements illustrate the
effect of the acquisition ("Pro Forma") on the Company's financial position and
results of operations. The condensed consolidated balance sheet as of December
31, 1995 is based on the historical balance sheet of the Company as of that date
and East End at September 30, 1995 (Its fiscal year end) and assumes the
acquisition took place on that date. The condensed consolidated statements of
income for the year ended December 31, 1995 and the nine months ended September
30, 1996 are based on historical statements of the Company for those periods and
historical statements of East End for the year ended September 30, 1995 and the
nine months ended June 30, 1996. The pro forma consolidated condensed
statements of income assume the acquisition took place on January 1, 1995.
The pro forma condensed consolidated financial statements may not be indicative
of the actual results of the acquisition. In particular, the pro forma
condensed financial statements are based on management's current estimate of the
allocation of the purchase price, the actual allocation of which may differ.
The accompanying condensed consolidated pro forma financial statements should be
read in connection with the historical financial statements of the Company and
East End.
<PAGE>
Sheet 1
MSH ENTERTAINMENT CORPORATION
AND EAST END PRODUCTIONS, INC.
PRO-FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
- ------
MSH EAST END ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C>
Cash 1,702 125 1,827
Accounts receivable - 136,115 136,115
--------- -------- ---------- --------
Total Current Assets 1,702 136,240 - 137,942
Property and Equipment - 169,249 169,249
Other assets 73,044 202,323 (201,160) 74,207
--------- -------- ---------- --------
TOTAL ASSETS 74,746 507,812 381,398
========= ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
- --------------------
Cash overdraft - 42,709 42,709
Accounts payable 33,000 75,248 108,248
Due to shareholders 32,123 - 32,123
Accrued payroll tax - 29,919 29,919
Income tax 800 800
Notes payable 126,750 - 126,750
--------- -------- ---------- --------
Total Current Liabilities 191,873 148,676 340,549
Stockholders' Equity (117,127) 359,136 (201,160) 40,849
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 74,746 507,812 (201,160) 381,398
========= ======== ========== ========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements (Unaudited)
Page 1
<PAGE>
Sheet 1
MSH ENTERTAINMENT CORPORATION
AND EAST END PRODUCTIONS, INC.
PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
MSH EAST END ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C>
Sales $ 32 $740,662 $ 740,694
Cost of Sales 17,457 319,579 337,036
--------- -------- ---------
Gross Margin (17,425) 421,083 403,658
General and Administrative 244,154 428,943 673,097
--------- -------- ---------
Loss from Operations (261,579) (7,860) (269,439)
Other Income - 260 260
--------- -------- ---------
Loss before Taxes (261,579) (7,600) (269,179)
Income Tax - 800 800
--------- -------- ---------
Net Loss $(261,579) $ (8,400) $(269,979)
========= ======== =========
Net Loss per Share $ (0.06) $ (0.07)
========= =========
Weighted average number of
shares outstanding 4,113,779 4,113,779
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements (Unaudited)
Page 2
<PAGE>
Sheet 1
MSH ENTERTAINMENT CORPORATION
AND EAST END PRODUCTIONS, INC.
PRO-FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
For the Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
MSH EAST END ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C>
Sales $ 29,106 $677,924 $ 707,030
Cost of Sales 231,657 470,398 702,055
--------- -------- ---------
Gross Margin (202,551) 207,526 4,975
General and Administrative 590,720 322,394 913,114
--------- -------- ---------
Loss from Operations (793,271) (114,868) (908,139)
Other Income - 795,328 (795,328) -
--------- -------- ---------
Loss before Taxes (793,271) 680,460 (112,811)
Income Tax 800 132,000 (132,000) 800
--------- -------- ---------
Net Loss $(792,471) $548,460 $(244,011)
========= ======== =========
Net Loss per Share $ (0.11) $ (0.03)
========= ======== =========
Weighted average number
of shares outstanding 7,106,881 7,106,881
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements (Unaudited)
Page 3
<PAGE>
MSH ENTERTAINMENT AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
NOTE A The pro forma adjustments to the condensed consolidated balance sheets
are as follows:
The acquisition of the assets of East End did not include any loans to
the stockholders of East End. At December 31, 1995, the balance due
was $ 201,160. This amount has been eliminated from the condensed
consolidated balance sheet.
NOTE B The pro forma adjustments to the condensed consolidated statement of
income for the nine months ended September 30, 1996 are as follows:
The acquisition of the assets of East End resulted in a substantial
gain to East End. The amount of this gain and the resulting income tax
liability have been eliminated from the condensed consolidated
statement of income.
<PAGE>
MSH ENTERTAINMENT CORPORATION
COMPILED FINANCIAL STATEMENT
SEPTEMBER 30, 1996
6
<PAGE>
FOX & FOX,
CERTIFIED PUBLIC ACCOUNTANTS
18101 VON KARMAN, SUITE 350
IRVINE, CALIFORNIA 92715
(714) 251-6561
Fax (714) 251-6562
April 3, 1997
MSH ENTERTAINMENT CORPORATION
768 Brannan Street
San Francisco, CA 94103
We have compiled the accompanying balance sheet of MSH ENTERTAINMENT CORPORATION
as of September 30, 1996, and the related statements of income, cash flows and
stockholders' equity for the nine months then ended in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
The Company has incurred significant losses since inception. Management
believes that actions being presently taken to revise the Company's operations
and financial requirements provide the opportunity for the Company to continue
as a going concern. However, if the Company is unable to successfully re
structure operations in order to reduce operating losses or generate profits, or
raise additional capital, it is uncertain whether the Company will be able to
meet its obligations over the coming year and it raises substantial doubt about
the companies ability to continue as a going concern. The financial statements
do no include any adjustments that might result from the outcome of this
uncertainty.
Management has elected to omit statements of income and cash flows and
substantially all of the disclosures ordinarily included in financial
statements. If the omitted statements and disclosures were included with the
financial statement, they might influence the user's conclusions about the
company's financial position and results of operations. Accordingly, these
financial statements are not designed for those who are not informed about such
matters.
/s/ Fox & Fox
____________________________________
Fox & Fox,
Certified Public Accountants
7
<PAGE>
MSH ENTERTAINMENT CORPORATION
BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets
Cash and cash equivalents $ 2,791
Accounts receivable 39,210
Due from employees 32,529
Film inventory cost 58,044
Prepaid expense 182,131
-----------
Total current assets 314,705
-----------
Property and equipment
Office furniture and equipment 34,943
Computer equipment 149,819
Production equipment 59,417
Automobiles 47,523
Leasehold improvements 45,553
-----------
337,255
Less accumulated depreciation (200,676)
-----------
Total property and equipment 136,579
Other assets
Goodwill 801,027
Loans to shareholder 126,750
Organization costs 950
Loan to affiliate 4,102
-----------
Total other assets 932,829
-----------
TOTAL ASSETS $ 1,384,829
===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Cash overdraft $ 25,495
Accounts payable 161,222
Notes payable - current 17,177
Deferred compensation 123,813
Convertible notes payable 48,000
Franchise tax payable 800
-----------
Total current liabilities 376,507
Non-Current liabilities
Note payable - long-term 965,000
Stockholders' equity
Preferred stock - par value $.05 per share, 25,000,000 shares
authorized, none issued and outstanding -
Common stock - par value $.001 per share, 50,000,000 shares -
authorized, 9,381,649 issued and outstanding 703,658
Additional paid in capital 701,806
Accumulated deficit (1,362,858)
-----------
Total stockholders' equity 42,606
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,384,113
===========
</TABLE>
See accountants' compilation report.
3
<PAGE>
MSH ENTERTAINMENT CORPORATION
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPT. 30, 1996
--------------
<S> <C>
Sales $ 29,106
Cost of sales (231,657)
----------
Gross Margin (202,551)
Selling, general and administrative expenses 590,720
----------
Income or (Loss) before income taxes (793,271)
Provision for income taxes (Note 1 and 6) 800
----------
Net income or (loss) $ (794,071)
==========
Net income or (loss) per share $ (0.08)
==========
</TABLE>
See accountants' compilation report.
4
<PAGE>
MSH ENTERTAINMENT CORPORATION
STATEMENT OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income or (loss) $ (794,071)
Adjustments to reconcile net loss to cash used by
operating activities:
Depreciation and amortization 25,596
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (5,232)
Decrease (increase) in loans to employees (32,529)
Decrease (increase) in inventory -
Decrease (increase) in prepaid expenses (167,131)
Increase (decrease) in accounts payable 153,717
Increase (decrease) in accrued liabilities 124,613
----------
Net cash provided (used) by operating activities (695,037)
Cash flows from investing activities:
(Purchase) of goodwill (815,537)
(Purchases) Dispositions of property and equipment (147,615)
(Purchase) of organization costs (1,000)
----------
Net cash used by investing activities (964,152)
----------
Cash flows from financing activities:
Increase in notes payable 903,427
(Decrease) in loans from shareholder (32,123)
Loans to shareholder (126,750)
Loan to affiliate (4,102)
Sale of common stock 698,826
Paid in capital 221,000
----------
Net cash used by financing activities 1,660,278
----------
Net increase (decrease) in cash and cash equivalents 1,089
Cash and cash equivalents balance, beginning 1,702
----------
Cash and cash equivalents balance, ending $ 2,791
==========
Supplemental disclosures of cash flow information:
Interest paid $ 24,173
==========
</TABLE>
See accountants' compilation report.
5
<PAGE>
MSH ENTERTAINMENT CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER ADDITIONAL TOTAL
PREFERRED OF RETAINED PAID IN STOCKHOLDERS'
STOCK SHARES AMOUNT EARNINGS CAPITAL DEFICIT
--------- --------- ------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 - 4,832,113 $4,832 $ (568,787) $ 480,806 $ (83,149)
Common stock issued - 4,549,536 4,550 - 915,276 919,826
Net loss for the year - - - (794,071) - $ (794,071)
--------- --------- ------ ----------- ---------- ----------
Balance at September 30, 1996 - 9,381,649 $9,382 $(1,362,858) $1,396,082 $ 42,606
========= ========= ====== =========== ========== ==========
</TABLE>
See accountants' compilation report.
6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
MSH Entertainment Corporation
Stone Harbor, New Jersey
We have audited the accompanying consolidated balance sheets of MSH
Entertainment Corporation and subsidiary (the "Company") as of December 31, 1995
and 1994 and the related consolidated statements of operations, stockholders'
deficit and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1995 and 1994 and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has a stockholders' deficit and a working capital deficit
which all raise substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ HACKER, JOHNSON, COHEN & GRIEB
HACKER, JOHNSON, COHEN & GRIEB
Tampa, Florida
September 30, 1996, except for Note 10 as
to which the date is December 26, 1996
F-1
<PAGE>
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ---------
<S> <C> <C>
ASSETS
Current assets-
Cash $ 1,702 234
--------- --------
Other assets:
Film inventory cost 58,044 30,833
Prepaid consulting fees 15,000 -
--------- --------
Total other assets 73,044 30,833
--------- --------
Total assets $ 74,746 31,067
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable 33,000 15,807
Due to stockholders 32,123 20,558
Convertible notes payable 76,750 150,000
Note payable 50,000 -
--------- --------
Total current liabilities 191,873 186,365
--------- --------
Commitments (Note 9)
Stockholders' Deficit:
Preferred stock - par value $.05 per share 25,000,000
shares authorized, none issued and outstanding - -
Common stock, $.001 par value, 50,000,000 shares
authorized, 4,832,113 in 1995 and
2,580,113 in 1994 shares issued and outstanding 4,832 2,580
Additional paid-in capital 480,806 149,330
Accumulated deficit (568,787) (307,208)
--------- --------
(83,149) (155,298)
Less receivable for stock issued (33,978) -
--------- --------
Total stockholders' deficit (117,127) (155,298)
--------- --------
Total liabilities and stockholders' deficit $ 74,746 31,067
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
1995 1994
------------ ----------
<S> <C> <C>
Net sales $ 32 445
---------- ---------
Costs and expenses:
Production costs 17,457 22,609
General and administrative expenses 244,154 49,521
---------- ---------
Total costs and expenses 261,611 72,130
---------- ---------
Loss from operations (261,579) (71,685)
Other income (expenses):
Interest income - 18
Loss on investment - (35,000)
---------- ---------
Net loss $ (261,579) (106,667)
========== =========
Net loss per share $ .06 .08
========== =========
Weighted average number of shares outstanding 4,113,779 1,320,113
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1995 1994
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(261,579) (106,667)
Adjustments to reconcile net loss to net cash used
by operating activities:
Common stock issued for services 147,150 1,000
Convertible note payable issued for services 1,000 -
Increase (decrease) in accounts payable 8,693 (13,003)
Increase in prepaid consulting fees (6,500) -
Additions to film inventory costs (27,211) (24,832)
--------- --------
Net cash used by operating activities (138,447) (143,502)
--------- --------
Cash flows from financing activities:
Issuance of note payable 50,000 -
Proceeds from stockholders loans 11,565 20,558
Repayment of convertible notes payable (29,900) -
Proceeds from issuance of common stock 85,000 -
Proceeds from issuance of convertible notes payable 23,250 122,600
--------- --------
Net cash provided by financing activities 139,915 143,158
--------- --------
Net increase (decrease) in cash 1,468 (344)
Cash at beginning of year 234 578
--------- --------
Cash at end of year $ 1,702 234
========= ========
Noncash transactions:
Common stock issued for services rendered $ 147,150 1,000
========= ========
Convertible note payable issued for services $ 1,000 -
========= ========
Common stock exchanged for convertible notes payable $ 67,600 -
========= ========
Common stock issued for receivable $ 33,978 -
========= ========
Accounts payable incurred in connection with
prepayment of consulting fees $ 8,500 -
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK RECEIVABLE
------------------------ ADDITIONAL FOR TOTAL
PREFERRED NUMBER OF NUMBER OF PAID IN ACCUMULATED STOCK STOCKHOLDERS'
STOCK SHARES SHARES AMOUNT CAPITAL DEFICIT ISSUED DEFICIT
--------- --------- ------------ ----------- --------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 - 2,000,000 $ 20,000 130,910 (200,541) - (49,631)
Recapitalization - 2,500,000 (2,000,000) (19,930) 19,930 - - -
--------- --------- ------------ ----------- --------- ------------ -------- -------------
Restated balance - 2,500,000 - 70 150,840 (200,541) - (49,631)
Issuance of common stock to
shareholders for assets
of MSH Entertainment
Corporation - 70,113 - 2,500 (2,500) - - -
Issuance of common stock for
services - 10,000 - 10 990 - - 1,000
Net loss for 1994 - - - - - (106,667) - (106,667)
--------- --------- ------------ ----------- --------- ------------ -------- -------------
Balance at December 31, 1994 - 2,580,113 - 2,580 149,330 (307,208) - (155,298)
Common stock issued for
debt cancellation - 280,500 - 280 67,320 - - 67,600
Sale of common stock - 500,000 - 500 118,478 - - 118,978
Common stock issued for
services - 1,471,500 - 1,472 145,678 - - 147,150
Receivable from sale of
330,000 shares of
common stock - - - - - - (33,978) (33,978)
Net loss for 1995 - - - - - (261,529) - (261,579)
--------- --------- ------------ ----------- --------- ------------ -------- -------------
Balance at December 31, 1995 - 4,832,113 - $ 4,832 480,806 (568,787) (33,978) (117,127)
========= ========= ============ =========== ========= ============ ======== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. MSH Entertainment Corporation (the "Company") and
its wholly-owned subsidiary, MSH Productions, Inc. (Subsidiary)
create, develop and produce home video motion picture tapes primarily
for sale internationally. The Company has released for sale three home
video motion pictures through December 31, 1995. The Company has not
benefited from wide spread market acceptance of its products.
MSH Entertainment Corporation was originally Railside, Inc., a Utah
Corporation incorporated on March 31, 1983. Railside Inc., changed
its name to Micropoly, Inc., on July 16, 1993. On June 23, 1994,
Micropoly changed its name to MSH Entertainment Corporation and
acquired 100% of the outstanding stock of MSH Productions, Inc., in a
transaction accounted for as a recapitalization of MSH Productions,
Inc. with the issuance of 2,500,000 shares of common stock of MSH
Productions, Inc. for the net assets of MSH Entertainment Corporation.
MSH Entertainment Corporation was previously an inactive entity. The
accumulated deficit of MSH Productions, Inc. was carried forward from
the acquisition date and no fair market value adjustments were made.
MSH Productions, Inc., was formed on January 19, 1993 as a Delaware
Corporation.
BASIS OF PRESENTATION. The accompanying consolidated financial statements
have been prepared on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in the consolidated financial
statements, the Company has incurred net losses of $261,579 and
$106,667 for the years ended December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, the Company has a net working capital
deficit of $190,171 and $186,131, respectively, and a stockholders'
deficit of $117,127 and $155,298, respectively which raises
substantial doubt about the Company's ability to continue as a going
concern. Management has developed plans intended to remedy these
conditions. These plans include seeking other sources of financing,
acquisition of a existing operating company, actively marketing
existing projects, reducing operating costs and seeking a joint
venture partner. No assurances can be given as to the success of these
plans. The consolidated financial statements do not include any
adjustments that might result should the Company be unable to continue
as a going concern.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. A summary of the significant
accounting policies followed in preparing the accompanying
consolidated financial statements is set forth below.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of MSH Entertainment Corporation and MSH Productions
Inc., its wholly-owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(continued)
F-6
<PAGE>
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
HOME VIDEO MOTION PICTURE PROJECT COSTS. The Company follows the
provisions of Statement of Financial Accounting Standards No. 53
("SFAS 53") with respect to motion pictures, television and video
project costs. Costs incurred in connection with motion picture,
television and video projects are capitalized. Such costs are charged
to production overhead if the project has been held for a three year
period and has not been set for production or if it is abandoned.
Production overhead is allocated to the cost of projects currently set
for, or in production. Although certain projects whose costs have been
carried at zero value may still be actively marketed by management
after the three year period. Project costs are stated at the lower of
cost or realizable value. Cost and related amortization of released
projects allocated to primary markets would be classified as current
assets. To date, no viable projects have been released to primary
markets. All other capitalized costs are classified as noncurrent
assets.
Under FASB 53, project costs, which include accrued related
participations and residuals, would be amortized based on the ratio of
revenue earned for the year to management's estimate of total gross
revenue to be earned. Each picture or project in production is valued
taking into account management's current estimates of the ultimate
revenue to be received from all sources, including theatrical
distribution, cable, pay, network and syndicated television licensing
and video cassette and video disc licensing. Such estimates, which are
based on such factors as the nature and popularity of the subject
matter and the expected rate structure in the various markets during
the periods the revenue from the project is estimated to be earned,
are revised periodically and estimated losses, if any are provided for
in full. To date, the projects of the Company are incomplete and
therefore, no amortization has been taken.
STATEMENTS OF CASH FLOWS. For purposes of the statements of cash flows,
only cash is considered.
REVENUE RECOGNITION. Revenues are recognized when home video motion picture
tapes are sold by distributors and are presented net of distributors'
commissions and expenses.
INCOME TAXES. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
balance sheet carrying amounts of existing assets and liabilities
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(continued)
F-7
<PAGE>
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
FUTURE ACCOUNTING REQUIREMENTS. The FASB has issued Statement of Financial
Accounting Standard No. 123 ("SFAS 123") which encourages employers to
account for stock-based compensation awards based on their fair value
at the date the awards are granted. The resulting compensation award
would be shown as an expense on the consolidated statement of
operations. Entities can choose not to apply the new accounting method
and continue to apply current accounting requirements, which generally
result in no compensation cost for most fixed stock-option plans.
Those that do so, however, will be required to disclose in the notes
to the financial statements what net earnings and earnings per share
would have been had they followed the Statement's accounting method.
This Statement is effective for 1996. Management does not anticipate
this Statement will have a material impact on the Company.
LOSS PER SHARE. Loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding. At December
31, 1995 and 1994 all common stock equivalents were antidilutive.
(2) SIGNIFICANT PROJECTS AND REVENUES
Substantially all of the revenues for the years ended December 31, 1995 and
1994 relates to two video projects. The revenue received is
commissions due to the Company from the marketing of the projects by
distributors pursuant to distribution agreements. The projects are low
budget films which have received limited acceptance in the market
place. Costs included in Film inventory cost at December 31, 1995 and
1994 relate primarily to one film which has not been distributed. In
the opinion of management the revenues expected to be received from
the film exceed the capitalized costs.
Film inventory costs consists of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------
1995 1994
--------------- --------------
<S> <C> <C>
Films in process $ 58,044 30,833
====== ======
</TABLE>
(3) INCOME TAXES
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are presented below:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1995 1994
-------- -------
<S> <C> <C>
Net operating loss carryforwards $194,740 111,383
Capital loss carryforward 13,171 13,171
------- -------
Total gross deferred tax assets 207,911 124,554
Less valuation allowance 207,911 124,554
------- -------
Net deferred tax assets $ - -
======= =======
</TABLE>
(continued)
F-8
<PAGE>
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) INCOME TAXES, CONTINUED
The net increase in the total valuation allowance for the years ended
December 31, 1995 and 1994 was $83,357 and $124,554, respectively.
The Company has available at December 31, 1995, unused net operating loss
carryforwards that may provide future tax benefits and that expire
as follows:
Unused Net
Year of Expiration Operating Loss
------------------ --------------
<TABLE>
<CAPTION>
<S> <C>
1999 $ 24,107
2008 200,541
2009 71,348
2010 221,516
--------
$ 517,512
=======
</TABLE>
The Company had capital loss carryovers at December 31, 1995 of $35,000
which will expire on December 31, 1999.
(4) CONVERTIBLE NOTES PAYABLE
In 1993, the Subsidiary authorized the sale of convertible notes payable.
The sale of convertible notes payable continued in 1994 and 1995 and
the convertible notes payable were assumed by the MSH Entertainment
Corporation after the acquisition in June, 1994. The Company received
$183,250 from the sale of the convertible notes through December 31,
1995. The notes were convertible into the Company's common stock based
upon one share of stock for each dollar of debt. The debt holders were
given various multiples of that conversion, which ranged from 1-1 to
4-1, based upon the amount and timing of their investment. Some of the
larger debt holders were given the option to use a lesser multiple
than the one granted for the stock and to also receive their original
debt back in cash. The amount of debt that holders elected to receive
in cash in exchange for the reduced stock multiple was $92,400. The
number of shares to be issued to debt holders still outstanding at
December 31, 1995 is 53,500. The convertible notes payable are
uncollateralized and are noninterest bearing.
Convertible notes payable consist of the following:
<TABLE>
<CAPTION>
At December 31,
---------------------------
1995 1994
---- ----
<S> <C> <C>
$ 76,750 150,000
====== =======
</TABLE>
(continued)
F-9
<PAGE>
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) NOTE PAYABLE
Note payable consists of the following:
<TABLE>
<CAPTION>
At December 31,
---------------
1995 1994
------- ----
<S> <C> <C>
Noninterest bearing note payable to individual, due
June 1, 1996 $50,000 -
======= ====
</TABLE>
(6) COMMON STOCK
INCENTIVE STOCK OPTION. On April 20, 1993, the Company adopted a Stock
Option Plan (the "Plan"), whereby the Company is authorized to issue
up to 500,000 shares to any one to purchase stock at the fair market
value at date of issue. The options are exercisable within ten years
of date of grant unless otherwise determined by the Company. If the
option is granted to a key employee owning more than 10% of the
combined voting power of all classes of stock of the Company, the
option price is 110% of the fair market value. If any transaction
takes place whereby the existing shareholders cease to own at least
75% of the voting stock of the Company, or if during any period of two
consecutive years, existing Company Board members cease to constitute
a majority, or if a plan of merger, consolidation, reorganization,
liquidation or dissolution is approved or if the Company approves a
plan of sale of substantially all of the Company's assets, the time
for exercising the options is immediately accelerated. The options are
terminated generally upon termination of employment or death.
OUTSTANDING STOCK OPTIONS. On December 31, 1994 and 1995 the options
issued pursuant to the plan are:
<TABLE>
<CAPTION>
At December 31, 1994:
Year of Expiration Shares Option Price
- ---------------------------------- --------- ------------
<S> <C> <C>
2003 100,000 .11
2004 378,500 .11
---------
Total 478,500
=========
At December 31, 1995:
2003 100,000 .11
2004 378,500 .11
2005 921,500 .10 to .11
---------
Total 1,400,000
=========
</TABLE>
There were no options exercised during the years ended December 31, 1995 or
1994.
(continued)
F-10
<PAGE>
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) DUE TO STOCKHOLDERS
Due to stockholders consist of unsecured noninterest bearing demand
promissory notes.
(8) BUSINESS COMBINATION
STOCK EXCHANGE. On June 24, 1994, MSH Entertainment Corporation issued
2,500,000 shares of its .001 par value common stock to the holders
of 100% of the outstanding common stock of MSH Productions, Inc., in
exchange for 2,000,000 shares of the .01 par value common stock in
that company. The stock was issued pursuant to an agreement between
the two companies.
The transaction has been recorded as an issuance of common stock by MSH
Productions, Inc., of the outstanding shares of MSH Entertainment
Corporation at June 24, 1994 in exchange for the assets of MSH
Entertainment Corporation as of that date, net of accumulated deficit
of $24,107.
The historical shares outstanding were retroactively restated, similar to a
stock split, to reflect the effect of the exchange as of the date of
the respective stock issuances.
Summarized results of operations of the separate companies for the period
from January 1, 1994 through June 24, 1994, the date of acquisition,
are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------------
MSHE MSHP
--------- ---------
<S> <C> <C>
Net sales - -
Loss - (10,165)
Net loss - (10,165)
</TABLE>
The summarized assets and liabilities of the separate companies on June 24,
1994, the date of acquisition, were as follows:
<TABLE>
<CAPTION>
AMOUNT
---------------------
MSHE MSHP
--------- ---------
<S> <C> <C>
Cash - 19,489
Other assets - 48,002
Current liabilities - (120,210)
</TABLE>
(continued)
F-11
<PAGE>
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) COMMITMENTS
On December 1, 1995, the Company entered into a agreement with Dominion
Group Limited ("Dominion") to locate an acquisition candidate. The
contract provides for the payment of a $15,000 retainer and monthly
fee of $3,500 for six months. If an acquisition occurs Dominion will
receive the greater of $50,000 or 5% of the first $5,000,000 in
purchase price; 2.5% of the next $10,000,000; 10% of the balance of
the purchase price.
(10) SUBSEQUENT EVENTS
EAST END COMMUNICATIONS ACQUISITION. On June 21, 1996, the Company acquired
East End Communications, East End Productions, and J.B. Dubs, Inc.,
("East End") for cash and a promissory note, in a business combination
accounted for as a purchase. East End are producers of communications
and promotional media. The purchase price of $1,065,000 exceeded the
fair value of the net assets of East End by $810,874, which will be
amortized on the straight line method over 14 years. The results of
operations of East End will be included with the results of the
Company from June, 1996. In addition, in connection with the
transaction the Company incurred an indebtedness of $865,000 to a
officer of the Company.
Also, the Company entered into employment agreements to provide salary plus
the issuance of 450,000 shares to the two key employees of East End.
STOCK FOR SERVICES. In June, 1996, the Company issued 1,598,000 shares of
common stock to various individuals in payment for services to the
Company. The number of shares issued is determined by the value of the
services provided relative to the current market value of the shares.
STOCK FOR CONVERTIBLE DEBENTURES. In June, 1996, the Company issued 56,036
shares of common stock in redemption of convertible debentures
totaling $32,500.
STOCK OPTIONS EXERCISED. In June, 1996, four shareholders of the Company
exercised their options to purchase 1,200,000 shares of common stock
in exchange for promissory notes due July, 2001 in the amount of
$120,000.
PRIVATE PLACEMENT. In June, 1996, the Company authorized the offering of
the sale of the Company's shares of stock in three private
placements. The stock is to be offered in the amounts of 500,000,
500,000 and 600,000 shares each at the price of $.50 per share. Such
offerings are to be under Form D of Rule 504 of the Securities Act of
1933.
REGISTRATION. In June, 1996, the Company entered into a consulting
agreement to file a registration statement with the Securities and
Exchange Commission (SEC), file Blue Sky filings with the requisite
states and file as a 1934 Act reporting company and apply for listing
on an established security exchange.
(continued)
F-12
<PAGE>
MSH ENTERTAINMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) SUBSEQUENT EVENTS, CONTINUED
INTEL AGREEMENT. In November, 1996, the Company executed an agreement with
Intel Corporation, to cooperate in the development and distribution of
a new animation management technology that will be used in the
production and management of production of episodic television shows.
The system would update on a daily basis, workloads, actual versus
budget, and track the project. It would combine the software
technology developed by the Company with the microprocessor capability
of Intel. The Agreement grants to Intel, the right to purchase up to
1,000,000 shares of the Company's common stock over a two year period.
The price per share is to be determined relative to the market value
of the stock at the time of the agreement.
AGE AGREEMENT. In November, 1996, the Company entered into a strategic
product development agreement with Abrams/Gentile Entertainment, Inc.
(AGE). Under the agreement, the Company acquired the rights to produce
a children's TV series entitled Vanpires and potential revenue from
related toys and merchandising. AGE received warrants to purchase
1,000,000 shares of the Company's stock. The purchase price per share
is to be the lowest of $1.75 per share or 75% of the currently
proposed secondary offering price (net of underwriting discounts).
HAPPY ZONE ACQUISITION. In August, 1996, the Company participated in the
formation of a new company, Happy Zone Entertainment (HZE) together
with AGE. The Company owns 60% and AGE owns 20% of HZE with the
balance owned by various members of the Company's management. HZE is
to develop animated television programs and services.
(11) LOSS ON INVESTMENT
During 1994, the Company determined its 17.5% investment in a Corporation
did not have any discernible future benefit. Accordingly, the
Company expensed its remaining investment of $35,000.
F-13
<PAGE>
EAST END PRODUCTIONS
REPORT ON AUDIT OF COMBINED FINANCIAL
STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
FOR THE NINE MONTHS ENDED JUNE 30,1996 AND
FOR EACH OF THE TWO YEARS IN THE PERIOD
ENDED SEPTEMBER 30, 1995
1
<PAGE>
EAST END PRODUCTIONS
FOR THE NINE MONTHS ENDED JUNE 30,1996 AND
FOR EACH OF THE TWO YEARS IN THE PERIOD
ENDED SEPTEMBER 30, 1995
CONTENTS
--------
Page
----
Report of independent public accountant................................ 3
-Financial Statements-
Balance sheets......................................................... 4
Statements of operations............................................... 5
Statement of changes in stockholder's equity........................... 6
Statements of cash flow................................................ 7
Notes to financial statements.......................................... 8
-SUPPLEMENTARY INFORMATION-
Schedule IV - Indebtedness of related parties - not current........... 14
Schedule X - Supplementary income statement information............... 15
2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
To The Board of Directors and Stockholders
East End Productions, Inc.
J.B. Dubs, Inc.
East End Communications, Inc.
We have audited the accompanying combined balance sheets of East End Productions
as of June 30, 1996, September 30, 1995 and 1994, and the related statements of
operations, changes in stockholders' equity, and cash flows for the nine months
and each of the two years in the period ended June 30, 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of East End
Productions as of June 30, 1996, and the results of their operations and their
cash flows for the nine months and each of the two years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental financial statement
schedules are presented for the purposes of complying with the Securities and
Exchange Commission's rules and are not a required part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
/s/ Fox & Fox
Fox & Fox
Irvine, California
April 2, 1997
3
<PAGE>
EAST END PRODUCTIONS
COMBINED BALANCE SHEETS
JUNE 30, 1996 AND SEPTEMBER 30, 1995 AND 1994
ASSETS
------
<TABLE>
<CAPTION>
JUNE 30, SEPT. 30, SEPT. 30,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents (Note 1) $ - $ 125 $ 79,928
Accounts receivable (net of
allowance for doubtful accounts)
(Note 1) - 136,115 83,139
---------- -------- --------
Total current assets - 136,240 163,067
---------- -------- --------
Property and equipment ( Note 1)
Office furniture and equipment - 34,943 34,943
Computer equipment - 138,346 101,883
Production equipment - 59,418 59,418
Automobiles - 45,553 45,553
Leasehold improvements - 47,523 47,523
---------- -------- --------
- 325,783 289,320
Less accumulated depreciation - (156,534) (112,392)
---------- -------- --------
Total property and equipment - 169,249 176,928
Other assets
Note receivable 965,000 - -
Loans to shareholder (Note 2) 286,280 201,160 110,668
Organization costs - 1,000 1,000
Deposits - 163 1,500
---------- -------- --------
Total other assets 1,251,280 202,323 113,168
---------- -------- --------
TOTAL ASSETS $1,251,280 $507,812 $453,163
========== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Cash overdraft $ - $ 42,709 $ -
Accounts payable 172,688 75,248 80,657
Accrued payroll and taxes 36,089 29,919 4,171
Income tax payable (Note 1 and 5) 134,907 800 800
---------- -------- --------
Total current liabilities 343,684 148,676 85,628
Stockholders' equity
Common stock - East End Productions,
Inc. (Note 3) 3,500 3,500 3,500
Common stock - J.B. Dubs, Inc.
(Note 3) 1,000 1,000 1,000
Retained earnings 903,096 354,636 363,035
---------- -------- --------
Total stockholders' equity 907,596 359,136 367,535
---------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,251,280 $507,812 $453,163
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
EAST END PRODUCTIONS
COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1996
AND THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ----------
<S> <C> <C>
Sales (Note 1) 677,924 $740,662 $1,969,422
Cost of sales 470,398 319,579 1,345,176
-------- -------- ----------
Gross Margin 207,526 421,083 624,246
Selling, general and administrative expenses 322,394 428,943 861,138
-------- -------- ----------
Loss from operations (114,868) (7,860) (236,892)
Other income
Gain on sale of assets (Note 7) 795,328 - -
Interest income - 260 1,481
-------- -------- ----------
Income or (Loss) before income taxes 680,460 (7,600) (235,411)
Provision for income taxes (Note 1 and 5) 132,000 800 800
-------- -------- ----------
Net income or (loss) $548,460 $ (8,400) $ (236,211)
======== ======== ==========
Net income or (loss) per share $ 91.41 $ (1.40) $ $(39.37)
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
EAST END PRODUCTIONS
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
East End Productions, Inc. J.B. Dubs, Inc.
Common Stock Common Stock
-------------------------- -----------------------
Number Number
of of Retained
Shares Amount Shares Amount Earnings
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1993 1,000 $3,500 5,000 $1,000 $ 599,247
Net loss for the year - - - - (236,211)
----- ------ ----- ------ ---------
Balance at September 30, 1994 1,000 3,500 5,000 1,000 $ 363,036
Net loss for the year - - - - (8,400)
----- ------ ------ ------ ---------
Balance at September 30, 1995 1,000 $3,500 5,000 $1,000 $ 354,636
----- ------ ------ ------ ---------
Net income for the year - - - - 548,460
----- ------ ------ ------ ---------
Balance at June 30, 1996 1,000 $3,500 5,000 $1,000 $ 903,096
===== ====== ===== ====== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
EAST END PRODUCTIONS
COMBINED STATEMENT OF CASH FLOW
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income or (loss) $ 548,460 $ (8,400) $(236,211)
Adjustments to reconcile net loss to
cash used by operating activities:
Depreciation 33,106 44,142 42,465
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 136,115 (52,976) 351,478
Decrease (increase) in inventory - - 55,357
Decrease (increase) in deposits 163 1,338 71,500
Decrease (increase in organization costs 1,000 - -
Increase (decrease) in accounts payable 54,731 37,300 (51,198)
Increase (decrease) in accrued liabilities 140,277 25,748 (21,613)
----------- -------- ---------
Net cash provided (used) by operating activities 913,852 47,152 211,778
Cash flows from investing activities:
(Purchases) Dispositions of property and equipment 136,143 (36,463) (96,587)
----------- -------- ---------
Net cash used by investing activities 136,143 (36,463) (96,587)
----------- -------- ---------
Cash flows from financing activities:
(Increase) in note receivable (965,000) - -
Loans to shareholder (85,120) (90,492) (110,668)
----------- -------- ---------
Net cash used by financing activities (1,050,120) (90,492) (110,668)
----------- -------- ---------
Net increase (decrease) in cash and cash equivalents (125) (79,803) 4,523
Cash and cash equivalents balance, beginning 125 79,928 75,405
----------- -------- ---------
Cash and cash equivalents balance, ending $ - $ 125 $ 79,928
=========== ======== =========
Supplemental disclosures of cash flow information:
Interest paid $ 36 $ 604 $ 1,077
=========== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
EAST END PRODUCTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL:
East End Productions (the "Companies") consist primarily of various video
production, video conferencing and animation production Companies.
COMBINATION POLICY:
The accompanying combined financial statements include the accounts of
the following Companies, all of which are under common control and stock
ownership:
<TABLE>
<CAPTION>
NAME OF COMPANY: PRINCIPAL BUSINESS ACTIVITY:
----------------------------- ----------------------------
<S> <C>
East End Productions, Inc. Video production
East End Communications, Inc. Video production
J.B. Dubs, Inc. Video production
</TABLE>
Intercompany transactions and balances have been eliminated in combination.
METHOD OF ACCOUNTING:
Assets, liabilities, revenue and expenses are recognized on the accrual
method of accounting for both financial statement presentation and income
tax purposes
CASH EQUIVALENTS:
For purposes of these statements of cash flows, the Companies consider all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. There were no cash equivalents at September 30,
1995 or 1994
ACCOUNTS RECEIVABLE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
June 30, 1996 September 30, 1995
1995 1994
<S> <C> <C> <C>
Accounts receivable $ -0- $137,265 $ 84,289
Allowance for doubtful accounts -0- (1,150) (1,150)
------ -------- --------
Total $ -0- $136,115 $ 83,139
------ -------- --------
</TABLE>
8
<PAGE>
EAST END PRODUCTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation is provided by the
straight-line method over the estimated useful lives of the assets.
Significant additions and betterments are capitalized. Expenditures for
maintenance, repairs and minor renewals are charged to operations.
Depreciation expense for the nine months ended June 30, 1996 and the years
ended September 30, 1995 and 1994 was $ 33,106, 44,142 and 42,465
respectively.
Property and equipment are depreciated using the following estimated useful
lives:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVE IN YEARS
----------------
<S> <C>
Office furniture and equipment 5-7
Computer equipment 5-7
Production equipment 5
Automobiles 5
Leasehold improvements 31
</TABLE>
INCOME TAXES:
Deferred tax provisions are calculated for certain transactions and events
because of differing treatments under generally accepted accounting
principles and the currently enacted tax laws of the federal government. The
results of these differences on a cumulative basis, known as temporary
differences, could result in the recognition and measurement of deferred tax
assets and liabilities in the accompanying balance sheets (See Note 6).
CONCENTRATION OF CREDIT RISK:
The Companies sell their products and services from their facilities in San
Francisco, California. The Companies extend credit to customers located
throughout California.
MAJOR CUSTOMER:
The Companies sold services representing more than 10% of its revenue for
the years ended September 30, 1995 and 1994 to Amdahl Corporation
9
<PAGE>
EAST END PRODUCTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
2. RELATED PARTY TRANSACTIONS:
The Companies are affiliated through common control and stock ownership The
amounts due related Companies totaled $8,251, 14,993 and $8,259 at June 30,
1996 September 30, 1995 and 1994, respectively.
The Companies' shareholder has received advances under a corporate loan
agreement. Amounts included in Loans to shareholder at June 30, 1996 and
September 30, 1995 and 1994 totaled $ 286,280, 201,160 and $ 110,668,
respectively.
3. COMMON STOCK:
Common stock consists of the following:
East End Productions, Inc. No par value, 10,000 shares authorized,
1,000 shares issued and outstanding
East End Communications, Inc. $ 1.00 par value, 50,000 shares authorized,
5,000 shares issued and outstanding
J.B Dubs, Inc. No par value, 10,000 shares authorized, 5,000 shares
issued outstanding
10
<PAGE>
EAST END PRODUCTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
4. PROFIT SHARING PLAN:
On October 1, 1991, the Companies adopted a qualified profit sharing plan.
All full-time employees over age 21 and with a minimum of one year of
service are eligible to participate. There is no required minimum
contribution to the plan, and the maximum allowable contribution is 3% of
annual compensation. Contributions to the plan within the minimum and
maximum limitations are determined by the board of directors. Contributions
to the plan for the fiscal years ended September 30, 1995 and 1994 were $ 0
and $ 0, respectively.
5. PROVISION FOR INCOME TAXES:
Effective October 1, 1993, the Companies adopted Statement of Financial
Accounting Standard No. 109 "Accounting for Income Taxes: (SFAS 109)",
as permitted under the new rules prior years' financial statements have not
been restated.
The adoption of SFAS 109 changes the Companies' method of accounting for
income taxes from the deferred method (APB 11) to an asset and liability
method. Previously, the Companies deferred the past tax effects of timing
differences between financial reporting and taxable income. The asset and
liability method requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences
between tax bases and financial reporting of other assets and liabilities.
No adjustment has been recognized as a result of this change in accounting
method.
Due to the recurring net operating losses incurred by the Companies and the
uncertainty regarding the recognition of those accumulated tax benefits, no
net deferred tax asset or benefit has been recognized by the Companies as of
and for the years ended September 30, 1995 and 1994.
6. LEASE COMMITMENTS:
At September 30, 1995 and 1994, the Companies was renting their office and
production facilities on a month to month basis.
11
<PAGE>
EAST END PRODUCTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
7. SALE OF ASSETS
On June 21, 1996, the Companies were acquired by MSH Entertainment
Corporation for cash and a promissory note in a business combination
accounted for as a purchase. The results of operations of the Companies
will be included with the results of MSH Entertainment Corporation from
June, 1996.
In addition, MSH Entertainment Corporation entered into employment
agreements to provide salary plus the issuance of 450,000 shares of common
stock to the employees of the Companies.
12
<PAGE>
FINANCIAL STATEMENT SCHEDULES
13
<PAGE>
EAST END PRODUCTIONS
SCHEDULE IV - INDEBTEDNESS OF RELATED PARTIES - NOT CURRENT
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------- ---------- ---------- ---------- ----------
indebtedness of
---------------
Balance at Balance at
Name of person beginning additions deductions end
- ---------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Nine Months ending June 30, 1996
- --------------------------------
Christopher Haigh $ 201,160 $ 146,000 $ 60,880 $ 286,280
========== ========== ========= ==========
Year ending September 30, 1995
- ------------------------------
Christopher Haigh $ 110,668 $ 90,492 $ - $ 201,160
========== ========== ========= ==========
Year ending September 30, 1994
- ------------------------------
Christopher Haigh $ - $ 110,668 $ - $ 110,668
========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
EAST END PRODUCTIONS
SCHEDULE X - SUPPLEMENTARY INFORMATION
<TABLE>
<CAPTION>
ITEM CHARGED TO COSTS AND EXPENSES
- ------------------------------------ -----------------------------
Six Months Ended Year Ended
June 30, September 30,
------- ------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Maintenance and repairs $ 6,019 $ 7,984 $ 19,381
Advertising costs $ -- $ 15 $ 2,112
</TABLE>
The accompanying notes are an integral part of these financial statements
15
<PAGE>
MSH ENTERTAINMENT CORPORATION
3,000,000 SHARES
COMMON STOCK
--------------------
PROSPECTUS
--------------------
___________ __, 1997
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell
or the solicitation of any offer to buy any security other than the shares of
the Common Stock offered by this Prospectus, nor does it constitute an offer to
sell or a solicitation of any offer to buy the shares of Common Stock by anyone
in any jurisdiction in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances create any implication that information contained herein is
correct as of any time subsequent to the date hereof.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Topic Page
----- ----
<S> <C>
Summary 1
Risk factors 2
Use of Proceeds
Dividend Policy
Price Range of Common Stock
Capitalization
Dilution
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The United States Television Industry
Business
Management
Certain Transactions
Principal Shareholders
Description of Capital Stock
Plan of Distribution
Legal Matters
Experts
Additional Information
Financial Information
Appendix A - Subscription A-1
</TABLE>
Until ________ __, 1997 (90 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as a underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses incurred or to be incurred by the Company in connection with the
preparation and filing of this Registration Statement are estimated to be as
follows:
<TABLE>
<S> <C>
Printing and duplication expenses $20,000
Registration fee 3,280
Blue sky filing fees and expenses 5,000
Legal fees and expenses 10,000
Accounting fees and expenses 30,000
Transfer Agent fees 2,000
Miscellaneous 9,720
-------
Total $80,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Bylaws provide that the Company may indemnify its officers and
directors, and may indemnify its employees and other agents, to the fullest
extent permitted by Washington law. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to officers, directors
or persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a schedule of all securities issued during the 36 month period
preceding the filing date with the note that following the acquisition of the
7,000,001 shares, a 1:100 reverse shock split was completed, data is current to
the date of filing. The table includes the names of the purchasers, the number
of shares, the exemptions relied on, and the consideration. The table is
through December 31, 1996 and totals 9,691,649 shares. As of September 30,
1996 the number of outstanding shares were 9,381,649. The 504 offering shares
were sold for $0.50 per share. The services were provide and the loans were
converted to shares at various values.
<TABLE>
<CAPTION>
Name Date Shares Consideration Exemptions
- ---- ---- ------ ------------- ----------
<S> <C> <C> <C> <C>
Chuck Walker 8-31-94 1,062,500 Acquisition/Merger Section 4(2)
Sam Cable 8-31-94 1,062,500 Acquisition/Merger Section 4(2)
Robert Maerz 8-31-94 305,000 Acquisition/Merger Section 4(2)
Conversion 2-10-95 280,500 Acquisition/Merger Section 4(2)
Financial Technology 3-23-95 150,000 Services/Financial Section 4(2)
Neal Bruckman 3-23-95 75,000 Services/Financial Section 4(2)
Inventive Resources 3-23-95 25,000 Services/Financial Section 4(2)
Geoffrey Deuel 3-23-95 7,500 Services/Financial Section 4(2)
Simon Weinberger 3-23-95 7,500 Services/Financial Section 4(2)
Richard Feiner 3-23-95 20,000 Services/Legal Section 4(2)
John Lowy 3-23-95 30,000 Services/Legal Section 4(2)
John Lowy PC 3-23-95 50,000 Services/Legal Section 4(2)
Alfred A. Stein 3-23-95 5,000 Services/Financial Section 4(2)
Tribune International 3-23-95 5,000 Services/Financial Section 4(2)
Infinet Inc. 4-05-95 500,000 Services/Financial Section 4(2)
CLR Associates 5-24-95 500,000 Cash 504 Offering
Carol Katchen 8-17-95 6,000 Note Conversion Section 4(2)
</TABLE>
1
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Hoffman Schneider 4-02-96 50,000 Cash 504 Offering
Capital
Allen Amsterdam 4-19-96 20,000 Services/Financial Section 4(2)
Schiffman Amsterdam 4-19-96 2,000 Services/Financial Section 4(2)
& Leshner
George Davis 4-19-96 40,000 Services/Consulting Section 4(2)
Andrew Steiner 4-19-96 150,000 Services/Consulting Section 4(2)
Mike Greenfield 4-19-96 150,000 Services/Consulting Section 4(2)
Olle Macaulay & Zorilla 4-19-96 40,000 Services/Legal Section 4(2)
Kay Collyer & Boose 4-19-96 25,000 Services/Legal Section 4(2)
Kim Wade 4-19-96 2,000 Services/Acting Section 4(2)
Keith Walker 4-19-96 2,000 Services/Production Section 4(2)
Ruchey Cable 4-19-96 2,000 Services/Production Section 4(2)
Karen McClain 4-19-96 2,000 Services/Script Sup. Section 4(2)
Kitty Lee 4-19-96 2,000 Services/Consulting Section 4(2)
Leslie Easterbrook 4-19-96 2,000 Services/Acting Section 4(2)
George Boyd 4-19-96 2,000 Services/Producer Section 4(2)
Margery Thompson 4-19-96 5,000 Services Section 4(2)
Claude Grespinet 4-19-96 150,000 Services/Financial Section 4(2)
Hofman Schneider 4-29-96 450,000 Cash 504 Offering
Capital
Hofman Schneider 5-06-96 500,000 Cash 504 Offering
Capital
Hastings Ltd. 5-15-96 216,000 Cash 504 Offering
Olle Macaulay & Zorrilla 6-13-96 10,000 Services/Legal Section 4(2)
Stazzulla Family Trust 6-13-96 20,000 Note Conversion Section 4(2)
Arthur Wilkie 7-15-96 12,673 Services/Financial Section 4(2)
Robert P Maerz 7-15-95 850,000 Services Section 4(2)
Timothy Noble 7-15-96 1,724 Note Conversion Section 4(2)
James Farrish 7-15-96 6,034 Note Conversion Section 4(2)
John Shimp 7-15-96 17,242 Note Conversion Section 4(2)
Janis Shimp 7-15-96 17,242 Note Conversion Section 4(2)
Fred Hassan 7-15-96 8,621 Note Conversion Section 4(2)
Johnathan Stathakis 7-15-96 650,000 Services Section 4(2)
Rick Siebold 7-15-96 50,000 Services Section 4(2)
Alfred Morgan 7-15-96 100,000 Services Section 4(2)
Christopher Haigh 7-15-96 400,000 Services Section 4(2)
Andrew Steiner 7-15-96 150,000 Services/Consulting Section 4(2)
Fred Aurelio 7-15-96 50,000 Services Section 4(2)
Irwin Zellermaier 7-15-96 20,000 Services/Financial Section 4(2)
Olle Macaulay 7-15-96 100,000 Services/Legal Section 4(2)
Dominion Group Ltd. 7-15-96 5,000 Services/Financial Section 4(2)
John Lowy 7-15-96 13,000 Services/Legal 504 Offering
Dan Markle 7-15-96 1,000 Note Conversion Section 4(2)
Barry Jackson 7-15-96 1,000 Note Conversion Section 4(2)
Nick Flaskay 7-15-96 1,000 Note Conversion Section 4(2)
Gearhart Family Trust 7-15-96 380,000 Services/Legal Section 4(2)
Robert J Zepfel 7-15-96 25,000 Services/Legal Section 4(2)
Geoffrey Deuel 7-15-96 5,000 Services/Financial Section 4(2)
Jack Large 7-15-96 15,000 Note Conversion Section 4(2)
Walmur & Co. 7-16-96 124,000 Cash 504 Offering
Roberts Premier 7-16-96 100,000 Cash 504 Offering
Holdings
Walmur & Co. 8-02-96 114,000 Cash 504 Offering
O Lee Tawes 8-29-96 100,000 Cash 504 Offering
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Satinwood Ltd. 8-29-96 14,000 Cash 504 Offering
Swan Alley 10-29-96 125,000 Cash 504 Offering
Prudential Securities 10-29-96 41,667 Cash 504 Offering
Midland Walwyn Capital 10-29-96 83,333 Cash 504 Offering
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
DESCRIPTION OF EXHIBITS
The following exhibits are filed with the Registration Statement:
<TABLE>
<C> <S>
1.1 Selling Group Agreement
3.1 Articles of Incorporation of MSH Entertainment Corporation
3.2 Bylaws of MSH Entertainment Corporation
4.1 Subscription Agreement
5.1 Opinion of Glenn L. Gearhart
10.1 Employment Agreement, dated July 1, 1996, between MSH Entertainment Corporation and Robert Maerz
10.2 Employment Agreement, dated January 1, 1997, between MSH Entertainment Corporation and Jonathan Stathakis
10.3 Employment Agreement, dated June 7, 1996, between MSH Entertainment Corporation and Christopher Haigh
</TABLE>
3
<PAGE>
<TABLE>
<C> <S>
10.4 Employment Agreement, dated June 21, 1996, between MSH Entertainment Corporation and Fred E. Aurelio
10.5 Promissory Note, dated June 21, 1996, by MSH Entertainment Corporation in favor of Christopher Haigh
10.6 MSH Entertainment Corporation 1996 Stock Option Plan
10.7 Credit Agreement, dated December 11, 1996 between MSH Entertainment Corporation and Robert Posner
10.8 Cooperation Agreement and Warrant Agreement, dated November 4, 1996, between Intel Corporation and MSH Entertainment
Corporation
10.9 Production Agreement and Warrant Agreement, dated November 1, 1996, between Abrams/Gentle Entertainment Inc. and MSH
Entertainment Corporation
10.10 Cooperation Agreement, dated September 1, 1996, between Happy Zone Entertainment Corporation and MSH Entertainment
Corporation
10.11 Promissory Note, dated July 11, 1996, by Robert Maerz in favor of MSH Entertainment Corporation
10.12 Promissory Note, dated July 11, 1996, by Alfred Morgan in favor of MSH Corporation
10.13 Promissory Note, dated July 15, 1996, by Rick Siebold in favor of MSH Entertainment Corporation
10.14 Promissory Note, dated July 11, 1996, by Jonathan Stathakis in favor of MSH Entertainment Corporation
10.15 Credit Agreement, dated September 1, 1996 between Happy Zone Entertainment Corporation and MSH Entertainment Corporation
23.3 Consent of Glenn L. Gearhart (included as part of Exhibit 5.1)
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding
4
<PAGE>
the foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the issuer pursuant to the foregoing provisions, or otherwise, the issuer has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the issuer of expense incurred or paid by a director,
officer or controlling person of the issuer in the successful defense of any
action, or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the Securities Act of 1933, the registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
of filing on Form S-1 and authorized this Amendment to Registration Statement to
be signed on its behalf by the undersigned, in the City of Los Angeles, State of
California on March 6, 1997.
MSH Entertainment Corporation
5
<PAGE>
By: /s/ Robert Maerz, Chairman
--------------------------
In accordance with the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
(1) Principal Executive Officer
/s/ Robert Maerz Chairman and a April 3, 1997
- ---------------------------------- Director
Robert Maerz
/s/ Jonathan Stathakis President and a April 3, 1997
- ---------------------------------- Director
Jonathan Stathakis
(2) Principal and Accounting Officer
/s/ Fred Aurelio Chief Financial Officer April 3, 1997
- ----------------------------------
Fred Aurelio
(3) Directors
/s/ Christopher Haigh Vice President and April 3, 1997
- ---------------------------------- a Director
Christopher Haigh
/s/ Al Morgan
- ---------------------------------- Director April 3, 1996
Al Morgan
/s/ Sam Cable Vice President and April 3, 1997
- ---------------------------------- a Director
Sam Cable
/s/ Chuck Walker Vice President and April 3, 1997
- ---------------------------------- a Director
Chuck Walker
/s/ Dennis Olle Director April 3, 1997
- ----------------------------------
Dennis Olle
</TABLE>
6
<PAGE>
The following exhibits are filed with the Registration Statement:
1.1 Selling Group Agreement
3.1 Articles of Incorporation of MSH Entertainment Corporation
3.2 Bylaws of MSH Entertainment Corporation
4.1 Subscription Agreement
5.1 Opinion of Glenn L. Gearhart
10.1 Employment Agreement, dated July 1, 1996, between MSH
Entertainment Corporation and Robert Maerz
10.2 Employment Agreement, dated January 1, 1997, between MSH
Entertainment Corporation and Jonathan Stathakis
10.3 Employment Agreement, dated June 7, 1996, between MSH
Entertainment Corporation and Christopher Haigh
10.4 Employment Agreement, dated June 21, 1996, between MSH
Entertainment Corporation and Fred E. Aurelio
10.5 Promissory Note, dated June 21, 1996, by MSH Entertainment
Corporation in favor of Christopher Haigh
10.6 MSH Entertainment Corporation 1996 Stock Option Plan
<PAGE>
10.7 Credit Agreement, dated December 11, 1996 between MSH Entertainment
Corporation and Robert Posner
10.8 Cooperation Agreement and Warrant Agreement, dated November 4, 1996,
between Intel Corporation and MSH Entertainment Corporation
10.9 Production Agreement and Warrant Agreement, dated November 1, 1996,
between Abrams/Gentle Entertainment Inc. and MSH Entertainment
Corporation
10.10 Cooperation Agreement, dated September 1, 1996, between Happy Zone
Entertainment Corporation and MSH Entertainment Corporation
10.11 Promissory Note, dated July 11, 1996, by Robert Maerz in favor of
MSH Entertainment Corporation
10.12 Promissory Note, dated July 11, 1996, by Alfred Morgan in favor of
MSH Entertainment Corporation
10.13 Promissory Note, dated July 15, 1996, by Rick Siebold in favor of
MSH Entertainment Corporation
10.14 Promissory Note, dated July 11, 1996, by Jonathan Stathakis in favor
of MSH Entertainment Corporation
10.15 Credit Agreement, dated September 1, 1996 between Happy Zone
Entertainment Corporation and MSH Entertainment Corporation
23.3 Consent of Glenn L. Gearhart (included as part of Exhibit 5.1)
<PAGE>
EXHIBIT 1.1
MSH ENTERTAINMENT CORPORATION
Public Offering of
3,000,000 Shares of Common Stock
PARTICIPATING DEALER AGREEMENT
MSH Entertainment Corporation, a Utah corporation (the "Company),
invites your participation as a Participating Dealer ("Participating Dealer"),
in a public offering of a up to 3,000,000 shares of Common Stock, with a par
value of $0.001 (the "Common Stock"), of the Company, to be offered and sold to
the public at the price of $______ per share. All such shares of Common Stock
are sometimes referred to herein as the "Shares." The Shares are being offered
subject to the terms of this Agreement and such further instructions from the
Company as may be forwarded to the Participating Dealers from time to time.
The terms of the offering are more fully described in the enclosed
Prospectus, which has been filled with the Securities and Exchange Commission as
part of the Company's Registration Statement on Form S-1 (File No. 333-
__________) (the "Registration Statement"). This invitation is made by the
Company only if the Shares may be lawfully offered to dealers in the state(s) in
which the Participating Dealer is registered as a broker-dealer. The terms and
conditions of this invitation are as follows:
1. Acceptance of Orders. Orders received from the Participating Dealer will
--------------------
be accepted only at the price, in the amount, and on the terms which are set
forth in the Company's current Prospectus and this Agreement. As used herein,
term "Prospectus" means a prospectus which meets the requirements of Section 10
of the Securities Act of 1933, as amended ("Act"), with respect to the
securities which are the subject of this Agreement. The Company may, from time
to time, allocate Shares which each Participating Dealer may offer and sell
subject to the terms in the current Prospectus and this Agreement, and may
increase or decrease such allocation or withdraw such allocation whether or not
such Participating Dealer has confirmed transactions as a result of such
allocation. Such allocation represents the maximum number of Shares a
Participating Dealer may offer for sale. Each such allocation does not require
the Escrow Agent (defined in Paragraph 7 below) or the Company to accept any
transaction in its sole, unconditional discretion.
2. Selling Concession. As a Participating Dealer, you will be allowed, on
------------------
all Shares sold by you, a concession (commission) of up to ten percent (10%) of
the total sales price as shown in the Company's current Prospectus.
3. Status of Dealer. The Participating Dealer agrees that it will act as
----------------
agent for the Company to sell the Shares to its customers only as authorized by
the Company. In all sales of the Shares to the public, the Participating Dealer
shall confirm as agent for the Company, and shall indicate thereon that the
transaction is subject to the terms and conditions of the Prospectus and the
Participating Dealers Agreement and may be rejected by the Company.
4. Special Limitation on Participating Dealer's Authority. The Participating
------------------------------------------------------
Dealer agrees that it will make no sales to any accounts over which it exercises
discretionary authority.
5. Acceptance. The Participating Dealer will promptly transmit, in
----------
accordance with Rule 15c2-4 promulgated under the Securities Exchange Act of
1934, as amended, into the Account identified in Paragraph 7 hereof all funds
received from purchasers, a duplicate confirmation, a record of each sale which
sets forth the name, address, social security number of each individual
beneficial purchaser, the
1
<PAGE>
number of Shares purchased, and, if there is more than one registered owner,
whether the certificate or certificates evidencing the Shares are to be issued
to the purchasers in joint tenancy, tenancy in common, or otherwise.
6. Blue Sky Approval and Rejection of Sales. The Shares may be sold only in
----------------------------------------
the states of ______ . Each Participating Dealer shall report, in writing, to
the Company the number of the Shares which each has sold in each state and the
number of persons in each such state who purchased Shares through the
Participating Dealer. Each transaction may be rejected by the Company in its
unconditional discretion, and if rejected, the Company will return or will
instruct the Escrow Agent to return to the purchaser all funds paid by the
purchaser which have been received by the Escrow Agent or the Company. If such
funds should be returned to the Participating Dealer, the Participating Dealer
will return promptly to the purchaser, but in no event more than five business
days after actual receipt from the Company or the Escrow Agent, the full
purchase price paid by the purchaser.
7. Deposit of Proceeds. The proceeds from the sale of Shares sold on behalf
-------------------
of the Company in the offering will be provided to the Company. No certificates
evidencing the Shares will be issued and no sales will be completed unless and
until the sales funds have been deposited with the Company's designated
depository Agent, ____________________________, and such funds have cleared and
been released and the proceeds thereof delivered to the Company. The Company
will promptly transmit (within five business days after payment of the proceeds
to the Company) the commissions and the concessions allowed to the Participating
Dealers.
8. Payment. Payment for the Shares shall be delivered to the Company's
-------
depository Agent. All checks and other instruments for the payment of money
shall be in clearing house funds or certified and made payable (or endorsed by
Participating Dealers which have net capital of $25,000 or more) to "_________."
In addition, customer checks will be made payable to the Company's depository
Agent in accordance with Rule 15c2-4 of the Securities Exchange Act of 1934 and
customer funds will be transmitted to the Company's depository Agent by
Participating Dealers by noon of the next business day following their receipt
in accordance with Rule 15c2-4 of the Securities Exchange Act of 1934.
Certificates for the Shares sold by the Participating Dealer shall be available
for delivery at the Company's transfer agent, unless other arrangements are made
with the Company for delivery. Neither the Participating Dealer nor any
purchaser shall have the right to cancel any confirmed order, or to receive a
refund of any part of the proceeds deposited in the Company's depository
Account.
9. Participating Dealer's Undertakings. No person is authorized to give any
-----------------------------------
information or to make any representations concerning the Company or the
offering of the Shares except those contained in the Company's then current
Prospectus. The Participating Dealer agrees to comply with the prospectus
delivery requirements of the Act. The Participating Dealer agrees not to use
any sales literature of any kind other than Prospectuses supplied by the Company
without prior written approval of the Company unless such sales literature is
furnished by the Company for such purpose. In offering and selling the Shares,
the Participating Dealer will rely solely on the representations contained in
the Company's current Prospectus. Additional copies of the then current
Prospectus will be supplied by the Company in reasonable quantities upon
request. The Participating Dealer understands that during the 60-day period
after the first date upon which the Shares of the Company are bona fide offered
to the public, all Participating Dealers effecting transactions in the Company's
Shares may be required to deliver the Company's Prospectus to any purchasers
thereof prior to or concurrent with the receipt of the confirmation of sale
(Rule 256).
2
<PAGE>
10. Conditions of Offering. All sales will be subject to delivery by the
----------------------
Company of certificates evidencing the Shares, which certificates will be issued
approximately five days after the close of the Offering Period. The Company
shall have full authority to take such action as it deems advisable in respect
of all matters pertaining to the offering or arising thereunder. The Company
shall incur no liabilities to the Participating Dealer except as may be incurred
under the Act, the Rules and Regulations thereunder, or for obligations assumed
in this Agreement.
11. Failure of Order. If a sale is rejected or if a payment is received
-----------------
which proves insufficient or worthless, any compensation paid to the
Participating Dealer shall be returned by the Participating Dealer's remittances
in cash.
12. Representations and Agreements of Dealer. The Participating Dealer
----------------------------------------
represents and agrees that:
(i) it is registered as a broker-dealer under the Securities Exchange Act of
1934, as amended;
(ii) it is qualified to act as a dealer in the states or other jurisdictions
in which it offers the Shares;
(iii) its representatives are qualified to act as such in each of the states
and other jurisdictions in which they may so act in offering and selling the
Shares subject to this Agreement;
(iv) it is a member in good standing of the National Association of
Securities Dealers, Inc.; and
(v) it will maintain such registrations, qualifications and memberships
throughout the term of this Agreement and comply with all statutes and other
requirements applicable to it as a broker or dealer pursuant to those
registrations, qualifications and memberships.
Further, in offering and selling the Shares, the Participating Dealer agrees
to comply with all applicable federal laws, the laws of the states or other
jurisdictions concerned and the Bylaws, Rules and Interpretations of the
National Association of Securities Dealers, Inc. Further, the Participating
Dealer agrees that it will not offer or sell the Shares in any state or
jurisdiction, except those set forth in Paragraph 6 hereof, subject to such
Participating Dealer's and its representatives' qualification as represented
above. The Participating Dealer shall not be entitled to any compensation
hereunder during any period in which it has been suspended or expelled from
membership in the National Association of Securities Dealers, Inc.
The Participating Dealer represents and agrees that not less than 48 hours
prior to the time at which it expects to mail confirmations of sale of Shares it
will distribute copies of the then current preliminary or final Prospectus to
all persons to whom it then reasonably expects to mail such confirmations, in
substantially the manner described in Rule 15c2-4 under the Securities Exchange
Act of 1934.
The Participating Dealer represents and agrees that it has not previously bid
for or purchased any securities whatsoever of which the Company is or will be
the issuer and until the distribution to which this Agreement relates is
completed, it will not bid for or purchase or attempt to induce any other
persons to bid for or purchase any securities whatsoever of which the Company is
the issuer, other than transactions involving the initial sale of the Shares
subject to this Agreement.
The Participating Dealer agrees to comply with the provisions of Article III
of the Rules of Fair Practice as promulgated by the National Association of
securities Dealers, Inc., including without limitation, Sections 24, 8, 36 and
25 thereof.
3
<PAGE>
13. Dealer's Employees. The Participating Dealer agrees to assume full
------------------
responsibility for thorough and proper training and supervision of its
representatives concerning, among other things, the federal and state laws which
may be applicable, including the federal and state requirements for the
registration of the Shares, the uses to be made of the Prospectus, the
prohibitions on the use of other sales literature, the federal and state
requirements for broker-dealer registration of representatives, the truthful
disclosure to and fair dealing with prospective investors, the prohibitions
against false, misleading and unwarranted representations, opinions, promises
and predictions, the suitability of the investment by the prospective investors,
and the prohibitions contained in the National Association of Securities
Dealers, Inc.'s "Free Riding and Withholding" interpretation and all other
applicable laws, regulations, rulers, orders and interpretations. In addition,
the Participating Dealer shall bring to the attention of each of its
representatives the provisions of the Prospectus to the effect that any
representation or information other than the representations and information
contained therein are not authorized by the Company and the provisions of
Paragraph 9 hereof, and will supervise its representatives to assure compliance
with such provisions.
14. Company's Indemnification. The Company hereby agrees to indemnify,
-------------------------
defend and hold the Participating Dealer, and each person, if any, who controls
the Participating Dealer within the meaning of either Section 15 of the Act or
Section 20 of the Securities Exchange Act from and against any and all losses,
claims, damages, liabilities or expenses joint or several, (including reasonable
legal or other expenses incurred by each such person in connection with
defending or investigating any such claims or liabilities, whether or not
resulting in any liability to such person) which they or any of them may incur
under the Act, or any state securities law and the Rules and Regulations or the
rules and regulations under any state securities laws or any other statute or at
common law or otherwise incurred by any of them in connection with any
litigation (including the cost of any investigation and preparation), whether or
not resulting in any liability, but only insofar as such losses, claims,
damages, liabilities and litigation arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereto or any application or other
document filed in any state or other jurisdiction in order to register or
qualify the Shares under the securities laws thereof, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, all as of the date when
the Registration Statement or such amendment, as the case may be, becomes
effective, or any untrue statement or alleged untrue statement of a material
fact contained in the Prospectus (as amended or supplemented if the Company
shall have filed with Commission any amendments thereof or supplements thereto),
or the omission or alleged omission to state therein a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the indemnity
agreement contained in this Paragraph 14 shall not apply to amounts paid in
settlement of any such litigation if such settlements are effected without the
consent of the Company, nor shall it apply to the Participating Dealer or any
person controlling the Participating Dealer in respect of any such losses,
claims, damages, liabilities or actions arising or any such omission or alleged
omission, if such statement or omission was made in reliance upon information
and furnished in writing to the Company by such Participating Dealer
specifically for use in connection with the preparation of the Registration
Statement and Prospectus or any such amendment or supplement thereto. This
indemnity agreement is in addition to any other liability which the Company may
otherwise have to the Participating Dealer.
15. Notice. The Participating Dealer agrees to notify the Company promptly
------
of the commencement of any litigation or proceeding against it or against any
such controlling person, of which it may be advised, in connection with the
offer and sale of any of the Shares and to furnish to the Company at its request
copies of all pleadings therein and permit the Company to be an observer therein
and apprise it of all the developments therein. In case of commencement of any
action in which indemnity may be sought
4
<PAGE>
from the Company on account of the indemnity agreement contained in Paragraph
14, the Participating Dealer agrees within a reasonable time after the receipt
by it of written notice of the commencement of any action against it or against
any person controlling it as aforesaid, to notify the Company in writing of the
commencement thereof. The omission of the Participating Dealer so to notify the
Company of any such action shall relieve the Company from any liability which it
may have to the Participating Dealer or any person controlling it. In case any
such action shall be brought against the Participating Dealer and the
Participating Dealer shall have notified the Company of the commencement
thereof, the Company shall be entitled to participate in the defense thereof at
its own expense, but such defense shall be conducted by counsel of recognized
standing and reasonably satisfactory to the Participating Dealer or such
controlling person or persons, defendant, or defendants in such litigation.
16. Participating Dealer's Indemnification. The Participating Dealer hereby
--------------------------------------
agrees in the same manner and to the same extent as set forth in Paragraph 14
above, to indemnify and hold harmless the Company, the directors of the Company
and each person, if any, who controls the Company within the meaning of either
Section 15 of the Act or Section 20 of the Securities Exchange Act with respect
to any statement in or omission from the Registration Statement or any amendment
thereto, or the Prospectus, or any amendment thereto, or any application or
other document filed in any state or other jurisdiction in order to register or
qualify the Shares under the securities law thereof, if such statements or
omissions were made in reliance upon information furnished in writing to the
Company by the Participating Dealer specifically for use in connection with the
preparation of the Registration Statement and Prospectus or any amendment or
supplement thereto, or with respect to any failure of the Participating Dealer
to deliver a Prospectus in accordance with the requirements of Section 5 of the
Act, or with respect to any untrue statement or alleged untrue statement of a
material fact made by the Participating Dealer or its agents not based on
statements in the Prospectus or authorized in writing by the Company, or with
respect to any misleading statement or alleged misleading statement made by the
Participating Dealer or its agents resulting from the omission of material facts
which misleading statement is not based upon the Prospectus, or information
furnished in writing by the Company. This indemnity agreement is in addition to
any other liability which the Participating Dealer may otherwise have to the
Company.
17. Notice. The Company agrees to notify the Participating Dealer promptly
------
of commencement of any litigation or proceedings against it or any of its
officers or directors, of which it may be advised, in connection with the offer
and sale of any of its Shares, to furnish to the Participating Dealer, at its
request, copies of all pleadings therein, and to permit the Participating Dealer
to be an observer therein and apprise the Participating Dealer of all
developments therein, all at the Company's expense. In case of commencement of
any action in which indemnity may be sought from the Participating Dealer on
account of the indemnity agreement contained in Paragraph 16, the Company shall
notify the Participating Dealer of the commencement thereof in writing within 10
days. The omission of the Company to so notify the Participating Dealer of any
such action shall relieve the Participating Dealer from any liability which it
may have to the Company or any persons controlling it on account of the
indemnity agreement contained in Paragraph 15.1 or otherwise. In case any such
action shall be brought against the Company and the Company shall have notified
the Participating Dealer of the commencement thereof, the Participating Dealer
shall be entitled to participate in the defense thereof at its own expense, but
such defense shall be conducted by counsel of recognized standing and reasonably
satisfactory to the Company or such controlling person or persons, defendant, or
defendants in such litigation. The Participating Dealer shall not be liable for
amounts paid in settlement of any litigation if such settlement was effected
without its consent.
18. Contribution. If the indemnification provided for in Paragraphs 14 and
-------------
15 is unavailable to an indemnified party in respect of any losses, claims,
damages or liabilities referred to therein, then each indemnifying party under
either such paragraph, in lieu of indemnifying such indemnified party
5
<PAGE>
thereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities (I) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and by the Participating Dealers on the other hand from
the offering of the Shares or (ii) if the allocation provided by clause (I)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (I) above but
also the relative fault of the Company on the one hand and of the Participating
Dealers on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Participating Dealers on the other shall be
deemed to be in the same proportion as the total nets proceeds from the offering
(before deducting expenses) received by the Company bears to the total
underwriting discounts and commissions received by the Participating Dealers, as
in each case set forth in the table on the cover page of the Prospectus. The
relative fault of the Company on the one hand, and of the Participating Dealers
on the other hand, shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
or by the Participating Dealers, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Participating Dealers agree that it would not be just and
equitable if contribution pursuant to this Paragraph 16 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party 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 legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Paragraph 16, no Participating Dealer
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares sold by it and distributed to the public exceeds
the amount of any damages which such Participating Dealer has otherwise been
required to pay 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 Act) shall be entitled to contribution
hereunder from any person who was not guilty of such fraudulent
misrepresentation.
19. Expenses. In addition to the compensation payable pursuant to Paragraph
---------
2 of this Agreement, the Company shall reimburse each Participating Dealer for
its accountable expenses for advertising, postage, travel and attendance at
Participating Dealers information meetings, in an amount equal to a maximum of 2
1/2% of the gross dollar amount of proceeds from the sale of Shares sold by such
Participating Dealer. Except as provided in Paragraph 16 hereof, no expenses
will be charged to Participating Dealers. A single transfer tax, if any, on the
sale of the Shares by the Participating Dealer to its customers will be paid by
the Participating Dealer when certificates representing such Shares are
delivered to the Participating Dealer for delivery to its customers. However,
the Participating Dealer will pay its proportionate share of any transfer tax or
any other tax (other than the single transfer tax described above) if any such
tax shall be from time to time assessed against the other Participating Dealer.
20. Controlling Law and Communications. This Agreement shall be construed
----------------------------------
according to the laws of the State of California. All communications to the
Company should be sent to the address shown in the opening paragraph of this
Agreement. Any notice to the Participating Dealer shall be properly given if
mailed or telephoned to the Participating Dealer at the address or to the
telephone number respectively given below.
6
<PAGE>
21. Assignment and Termination. This Agreement may not be assigned by the
--------------------------
Participating Dealer without the Company's consent. This Agreement will
terminate, except as otherwise provided herein, upon the termination of the
offering of the Shares, except that either party may terminate this Agreement
at any time by giving written notice to the other.
22. Acceptance. This Agreement shall become binding upon acceptance by the
----------
Company of the Participating Dealer's offer to enter into this Agreement, which
offer is evidenced by the Participating Dealer signing this Agreement in the
space provided:
INFORMATION CONCERNING PARTICIPATING DEALER
Name:
-------------------------------------------------------------
Address:
-------------------------------------------------------------
Telephone:
IRS Employer Identification Number:
Share Allocation:
Signed by Participating Dealer on ________________________ __, 1997
By:
-----------------------------
Signature
-----------------------------
Print Name and Title
Accepted by MSH Entertainment Corporation on ________________ __, 1997.
By:
-----------------------------
7
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
RAILSIDE, INC.
We, the undersigned natural persons of the age of twenty-one or more,
acting as incorporators of a corporation under the Utah Business Corporation
Act, (hereinafter called the "Act"), adopt the following Articles of
Incorporation for such corporation:
ARTICLE I
Name
----
The name of the corporation (hereinafter called the "Corporation"), is
Railside, Inc.
ARTICLE II
Period of Duration
------------------
The period of duration of the Corporation is perpetual.
ARTICLE III
Purpose
-------
The purposes for which the Corporation is organized are:
Section 1: Real estate and warehousing.
---------
Section 2: Any other lawful business authorized by Title 16 of the Utah
---------
Code.
ARTICLE IV
Authorized Shares
-----------------
This Corporation is authorized to issue one class of common stock. The
total authorized common stock of this Corporation shall be 50,000,000 shares of
$0.001 par value per share. These shares shall bear voting rights and share
equally in distribution of profits of the Corporation.
ARTICLE V
Pre-Emptive Rights
------------------
No stockholder of the Corporation shall, because of ownership of stock,
have a pre-emptive or other right to purchase, subscribe for or take part of any
stock, or any part of the notes, debentures, bonds, or other securities
convertible into or carrying options for warrants to purchase stock of the
Corporation issued, optioned or sold by it after its incorporation, except as
may be otherwise stated in these Articles of Incorporation. Any part of the
capital stock and any part of the notes, debentures, bonds or other securities
convertible into or carrying options or warrants to purchases stock of the
Corporation authorized by these Articles of Incorporation or by an amended
certificate duly filed, may at any time be issued, optioned for sale and sold or
disposed of by the Corporation, pursuant to resolution of its Board of
Directors, to such persons and upon such terms as may to such Board seem proper,
without first offering such stock or securities or any part thereof to existing
stockholders.
1
<PAGE>
ARTICLE VI
Commencement of Business
------------------------
This Corporation shall not commence business until at least One Thousand
($1,000.00) Dollars has been received by it as consideration for the issuance of
shares.
ARTICLE VII
Voting of Shares
----------------
Each outstanding share of the common stock of the Corporation shall be
entitled to one vote on each matter submitted to a vote at a meeting of the
stockholders. At each election for directors every shareholder entitled to vote
at such election shall have the right to vote in person or by proxy the number
of shares owned by him or it for as many persons as there are directors to be
elected, and for whose election he or it has a right to vote, but the
shareholders shall have no right whatsoever to accumulate his or its votes with
regard to such election.
ARTICLE VIII
Provisions for Regulation of the
--------------------------------
Internal Affairs of the Corporation
-----------------------------------
Section 1: Meetings of Shareholders. All meetings of the
--------- ------------------------
shareholders of the Corporation shall be held at such place, either within or
without the State of Utah, as may be provided in the Bylaws of the Corporation.
In the absence of any such provision, all such meetings shall be held at the
registered office of the Corporation.
Section 2: Quorum of Shareholders. Unless otherwise provided in the
--------- ----------------------
Act or other applicable law, a majority of the shares of the common stock of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of the shareholders of the Corporation.
Section 3: Meetings of Directors. Meetings of the Board of Directors
--------- ---------------------
of the Corporation, whether regular or special, may be held either within or
without the State of Utah, and upon such notice as may be prescribed in the
Bylaws of the Corporation.
Section 4: Quorum of Directors. The number of Directors of the
--------- -------------------
Corporation which shall constitute a quorum for the transaction of business at
any meeting of the Board of Directors shall be fixed in the Bylaws of the
Corporation.
Section 5: Designation of Committees by the Board of Directors. The
--------- ---------------------------------------------------
Board of Directors may, by a resolution or resolutions passed by a majority of
the whole Board, designate a committee or committees consisting of not less than
three (3) directors, which committee or committees, to the extent provided in
such resolution or resolutions, shall have and may exercise all the authority so
provided, but the designations of such committees and the delegation thereto for
such authority shall not operate to relieve the Board of Directors, or any
member thereof, of any responsibility imposed upon it or by him by law.
2
<PAGE>
Section 6: Bylaws of the Corporation. The initial Bylaws of the
--------- -------------------------
Corporation shall be adopted by its Board of Directors; thereafter, unless
otherwise provided in the Act, Bylaws of the Corporation may be adopted, amended
or repealed, either by the shareholders or by the Board of Directors, except
that (a) no Bylaws adopted or amended by the shareholders shall be altered or
repealed by the Board of Directors, and (b) no Bylaws shall be adopted by the
Directors which shall require more than a majority of the shareholders for a
quorum at a meeting of the shareholders of the Corporation, or more than a
majority of the votes cast to constitute action by the shareholders, except
where higher percentages are required by law. The Bylaws may contain any
provisions for the regulation and management of the affairs of the Corporation
not inconsistent with the Act, other applicable laws, and these Articles of
Incorporation.
Section 7: Vacancy in the Board of Directors. Any vacancy occurring
--------- ---------------------------------
in the Board of Directors may be filled by affirmative vote of a majority of the
remaining directors, though less than a quorum of the Board of Directors. A
director elected to fill a vacancy shall be elected for the unexpired term of
his predecessor in offices. Any directorship to be filled by reason on an
increase in the number of directors shall also be filled by the Board of
Directors, such appointment to be until the next annual meeting or a special
meeting of the shareholders called for the purpose of electing a director to the
office so created.
Section 8: Shareholders of Record. The name and address of each
--------- ----------------------
shareholder of record of the capital stock of the Corporation as they appear in
the stock records of the Corporation shall be conclusive evidence as to who are
the shareholders who are entitled to receive notice of any meetings of the
shareholders, to vote at such meetings, to examine a complete list of the
shareholders who may be entitled to vote at such meetings, to own, enjoy and
exercise any other rights and privileges which are based upon the ownership of
these share of common stock of the Corporation.
Section 9: Books and Records. The Corporation shall keep complete
--------- -----------------
and correct books and records of account and shall keep minutes of the
proceedings of its shareholders' and Board of Directors meetings, and shall keep
at its registered office or principal place of business or at the office of its
transfer agent or registrar, a record of its shareholders, giving names and
addresses of all shareholders and the number of shares of the Corporation held
by each. No shareholder shall have the right to inspect any such books and
records except as conferred by the Act or other applicable law, unless
authorized to so by resolution or resolutions of the shareholders or the Board
of Directors.
Section 10: Working Capital. The Board of Directors of the
---------- ---------------
Corporation shall have the power from time to time to fix and determine and to
vary the amount which is to be reserved by the Corporation as working capital;
and before the payment of any dividends or the making of any distribution of
profits, or may set aside out of net profits or earned surplus of the
Corporation, such sum or sums as it may from time to time in its absolute
discretion deem to be proper, whether as a reserve fund to meet contingencies
or for the equalizing of dividends, or the repairing or maintenance of any
property of the Corporation, or for an addition to stated capital, capital
surplus, earned surplus, or for any corporate purpose which the Board of
Directors shall deem to be in the best interests of the Corporation, subject
only to such limitations as the Bylaws of the Corporation may from time to time
impose.
Section 11: Compensation of Directors. The Board of Directors of the
---------- -------------------------
Corporation may, provided the Bylaws of the Corporation so provide, make
provision for reasonable compensation to its members for their services as
directors and established the basis and conditions upon which such compensations
shall be paid. Any director of the Corporation may also serve the Corporation
in any other capacity and receive proper compensation therefor.
Section 12: Qualification of Directors. The Directors of this
---------- --------------------------
Corporation need not be stockholders.
Section 13: Number of Directors. The exact number of directors may
---------- -------------------
from time to time be specified by the Bylaws at not less than three (3) or more
than nine (9). When the Bylaws do not specify the exact number of directors,
the number of directors shall be three (3).
3
<PAGE>
Section 14: Reliance Upon Others. A director shall be fully
---------- --------------------
protected in relying in good faith upon the books of accounts relevant to the
existence and amount of surplus or other funds from which dividends might be
declared and paid.
Section 15: Reliance Upon Others - Prudent Conduct. No person shall
---------- --------------------------------------
be liable to the Corporation for any loss or damage suffered by it on account of
any action taken or omitted to be taken by him as a director or officer of the
Corporation in good faith, if such person (a) exercised or used the same degree
of care and skill as a prudent man would have exercised or used under the
circumstances in the conduct of his own affairs, or (b) took or omitted to take
such action in reliance upon advice of counsel for the Corporation, or upon
statements made or information furnished by officers or employees of the
Corporation which he had reasonable grounds to believe, or upon a financial
statement of the Corporation prepared by an officer or employee of the
Corporation in charge of its accounts or certified by a public accountant or
firm of public accountants.
Section 16: Contracts with Interested Directors - Disclosure and
---------- ----------------------------------------------------
Voting. A director of the Corporation shall not in the absence of fraud be
- ------
disqualified by his office from dealing with or contracting with the
Corporation, either as a vendor, purchaser or otherwise, so long as such
transaction shall not conflict with his obligations and duties to the
Corporation as a corporate officer; nor in the absence of fraud shall, insofar
as permitted by the Act or any other applicable statute, any transaction or
contract of the Corporation be void or voidable or affected by reason of the
fact that any director or any firm of which a director is a member, or any
corporation of which any director is an officer, director or stockholder is in
any way interested in such transaction or contract; provided that at the meeting
of the Board of Directors or of a committee thereof, having authority in the
premises to authorize or confirm such contract or transaction, the interest of
such director, firm or corporation is disclosed or made known, and there shall
be present a quorum of the Board of Directors or of the directors constituting
such committee and the contract or transaction shall be approved by a majority
of such quorum which majority shall consist of directors no so interested or
connected. Nor shall any directors be liable to account to the Corporation for
any profit realized by him from or through any such transaction or contract of
the Corporation, ratified or approved as herein provided, by reason of the fact
that he or any firm of which he is a member or any corporation of which he is a
stockholder, director or officer was interested in such transaction or contract.
Directors so interested may be counted when present at a meeting of the
Board of Directors or of such committee for the purpose of determining the
existence of a quorum. Each and every person who is or may become a director of
the Corporation is hereby relieved from any liability that might otherwise exist
from those contracting with the Corporation for the benefit of himself or any
firm, association or corporation in which he may be in any way interested. Any
contract, transaction or act of the Corporation or of the Board of Directors or
of any committee which shall be ratified by a majority in interest of a quorum
of the shareholders having voting power shall be as valid and binding as though
ratified by each and every stockholder of the Corporation; but this shall not be
constituted as requiring the submission of any contract to the shareholders for
approval. This section shall not be construed to abrogate duty of an officer
within the scope of his employment to present to the Corporation all such
reasonable opportunities which the Corporation would be entitled to take
advantage of within the scope of its then current business purposes or within
the scope of these Articles of Incorporation as applied to its then existing
relevant situation; and no director or officer or committee member of any
committee established pursuant to these Articles shall, while serving in such
capacity, discover an opportunity which is reasonable within the scope and
framework of the activity of the Corporation and take personal benefit or gain
from that discovery by hypothecating the opportunity to the Corporation in
exchange for stock or consideration above or beyond the normal compensation to
which he would be entitled within the scope and framework of his employment
contract. The foregoing provision shall not be construed to prevent the Board
of Directors at a duly constituted meeting from declaring a bonus to any such
officer or director which is fairly and reasonably related to the benefit
initiating a transaction whereby the Corporation shall directly take advantage
of any such corporate opportunity.
4
<PAGE>
Section 17: Ratification of Act of Directors. The directors may submit
---------- --------------------------------
any contract or transaction for approval at any annual meeting of the
shareholders or at any special meeting of the stockholders called for that
purpose; and any contract or transaction so approved by a majority vote of a
quorum of the stockholders at such meeting shall be binding upon the Corporation
and all its stockholders, whether or not the contract or transaction would
otherwise be subject to attack because of the interest of any of the directors
of the Corporation or for any other reason.
Section 18: The Corporation may in its Bylaws make any other provisions or
----------
requirements for the management of the business of the Corporation provided the
same are not inconsistent with the provisions of these Articles of Incorporation
or contrary to the laws of the State of Utah or of the United States.
Section 19: The Corporation may issue and sell its authorized shares
----------
without par value from time to time in the absence of fraud, in the transaction
for such considerations as may from time to time be fixed by the Board of
Directors, and sell and dispose of any stocks having a par value for such
consideration permitted by law, as the Board of Directors may from time to time
determine without other authority, consent or vote of the stockholders of the
Corporation or any class or classes.
Section 20: Amendments to these Articles of Incorporation. The
---------- ---------------------------------------------
Corporation reserves the right to amend, alter or repeal or to add any
provisions to these Articles of Incorporation in any manner now or hereafter
prescribed by law, or to vote exceptions thereto at a duly constituted
shareholders meeting called for that purpose.
Section 21: Assistant Treasurer. The Assistant Treasurer of the
---------- -------------------
Corporation shall be corporate counsel, whose sole responsibility, other than
legal duties, shall be to file the annual report.
ARTICLE IX
Initial Registered Office and Initial Registered Agent
------------------------------------------------------
Section 1: The address of the initial registered office of the Corporation
---------
is 240 Continental Bank Building, Salt Lake City, Utah 84101.
Section 2: The name of the initial registered agent at that address is
---------
Lowell V. Summerhays.
ARTICLE X
Directors
---------
Section 1: Initial Board of Directors. The initial Board of Directors of
--------- --------------------------
the Corporation shall consist of three (3) members. Their respective names and
addresses are:
Name Address
---- -------
Robert J. Phillips 1427 Sherman Avenue
Salt Lake City, Utah 84105
Kari Greenfield 1248 University Village
Salt Lake City, Utah 84102
Robert Tait 534 West Applewood Drive
Centerville, Utah 84014
which directors shall hold office until the first meeting of the shareholders of
the Corporation and until their successors shall have been elected.
5
<PAGE>
Section 2: Subsequent Board of Directors. At the first meeting of the
--------- -----------------------------
stockholders of the Corporation and at each annual meeting thereafter, the
shareholders shall elect directors to hold office until the next succeeding
annual meeting of the shareholders. Each director so elected shall hold office
for the term of which he is elected, or until his successor shall have been
elected and qualified. Directors need not be residents of the State of Utah or
shareholders of the Corporation.
ARTICLE XI
Incorporators
-------------
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Carl A. McLelland 420 Continental Bank Building
Salt Lake City, Utah 84101
Sandy Allen 420 Continental Bank Building
Salt Lake City, Utah 84101
Sharon McNeill 420 Continental Bank Building
Salt Lake City, Utah 84101
</TABLE>
ARTICLE XII
Liability of Directors, Officers, Committeemen and
--------------------------------------------------
Incorporate, Records, Books and Accounts
----------------------------------------
It is the intention of the incorporators, present shareholders and future
shareholders and all present and future officers of the Corporation, that a full
and adequate set of records, books and accounts be kept with respect to all
phases of corporate activities, and particularly with respect to the economic
activities of the Corporation. Any directors, officers, committeemen, present
or future, and the incorporators in such capacity, become liable for a failure
to keep proper books, records, and statements of account as heretofore
specified, and it shall be presumed that if such books, records and accounts are
not kept, that any loss accruing to the Corporation shall be as a direct failure
to keep such records and books of account.
It is assumed and intended that any person acquiring stock in this
Corporation shall do so in reliance upon the representation and fact that such
books, accounts and records have been kept, are being kept, and shall in the
future be kept with respect to all phases of activity in this Corporation. All
officers, directors, committeemen and incorporators agree that they shall be
jointly and severally liable for such failure to keep books, records and
accounts as heretofore specified during the period of time which they are in
office. With respect to incorporators, their liabilities shall flow for a
period of time consisting of the first four (4) months of operation of the
Corporation. This Article is included in these Articles of Incorporation
because it is the intention of the incorporators, officers, directors and
stockholders that such books, records and accounts be kept, and it is their
opinion that the failure to keep such books will likely lead to a financial
failure of the Corporation and lead to other related liabilities and it is also
their opinion that the keeping of such records, books and accounts shall
materially enhance the possibilities that the Corporation shall function on a
profitable basis. Adequate books, records, and accounts for the purpose of this
Article shall be those books, records and accounts which a reasonably prudent
certified public accountant would recommend for a corporation of like size,
purpose and function. In the event that anyone shall claim liability in this
regard, he shall first submit his claim to the Board of Directors of the
Corporation in writing and allege such failure with specificity. The person
complaining under the terms of this Article shall submit the name of a certified
public accountant whom he has chosen as an arbitrator for the purpose of
determining whether or not adequate books and records of account have been kept
according to the foregoing definition.
6
<PAGE>
The Board of Directors shall appoint a certified public accountant for such
purposes within ten (10) days after the submission in writing by the complaining
party, and the certified public accountant so chosen shall choose a third
certified public accountant, and these three shall expeditiously proceed to
arbitrate the questions as to whether or not adequate books and records of
accounts have been kept during the period complained of, and if not, the amount
of loss which was accrued during that period of time. If, for any reason the
foregoing procedure fails to reach a result or conclusion within a reasonable
period of time after a good faith attempt by the parties concerned, then the
aggrieved party (either the Board of Directors or the complaining party) shall
have the right to institute immediate action in a court of appropriate
jurisdiction to enforce his rights under the provisions of this Article.
ARTICLE XIII
1244 Stock
----------
The stock issued in this Corporation shall be deemed to be 1244 stock in
that:
A. The stock is being issued pursuant to a plan and shall be issued within
a period of time no later than two years after the date of the plan.
B. The Corporation is a small business corporation.
C. No portion of a prior stock offering is outstanding.
D. The stock is being offered in exchange for money or other property.
E. The Corporation is and will derive more than fifty percent (50%) of its
aggregate gross receipts from sources other than royalties, rents, dividends,
interest, annuities, and sales or exchange of stock or securities.
DATED this 25th day of March, 1993.
----
/s/ CARL A. McLELLAND
---------------------
Carl A. McLelland
/s/ SANDY ALLEN
---------------------
Sandy Allen
/s/ SHARON McNEILL
---------------------
Sharon McNeill
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )
Carl A. McLelland, Sandy Allen, and Sharon McNeill, being first duly sworn,
deposed and declared to me, the undersigned notary public, that they signed the
foregoing document as Incorporators, and that the statements contained therein
are the truth to the best of their knowledge.
IN WITNESS WHEREOF, I have hereunto set my seal this 25th day of March,
----
1983.
/s/ NORA HILL
--------------
Notary Public
Residing at: SANDY HILL
----------
My Commission Expires: 1-1-87
------
7
<PAGE>
CERTIFICATE
OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
OF
RAILSIDE, INC.
The undersigned, being the President and Secretary of Railside, Inc., a
Utah corporation, hereby certify that by unanimous vote of the Board of
Directors and the consent of a majority of the Stockholders on July 16, 1993, it
was agreed that this Certificate of Amendment to the Articles of Incorporation
be filed.
The undersigned further certify that the original Articles of Incorporation
of Railside, Inc. were filed with the Secretary of State of the Sate of Utah on
March 31, 1983.
The undersigned further certify that Article I and Article IV of the
original Articles of Incorporation filed on March 31, 1983 are hereby amended to
read as follows:
ARTICLE I
Name
----
The name of the corporation (hereinafter called the "Corporation") is
MicroPoly, Inc.
ARTICLE IV
Authorized Shares
-----------------
This Corporation is authorized to issue one class of common stock. The
total authorized common stock of this corporation shall be 50,000,000 shares of
$0.001 par value per share. These shares shall bear voting rights and share
equally in distribution of profits of the Corporation.
This Corporation is also authorized to issue preferred stock. The total
authorized preferred stock of this corporation shall be 25,000,000 shares whose
classes, par value, designations, preferences, voting rights, dividends,
convertibility, redeemability, and the right to participate in the proceeds of
liquidation shall be determined by the Board of Directors of the Corporation
from time to time, prior to the issuance of any shares of preferred stock.
The number of common shares voted for such amendment were sufficient for
approval. The undersigned hereby certify that they have on this 5th day of
August, 1993, executed this certificate amending the original Articles of
Incorporation heretofore filed with the Secretary of State of Utah.
/s/ Jerry E. Chase
------------------
President
/s/ Sue Chase
------------------
Secretary
8
<PAGE>
STATE OF UTAH )
)ss:
COUNTY OF SALT LAKE )
On this 5th day of August, 1993, before me the undersigned a Notary Public
in and for the County of Salt Lake, State of Utah, personally appeared Jerry E.
Chase and Sue Chase, known to me to be the persons whose names are subscribed to
the foregoing Certificate of Amendment to the Articles of Incorporation and
acknowledged to me that they executed the same.
/s/ SHAUNA CHRISTENSEN
----------------------
Notary Public
My commission expires: 6-15-96
-------
CERTIFICATE OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
MICROPOLY, INC.
---------------
The undersigned, being the President and Secretary of MicroPoly, Inc.,
a Utah corporation (the "Company"), hereby certify that, effective July 18,
1994, resolutions were duly adopted by written consent, in accordance with
Section 16-10a-704 of the Utah Business Corporation Act, by a majority of the
shareholders of the Company authorizing that this Certificate of Amendment to
the Articles of Incorporation of the Company be filed.
The undersigned further certify that the original Articles of
Incorporation of the Company were filed with the Secretary of State of Utah on
March 31, 1983, as amended August 6, 1993.
The undersigned further certify that Article IV of the Company's
Articles of Incorporation filed on March 31, 1983, and amended on August 6,
1993, are hereby further amended to read as follows:
ARTICLE IV
AUTHORIZED SHARES
-----------------
This Corporation is authorized to issue one class of common stock.
The total authorized common stock of this Corporation shall be 500,000 shares of
$.10 par value per share. These shares shall bear voting rights and share
equally in distribution of profits of the Corporation.
This Corporation is also authorized to issue preferred stock. The
total authorized preferred stock of this corporation shall be 25,000,000 shares
whose classes, par value, designations, preferences, voting rights, dividends,
convertibility, redeemability, and the right to participate in the proceeds of
liquidation shall be determined by the Board of Directors of the Corporation
from time to time, prior to the issuance of any shares of preferred stock.
On July 18, 1994 there were 14,000,001 hares of common stock
outstanding. The number of common shares voted for such amendments were
7,000,001 for, 0 against. The undersigned hereby certify that they have on this
22nd day of July, 1994, executed this certificate amending the original Articles
of Incorporation, as amended, heretofore filed with the Secretary of State of
Utah.
9
<PAGE>
/s/ CHUCK WALKER
-----------------------
Chuck Walker, President
/s/ SAMUEL CABLE
-----------------------
Samuel Cable, Secretary
STATE OF TEXAS )
) SS:
COUNTY OF MONTGOMERY)
The foregoing instrument was acknowledged before me this 22nd day of
July, 1994, by Chuck Walker, as President of MicroPoly, Inc., a Utah
corporation, on behalf of such corporation. He is known to me personally or has
produced drivers license as identification and who did (did not) take an oath.
/s/ STARLETT CURRY
------------------
NOTARY PUBLIC
STATE OF TEXAS
Print Name:Starlett Curry
[Notarial Seal]
Notary's commission number:
My commission expires:3/31/95
STATE OF TEXAS )
) SS:
COUNTY OF MONTGOMERY)
The foregoing instrument was acknowledged before me this 22nd day of
July, 1994, by Samuel Cable, as Secretary of MicroPoly, Inc., a Utah
corporation, on behalf of such corporation. He is known to me personally or has
produced drivers license as identification and who did (did not) take an oath.
/s/ STARLETT CURRY
------------------
NOTARY PUBLIC
STATE OF TEXAS
Print Name: Starlett Curry
[Notarial Seal]
Notary's commission number:
My commission expires:3/31/95
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION OF
MICROPOLY, INC.
---------------
10
<PAGE>
The undersigned, being the President and Secretary of MicroPoly, Inc.,
a Utah corporation (the "Company"), hereby certify that, effective July 18,
1994, resolutions were duly adopted by written consent, in accordance with
Section 16-10a-704 of the Utah Business Corporation Act, by a majority of the
shareholders of the Company authorizing that this Certificate of Amendment to
the Articles of Incorporation of the Company be filed.
The undersigned further certify that the original Articles of
Incorporation of the Company were filed with the Secretary of State of Utah on
March 31, 1983, as amended August 6, 1993, and as amended August 1, 1994.
The undersigned further certify that Article IV of the Company's
Articles of Incorporation filed on March 31, 1983, and amended on August 6,
1993, and amended on August 1, 1994, are hereby further amended to read as
follows:
ARTICLE I
NAME
The name of this corporation is MSH Entertainment Corporation
(hereinafter the "Corporation").
***
ARTICLE IV
AUTHORIZED SHARES
-----------------
This Corporation is authorized to issue one class of common stock.
The total authorized common stock of this Corporation shall be 50,000,000 shares
of $.001 par value per share. These shares shall bear voting rights and share
equally in distribution of profits of the Corporation.
This Corporation is also authorized to issue preferred stock. The
total authorized preferred stock of this corporation shall be 25,000,000 shares
whose classes, par value, designations, preferences, voting rights, dividends,
convertibility, redeemability, and the right to participate in the proceeds of
liquidation shall be determined by the Board of Directors of the Corporation
from time to time, prior to the issuance of any shares of preferred stock.
***
On July 18, 1994 there were 14,000,001 shares of common stock
outstanding. The number of common shares voted for such amendments were
7,000,001 for, 0 against. The undersigned hereby certify that they have, on the
date noted below, executed this certificate amending the original Articles of
Incorporation, as amended, heretofore filed with the Secretary of State of Utah.
/s/ CHUCK WALKER
-----------------------
Chuck Walker, President
/s/ SAMUEL CABLE
-----------------------
Samuel Cable, Secretary
STATE OF TEXAS )
) SS:
COUNTY OF MONTGOMERY)
11
<PAGE>
The foregoing instrument was acknowledged before me this 22nd day of
July, 1994, by Chuck Walker, as President of MicroPoly, Inc., a Utah
corporation, on behalf of such corporation. He is known to me personally or has
produced drivers license as identification and who did (did not) take an oath.
/s/ STARLETT
-------------------------
NOTARY PUBLIC
STATE OF TEXAS
Print Name:Starlett Curry
[Notarial Seal]
Notary's commission number:
My commission expires:3/31/95
STATE OF TEXAS )
) SS:
COUNTY OF MONTGOMERY)
The foregoing instrument was acknowledged before me this 22nd day of
July, 1994, by Samuel Cable, as Secretary of MicroPoly, Inc., a Utah
corporation, on behalf of such corporation. He is known to me personally or has
produced drivers license as identification and who did (did not) take an oath.
/s/ STARLETT CURRY
-------------------------
NOTARY PUBLIC
STATE OF TEXAS
Print Name:Starlett Curry
[Notarial Seal]
Notary's commission number:
My commission expires:3/31/95
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION OF
MSH ENTERTAINMENT CORPORATION
-----------------------------
The undersigned, being the President and Secretary of MSH
Entertainment Corporation, a Utah corporation (the "Company"), hereby certify
that, effective October 20, 1994, resolutions were duly adopted by a majority of
the shareholders of the Company at the Annual Meeting of Shareholders of the
Company held October 20, 1994, in accordance with the Utah Business Corporation
Act, authorizing that this Certificate of Amendment to the Articles of
Incorporation of the Company be filed. There are 2,570,000 outstanding shares.
2,500,000 voted for the amendment, 0 against. (as per mr)
The undersigned further certify that the original Articles of
Incorporation of the Company were filed with the Secretary of State of Utah on
March 31, 1983, as amended August 6, 1993, as further amended August 1, 1994,
and as further amended August 18, 1994.
The undersigned further certify that the Company's Articles of
Incorporation are hereby further amended to add a new provision to the Articles
to read as follows:
ARTICLE XIV
SHAREHOLDER ACTIONS
12
<PAGE>
Shareholders of the Company are permitted to take action by written
consent signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take the action
at a meeting at which all shares entitled to vote thereon were present and
voted.
***
The number of common shares voted for such amendment was sufficient
for approval. The undersigned hereby certify that they have, on the date
noted below, executed this Certificate amending the original Articles of
Incorporation, as amended, heretofore filed with the Secretary of State of Utah.
/s/ CHUCK WALKER
-----------------------
Chuck Walker, President
/s/ SAMUEL CABLE
-----------------------
Samuel Cable, Secretary
13
<PAGE>
STATE OF TEXAS )
) SS:
COUNTY OF MONTGOMERY)
The foregoing instrument was acknowledged before me this 9th day of
December, 1994, by Chuck Walker, as President of MSH Entertainment Corporation,
a Utah corporation, on behalf of such corporation. He is known to me personally
or has produced ______________________ as identification and who did (did not)
take an oath.
/s/ GAIL A. BRAND
------------------------
NOTARY PUBLIC
STATE OF TEXAS
Print Name:Gail A. Brand
[Notarial Seal]
Notary's commission number:
My commission expires:1/23/95
STATE OF TEXAS )
) SS:
COUNTY OF MONTGOMERY)
The foregoing instrument was acknowledged before me this 9th day of
December, 1994, by Samuel Cable, as Secretary of MSH Entertainment Corporation,
a Utah corporation, on behalf of such corporation. He is known to me personally
or has produced ______________________ as identification and who did (did not)
take an oath.
/s/ GAIL A. BRAND
------------------------
NOTARY PUBLIC
STATE OF TEXAS
Print Name:Gail A. Brand
[Notarial Seal]
Notary's commission number:
My commission expires:1/23/95
14
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
RAILSIDE, INC.
ARTICLE I
Offices
-------
The principal office of the corporation in the State of Utah shall be
located in the City of Bountiful, County of Davis. The corporation may have
such other offices, either within or without the State of Utah as the Board of
Directors may designated or as the business of the corporation may from time to
time require.
ARTICLE II
Stockholders
------------
2.1 Annual Meeting. The annual meeting of the stockholders shall be held
in January of each year, beginning with the year 1984, at a time and place to be
designated, for the purpose of electing directors and for the transaction of
such other business as may come before the meeting. If the day fixed for the
annual meeting shall be a legal holiday, such meeting shall be held on the next
succeeding business day.
2.2 Special Meetings. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute, may be called by
the President or by the Directors, and shall be called by the President at the
request of the holders of not less than thirty percent (30%) of all the
outstanding shares of the corporation entitled to vote at the meeting.
2.3 Place of Meeting. The directors may designate any place, either
within or without the State of Utah unless otherwise prescribed by statute, as
the place of meeting for any annual meeting or for any special meeting called by
the directors. A waiver of notice signed by all stockholders entitled to vote
at a meeting may designated any place, either within or without the State of
Utah unless otherwise prescribed by statute, as the place for holding such
meeting. If no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the principal office of the corporation.
2.4 Notice of Meeting. Written or printed notice stating the place, day
and hour of the meeting and, in case of a special meeting, shall be delivered
not less than ten (10) days nor more than thirty (30) days before the date of
the meeting, either personally or by mail, by or at the direction of the
President or Secretary, or the officer or persons calling the meeting, to each
stockholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail,
addressed to the stockholder at his address as it appears on the stock transfer
books of the corporation, with postage thereon prepaid.
2.5 Closing of Transfer Books or Fixing of Record Date. For the purpose
of determining stockholders entitled to notice of or to vote at any meeting of
stockholders entitled to receive payment of any dividend, or in order to make a
determination of stockholders for any other proper purpose, the directors of the
corporation may provide that the stock transfer books shall be closed for a
stated period but not to exceed, in any case, thirty (30) days. If the stock
transfer books shall be closed for the purpose of determining stockholders
entitled to notice of or to vote at a meeting of the stockholders, such books
shall be closed for at least thirty (30) days immediately preceding such
meeting. In lieu of closing the stock transfer books, the directors may fix in
advance a date as the record date for any such determination of stockholders,
such date in any case to be not more than thirty (30) days and, in the case of a
meeting of stockholders, not less than ten (10) days prior to the date on which
the particular action requires such determination of stockholders is to be
taken.
1
<PAGE>
If the stock transfer books are not closed and on record date is fixed for the
determination of stockholders entitled to notice of or to vote at a meeting of
stockholders, or stockholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the directors declaring such dividend is adopted, as the case may
be, shall be the record date for such determination of stockholders. When a
determination of stockholders entitled to vote at any meeting of stockholders
has been made as provided in this section, such determination shall apply to any
adjournment thereof.
2.6 Voting Lists. The officers or agent having charge of the stock
transfer books for shares of the corporation shall make, at least fifteen (15)
days before each meeting of stockholders, a complete list of the stockholders
entitled to vote at such meeting, or any adjournment thereof, arranged in
alphabetical order, with the address, of the number of shares held by each,
which lists, for a period of fifteen (15) days prior to such meeting, shall be
kept on file at the principal office of the corporation and shall be subject to
inspection by any stockholder at any time during usual business hours. Such
lists shall also be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any stockholder during the whole time
of the meeting. The original stock transfer book shall be prima facie evidence
as to who are the stockholders entitled to examine such list or transfer books
or to vote at the meeting of the stockholders.
2.7 Quorum. At any meeting of stockholders, those shares represented at
the meeting, no matter what number that may be, shall constitute a quorum of
stockholders which shall allow voting to proceed. Subject to the provisions of
Section 2.9, a vote of a majority of a quorum on any issue shall be dispositive.
The shareholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
2.8 Proxies. At all meetings of stockholders, a stockholder may vote by
proxy executed in writing by the stockholder or by his duly authorized attorney
in fact. Such proxy shall be filed with the secretary of the corporation before
or at the time of the meeting.
2.9 Voting. Each stockholder entitled to vote in accordance with the
terms and provisions of the certificate of incorporation and these Bylaws shall
be entitled to one (1) vote, in person or by proxy, for each share of stock
entitled to vote held by such stockholders. Upon the demand of any stockholder,
the vote for directors and upon any question before the meeting shall be by
ballot. All elections for directors shall be decided by plurality vote; all
other questions shall be decided by majority vote except as otherwise provided
by the certificate of incorporation or the laws of this State. Article VII,
Voting of Shares, as set forth in the certificate of incorporation, shall be
- ----------------
construed strictly to mean that each common stock shareholder shall have no
cumulative voting rights.
2.10 Order of Business. The order of business at all meetings of the
stockholders shall be as follows:
a. Roll call.
b. Proof of notice of meeting or waiver of notice.
c. Reading of minutes of preceding meeting.
d. Reports of officers.
e. Reports of committees.
f. Election of directors.
g. Unfinished business.
h. New business.
2.11 Informal Action by Stockholders. Unless otherwise provided by law,
any action required to be taken at a meeting of the shareholders may be taken
without a meeting, if a consent in writing, setting forth the action so taken,
shall be signed by all of the shareholders entitled to vote with respect to the
subject matter thereof.
2
<PAGE>
ARTICLE III
Board of Directors
------------------
3.1 General Powers. The business and affairs of the corporation shall be
managed by its Board of Directors. The directors shall in all cases act as a
Board, and they may adopt such rules and regulations for the conduct of their
meetings and the management of the corporation, as they may deem proper, not
inconsistent with these Bylaws and the laws of this State.
3.2 Number, Tenure and Qualifications. The number of directors of the
corporation shall be three (3). Each director shall hold office until the next
annual meeting of stockholders and until his successor shall have been elected
and qualified.
3.3 Regular Meetings. A regular meeting of the directors shall be held
without other notice than this bylaw immediately after, and at the same place
as, the annual meeting of stockholders. The directors may provide, by
resolution, the time and place for the holding of additional regular meetings
without other notice than such resolution.
3.4 Special Meetings. Special meetings of the directors may be called by
or at the request of the President or any two (2) directors. The person or
persons authorized to call special meetings of the directors may fix the place
for holding any special meeting of the directors called by them.
3.5 Notice. Notice of any special meetings shall be given at least
fifteen (15) days previously thereto by written notice delivered personally, or
by telegram or mailed to each director at his business address. If mailed, such
notice shall be deemed to be delivered when deposited in the United States mail
so addressed, with postage thereon prepaid. If notice be given by telegram,
such notice shall be deemed to be delivered when the telegram is delivered to
the telegraph company. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened.
3.6 Quorum. At any meeting of the directors, a plurality shall constitute
a quorum for the transaction of business, but if less than said number is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time without further notice.
3.7 Manner of Acting. The act of the majority of the directors present at
a meeting at which a quorum is present shall be the act of the directors.
3.8 Newly Created Directorships and Vacancies. Newly created
directorships resulting from an increase in the number of directors and
vacancies occurring in the Board for any reason except the removal of directors
without cause may be filled by a vote of a majority of the directors then in
office, although less than a quorum exists. Vacancies occurring by reason of
the removal of directors without cause shall be filled by vote of the
stockholders. A director elected to fill a vacancy caused by resignation, death
or removal shall be elected to hold office for the unexpired term of his
predecessor.
3.9 Resignation. A director may resign at any time by giving written
notice to the Board, the President or the Secretary of the corporation. Unless
otherwise specified in the notice, the resignation shall take effect upon
receipt thereof by the Board of such officer, and the acceptance of the
resignation shall not be necessary to make it effective.
3.10 Compensation. No compensation shall be paid to directors, as such,
for their services, but by resolution of the Board, a fixed sum and expenses for
actual attendance at each regular or special meeting of the Board may be
authorized. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor.
3
<PAGE>
3.11 Presumption of Asset. A director of the corporation who is present
at a meeting of the directors at which action on any corporate matter is taken
shall be presumed to have assented to the action taken unless his dissent shall
be entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the person acting as the secretary of the meeting
before the adjournment thereof or shall forward such dissent by registered mail
to the Secretary of the corporation immediately after the adjournment of the
meeting. Such right to dissent shall not apply to a director who voted in favor
of such action.
3.12 Executive and Other Committees. The Board, by resolution, may
designate from among its members an executive committee and other committees,
each consisting of three (3) or more directors. Each such committee shall serve
at the pleasure of the Board.
ARTICLE IV
Officers
--------
4.1 Number. The officers of the corporation shall be a President, a Vice-
President and a Secretary-Treasurer, each of whom shall be elected by the
directors. Such other officers and assistant officers as may be deemed
necessary may be elected or appointed by the directors.
4.2 Election and Term of Office. The officers of the corporation to be
elected by the directors shall be elected annually at the first meeting of the
directors held after each annual meeting of the stockholder. Each officer shall
hold office until his successor shall have been duly elected and resign or shall
have been removed in the manner hereinafter provided.
4.3 Removal. Any officer or agent elected or appointed by the directors
may be removed by the directors whenever in their judgment the best interests of
the corporation would be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
4.4 Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification or otherwise, may be filled by the directors for the
unexpired portion of the term.
4.5 President. The President shall be the principal executive officer of
the corporation and, subject to the control of the directors, shall in general
supervise and control all of the business and affairs of the corporation. He
shall, when present, preside at all meetings of the stockholders and of the
directors. He may sign, with the Secretary or any other proper officer of the
corporation thereunto authorized by the directors, certificates for shares of
the corporation, any deeds, mortgages, bonds, contracts, or other instruments
which the directors have authorized to be executed, except in cases where the
signing and execution thereof shall be expressly delegated by the directors or
by these Bylaws to some other officer or agent of the corporation, or shall be
required by law to be otherwise signed or executed; and in general, shall
perform all duties incident to the office of President and such other duties as
may be prescribed by the directors from time to time.
4.6 Vice-President. In the absence of the President or event of his
death, inability or refusal to act, the Vice-President shall perform the duties
of the President, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the President. The Vice-President shall
perform such other duties as from time to time may be assigned to him by the
President or by the directors.
4.7 Secretary-Treasurer. The Secretary-Treasurer shall keep the minutes
of the stockholders' and of the directors' meetings in one or more books
provided for that purpose, see that all notices are duly given in accordance
with provisions of these Bylaws or as required, be custodian of the corporate
records and of the seal of the corporation and keep a register of the post
office address of each stockholder which shall be furnished to the Secretary by
such stockholder, have general charge of the stock transfer books of the
corporation. If required by the directors, he shall give a bond for the
faithful discharge of his duties in such sum and with such surety or sureties
as the directors shall determine.
4
<PAGE>
He shall have charge and custody of and be responsible for all funds and
securities of the corporation; receive and give receipts for monies due and
payable to the corporation from any source whatsoever, and deposit all such
monies in the name of the corporation in such banks, trust companies or other
depositories as shall be selected in accordance with these Bylaws, and in
general perform all of the duties incident to the office of Secretary-Treasurer,
and such other duties as from time to time may be assigned to him by the
President or by the directors.
4.8 Salaries. The salaries of the officers shall be fixed from time to
time by the directors, and no officer shall be prevented from receiving such
salary by reason of the fact that he is also a director of the corporation.
ARTICLE V
Contract, Loans, Checks and Deposits
------------------------------------
5.1 Contracts. The directors may authorize any officer or officers, agent
or agents, to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the corporation, and such authority may be general
or confined to specific instances.
5.2 Loans. No loans shall be contracted on behalf of the corporation and
no evidences of indebtedness shall be issued in its name unless authorized by a
resolution of the directors. Such authority may be general or confined to
specific instances.
5.3 Checks, Drafts, Etc. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation, shall be signed by such officer or officers, agent or agents of
the corporation and in such manner as shall from time to time be determined by
resolution of the directors.
5.4 Deposits. All funds of the corporation not otherwise employed shall
be deposited from time to time to the credit of the corporation in such banks,
trust companies or other depositories as the directors may select.
ARTICLE VI
Certificates for Shares and Their Transfer
------------------------------------------
6.1 Certificates for Shares. Certificates representing shares of the
corporation shall be in such form as shall be determined by the directors. Such
certificates shall be signed by the President and by the Secretary, or by such
other officers authorized by law and by the directors. All certificates for
shares shall be consecutively numbered or otherwise identified. The name and
address of the stockholders, the number of shares and date of issue shall be
entered on the stock transfer books of the corporation. All certificates
surrendered to the corporation for transfer shall be canceled and no new
certificate shall be issued until the former certificate for a like number of
shares shall have been surrendered and canceled, except that in case of a lost,
destroyed or mutilated certificate, a new one may be issued therefor upon such
terms and indemnify to the corporation as the directors may prescribe.
6.2 Transfer of Shares.
(a) Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, and cancel the old certificate; every such transfer shall be entered on
the transfer book of the corporation which shall be kept at its principal
office.
5
<PAGE>
(b) The corporation shall be entitled to treat the holder of record
of any shares as the holder in fact thereof, and accordingly, shall not be bound
to recognize any equitable or other claim to or interest in such share on the
part of any other person whether or not it shall have express or other notice
thereof, except as expressly provided by the laws of this State.
ARTICLE VII
Fiscal Year
-----------
The fiscal year of the corporation shall begin on the first day of January
in each year.
ARTICLE VIII
Dividends
---------
The directors may from time to time declare, and the corporation may pay,
dividends on its outstanding shares in the manner and upon the terms and
conditions provided by law.
ARTICLE IX
Seal
----
The directors shall provide a corporate seal which shall be circular in
form and shall have inscribed thereon the name of the corporation, the state of
incorporation, year of incorporation, and the words "Corporate Seal".
ARTICLE X
Waiver of Notice
----------------
Unless otherwise provided by law, whenever any notice is required to be
given to any stockholder or director of the corporation under the provisions of
these Bylaws or under the provisions of the Articles of Incorporation, a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice.
ARTICLE XI
Amendments
----------
These Bylaws may be altered, amended or repealed and new Bylaws may be
adopted by a vote of the stockholders representing a majority of all the shares
issued and outstanding, at any annual stockholders' meeting or at any special
stockholders' meeting when the proposed amendment has been set out in the notice
of such meeting.
DATED this 7th day of July, 1983.
---
/s/ ROBERT KAY TAIT
---------------------
Secretary
6
<PAGE>
EXHIBIT 4.1
MSH ENTERTAINMENT CORPORATION
SUBSCRIPTION AGREEMENT
Persons interested in purchasing shares of the Common Stock of MSH
ENTERTAINMENT CORPORATION (the "Shares") must complete and return this
Subscription Agreement along with their check or money order to MSH
ENTERTAINMENT CORPORATION, 768 Brannan Strret, San Francisco, CA 94103. If and
when accepted by MSH ENTERTAINMENT CORPORATION, a Utah corporation (the
"Company"), this Subscription Agreement shall constitute a subscription for
shares of Common Stock of the Company.
An accepted copy of this Agreement will be returned to you, and a stock
certificate will be issued to you shortly thereafter. Method of Payment:
Check, Money Order or Wire Transfer payable to "MSH Entertainment Corporation".
I hereby irrevocably tender this Subscription Agreement for the purchase of
_______ Shares at $_____ per Share. With this subscription Agreement, I tender
payment in the amount of $ _______ ($______ per Share) for the Shares
subscribed.
In connection with this investment in the company, I represent and warrant as
follows:
(a) Prior to tendering payment for the Shares, I received the Company's
Prospectus dated _____________________ __, 1997.
(b) I am a bona fide resident of the state of ________________________.
Please register the Shares which I am purchasing as follows:
1. INDIVIDUAL(S) -- if more than one owner, please issue as follows:
[_] Tenants-in-Common (all parties must sign -- each investor has an
undivided interest)
[_] Joint Tenants with Right of Survivorship (all parties must sign --
joint ownership)
[_] Minor with adult custodian under the Uniform Gift to Minors Act in
your state
____________________________________
INVESTOR NO. 1 (print name above)
____________________________________
Street (residence address)
____________________________________
City State Zip
____________________________________
Home Phone
____________________________________
Social Security Number
____________________________________
Date of Birth
____________________________________ ________________________
Signature Date
1
<PAGE>
____________________________________
INVESTOR NO. 2 (print name above)
____________________________________
Street (residence address)
____________________________________
City State Zip
____________________________________
Home Phone
____________________________________
Social Security Number
____________________________________
Date of Birth
____________________________________ __________________
Signature Date
2. ENTITY
[_] Corporation (authorized agent of corporation must sign)
[_] Existing Partnership (at least one partner must sign)
__________________________________________
Name of Corporation or Partnership
__________________________________________
Street (business address)
__________________________________________
City State Zip
__________________________________________
Authorized Agent (print name above)
__________________________________________
Title of Authorized Agent
__________________________________________
Federal Tax I.D. Number
__________________________________________
Business Phone
The undersigned acknowledges under the penalties of perjury that the foregoing
information is true, accurate and complete.
__________________________________________ _________________
Signature of Authorized Agent Date
2
<PAGE>
3. TRUST
[_] Trust (all trustees must sign)
________________________________________________
Trustee (print name above)
________________________________________________
Street Address
________________________________________________
City State Zip
________________________________________________
Trust (print name above)
________________________________________________
Date of Trust Agreement
________________________________________________
Social Security or Federal Identification Number
________________________________________________
Phone
The undersigned acknowledges under the penalties of perjury that the foregoing
information is true, accurate and complete.
_________________________________________ ________________
Signature Date
_________________________________________ ________________
Signature Date
ACCEPTED BY: MSH ENTERTAINMENT CORPORATION
By: ___________________________________ Date: ________________________
3
<PAGE>
EXHIBIT 5.1
GLENN L. GEARHART
Attorney at Law
7222 Seaworthy Drive
Huntington Beach, CA USA 92648
Ph 714-536-8045 Fax 714-536-7035
March 14, 1997
MHS Entertainment Corporation
3330 Ocean Park Blvd.
Santa Monica, CA 90405
Re: MHS Entertainment Corporation, Form S-1 Registration Statement
-------------------------------
Dear Sir or Madam:
In connection with the pending Registration Statement on Form S-1 (the
"Registration Statement") filed by MHS Entertainment Corporation, a Utah
corporation (the "Company"), with the Securities and Exchange Commission for the
purpose of registering for sale under the Securities Act of 1993, as amended
(the "Act"), an aggregate of 3,250,000 shares of the Company's Common Stock, you
have requested my opinion as to certain legal matters regarding the issuance
under Utah law of the Common Stock.
For purposes of rendering this opinion, I have examined such documents as I have
deemed advisable or necessary, including, among other things, the Company's
Articles of Incorporation and Bylaws, resolutions adopted by the Company's Board
of Directors authorizing the issuance and sale of the Common Stock, and oral and
written representations from officers of the Company. In rendering this
opinion, I have also made such other investigations and reviewed such other
corporate and official records, agreements, certificates, approvals and other
documents, and have reviewed such matters of law, as I have deemed necessary or
appropriate for purposes of this opinion.
On the basis of such examination and inquiries, and relying thereon, I am of the
opinion that the issuance and sale of the Common Stock have been duly
authorized by all necessary corporate action under the laws of the State of
Utah, and that the shares of Common Stock, when issued, sold and paid for as
described in the Registration Statement, will be validly issued, fully paid and
non-assessable under the laws of the State of Utah.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to me under the caption "Legal Matters" in the
Registration Statement.
Very truly yours,
/s/ Glenn L. Gearhart
- ----------------------
Glenn L. Gearhart
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is made and entered into as of this 1st day of July,
1996, by and between MSH ENTERTAINMENT CORPORATION, INC., a Utah corporation
(the "Company"), and Robert Maerz (the "Executive").
Preliminary Statements:
-----------------------
A. The Executive is currently functioning as the Chairman of the Board
("Chairman") and the Chief Executive Officer ("CEO") of the Company.
B. The Executive possesses intimate knowledge of the business and affairs
of the Company, its policies, methods and personnel.
C. The Board of Directors of the Company (the "Board") recognizes that the
Executive has contributed to the growth and success of the Company and desires
to assure the Company of the Executive's continued employment and to compensate
him therefore.
D. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
E. The Executive is willing to make his services available to the Company
on the terms and conditions hereinafter set forth.
AGREEMENTS:
-----------
NOW, THEREFORE, in consideration of the premises and mutual covenants set forth
herein, the parties agree as follows:
1. Employment.
-----------
1.1 General. The Company hereby agrees to employ the Executive, and
--------
the Executive hereby agrees to serve the Company, on the terms and subject to
the conditions set forth herein.
<PAGE>
Page 2 of 10 pages
1.2 Duties of Executive. During the term of this Agreement, the
--------------------
Executive shall serve as the Chairman and CEO of the Company, and shall
diligently perform all the services as may be assigned to him by the Board, and
shall exercise such power and authority as may from time to time be delegated to
him by the Board. The Executive agrees to devote his full time and attention to
the business and affairs of the Company, render such services to the best of his
ability, and use his best efforts to promote the interests of the Company.
2. Term.
-----
2.1 Initial Term. The initial term of this Agreement and the
-------------
employment of the Executive hereunder shall be for the three year six month (3
1/2) period commencing on the date of the transactions contemplated by the
Agreement are consummated (the "Initial Term"), unless sooner terminated in
accordance with the terms and conditions hereof.
2.2 Renewal Terms. The Initial Term of this Agreement, and the
--------------
employment of the Executive hereunder, may be renewed and extended for such
period or periods as may be mutually agreed to by the Company and the Executive.
If this Agreement is not so renewed and extended prior to the expiration of the
Initial Term, this Agreement, and the employment of the Executive hereunder,
shall automatically terminate upon the expiration of the Initial Term.
3. Compensation.
-------------
3.1 Base Salary. The Executive shall receive a base salary (the
------------
"Base Salary") at the following annual rate with such Base Salary payable in
installments consistent with the Company's normal payroll schedule, subject to
applicable withholding and other taxes:
(a) Seventy-two Thousand Dollars ($72,000.00) for the 1996 Term;
(b) Fifty-nine Thousand Dollars ($59,000.00) during the 1997
Term of this Agreement.
(c) Eighty-four Thousand Dollars ($84,000.00) during the
1998 Term of this Agreement
(d) Eighty-four Thousand Dollars ($84,000.00) during the 1999
Term of this Agreement;
<PAGE>
Page 3 of 10 pages
3) If the term of this Agreement shall be renewed and extended
as provided in Section 2.2 hereof.
3.2 Incentive Compensation.
-----------------------
(a) In addition to the Base Salary, the Executive shall be entitled
to receive annual incentive compensation (the "Incentive Compensation") equal to
Twenty-Five Percent (25%) of the Executive's Base Salary for each fiscal year
of the Company ending after the date of this Agreement and during the term of
the Executive's employment hereunder.
(b) For purposes of this Agreement, the amount of the Incentive
Compensation payable with respect to any fiscal year (net of any tax or other
amount properly withheld therefrom) shall be paid by the Company to Executive
within one hundred and twenty days (120) after the end of the fiscal year.
(c) In the event that the Executive's employment is terminated upon
the expiration of the Initial Term, the Executive shall not be entitled to any
Incentive Compensation for the fiscal year then in effect. Instead, the
Executive shall be entitled to payment of an amount equal to the Incentive
Compensation, if any, paid to him in respect of the immediately preceding fiscal
year, prorated for the period of service by the Executive from the end of the
immediately preceding fiscal year to the end of the Initial Term.
4. Expense Reimbursement and Other Benefits.
-----------------------------------------
4.1 Expense Reimbursement. The Executive shall be entitled to
-----------------------
reimbursement by the Company for all reasonable business expenses incurred by
him in connection with the performance of his duties hereunder, provided,
---------
however, that such entitlement is conditioned upon the Executive providing the
Company with appropriate documentation of such expenses in accordance with
Company policy.
4.2 Other Benefits. The Executive shall be entitled to participation
---------------
in all medical, hospitalization, disability and group life insurance plans, and
any and all other employee benefit plans, as are presently and hereinafter
provided by the Company to its executives. The Executive shall be entitled to
four (4) weeks vacation per year in accordance with the Company's prevailing
policy for its executives; provided, however, that in no event may a vacation
---------
be taken when to do so could reasonably be expected to materially and adversely
affect
<PAGE>
Page 4 of 10 pages
the Company's business. In addition, the Executive shall be entitled to
the benefits set forth on Exhibit "A" attached hereto. Notwithstanding the
foregoing, except as set forth in Exhibit A, the Executive shall be entitled to
employee benefits which are no less favorable than those currently in operation
in the Company.
4.3 Working Facilities. The Company shall furnish the Executive with
-------------------
an office, secretarial help and other facilities and services suitable to his
position and adequate for the performance of his duties hereunder.
5. Termination.
------------
5.1 Termination For Cause. The Company shall at all times have the
----------------------
right, upon written notice to the Executive, to terminate the Executive's
employment hereunder for cause (as hereinafter defined). For purposes of this
Agreement, the term "Cause" shall mean (a) a willful breach by the Executive
of any of the material terms or provisions of this Agreement; (b) the charging
or indictment of the Executive in connection with a felony; (c) commission by
the Executive of an act or acts involving fraud, embezzlement, misappropriation,
theft, breach of fiduciary duty or dishonesty against property or personnel of
the Company; or (d) willful or reckless conduct by the Executive which the
Board in good faith determines could reasonably be expected to have a material
adverse effect on the business, assets, properties, results of operations,
financial condition or prospects of the Company. Upon any termination pursuant
to this Section 5.1, the Executive shall be entitled to be paid his Base Salary
to the date of termination and the Company shall have no further liability under
this Agreement (other than for the reimbursement for reasonable pre-approved
business expenses incurred prior to the date of termination, subject, however,
to the provisions of Section 4.1).
5.2 Disability. The Company shall at all times have the right, upon
-----------
written notice to the Executive, to terminate the Executive's employment
hereunder, if the Executive shall, as the result of mental or physical
incapacity, illness or disability become unable to perform his duties hereunder
for in excess of sixty (60) consecutive calendar days or ninety (90) calendar
days in any twelve (12) month period. Upon any termination pursuant to this
Section 5.2, (a) the Company shall pay to the Executive (I) immediately any
unpaid amounts of his Base Salary accrued through the effective date of
termination, plus (ii) in accordance with Section 3.2 (b), an amount equal to
the Incentive Compensation, if any, payable to him in respect of the fiscal year
of the Company in which such termination occurs, prorated for the period of
service by the Executive from the beginning of such fiscal year through the date
of
<PAGE>
Page 5 of 10 pages
termination, and (b) the Company shall have no further liability under this
Agreement (other than for reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however, to the provisions
of Section 4.1).
5.3 Death. In the event of the death of the Executive during the term of
------
his employment hereunder, (a) the Company shall pay to the estate of the
deceased Executive (i) immediately any unpaid amounts of his Base Salary
accrued through the date of death, plus (ii) in accordance with Section
----
3.2(b), an amount equal to the Incentive Compensation, if any, payable to him in
respect of the fiscal year of the Company in which such death occurs, prorated
for the period of service by the Executive from the beginning of such fiscal
year through the date of his death, and (b) the Company shall have no further
liability under this Agreement (other than for reimbursement for reasonable pre-
approved business expenses incurred prior to the date of the Executive's death,
subject, however, to the provisions of Section 4.1).
5.4 Termination Without Cause. At any time the Company shall have the
--------------------------
right to terminate the Executive's employment hereunder by written notice to the
Executive, provided, however, that the Company shall (i) on the effective date
-------- -------
of termination specified in the notice, pay to the Executive any unpaid Base
Salary accrued through the effective date of termination, (ii) pay to the
Executive one-half of his then effective Base Salary, in equal installments
consistent with the Company's normal payroll practices until the date (the
"Severance Date") which is twelve (12) months following the effective date of
termination, and (iii) in accordance with Section 3.2(b), pay the Executive an
amount equal to the Incentive Compensation, if any, payable to him in respect of
the fiscal year of the Company in which the termination occurs, prorated for the
period of service by the Executive from the beginning of such fiscal year
through the date of termination. Upon such termination and payments, the Company
shall have no further liability under this Agreement (other than for
reimbursement for reasonable pre-approved business expenses incurred prior to
the date of termination, subject, however to the provisions of Section 4.1).
5.5 Resignation By Executive. If Executive resigns, quits or voluntarily
-------------------------
terminates his employment prior to the expiration of the term of this Agreement,
Executive is required, and agrees to, give the Company a six (6) week notice
prior to such resignation or voluntary termination of his employment, the
purpose of which is to allow the Company ample time to locate a senior
management replacement for the Executive's vacant position. If, during the six
(6) week period, a senior management replacement is hired by the Company,
Executive
<PAGE>
Page 6 of 10 pages
agrees to remain with the Company for the balance of the remaining time to aid
in the transition period and the initial training of the new executive.
6. Restrictive Covenants.
----------------------
6.1 Non-competition. While employed by the Company and during the
----------------
Non-competition Period (as hereinafter defined), the Executive shall not,
directly or indirectly, engage in or have any interest in any sole
proprietorship, partnership, corporation or business or any other person or
entity (whether as an employee, officer, director, partner, agent, security
holder, creditor, consultant or otherwise) that directly or indirectly engages
in any type of entertainment production, business, marketing, computer or cell
animation, graphics, distribution, producing, writing, directing and/or
manufacturing of any type of entertainment product including, but not limited
to, toys, records, videos, CD-ROM and merchandising items anywhere throughout
the universe. For purpose of this Section 6.1, the term "Non-competition
Period" shall mean (a) in the event the Executive's employment is terminated
pursuant to Section 5.4, the period beginning on the effective date of
termination and ending one (1) year thereafter, or (b) in the event the
Executive's employment hereunder is terminated for any other reason, a period of
two (2) years following the date of his employment is terminated. Because such
mandatory restrictive covenants are being placed on the Executive, the Company
shall pay the Executive's base salary hereunder for a period of two (2) years
after termination of employment.
6.2 Nondisclosure. The Executive shall not divulge, communicate, or
--------------
use to the detriment of the Company or for the benefit of any other person or
persons, or misuse in any way, any confidential information or data now known or
hereafter acquired by the Executive with respect to the business of the Company
(which shall include, but not be limited to, information concerning the
Company's financial condition, prospects, customers, sources of leads, methods
of doing business, and the manner of design, manufacture, financing, marketing
and distribution of the Company's productions) shall be deemed a valuable,
special and unique asset of the Company that is received by the Executive in
confidence and as a fiduciary, and the Executive shall remain a fiduciary to the
Company with respect to all such information.
6.3 Non-solicitation of Employees and Customers. While employed by
--------------------------------------------
the Company and for two (2) years following the termination of his employment
for any reason, the Executive shall not, directly or indirectly, for himself or
for any other person, firm, corporation, partnership, association or
<PAGE>
Page 7 of 10 pages
other entity, (a) attempt to employ or enter into any contractual arrangement
with any employee or former employee of the Company, unless such employee or
former employee has not been employed by the Company for a period in excess of
one (1) year, or (b) call or solicit any of the actual or targeted prospective
customers or clients of the Company, nor shall the Executive make known the
names and addresses of such customers or clients or any information relating in
any manner to the Company's trade or business relationships with such customers
and clients.
6.4 Books and Records. All books, records and accounts relating in
------------------
any manner to the business, customers, suppliers or clients of the Company
and all other documents, disks, software or other items containing confidential
information relating to the Company, whether prepared by the Executive or
otherwise coming into the Executive's possession, shall be the exclusive
property of the Company and shall be returned immediately, together with any
copies, to the Company on the termination of the Executive's employment
hereunder, or on the Company's request at any time.
7. Injunction. It is recognized and hereby acknowledged by the parties
-----------
hereto that a breach by the Executive of any of the covenants contained in
Section 6 of this Agreement will cause irreparable harm and damage to the
Company, the monetary amount of which may be virtually impossible to ascertain.
As a result, the Executive recognizes and hereby acknowledges that the Company
shall be entitled to an injunction from any court of competent jurisdiction
enjoining and restraining any violation of any or all of the covenants contained
in Section 6 of this Agreement by the Executive or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
8. Governing Law. This Agreement shall be governed by and construed in
--------------
accordance with the internal laws of the State of California.
9. Entire Agreement. This Agreement constitutes the entire agreement
-----------------
between the parties hereto with respect to the subject matter hereof and, upon
its effectiveness, shall supersede all prior agreements, understandings and
arrangements, both oral and written, between and among the Executive, the
Company and/or any of their affiliates with respect to the subject matter
contained herein. Except for the obligation to pay any accrued but unpaid salary
due the Executive, all such prior agreements, understandings and arrangements
for the provision of services by the Executive to the Company and/or any of its
affiliates and the compensation of the Executive in any form shall automatically
<PAGE>
Page 8 of 10 pages
terminate upon the consummation of the transactions contemplated by the Purchase
Agreement, and each party shall thereupon and thereby, without any further
action, release and forever discharge the other (and the other's affiliates)
from any and all liabilities and obligations of any nature arising out of or in
connection with any and all such prior agreements, understandings or
arrangements. This Agreement may not be modified in any way unless by a written
instrument signed by both the Company and the Executive.
10. Notices. Any notice required or permitted to be given hereunder shall
--------
be deemed given when delivered by hand, by facsmile or three (3) business days
after being deposited in the United States mail, by registered or certified
mail, return receipt requested, postage prepaid, (i) if to the Company, to the
address of the Company's principal offices in 3330 Ocean Park Blvd, Suite 115A,
Santa Monica, California 90405 and (ii) to the Executive, to his address as
reflected on the payroll records of the Company, or to such other address as
either party hereto may from time to time give notice of to the other.
11. Benefits; Binding Effect. This Agreement shall be for the benefit of
--------------------------
and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns, including without limitation, any successor to the Company, whether by
merger, consolidation, sale of stock, sale of assets or otherwise; provide,
however, that under no circumstances may the Executive delegate his employment
obligations hereunder or any portion thereof.
12. Severability. The invalidity of any one or more of the words,
--------------
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more words, phrases, sentences, clauses
or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by length of time or size of
area, or both, the otherwise invalid provision will be considered to be reduced
to a period or area which would cure such invalidity.
13. Waiver. The waiver by either party hereto of a breach or violation of
-------
any term or provision of this Agreement shall not operate nor be construed as a
waiver of any subsequent breach or violation.
<PAGE>
Page 9 of 10 pages
14. Damages; Prevailing Party. Nothing contained herein shall be
--------------------------
construed to prevent the Company or the Executive from seeking and recovering
from the other damages sustained by either or both of them as a result of its or
his breach of any term or provision of this Agreement. If there is any legal
action or proceeding to enforce or interpret any provision of this Agreement or
to protect or to establish any right or remedy of any party, the nonprevailing
party to such action or proceeding shall pay to the prevailing party all costs
and expenses, including reasonable attorney's fees and costs, incurred by such
prevailing party in such action or proceeding, in enforcing its judgment, and in
connection with any appeal from such judgment. Reasonable attorney's fees and
costs incurred in enforcing any judgment or in connection with any appeal shall
be recoverable separately from and in addition to any other amount included in
such judgment. The prevailing party's rights under this Section 14 shall not
merge into any judgment and shall survive until all such fees and costs have
been paid.
15. Section Headings. The section headings contained in this Agreement
-----------------
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this agreement.
16. No Third Party Beneficiary. Nothing expressed or implied in this
---------------------------
Agreement is intended, or shall be construed, to confer upon or give any person
other than the Company, the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and assigns, any rights or
remedies under or by reason of this Agreement.
17. Subsidiaries. All reference to the "Company" in this Agreement,
-------------
including but not limited to those in Section 6, shall be deemed to include any
and all of the Company's direct and indirect subsidiaries to the extent the
contex may require.
<PAGE>
Page 10 of 10 Pages
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
MSH Entertainment Corporation, Inc.
By: /s/ JONATHAN STATHAKIS
-------------------------
Jonathan Stathakis
-------------------------
(Print Name)
Its: President
-------------------------
Agreed to Accepted:
By: /s/ ROBERT MAERZ
-------------------------
Executive
<PAGE>
EXHIBIT A
---------
Employee Benefits
-----------------
1. The Company shall provide to the Executive for his use a leased
automobile comparable to the automobiles provided to the senior executives of
the Company (the "Automobile"). The Automobile shall be comparable to and shall
not exceed the monthly lease payment of any leased automobile of any senior
executive of the Company. All reasonable expenses, including car insurance, for
the maintenance and operation of the Automobile shall be paid by the Company.
2. If, in the performance of his duties on behalf of the Company, the
Executive should utilize a place of abode owned by the Executive or a member of
his immediate family while on a business trip away from his principal residence
in San Francisco, the Company shall pay to the Executive a lodging allowance of
One Hundred and Seventy-Five Dollars ($175.00) per night. Under no
circumstances, however, shall the Executive be entitled to such payment with
respect to any place of abode owned by him or by a member of his immediate
family in the San Francisco or Los Angeles metropolitan area. The Executive
shall also be entitled to reimbursement by Company for all reasonable pre-
approved business expenses incurred by him in connection with any foriegn
business trips which are trade and convention related or otherwise, which are in
connection with his duties hereunder.
3. The Company shall not pay the Executive's personal expenses including,
but not limited to, insurance (except as noted below), legal and accounting
expenses.
4. Executive shall receive a living allowance ("Living Allowance") on the
date the Executive is required to begin his employment with the Company and
while Executive retains a residency in either Los Angeles or San Francisco (the
"City"). Said Living Allowance shall be payable on the first day of each month
thereafter in the amount of Two Thousand Five Hundred Dollars ($2,500.00) a
month.
5. For the term of this Agreement, Executive shall be offered a seat on
the Board of Directors of MSH Entertainment Corporation and on any and all
current or future MSHE subsidiary companies owned or formed by MSHE and/or those
formed by Executive either individually or with non-MSHE personnel.
6. Executive shall participate in the Stock-option plan of the Company,
whereby additional options may be granted to Executive depending upon the
performance of the Executive and the Company. In addition, Executive shall be
<PAGE>
entitled to shares and/or options of any and all new companies and/or
corporations formed by the Company. Executive shall also be entitled to shares
and/or options whereby Executive assisted in the implementation of the forming
of new corporations in conjunction with others not associated with the Company.
7. Executive shall be provided with major medical insurance unless
Executive elects to retain his current insurance whereby Company agrees to pay
for same as long as the amount paid does not exceed any sum paid for major
medical insurance for any senior Company executive. Any additional amount shall
be paid by and be the responsibility of the Executive.
8. Executive shall be entitled to be paid producer, executive producer
and/or writer fees from any and all programs that the Executive is either
producing or executive producing. Said fees shall be set by either the executive
producers, the Company and/or the broadcaster(s) and/or the distributor(s) and
shall not exceed industry standards and in many cases may be below industry
standards. The Company is endeavoring to achieve a reputation in the industry as
a quality low to moderate budget producer of programming and intends to and will
have to be competitive with its budgets to achieve this goal. It is not the
intent of the Company to have the Executive produce specific programs, but only
those which the Executive may be requested to produce and/or executive producer
by a broadcaster, distributor, buyer, production partner and/or joint venture
partner.
9. Company shall pay the moving expenses of the Executive from Executive's
current place of residency to the required place of residency whether it is Los
Angeles or San Francisco, or any other city designated by the Company for the
performance of the Executives's duties, said moving expenses are not to exceed
the total sum of Five Thousand Dollars ($5,000.00).
10. Executive shall have the authority to negotiate and sign agreements
for the Company concerning any and all matters including, but not limited to,
employment, production, distribution and financial.
11. The Company shall establish a payroll escrow account whereby the
Executive's salary for one (1) full year shall be escrowed as a guarantee to
Executive.
/s/ RM /s/ JS
- ------------------ ------------------
Executive Initials Company Initials
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is made and entered into as of the first
day of January, 1997, by and between MSH ENTERTAINMENT CORPORATION, INC., a Utah
corporation (the "Company"), and Jonathan Stathakis (the "Executive").
PRELIMINARY STATEMENTS:
-----------------------
A. The Executive is currently functioning as a consultant to the Company.
B. The Executive possesses intimate knowledge of the business and affairs
of the Company, its policies, methods and personnel.
C. The Board of Directors of the Company (the "Board") recognizes that the
Executive has contributed to the growth and success of the Company and desires
to assure the Company of the Executive's continued employment and to compensate
him therefore.
D. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
E. The Executive is willing to make his services available to the Company
on the terms and conditions hereinafter set forth.
AGREEMENTS:
-----------
NOW, THEREFORE, in consideration of the premises and mutual covenants set forth
herein, the parties agree as follows:
1. Employment.
-----------
1.1 General. The Company hereby agrees to employ the Executive, and
--------
the Executive hereby agrees to serve the Company, on the terms and subject to
the conditions set forth herein.
<PAGE>
Page 2 of 10 pages
1.2 Duties of Executive. During the term of this Agreement, the
--------------------
Executive shall serve as the President and Chief Operating Officer ("COO") of
the Company, and shall diligently perform all the services as may be assigned to
him by the Board, and shall exercise such power and authority as may from time
to time be delegated to him by the Board. The Executive agrees to devote his
full time and attention to the business and affairs of the Company, render such
services to the best of his ability, and use his best efforts to promote the
interests of the Company.
2. Term.
-----
2.1 Initial Term. The initial term of this Agreement and the
-------------
employment of the Executive hereunder shall be for the three (3) year period
commencing on the date of the transactions contemplated by the Agreement are
consummated (the "Initial Term"), unless sooner terminated in accordance with
the terms and conditions hereof.
2.2 Renewal Terms. The Initial Term of this Agreement, and the
--------------
employment of the Executive hereunder, may be renewed and extended for such
period or periods as may be mutually agreed to by the Company and the Executive.
If this Agreement is not so renewed and extended prior to the expiration of the
Initial Term, this Agreement, and the employment of the Executive hereunder,
shall automatically terminate upon the expiration of the Initial Term.
3. Compensation.
-------------
3.1 Signing Bonus: As an incentive to enter into this Agreement,
--------------
Company shall pay Executive a signing bonus of Twenty-Five Thousand Dollars
($25,000.00), payable upon the signing of this Agreement.
3.2 Base Salary. The Executive shall receive a base salary (the
------------
"Base Salary") at the following annual rates, with such Base Salary payable, in
installments consistent with the Company's normal payroll schedule, subject to
applicable withholding and other taxes:
(a) Fifty-nine Thousand Dollars ($59,000.00) during the 1997
Term of this Agreement;
(b) Eighty-four Thousand Dollars during the 1998 Term of this
Agreement;
<PAGE>
Page 3 of 10 pages
(c) Eighty-four Thousand Dollars during the 1999 Term of this
Agreement.
(d) If the Term of this Agreement shall be renewed and extended
as provided in Section 2.2 hereof.
3.3 Incentive Compensation.
-----------------------
(a) In addition to the Base Salary, the Executive shall be
entitled to receive annual incentive compensation (the "Incentive Compensation")
equal to twenty-five percent (25%) of the Executive's Base Salary for each
fiscal year of the Company ending after the date of this Agreement and during
the term of the Executive's employment hereunder.
(b) For purposes of this Agreement, the amount of the Incentive
Compensation payable with respect to any fiscal year (net of any tax or other
amount properly withheld therefrom) shall be paid by the Company to Executive
within one hundred and twenty days (120) after the end of the fiscal year.
(c) In the event that the Executive's employment is terminated
upon the expiration of the Initial Term, the Executive shall not be entitled to
any Incentive Compensation for the fiscal year then in effect. Instead, the
Executive shall be entitled to payment of an amount equal to the Incentive
Compensation, if any, paid to him in respect of the immediately preceding fiscal
year, prorated for the period of service by the Executive from the end of the
immediately preceding fiscal year to the end of the Initial Term.
4. Expense Reimbursement and Other Benefits.
-----------------------------------------
4.1 Expense Reimbursement. The Executive shall be entitled to
-----------------------
reimbursement by the Company for all reasonable business expenses incurred by
him in connection with the performance of his duties hereunder, provided,
---------
however, that such entitlement is conditioned upon the Executive providing the
Company with appropriate documentation of such expenses in accordance with
Company policy.
4.2 Other Benefits. The Executive shall be entitled to participation
---------------
in all medical, hospitalization, disability and group life insurance plans, and
any and all other employee benefit plans, as are presently and hereinafter
provided
<PAGE>
Page 4 of 10 pages
by the Company to its executives. The Executive shall be entitled to four (4)
weeks vacation per year in accordance with the Company's prevailing policy for
its executives; provided, however, that in no event may a vacation be taken
---------
when to do so could reasonably be expected to materially and adversely affect
the Company's business. In addition, the Executive shall be entitled to the
benefits set forth on Exhibit "A" attached hereto. Notwithstanding the
foregoing, except as set forth in Exhibit A, the Executive shall be entitled to
employee benefits which are no less favorable than those currently in operation
in the Company.
4.3 Working Facilities. The Company shall furnish the Executive with
-------------------
an office, secretarial help and other facilities and services suitable to his
position and adequate for the performance of his duties hereunder.
5. Termination.
------------
5.1 Termination For Cause. The Company shall at all times have the
----------------------
right, upon written notice to the Executive, to terminate the Executive's
employment hereunder for cause (as hereinafter defined). For purposes of this
Agreement, the term "Cause" shall mean (a) a willful breach by the Executive
of any of the material terms or provisions of this Agreement; (b) the charging
or indictment of the Executive in connection with a felony; (c) commission by
the Executive of an act or acts involving fraud, embezzlement, misappropriation,
theft, breach of fiduciary duty or dishonesty against property or personnel of
the Company; or (d) willful or reckless conduct by the Executive which the
Board in good faith determines could reasonably be expected to have a material
adverse effect on the business, assets, properties, results of operations,
financial condition or prospects of the Company. Upon any termination pursuant
to this Section 5.1, the Executive shall be entitled to be paid his Base Salary
to the date of termination and the Company shall have no further liability under
this Agreement (other than for the reimbursement for reasonable pre-approved
business expenses incurred prior to the date of termination, subject, however,
to the provisions of Section 4.1).
5.2 Disability. The Company shall at all times have the right, upon
-----------
written notice to the Executive, to terminate the Executive's employment
hereunder, if the Executive shall, as the result of mental or physical
incapacity, illness or disability become unable to perform his duties hereunder
for in excess of sixty (60) consecutive calendar days or ninety (90) calendar
days in any twelve (12) month period. Upon any termination pursuant to this
Section 5.2, (a) the Company shall pay to the Executive (I) immediately any
unpaid amounts of his Base Salary accrued through the effective date of
termination, plus (ii) in accordance with Section 3.2 (b), an amount equal to
the Incentive
<PAGE>
Page 5 of 10 pages
Compensation, if any, payable to him in respect of the fiscal year of the
Company in which such termination occurs, prorated for the period of service by
the Executive from the beginning of such fiscal year through the date of
termination, and (b) the Company shall have no further liability under this
Agreement (other than for reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however, to the provisions
of Section 4.1).
5.3 Death. In the event of the death of the Executive during the term of
------
his employment hereunder, (a) the Company shall pay to the estate of the
deceased Executive (i) immediately any unpaid amounts of his Base Salary
accrued through the date of death, plus (ii) in accordance with Section
----
3.2(b), an amount equal to the Incentive Compensation, if any, payable to him in
respect of the fiscal year of the Company in which such death occurs, prorated
for the period of service by the Executive from the beginning of such fiscal
year through the date of his death, and (b) the Company shall have no further
liability under this Agreement (other than for reimbursement for reasonable pre-
approved business expenses incurred prior to the date of the Executive's death,
subject, however, to the provisions of Section 4.1).
5.4 Termination Without Cause. At any time the Company shall have the
--------------------------
right to terminate the Executive's employment hereunder by written notice to the
Executive, provided, however, that the Company shall (i) on the effective date
-------- -------
of termination specified in the notice, pay to the Executive any unpaid Base
Salary accrued through the effective date of termination, (ii) pay to the
Executive one-half of his then effective Base Salary, in equal installments
consistent with the Company's normal payroll practices until the date (the
"Severance Date") which is twelve (12) months following the effective date of
termination, and (iii) in accordance with Section 3.2(b), pay the Executive an
amount equal to the Incentive Compensation, if any, payable to him in respect of
the fiscal year of the Company in which the termination occurs, prorated for the
period of service by the Executive from the beginning of such fiscal year
through the date of termination. Upon such termination and payments, the Company
shall have no further liability under this Agreement (other than for
reimbursement for reasonable pre-approved business expenses incurred prior to
the date of termination, subject, however to the provisions of Section 4.1).
5.5 Resignation By Executive. If Executive resigns, quits or voluntarily
-------------------------
terminates his employment prior to the expiration of the term of this Agreement,
Executive is required, and agrees to, give the Company a six (6) week notice
prior to such resignation or voluntary termination of his employment, the
purpose of which is to allow the Company ample time to locate a senior
management replacement for the Executive's vacant position. If, during the six
(6) week period, a senior management replacement is hired by the Company,
Executive
<PAGE>
Page 6 of 10 pages
agrees to remain with the Company for the balance of the remaining time to aid
in the transition period and the initial training of the new executive.
6. Restrictive Covenants.
----------------------
6.1 Non-competition. While employed by the Company and during the
----------------
Non-competition Period (as hereinafter defined), the Executive shall not,
directly or indirectly, engage in or have any interest in any sole
proprietorship, partnership, corporation or business or any other person or
entity (whether as an employee, officer, director, partner, agent, security
holder, creditor, consultant or otherwise) that directly or indirectly engages
in any type of entertainment production, business, marketing, computer or cell
animation, graphics, distribution, producing, writing, directing and/or
manufacturing of any type of entertainment product including, but not limited
to, toys, records, videos, CD-ROM and merchandising items anywhere throughout
the universe. For purpose of this Section 6.1, the term "Non-competition
Period" shall mean (a) in the event the Executive's employment is terminated
pursuant to Section 5.4, the period beginning on the effective date of
termination and ending one (1) year thereafter, or (b) in the event the
Executive's employment hereunder is terminated for any other reason, a period of
one (1) year following the date of his employment is terminated. Because such
mandatory restrictive covenants are being placed on the Executive, the Company
shall pay the Executive's Base Salary hereunder for a period of two (2) years
after termination of employment.
6.2 Nondisclosure. The Executive shall not divulge, communicate, or
--------------
use to the detriment of the Company or for the benefit of any other person or
persons, or misuse in any way, any confidential information or data now known or
hereafter acquired by the Executive with respect to the business of the Company
(which shall include, but not be limited to, information concerning the
Company's financial condition, prospects, customers, sources of leads, methods
of doing business, and the manner of design, manufacture, financing, marketing
and distribution of the Company's productions) shall be deemed a valuable,
special and unique asset of the Company that is received by the Executive in
confidence and as a fiduciary, and the Executive shall remain a fiduciary to the
Company with respect to all such information.
6.3 Non-solicitation of Employees and Customers. While employed by
--------------------------------------------
the Company and for six (6) months following the termination of his employment
for any reason, the Executive shall not, directly or indirectly, for himself or
for any other person, firm, corporation, partnership, association or other
entity, (a) attempt to employ or enter into any contractual arrangement with
any employee or former employee of the Company, unless such employee or former
employee has not been employed by the Company for a period in
<PAGE>
Page 7 of 10 pages
excess of six (6) months, or (b) call or solicit any of the actual or targeted
prospective customers or clients of the Company, nor shall the Executive make
known the names and addresses of such customers or clients or any information
relating in any manner to the Company's trade or business relationships with
such customers and clients.
6.4 Books and Records. All books, records and accounts relating in
------------------
any manner to the business, customers, suppliers or clients of the Company
and all other documents, disks, software or other items containing confidential
information relating to the Company, whether prepared by the Executive or
otherwise coming into the Executive's possession, shall be the exclusive
property of the Company and shall be returned immediately, together with any
copies, to the Company on the termination of the Executive's employment
hereunder, or on the Company's request at any time.
7. Injunction. It is recognized and hereby acknowledged by the parties
-----------
hereto that a breach by the Executive of any of the covenants contained in
Section 6 of this Agreement will cause irreparable harm and damage to the
Company, the monetary amount of which may be virtually impossible to ascertain.
As a result, the Executive recognizes and hereby acknowledges that the Company
shall be entitled to an injunction from any court of competent jurisdiction
enjoining and restraining any violation of any or all of the covenants contained
in Section 6 of this Agreement by the Executive or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
8. Governing Law. This Agreement shall be governed by and construed in
--------------
accordance with the internal laws of the State of California.
9. Entire Agreement. This Agreement constitutes the entire agreement
-----------------
between the parties hereto with respect to the subject matter hereof and, upon
its effectiveness, shall supersede all prior agreements, understandings and
arrangements, both oral and written, between and among the Executive, the
Company and/or any of their affiliates with respect to the subject matter
contained herein. Except for the obligation to pay any accrued but unpaid salary
due the Executive, all such prior agreements, understandings and arrangements
for the provision of services by the Executive to the Company and/or any of its
affiliates and the compensation of the Executive in any form shall automatically
terminate upon the consummation of the transactions contemplated by the Purchase
Agreement, and each party shall thereupon and thereby, without any further
action, release and forever discharge the other (and the other's affiliates)
from any and all liabilities and obligations of any nature arising out of or in
<PAGE>
Page 8 of 10 pages
connection with any and all such prior agreements, understandings or
arrangements. This Agreement may not be modified in any way unless by a written
instrument signed by both the Company and the Executive.
10. Notices. Any notice required or permitted to be given hereunder shall
--------
be deemed given when delivered by hand, by facsmile or three (3) business days
after being deposited in the United States mail, by registered or certified
mail, return receipt requested, postage prepaid, (I) if to the Company, to the
address of the Company's principal offices in 3330 Ocean Park Blvd., suite 115A,
Santa Monica, California 90405 and (ii) to the Executive, to his address as
reflected on the payroll records of the Company, or to such other address as
either party hereto may from time to time give notice of to the other.
11. Benefits; Binding Effect. This Agreement shall be for the benefit of
-------------------------
and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns, including without limitation, any successor to the Company, whether by
merger, consolidation, sale of stock, sale of assets or otherwise; provide,
however, that under no circumstances may the Executive delegate his employment
obligations hereunder or any portion thereof.
12. Severability. The invalidity of any one or more of the words,
-------------
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more words, phrases, sentences, clauses
or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by length of time or size of
area, or both, the otherwise invalid provision will be considered to be reduced
to a period or area which would cure such invalidity.
13. Waiver. The waiver by either party hereto of a breach or violation of
-------
any term or provision of this Agreement shall not operate nor be construed as a
waiver of any subsequent breach or violation.
14. Damages; Prevailing Party. Nothing contained herein shall be
--------------------------
construed to prevent the Company or the Executive from seeking and recovering
from the other damages sustained by either or both of them as a result of its or
his breach of any term or provision of this Agreement. If there is any legal
action or proceeding to enforce or interpret any provision of this Agreement or
to protect or to establish any right or remedy of any party, the nonprevailing
party to such
<PAGE>
Page 9 of 10 pages
action or proceeding shall pay to the prevailing party all costs and expenses,
including reasonable attorney's fees and costs, incurred by such prevailing
party in such action or proceeding, in enforcing its judgment, and in connection
with any appeal from such judgment. Reasonable attorney's fees and costs
incurred in enforcing any judgment or in connection with any appeal shall be
recoverable separately from and in addition to any other amount included in such
judgment. The prevailing party's rights under this Section 14 shall not merge
into any judgment and shall survive until all such fees and costs have been
paid.
15. Section Headings. The section headings contained in this Agreement
-----------------
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this agreement.
16. No Third Party Beneficiary. Nothing expressed or implied in this
---------------------------
Agreement is intended, or shall be construed, to confer upon or give any person
other than the Company, the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and assigns, any rights or
remedies under or by reason of this Agreement.
17. Subsidiaries. All reference to the "Company" in this Agreement,
-------------
including but not limited to those in Section 6, shall be deemed to include any
and all of the Company's direct and indirect subsidiaries to the extent the
contex may require.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
MSH Entertainment Corporation, Inc.
By: /s/ ROBERT MAERZ
-------------------------
Robert Maerz
-------------------------
(Print Name)
Its: Chairman
-------------------------
<PAGE>
Page 10 of 10 pages
Agreed to Accepted:
By: /s/ JONATHAN STATHAKIS
--------------------------
Executive
Jonathan Stathakis
--------------------------
Print Name
<PAGE>
EXHIBIT A
---------
Employee Benefits
-----------------
1. The Company shall provide to the Executive for his use a leased
automobile comparable to the automobiles provided to the senior executives of
the Company (the "Automobile"). The Automobile shall be comparable to and shall
not exceed the monthly lease payment of any leased automobile of any senior
executive of the Company. All reasonable expenses, including car insurance, for
the maintenance and operation of the Automobile shall be paid by the Company.
2. If, in the performance of his duties on behalf of the Company, the
Executive should utilize a place of abode owned by the Executive or a member of
his immediate family while on a business trip away from his principal residence
in San Francisco, the Company shall pay to the Executive a lodging allowance of
One Hundred and Seventy-Five Dollars ($175.00) per night. Under no
circumstances, however, shall the Executive be entitled to such payment with
respect to any place of abode owned by him or by a member of his immediate
family in the San Francisco or Los Angeles metropolitan area. The Executive
shall also be entitled to reimbursement by Company for all reasonable pre-
approved business expenses incurred by him in connection with any foriegn
business trips which are trade and convention related or otherwise, which are in
connection with his duties hereunder.
3. The Company shall not pay the Executive's personal expenses including,
but not limited to, insurance (except as noted below), legal and accounting
expenses.
4. Executive shall receive a living allowance ("Living Allowance") on the
date the Executive is required to begin his employment with the Company and
while Executive retains a residency in either Los Angeles or San Francisco (the
"City"). Said Living Allowance shall be payable on the first day of each month
thereafter in the amount of Two Thousand Five Hundred Dollars ($2,500.00) a
month.
5. For the term of this Agreement, Executive shall be offered a seat on
the Board of Directors of MSH Entertainment Corporation and on any and all
current or future MSHE subsidiary companies owned or formed by MSHE and/or those
formed by Executive either individually or with non-MSHE personnel.
<PAGE>
6. Executive shall participate in the Stock-option plan of the Company,
whereby additional options may be granted to Executive depending upon the
performance of the Executive and the Company. In addition, Executive shall be
entitled to shares and/or options of any and all new companies and/or
corporations formed by the Company. Executive shall also be entitled to shares
and/or options whereby Executive assisted in the implementation of the forming
of new corporations in conjunction with others not associated with the Company.
7. Executive shall be provided with major medical insurance unless
Executive elects to retain his current insurance whereby Company agrees to pay
for same as long as the amount paid does not exceed any sum paid for major
medical insurance for any senior Company executive. Any additional amount shall
be paid by and be the responsibility of the Executive.
8. Executive shall be entitled to be paid producer, executive producer
and/or writer fees from any and all programs that the Executive is either
producing or executive producing. Said fees shall be set by either the executive
producers, the Company and/or the broadcaster(s) and/or the distributor(s) and
shall not exceed industry standards and in many cases may be below industry
standards. The Company is endeavoring to achieve a reputation in the industry as
a quality low to moderate budget producer of programming and intends to and will
have to be competitive with its budgets to achieve this goal. It is not the
intent of the Company to have the Executive produce specific programs, but only
those which the Executive may be requested to produce and/or executive producer
by a broadcaster, distributor, buyer, production partner and/or joint venture
partner.
9. Company shall pay the moving expenses of the Executive from Executive's
current place of residency to the required place of residency whether it is Los
Angeles or San Francisco, or any other city designated by the Company for the
performance of the Executives's duties, said moving expenses are not to exceed
the total sum of Five Thousand Dollars ($5,000.00).
10. Executive shall have the authority to negotiate and sign agreements
for the Company concerning any and all matters including, but not limited to,
employment, production, distribution and financial.
11. The Company shall establish a payroll escrow account whereby the
Executive's salary for one (1) full year shall be escrowed as a guarantee to
Executive.
/s/ JS /s/ RM
- ------------------ ----------------
Executive Initials Company Initials
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is made and entered into as of the 7th day of
June, 1996, by and between MSH ENTERTAINMENT CORPORATION, a Utah corporation
(the "Company"), and Christopher Haigh (the "Executive").
------- ---------
PRELIMINARY STATEMENTS:
----------------------
A. The Executive is currently employed as President of East End
Productions, Inc. and East End Communications, Inc. and J.B. Dubs, Inc., each of
which is a California corporation (collectively, "EEP").
B. The Executive possesses intimate knowledge of the business and affairs
of EEP, its policies, methods and personnel.
C. The Company, EEP, and the Executive (as agent and attorney-in-fact
for the shareholders of EEP) have entered into an Agreement dated as of June 7,
1996 (the "Agreement"), pursuant to which the Company will purchase the Assets
---------
of the EEP.
D. The Board of Directors of the Company (the "Board") recognizes that
-----
the Executive has contributed to the growth and success of EEP and desires to
assure the Company of the Executive's continued employment and to compensate him
therefor.
E. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
F. The Executive is willing to make his services available to the Company
on the terms and conditions hereinafter set forth.
AGREEMENT:
---------
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties agree as follows:
1. EMPLOYMENT.
----------
1.1 GENERAL. The Company hereby agrees to employ the Executive,
-------
and the Executive hereby agrees to serve the Company, on the terms and subject
to the conditions set forth herein.
1.2 DUTIES OF EXECUTIVE. During the term of this Agreement, the
-------------------
Executive shall serve as an executive of the Company, shall diligently perform
all services as may be assigned to him by the Board, and shall exercise such
power and authority as may from time to time be delegated to him by the Board.
The Executive shall devote his full time and attention to the business and
affairs of the Company, render such services to the best of his ability, and use
his best efforts to promote the interests of the Company.
2. TERM.
----
2.1 INITIAL TERM. The initial term of this Agreement and the
------------
employment of the Executive hereunder shall expire on the later to occur of the
following: (i) three years after the date the transactions contemplated by the
Agreement are consummated; or (ii) the Aggregate Purchase Consideration has
<PAGE>
been paid to the Seller (the "Initial Term"), unless sooner terminated in
------------
accordance with the terms and conditions hereof.
2.2 RENEWAL TERMS. The Initial Term of this Agreement, and the
-------------
employment of the Executive hereunder, may be renewed and extended for such
period or periods as may be mutually agreed to by the Company and the Executive
in a written supplement to this Agreement signed by the Executive and the
Company (the "Written Supplement"). If this Agreement is not so renewed and
------- ----------
extended prior to the expiration of the Initial Term, this Agreement, and the
employment of the Executive hereunder, shall automatically terminate upon the
expiration of the Initial Term.
3. COMPENSATION. The Executive shall receive a base salary at the annual
------------
rate of $150,000 (the "Base Salary") during the Initial Term of this Agreement,
-----------
with such Base Salary payable in installments consistent with the Company's
normal payroll schedule, subject to applicable withholding and other taxes. If
the term of this Agreement shall be renewed and extended as provided in Section
2.2 hereof, then during such renewal term of his employment hereunder the
Executive shall be paid a base salary as set forth in the Written Supplement.
The Company shall place $150,000 (the "Escrow Fund") in an escrow account to
secure the Company's performance of its obligations under this Agreement. The
Executive's Base Salary for the Initial Term will be paid out of the Escrow
Fund.
3.1 PRODUCER AND DIRECTOR DUTIES. The Company will act in good faith
----------------------------
to assign either producer or director duties to the Executive where reasonably
practicable under all the circumstances. Fees shall not exceed industry
standards. The Executive shall not be assigned as both the producer and
director of the same project and will not be assigned to every project.
Assignments shall be made at the sole direction of the Company.
3.2 RESOLUTION OF DISPUTES. In the event of a dispute as to the
----------------------
amount of director's or producer's fees, the parties agree to single-arbitrator
arbitration under the Commercial Rules of the American Arbitration Association
with the arbitration forum to be in San Francisco, California.
2
<PAGE>
4. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.
----------------------------------------
4.1 EXPENSE REIMBURSEMENT. The Executive shall be entitled to
---------------------
reimbursement by the Company for all reasonable business expenses incurred by
him in connection with the performance of his duties hereunder; provided,
--------
however, that such entitlement is conditioned upon the Executive providing the
- -------
Company with appropriate documentation of such expenses in accordance with
Company policy.
4.2 OTHER BENEFITS. The Executive shall be entitled to
--------------
participate in all medical, hospitalization, disability and group life insurance
plans, and any and all other employee benefit plans, as are presently and
hereinafter provided by the Company to its executives. The Executive shall be
entitled to four weeks vacation per year in accordance with the Company's
prevailing policy for its executives; provided, however, that in no event may a
-------- -------
vacation be taken when to do so could reasonably be expected to materially and
adversely affect the Company's business. In addition, the Executive shall be
entitled to the benefits set forth on Exhibit "A" attached hereto.
Notwithstanding the foregoing, except as set forth on Exhibit "A", the Executive
shall be entitled to employee benefits which are no less favorable than those
currently in operation in the Company.
4.3 WORKING FACILITIES. The Company shall furnish the Executive with
------------------
an office, secretarial help and other facilities and services suitable to his
position and adequate for the performance of his duties hereunder.
4.4 FEES. The Executive shall be entitled to be paid additional
----
amounts from the Company for producing and directing programs and projects.
Such fees may not exceed industry standards, and may in fact be less than
industry standards in keeping with the Company's desire to create a reputation
for producing quality, low to moderate budget programming.
4.5 DIRECTORSHIP. During the term of the Executive's employment with
------------
the Company, the Executive shall be given a seat on the Company's board of
directors.
4.6 STOCK OPTIONS. Executive will have the right to participate in
-------------
the Company's existing Stock Option Plan. The number and price for such stock
options shall be based on the performance of the Company and the Executive.
5. TERMINATION.
-----------
5.1 TERMINATION FOR CAUSE. The Company shall at all times have
---------------------
the right, upon written notice to the Executive, to terminate the Executive's
employment hereunder for Cause (as hereinafter defined). For purposes of this
Agreement, the term "Cause" shall mean (a) a willful breach by the Executive of
-----
any of the material terms or provisions of this Agreement, (b) the charging or
indictment of the Executive in connection with a felony, (c) commission by the
Executive of an act or acts involving fraud, embezzlement, misappropriation,
theft, breach of fiduciary duty or dishonesty against the property or personnel
3
<PAGE>
of the Company, or (d) willful or reckless conduct by the Executive which the
Board in good faith determines could reasonably be expected to have a material
adverse effect on the business, assets, properties, results of operations,
financial condition or prospects of the Company. Upon any termination pursuant
to this Section 5.1, the Executive shall be entitled to be paid his Base Salary
to the date of termination and the Company shall have no further liability under
this Agreement (other than for reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however to the provisions of
Section 4.1).
5.2 DISABILITY. The Company shall at all times have the right,
----------
upon written notice to the Executive, to terminate the Executive's employment
hereunder, if the Executive shall, as the result of mental or physical
incapacity, illness or disability, become unable to perform his duties hereunder
for in excess of 60 consecutive calendar days or 90 calendar days in any 12-
month period. Upon any termination pursuant to this Section 5.2, (a) the
Company shall pay to the Executive (i) immediately any unpaid amounts of his
Base Salary accrued through the effective date of termination, (ii) plus one
----
year's Base Salary, plus (iii) in accordance with Section 3.2(b), an amount
----
equal to the Incentive Compensation, if any, payable to him in respect of the
fiscal year of the Company in which such termination occurs, prorated for the
period of service by the Executive from the beginning of such fiscal year
through the date of termination, and (b) the Company shall have no further
liability under this Agreement (other than for reimbursement for reasonable
business expenses incurred prior to the date of termination, subject, however,
to the provisions of Section 4.1).
5.3 DEATH. In the event of the death of the Executive during
-----
the term of his employment hereunder, (a) the Company shall pay to the estate of
the deceased Executive (i) immediately any unpaid amounts of his Base Salary
accrued through the date of his death, (ii) plus one year's Base Salary, plus
---- ----
(iii) in accordance with Section 3.2(b), an amount equal to the Incentive
Compensation, if any, payable to him in respect of the fiscal year of the
Company in which such death occurs, prorated for the period of service by the
Executive from the beginning of such fiscal year through the date of his death,
and (b) the Company shall have no further liability under this Agreement (other
than for reimbursement for reasonable business expenses incurred prior to the
date of the Executive's death, subject, however to the provisions of Section
4.1).
5.4 TERMINATION WITHOUT CAUSE. At any time the Company shall
-------------------------
have the right to terminate the Executive's employment hereunder by written
notice to the Executive; provided, however, that the Company shall (i) on the
-------- -------
effective date of termination specified in the notice, pay to the Executive any
unpaid Base Salary accrued through the effective date of termination, (ii) pay
the executive his then-effective Base Salary through the Term of this Agreement
plus any applicable extensions or renewals, or otherwise for the remainder of
the then-applicable contractual term of employment; and (iii) in accordance with
Section 3.2(b), pay the Executive an amount equal to the Incentive Compensation,
if any, payable to him in respect of the fiscal year of the Company in which
such termination occurs, prorated for the period of service by the Executive
from the beginning of such fiscal year through the date of termination. Upon
such termination and payments, the Company shall have no further liability under
this Agreement (other than for reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however to the provisions of
Section 4.1).
4
<PAGE>
5.5 TERMINATION BY EXECUTIVE. In the event the Executive voluntarily
------------------------
terminates his employment with the Company, the Company, consistent with current
labor laws, and, subject to Section 6.5, shall pay to the Executive any unpaid
Base Salary accrued through the date of termination. Upon any termination
pursuant to this Section 5.5, the Executive shall be entitled to be paid his
Base Salary to the date of termination and the Company shall have no further
liability under this Agreement (other than for reimbursement for reasonable
business expenses incurred prior to the date of termination, subject, however to
the provisions of Section 4.1).
6. RESTRICTIVE COVENANTS.
---------------------
6.1 NON-COMPETITION. While employed by the Company and during the
---------------
Non-competition Period (as hereinafter defined), subject to limitations on
enforcement of Section 6.5, the Executive shall not, directly or indirectly,
engage in or have any interest in any sole proprietorship, partnership,
corporation or business or any other person or entity (whether as an employee,
officer, director, partner, agent, security holder, creditor, consultant or
otherwise) that directly or indirectly engages in activities which are in direct
competition with the major activities of the Company, or which result in the
loss of customers to the Company. For purposes of this Section 6.1, the term
"Non-competition Period" shall mean (a) in the event the Executive's employment
- -----------------------
is terminated pursuant to Section 5.4, the period beginning on the effective
date of such termination and ending one year thereafter, or (b) in the event the
Executive's employment hereunder is terminated for any other reason, a period of
two years following the date his employment is terminated.
6.2 NONDISCLOSURE. The Executive shall not divulge,
-------------
communicate, or use to the detriment of the Company or for the benefit of any
other person or persons, or misuse in any way, any confidential information
pertaining to the business of the Company. Any confidential information or data
now known or hereafter acquired by the Executive with respect to the business of
the Company (which shall include, but not be limited to, information concerning
the Company's financial condition, prospects, customers, sources of leads,
methods of doing business, and the manner of design, manufacture, financing,
marketing and distribution of the Company's products) shall be deemed a
valuable, special and unique asset of the Company that is received by the
Executive in confidence and as a fiduciary, and the Executive shall remain a
fiduciary to the Company with respect to all of such information.
6.3 NON-SOLICITATION OF EMPLOYEES AND CUSTOMERS. While employed
-------------------------------------------
by the Company and for two years following the termination of his employment for
any reason, the Executive shall not, directly or indirectly, for himself or for
any other person, firm, corporation, partnership, association or other entity,
(a) attempt to employ or enter into any contractual arrangement with any
employee or former employee of the Company, unless such employee or former
employee has not been employed by the Company for a period in excess of one
year, or (b) call on or solicit any of the actual or targeted prospective
customers or clients of the Company, nor shall the Executive make known the
names and addresses of such customers or clients or any information relating in
any manner to the Company's trade or business relationships with such customers
or clients.
5
<PAGE>
6.4 BOOKS AND RECORDS. All books, records and accounts relating in
-----------------
any manner to the business, customers, suppliers or clients of the Company and
all other documents, disks, software or other items containing confidential
information relating to the Company, whether prepared by the Executive or
otherwise coming into the Executive's possession, shall be the exclusive
property of the Company and shall be returned immediately, together with any
copies, to the Company on termination of the Executive's employment hereunder or
on the Company's request at any time.
6.5 ENFORCEMENT OF THE NON-COMPETITION PERIOD. In the event the
-----------------------------------------
Executive is terminated for Cause, or voluntarily terminates his employment with
the Company, the Company shall only have the right to enforce the Non-
Competition Period by continuing to pay to the Executive the then applicable
installments of Base Salary. The enforceable Non-Competition Period shall be
extended as each installment is made by the period covered by such installment.
In the event that the Executive is terminated without cause, the
Company shall have the right to enforce the Non-Competition Period only by
paying the Executive the Average Total Compensation (as hereafter defined) at
the time of termination. The enforceable Non-Competition Period shall be
extended as each installment is made by the period covered by such installment,
and such Non-Competition may not exceed the limits set forth in Section 6.1,
unless otherwise mutually agreed. Average Total Compensation shall mean Base
Salary, plus director's and producer's fees and other compensation paid to the
Executive for the previous 12-month period.
7. INJUNCTION. It is recognized and hereby acknowledged by the parties
----------
hereto that a breach by the Executive of any of the covenants contained in
Section 6 of this Agreement will cause irreparable harm and damage to the
Company, the monetary amount of which may be virtually impossible to ascertain.
As a result, the Executive recognizes and hereby acknowledges that the Company
shall be entitled to an injunction from any court of competent jurisdiction
enjoining and restraining any violation of any or all of the covenants contained
in Section 6 of this Agreement by the Executive or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
8. GOVERNING LAW. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of California.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire
----------------
agreement between the parties hereto with respect to the subject matter hereof
and, upon its effectiveness, shall supersede all prior agreements,
understandings and arrangements, both oral and written, between and among the
Executive, the Company and the Target (or any of their affiliates) with respect
to such subject matter. Except for the obligation to pay any accrued but unpaid
salary due the Executive, all such prior agreements, understandings and
arrangements for the provision of services by the Executive to the Target and/or
any of its affiliates and the compensation of the Executive in any form shall
automatically terminate upon the consummation of the transactions contemplated
by the Merger Agreement, and each party shall thereupon and thereby, without any
further action, release and forever discharge the other (and the other's
affiliates) from any and all liabilities and obligations of any nature arising
out of or in connection with any and all such prior agreements, understandings
6
<PAGE>
or arrangements. This Agreement may not be modified in any way unless by a
written instrument signed by both the Company and the Executive.
10. NOTICES. Any notice required or permitted to be given hereunder
-------
shall be deemed given when delivered by hand, by facsimile or three business
days after being deposited in the United States mail, by registered or certified
mail, return receipt requested, postage prepaid, (i) if to the Company, to the
address of the Company's principal offices in San Francisco, California and (ii)
if to the Executive, to his address as reflected on the payroll records of the
Company, or to such other address as either party hereto may from time to time
give notice of to the other.
11. BENEFITS; BINDING EFFECT. This Agreement shall be for the
------------------------
benefit of and binding upon the parties hereto and their respective heirs,
personal representative, legal representatives, successors and, where
applicable, assigns, including, without limitation, any successor to the
Company, whether by merger, consolidation, sale of stock, sale of assets or
otherwise; provided, however, that under no circumstances may the Executive
delegate his employment obligations hereunder or any portion thereof.
12. SEVERABILITY. The invalidity of any one or more of the words,
------------
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by length of time or size of
area, or both, the otherwise invalid provision will be considered to be reduced
to a period or area which would cure such invalidity.
13. WAIVER. The waiver by either party hereto of a breach or
------
violation of any term or provision of this Agreement shall not operate nor be
construed as a waiver of any subsequent breach or violation.
14. DAMAGES; PREVAILING PARTY. Nothing contained herein shall be
-------------------------
construed to prevent the Company or the Executive from seeking and recovering
from the other damages sustained by either or both of them as a result of its or
his breach of any term or provision of this Agreement. If there is any legal
action or proceeding to enforce or interpret any provision of this Agreement or
to protect or establish any right or remedy of any party, the nonprevailing
party to such action or proceeding shall pay to the prevailing party all costs
and expenses, including reasonable attorneys' fees and costs, incurred by such
prevailing party in such action or proceeding, in enforcing its judgment, and in
connection with any appeal from such judgment. Reasonable attorneys' fees and
costs incurred in enforcing any judgment or in connection with any appeal shall
be recoverable separately from and in addition to any other amount included in
such judgment. The prevailing party's rights under this Section 14 shall not
merge into any judgment and shall survive until all such fees and costs have
been paid.
15. SECTION HEADINGS. The section headings contained in this
----------------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this agreement.
7
<PAGE>
16. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
--------------------------
Agreement is intended, or shall be construed, to confer upon or give any person
other than the Company, the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and assigns, any rights or
remedies under or by reason of this Agreement.
17. SUBSIDIARIES. All references to the "Company" in this Agreement,
------------
including but not limited to those in Section 6, shall be deemed to include any
and all of the Company's direct and indirect subsidiaries to the extent the
context may require.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
MSH ENTERTAINMENT CORPORATION,
a Utah corporation
By: /s/ Robert Maerz
----------------------------
Robert Maerz (Print Name)
----------------------------
Its: Chairman
----------------------------
/s/ CHRISTOPHER HAIGH
----------------------------
Christopher Haigh
8
<PAGE>
EXHIBIT A
---------
EMPLOYEE BENEFITS
-----------------
(Haigh)
1. The Executive shall be entitled to the use of one of the two
automobiles provided to him by EEP (the "Old Automobile"). On or after June 1,
1996, the Executive shall have an option to purchase the Old Automobile from the
Company at a price equal to its net book value as recorded on the Company's
balance sheet (the "Option"). In the event that the Executive purchases the Old
Automobile pursuant to the Option, the Company shall provide to the Executive
for his use a leased automobile comparable to the automobiles provided to the
senior executives of the Company (the "New Automobile"). All reasonable
expenses for the maintenance and operation of the Old Automobile before the
exercise of the Option and the New Automobile thereafter shall be paid by the
Company.
2. If, in the performance of his duties on behalf of the Company, the
Executive should utilize a place of abode owned by the Executive or a member of
his immediate family while on a business trip away from his principal residence,
the Company shall pay to the Executive a lodging allowance of $175 per night.
Under no circumstances, however, shall the Executive be entitled to such payment
with respect to any place of abode owned or leased by him or by a member of his
immediate family in the San Francisco metropolitan area.
3. The Company shall not pay the Executive's personal expenses,
including, but not limited to, insurance, legal or accounting expenses.
9
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT is made and entered into as of the 21st
day of June, 1996, by and between MSH ENTERTAINMENT CORPORATION, INC., a Utah
corporation (the "Company"), and Fred Aurelio (the "Executive").
PRELIMINARY STATEMENTS:
-----------------------
A. The Executive is currently functioning as the Chief Financial Officer
of East End Communications, Inc. ("EEC"), a California corporation.
B. The Executive possesses intimate knowledge of the business and affairs
of EEC, its policies, methods and personnel.
C. The Company (the "Board"), EEC, and the Executive (as agent for and
attorney-in-fact for the shareholders of EEC) have entered into an Agreement
dated as of June 21, 1996 (the "Agreement"), in which the Company purchased the
assets of EEC.
D. The Board of Directors of the Company (the "Board") recognizes that
the Executive has contributed to the growth and success of EEC and desires to
assure the Company of the Executive's employment with the Company and to
compensate him therefore.
E. The Board has determined that this Agreement will reinforce and
encourage the Executive's continued attention and dedication to the Company.
F. The Executive is willing to make his services available to the Company
on the terms and conditions hereinafter set forth.
AGREEMENTS:
-----------
NOW, THEREFORE, in consideration of the premises and mutual covenants set forth
herein, the parties agree as follows:
1. Employment.
-----------
1.1 General. The Company hereby agrees to employ the Executive, and
--------
the Executive hereby agrees to serve the Company, on the terms and subject to
the conditions set forth herein.
<PAGE>
Page 2 of 9 pages
1.2 Duties of Executive. During the term of this Agreement, the
--------------------
Executive shall serve as the Chief Financial Officer ("CFO") of the Company, and
shall diligently perform all the services as may be assigned to him by the
Board, and shall exercise such power and authority as may from time to time be
delegated to him by the Board. The Executive agrees to devote his full time and
attention to the business and affairs of the Company, render such services to
the best of his ability, and use his best efforts to promote the interests of
the Company.
2. Term.
-----
2.1 Initial Term. The initial term of this Agreement and the
-------------
employment of the Executive hereunder shall be for the three (3) year period
commencing on the date of the transactions contemplated by the Agreement are
consummated (the "Initial Term"), unless sooner terminated in accordance with
the terms and conditions hereof.
2.2 Renewal Terms. The Initial Term of this Agreement, and the
--------------
employment of the Executive hereunder, may be renewed and extended for such
period or periods as may be mutually agreed to by the Company and the Executive
in a written supplement to this Agreement signed by the Executive and the
Company (the "Written Supplement"). If this Agreement is not so renewed and
extended prior to the expiration of the Initial Term, this Agreement, and the
employment of the Executive hereunder, shall automatically terminate upon the
expiration of the Initial Term.
3. Compensation.
-------------
3.1 Base Salary. The Executive shall receive a base salary at the
------------
annual rate of Seventy-Five Thousand Dollars ($75,000.00) (the "Base Salary")
during the Initial Term of this Agreement, with such Base Salary payable, in
installments consistent with the Company's normal payroll schedule, subject to
applicable withholding and other taxes. If the term of this Agreement shall be
renewed and extended as provided in Section 2.2 hereof, then during such renewal
term of his employment hereunder the Executive shall be paid a base salary as
set forth in the Written Supplement.
3.2 Incentive Compensation.
-----------------------
(a) In addition to the Base Salary, the Executive shall be
entitled to receive annual incentive compensation equal to 2.5% of the Base
Salary for each fiscal year of the Company ending after the date of this
Agreement and during the term of the Executive's employment hereunder.
<PAGE>
Page 3 of 9 pages
(b) For purposes of this Agreement, the amount of the Incentive
Compensation payable with respect to any fiscal year (net of any tax or other
amount properly withheld therefrom) shall be paid by the Company to Executive
within one hundred and twenty days (120) after the end of the fiscal year.
(c) In the event that the Executive's employment is terminated upon
the expiration of the Initial Term, the Executive shall not be entitled to any
Incentive Compensation for the fiscal year then in effect. Instead, the
Executive shall be entitled to payment of an amount equal to the Incentive
Compensation, if any, paid to him in respect of the immediately preceding fiscal
year, prorated for the period of service by the Executive from the end of the
immediately preceding fiscal year to the end of the Initial Term.
4. Expense Reimbursement and Other Benefits.
-----------------------------------------
4.1 Expense Reimbursement. The Executive shall be entitled to
-----------------------
reimbursement by the Company for all reasonable business expenses incurred by
him in connection with the performance of his duties hereunder, provided,
---------
however, that such entitlement is conditioned upon the Executive providing the
Company with appropriate documentation of such expenses in accordance with
Company policy.
4.2 Other Benefits. The Executive shall be entitled to participation
---------------
in all medical, hospitalization, disability and group life insurance plans, and
any and all other employee benefit plans, as are presently and hereinafter
provided by the Company to its executives. The Executive shall be entitled to
four (4) weeks vacation per year in accordance with the Company's prevailing
policy for its executives; provided, however, that in no event may a vacation
---------
be taken when to do so could reasonably be expected to materially and adversely
affect the Company's business. In addition, the Executive shall be entitled to
the benefits set forth on Exhibit "A" attached hereto. Notwithstanding the
foregoing, except as set forth in Exhibit A, the Executive shall be entitled to
employee benefits which are no less favorable than those currently in operation
in the Company.
4.3 Working Facilities. The Company shall furnish the Executive with
-------------------
an office, secretarial help and other facilities and services suitable to his
position and adequate for the performance of his duties hereunder.
<PAGE>
Page 4 of 9 pages
5. Termination.
------------
5.1 Termination For Cause. The Company shall at all times have the
----------------------
right, upon written notice to the Executive, to terminate the Executive's
employment hereunder for cause (as hereinafter defined). For purposes of this
Agreement, the term "Cause" shall mean (a) a willful breach by the Executive
of any of the material terms or provisions of this Agreement; (b) the charging
or indictment of the Executive in connection with a felony; (c) commission by
the Executive of an act or acts involving fraud, embezzlement, misappropriation,
theft, breach of fiduciary duty or dishonesty against property or personnel of
the Company; or (d) willful or reckless conduct by the Executive which the
Board in good faith determines could reasonably be expected to have a material
adverse effect on the business, assets, properties, results of operations,
financial condition or prospects of the Company. Upon any termination pursuant
to this Section 5.1, the Executive shall be entitled to be paid his Base Salary
to the date of termination and the Company shall have no further liability under
this Agreement (other than for the reimbursement for reasonable pre-approved
business expenses incurred prior to the date of termination, subject, however,
to the provisions of Section 4.1).
5.2 Disability. The Company shall at all times have the right, upon
-----------
written notice to the Executive, to terminate the Executive's employment
hereunder, if the Executive shall, as the result of mental or physical
incapacity, illness or disability become unable to perform his duties hereunder
for in excess of sixty (60) consecutive calendar days or ninety (90) calendar
days in any twelve (12) month period. Upon any termination pursuant to this
Section 5.2, (a) the Company shall pay to the Executive (I) immediately any
unpaid amounts of his Base Salary accrued through the effective date of
termination, plus (ii) in accordance with Section 3.2 (b), an amount equal to
the Incentive Compensation, if any, payable to him in respect of the fiscal year
of the Company in which such termination occurs, prorated for the period of
service by the Executive from the beginning of such fiscal year through the date
of termination, and (b) the Company shall have no further liability under this
Agreement (other than for reimbursement for reasonable business expenses
incurred prior to the date of termination, subject, however, to the provisions
of Section 4.1).
<PAGE>
Page 5 of 9 pages
5.3 Death. In the event of the death of the Executive during the term of
------
his employment hereunder, (a) the Company shall pay to the estate of the
deceased Executive (i) immediately any unpaid amounts of his Base Salary
accrued through the date of death, plus (ii) in accordance with Section
----
3.2(b), an amount equal to the Incentive Compensation, if any, payable to him in
respect of the fiscal year of the Company in which such death occurs, prorated
for the period of service by the Executive from the beginning of such fiscal
year through the date of his death, and (b) the Company shall have no further
liability under this Agreement (other than for reimbursement for reasonable pre-
approved business expenses incurred prior to the date of the Executive's death,
subject, however, to the provisions of Section 4.1).
5.4 Termination Without Cause. At any time the Company shall have the
--------------------------
right to terminate the Executive's employment hereunder by written notice to the
Executive, provided, however, that the Company shall (i) on the effective date
-------- -------
of termination specified in the notice, pay to the Executive any unpaid Base
Salary accrued through the effective date of termination, (ii) pay to the
Executive one-half of his then effective Base Salary, in equal installments
consistent with the Company's normal payroll practices until the date (the
"Severance Date") which is six (6) months following the effective date of
termination, and (iii) in accordance with Section 3.2(b), pay the Executive an
amount equal to the Incentive Compensation, if any, payable to him in respect of
the fiscal year of the Company in which the termination occurs, prorated for the
period of service by the Executive from the beginning of such fiscal year
through the date of termination. Upon such termination and payments, the Company
shall have no further liability under this Agreement (other than for
reimbursement for reasonable pre-approved business expenses incurred prior to
the date of termination, subject, however to the provisions of Section 4.1).
6. Restrictive Covenants.
----------------------
6.1 Non-competition. While employed by the Company and during the
----------------
Non-competition Period (as hereinafter defined), the Executive shall not,
directly or indirectly, engage in or have any interest in any sole
proprietorship, partnership, corporation or business or any other person or
entity (whether as an employee, officer, director, partner, agent, security
holder, creditor, consultant or otherwise) that directly or indirectly engages
in any type of entertainment production, business, marketing, computer or cell
animation, graphics, distribution, producing, writing, directing and/or
manufacturing of any type of entertainment product including, but not limited
to, toys, records, videos, CD-ROM and merchandising items anywhere throughout
the universe. For purpose of this Section 6.1, the term "Non-competition
Period" shall mean (a) in the event the Executive's employment is terminated
pursuant to Section 5.4, the
<PAGE>
Page 6 of 9 pages
period beginning on the effective date of termination and ending one (1) year
thereafter, or (b) in the event the Executive's employment hereunder is
terminated for any other reason, a period of two (2) years following the date of
his employment is terminated.
6.2 Nondisclosure. The Executive shall not divulge, communicate, or
--------------
use to the detriment of the Company or for the benefit of any other person or
persons, or misuse in any way, any confidential information or data now known or
hereafter acquired by the Executive with respect to the business of the Company
(which shall include, but not be limited to, information concerning the
Company's financial condition, prospects, customers, sources of leads, methods
of doing business, and the manner of design, manufacture, financing, marketing
and distribution of the Company's productions) shall be deemed a valuable,
special and unique asset of the Company that is received by the Executive in
confidence and as a fiduciary, and the Executive shall remain a fiduciary to the
Company with respect to all such information.
6.3 Non-solicitation of Employees and Customers. While employed by
--------------------------------------------
the Company and for two (2) years following the termination of his employment
for any reason, the Executive shall not, directly or indirectly, for himself or
for any other person, firm, corporation, partnership, association or other
entity, (a) attempt to employ or enter into any contractual arrangement with
any employee or former employee of the Company, unless such employee or former
employee has not been employed by the Company for a period in excess of one (1)
year, or (b) call or solicit any of the actual or targeted prospective
customers or clients of the Company, nor shall the Executive make known the
names and addresses of such customers or clients or any information relating in
any manner to the Company's trade or business relationships with such customers
and clients.
6.4 Books and Records. All books, records and accounts relating in
------------------
any manner to the business, customers, suppliers or clients of the Company and
all other documents, disks, software or other items containing confidential
information relating to the Company, whether prepared by the Executive or
otherwise coming into the Executive's possession, shall be the exclusive
property of the Company and shall be returned immediately, together with any
copies, to the Company on the termination of the Executive's employment
hereunder, or on the Company's request at any time.
<PAGE>
Page 7 of 9 pages
7. Injunction. It is recognized and hereby acknowledged by the parties
-----------
hereto that a breach by the Executive of any of the covenants contained in
Section 6 of this Agreement will cause irreparable harm and damage to the
Company, the monetary amount of which may be virtually impossible to ascertain.
As a result, the Executive recognizes and hereby acknowledges that the Company
shall be entitled to an injunction from any court of competent jurisdiction
enjoining and restraining any violation of any or all of the covenants contained
in Section 6 of this Agreement by the Executive or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
8. Governing Law. This Agreement shall be governed by and construed in
--------------
accordance with the internal laws of the State of California.
9. Entire Agreement. This Agreement constitutes the entire agreement
-----------------
between the parties hereto with respect to the subject matter hereof and, upon
its effectiveness, shall supersede all prior agreements, understandings and
arrangements, both oral and written, between and among the Executive, the
Company and/or any of their affiliates with respect to the subject matter
contained herein. Except for the obligation to pay any accrued but unpaid salary
due the Executive, all such prior agreements, understandings and arrangements
for the provision of services by the Executive to the Company and/or any of its
affiliates and the compensation of the Executive in any form shall automatically
terminate upon the consummation of the transactions contemplated by the Purchase
Agreement, and each party shall thereupon and thereby, without any further
action, release and forever discharge the other (and the other's affiliates)
from any and all liabilities and obligations of any nature arising out of or in
connection with any and all such prior agreements, understandings or
arrangements. This Agreement may not be modified in any way unless by a written
instrument signed by both the Company and the Executive.
10. Notices. Any notice required or permitted to be given hereunder shall
--------
be deemed given when delivered by hand, by facsmile or three (3) business days
after being deposited in the United States mail, by registered or certified
mail, return receipt requested, postage prepaid, (i) if to the Company, to the
address of the Company's principal offices in 768 Brannen Street, San Francisco,
California and (ii) to the Executive, to his address as reflected on the
payroll records of the Company, or to such other address as either party hereto
may from time to time give notice of to the other.
11. Benefits; Binding Effect. This Agreement shall be for the benefit of
--------------------------
and binding upon the parties hereto and their respective heirs, personal
<PAGE>
Page 8 of 9 pages
representatives, legal representatives, successors and, where applicable,
assigns, including without limitation, any successor to the Company, whether by
merger, consolidation, sale of stock, sale of assets or otherwise; provide,
however, that under no circumstances may the Executive delegate his employment
obligations hereunder or any portion thereof.
12. Severability. The invalidity of any one or more of the words,
-------------
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more words, phrases, sentences, clauses
or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by length of time or size of
area, or both, the otherwise invalid provision will be considered to be reduced
to a period or area which would cure such invalidity.
13. Waiver. The waiver by either party hereto of a breach or violation of
-------
any term or provision of this Agreement shall not operate nor be construed as a
waiver of any subsequent breach or violation.
14. Damages; Prevailing Party. Nothing contained herein shall be
--------------------------
construed to prevent the Company or the Executive from seeking and recovering
from the other damages sustained by either or both of them as a result of its or
his breach of any term or provision of this Agreement. If there is any legal
action or proceeding to enforce or interpret any provision of this Agreement or
to protect or to establish any right or remedy of any party, the nonprevailing
party to such action or proceeding shall pay to the prevailing party all costs
and expenses, including reasonable attorney's fees and costs, incurred by such
prevailing party in such action or proceeding, in enforcing its judgment, and in
connection with any appeal from such judgment. Reasonable attorney's fees and
costs incurred in enforcing any judgment or in connection with any appeal shall
be recoverable separately from and in addition to any other amount included in
such judgment. The prevailing party's rights under this Section 14 shall not
merge into any judgment and shall survive until all such fees and costs have
been paid.
15. Section Headings. The section headings contained in this Agreement
-----------------
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this agreement.
<PAGE>
Page 9 of 9 pages
16. No Third Party Beneficiary. Nothing expressed or implied in this
---------------------------
Agreement is intended, or shall be construed, to confer upon or give any person
other than the Company, the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and assigns, any rights or
remedies under or by reason of this Agreement.
17. Subsidiaries. All reference to the "Company" in this Agreement,
-------------
including but not limited to those in Section 6, shall be deemed to include any
and all of the Company's direct and indirect subsidiaries to the extent the
context may require.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
MSH Entertainment Corporation, Inc.
By: /s/ ROBERT MAERZ
----------------------------------
Robert Maerz
----------------------------------
(Print Name)
Its: Chairman
----------------------------------
Agreed to Accepted:
By: /s/ Fred Aurelio
----------------------------------
Executive
<PAGE>
EXHIBIT A
---------
Employee Benefits
-----------------
1. The Company shall provide to the Executive for his use a leased
automobile comparable to the automobiles provided to the senior executives of
the Company (the "Automobile"). The Automobile shall be comparable to and shall
not exceed the monthly lease payment of any leased automobile of any senior
executive of the Company. All reasonable expenses, including car insurance, for
the maintenance and operation of the Automobile shall be paid by the Company.
2. If, in the performance of his duties on behalf of the Company, the
Executive should utilize a place of abode owned by the Executive or a member of
his immediate family while on a business trip away from his principal residence
in San Francisco, the Company shall pay to the Executive a lodging allowance of
One Hundred and Seventy-Five Dollars ($175.00) per night. Under no
circumstances, however, shall the Executive be entitled to such payment with
respect to any place of abode owned by him or by a member of his immediate
family in the San Francisco metropolitan area. For trips to foreign countries
related to trade and industry festivals, Executive shall be entitled to
reimbursement by Company for pre-approved reasonable business expenses incurred
by him in connection with the performance of his duties hereunder.
3. The Company shall not pay the Executive's personal expenses including,
but not limited to, insurance (except as noted below), legal and accounting
expenses.
4. Executive shall participate in the Stock-option plan of the Company,
whereby additional options may be granted to Executive depending upon the
performance of the Executive and the Company.
5. Executive shall be provided with major medical insurance and agrees to
pay 50% of the monthly premium.
/s/ FA /s/ RM
- ------------------ ----------------
Executive Initials Company Initials
<PAGE>
EXHIBIT 10.5
PROMISSORY NOTE
---------------
$865,000 JUNE 21, 1996
FOR VALUE RECEIVED, the undersigned, MSH ENTERTAINMENT CORPORATION, a Utah
corporation maintaining a place of business at 11205 Third Avenue, P.O, Box 573,
Stone Harbor, New Jersey 08241 (hereinafter call the "Maker"), promises to pay
to the order of Christopher Haigh, at San Francisco, California (hereinafter
called the "Payee"), at the Payee's aforementioned address, or at such other
place as the Payee may designate in writing to the Maker, in lawful money of the
United States of America, the principal sum of EIGHT HUNDRED AND SIXTY-FIVE
THOUSAND ($865,000) DOLLARS, together with 10% simple interest calculated on the
basis of a 365-day year and the actual number of days elapsed, which principal
along with accrued interest thereon shall be paid in one balloon payment on
December 1, 1996.
Within 10 days of receipt by Maker of the full offering amount of a public
offering of Maker's common shares, Maker shall apply 60% of the net proceeds
from the sale of its common shares to reduce the principal due under this Note.
If Maker fails to make the required balloon payment due under this Note on
or before December 1, 1996, then the Intellectual Property rights as defined in
the Asset Purchase Agreement, dated as of even date herewith, shall be
transferred back to Payee; provided, however that Maker shall be granted a one
year extension to make the balloon payment due hereunder if it pays (i) all
accrued and outstanding interest due under the Note on or before January 1,
1997, and (ii) pays accrued interest to Payee each month on the outstanding
principal balance of the Note beginning on February 1, 1997.
If this Note is collected by suit or legal proceeding, the Maker agrees to
pay the holder hereof the costs and reasonable attorneys fees incurred in the
collection hereof.
It is the intention of the parties hereto to comply with applicable usury
laws (now or hereafter enacted); accordingly, notwithstanding any provision to
the contrary in this Note, or in any of the documents securing payment hereof or
otherwise relating hereto, in no event shall this Note or such documents require
the payment or permit the collection of interest in excess of the maximum amount
permitted by such laws. If any such excess of interest is contracted for,
charged, taken, reserved or received under this Note or under the terms of any
of the documents securing payment hereof or otherwise relating hereto, or in the
event that all or part of the principal or interest of this Note shall be
prepaid, so that under any of such circumstances the amount of interest
contracted for, charged, taken, reserved or received under this Note or under
any of the instruments securing payment hereof or otherwise relating hereto,
this Note or otherwise relating hereto, on the amount of principal actually
outstanding from time to time under this Note shall exceed the maximum amount of
interest permitted by applicable usury laws, now or hereafter enacted, then in
any such event (i) the provisions of this paragraph shall govern and control,
(ii) any such excess which may have been collected at final maturity of said
indebtedness either shall be applied as a credit against the then unpaid
principal amount hereof or refunded to the Maker at the Payee's option, and
(iii) upon such final maturity, the effective rate of interest shall be
automatically reduced to the maximum lawful rate allowed under applicable usury
laws as now or hereafter construed by the courts having jurisdiction thereof.
Without limiting the foregoing, all calculations of the rate of interest
contracted for, charged, taken, reserved or received under this Note or under
such other documents which are made for the purpose of determining whether such
rate exceeds the maximum lawful rate, shall be made, to the extent permitted by
law, by amortizing, prorating, allocating and spreading in equal parts during
the period of the full stated term of the loan evidenced hereby, all interest at
any time contracted for, charged, taken, reserved or received from the Maker or
otherwise by the Payee in connection with such indebtedness.
Any check, draft, money order or other instrument given in payment of all
or any portion hereof may be accepted by the holder hereof and handled in
collection in the customary manner, but the same shall not constitute payment
hereunder or diminish any rights of the holder hereof except to the extent that
actual cash proceeds of such instrument are unconditionally received by the
holder and applied to this indebtedness in the manner elsewhere herein provided.
1
<PAGE>
There shall be no penalty for prepayment or for late payment hereunder, or
like defaults; provided, however, that the foregoing shall not be construed as a
limitation upon any amounts otherwise due hereunder.
The legality, enforceability and construction of this Note and the
obligations evidenced hereby shall be governed by the law of the State of
California without regard to its law of conflicts of law, or choice of law and,
to the extent applicable, by the laws of the United States of America.
MSH ENTERTAINMENT CORPORATION,
a Utah corporation
By: /s/ ROBERT MAERZ
----------------
2
<PAGE>
EXHIBIT 10.6
MSH ENTERTAINMENT CORPORATION
1996 Stock Option Plan
----------------------
1. PURPOSE. The Plan is intended to provide incentive to key employees and
-------
directors of the Company, to encourage proprietary interest in the Company, to
encourage such key employees to remain in the employ of the Company, and to
attract new employees with outstanding qualifications.
2. DEFINITIONS.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the committee, if any, appointed by the Board in
accordance with Section 4 of the Plan.
(d) "Common Stock" shall mean the Common Stock of the Company.
(e) "Company" shall mean MSH Entertainment Corporation, a Utah corporation.
(f) "Disability" shall mean the condition of an Employee who is unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than twelve months.
(g) "Employee" shall mean an individual who is employed (within the meaning
of I.R.S. Code Section 3401 and the regulations thereunder) by the Company.
(h) "Exercise Price" shall mean the price per Share of Common Stock,
determined by the Board or the Committee, at which an Option may be exercised.
(i) "Fair Market Value" shall mean the value of one Share of Common Stock,
determined as follows:
(1) If the Shares are traded on an exchange, the price at which Shares
traded at the close of business on the date of valuation;
(2) If the Shares are traded over-the-counter on the NASDAQ System,
the closing price if one is available, or the mean between the bid and asked
prices at the close of business on the date of valuation; and
(3) If neither (1) nor (2) applies, the fair market value of the
Shares as determined by the Board or the Committee in good faith.
(j) "Option" shall mean any stock option granted pursuant to the Plan.
<PAGE>
(k) "Optionee" shall mean an employee who has received an Option.
(l) "Plan" shall mean the MSH Entertainment Corporation. 1996 Stock Option
Plan, as it may be amended from time to time.
(m) "Purchase Price" shall mean the Exercise Price times the number of
Shares with respect to which an Option is exercised.
(n) "Retirement" shall mean the voluntary termination of employment by an
Employee upon the attainment of age sixty-five and the completion of not less
than twenty years of service with the Company.
(o) "Share" shall mean one share of Common Stock, adjusted in accordance
with Section 9 of the Plan (if applicable).
3. EFFECTIVE DATE. The Plan was adopted by the Board on June 1, 1996, which
--------------
shall be the effective date of the Plan.
4. ADMINISTRATION. The Plan shall be administered by the Board, or by a
--------------
committee appointed by the Board which shall consist of not less than three
members (the "Committee"). The Board shall appoint one of the members of the
Committee, if there be one, as Chairman of the Committee. If a Committee has
been appointed, the Committee shall hold meetings at such times and places as it
may determine. Acts of a majority of the Committee at which a quorum is
present, or acts reduced to or approved in writing by a majority of the members
of the Committee, shall be the valid acts of the Committee. The Board, or the
Committee if there be one, shall from time to time at its discretion select the
Employees or Directors who are to be granted Options, and determine the number
of Shares to be granted to each Optionee. A member of the Board or a Committee
member shall in no event participate in any determination relating to Options
held by or to be granted to such Board or Committee member. The interpretation
and construction by the Board, or by the Committee if there be one, of any
provision of the Plan or of any Option granted thereunder shall be final. No
member of the Board or of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any Option granted
thereunder.
5. PARTICIPATION. The Optionees shall be such persons as the Board, or the
-------------
Committee if there be one, may select from among the following classes of
persons:
(a) Employees of the Company (who may be officers, whether or not they are
directors); and
(b) Directors of the Company.
<PAGE>
6. STOCK. The stock subject to Options granted under the Plan shall be Shares
------
of the Company's authorized but unissued or reacquired Common Stock. The
aggregate number of Shares which may be issued upon exercise of Options under
the Plan shall not exceed 4,000,000 shares. The number of Shares subject to
Options outstanding at any time shall not exceed the number of Shares remanding
available for issuance under the Plan. In the event that any outstanding Option
for any reason expires or is terminated, the Shares allocable to the unexercised
portion of such Option may again be made subject to any Option. The limitations
established by this Section 6 shall be subject to adjustment in the manner
provided in Section 9 hereof upon the occurrence of an event specified therein.
7. TERMS AND CONDITIONS OF OPTIONS.
--------------------------------
(a) Stock Option Agreements. Options shall be evidenced by written stock
------------------------
option agreements in such form as the Board, or the Committee if there be one,
shall from time to time determine. Such agreements shall comply with and be
subject to the terms and conditions set forth below.
(b) Number of Shares. Each Option shall state the number of Shares to
-----------------
which it pertains and shall provide for the adjustment thereof in accordance
with the provisions of Section 9 hereof.
(c) Exercise Price. Each Option shall state the Exercise Price. Except as
---------------
otherwise determined by the Board or the Committee, the Exercise Price shall not
be less than 85% of the Fair Market Value on the date of grant.
(d) Medium and Time of Payment. The Purchase Price shall be payable in
---------------------------
full in United States dollars upon the exercise of the Option; provided,
however, that unless the applicable Option Agreement provides otherwise, the
Purchase Price may be paid (i) by the surrender of Shares in good form for
transfer, owned by the person exercising the Option and having a Fair Market
Value on the date of exercise equal to the Purchase Price, or in any combination
of cash and Shares, as long as the sum of the cash so paid and the Fair Market
Value of the Shares so surrendered equal the Purchase Price, (ii) by
cancellation of indebtedness owed by the Company to the Optionee, or (iii) any
combination of the foregoing. In the event the Company determines that it is
required to withhold state or Federal income tax as a result of the exercise of
an Option, as a condition to the exercise thereof, an Employee may be required
to make arrangements satisfactory to the Company to enable it to satisfy such
withholding requirements.
(e) Term and Nontransferability of Options. Each Option shall state the
---------------------------------------
time or times, and the conditions upon which, all or part thereof becomes
exercisable. No Option shall be exercisable after the expiration of ten years
from the date it was granted. During the lifetime of the Optionee, the Option
shall be exercisable only by the Optionee and shall not be assignable or
transferable. In the event of the Optionee's death, the Option shall not be
transferable by the Optionee other than by will or the laws of descent and
distribution.
<PAGE>
(f) Termination of Employment, Except by Death, Disability or Retirement.
---------------------------------------------------------------------
If an Optionee ceases to be an Employee for any reason other than his or her
death, Disability or Retirement, such Optionee shall have the right to exercise
the Option at any time within ninety days after termination of employment, but
only to the extent that, at the date of termination of employment, the
Optionee's right to exercise such Option had accrued pursuant to the terms of
the applicable option agreement and had not previously been exercised; provided,
however, that if the Optionee was terminated for cause (as determined by the
Board of Directors) any Option not exercised in full prior to such termination
shall be canceled. For this purpose, the employment relationship shall be
treated as continuing intact while the Optionee is on military leave, sick leave
or other bona fide leave of absence (to be determined in the sole discretion of
the Committee). The foregoing notwithstanding, the Board, or the Committee if
there be one, may extend or otherwise modify the period of time specified herein
during which the Option may be exercised following termination of Optionee's
employment.
(g) Death of Optionee. If an Optionee dies while employed by the Company,
------------------
or after ceasing to be an Employee but during the period while he or she could
have exercised the Option under this Section 7, and has not fully exercised the
Option, then the Option may be exercised in full, subject to the restrictions of
(e) above, at any time within twelve months after the Optionee's death, by the
executors or administrators of his or her estate or by any person or persons who
have acquired the Option directly from the Optionee by bequest or inheritance,
but only to the extent that, at the date of death the Optionee's right to
exercise such Option had accrued and had not been forfeited pursuant to the
terms of the applicable Option Agreement and had not previously been exercised.
The foregoing notwithstanding, the Board, or the Committee if there be one, may
extend or otherwise modify the period of time specified herein during which the
Option may be exercised following termination of Optionee's employment.
(h) Disability of Optionee. If an Optionee ceases to be an Employee by
-----------------------
reason of Disability, such Optionee shall have the right, subject to the
restrictions of (f) above, to exercise the Option at any time within twelve
months after termination of employment, but only to the extent that, at the date
of termination of employment, the Optionee's right to exercise such Option had
accrued pursuant to the terms of the applicable Option Agreement and had not
previously been exercised. The foregoing notwithstanding, the Board, or the
Committee if there be one, may extend or otherwise modify the period of time
specified herein during which the Option may be exercised following termination
of Optionee's employment.
(i) Retirement of Optionee. If an Optionee ceases to be an Employee by
-----------------------
reason of Retirement, such Optionee shall have the right, subject to the
restrictions of (e) above, to exercise the Option at any time within ninety days
after the date of Retirement, but only to the extent that, at the date of
Retirement, the Optionee's right to exercise such Option had accrued pursuant to
the terms of the applicable Option Agreement and had not previously been
exercised. The foregoing notwithstanding, the Board, or the Committee if there
be one, may extend or otherwise modify the period of time specified herein
during which the Option may be exercised following Retirement of the Optionee.
<PAGE>
(j) Rights as a Stockholder. An Optionee, or a transferee of an Optionee,
------------------------
shall have no rights as a stockholder with respect to any Shares covered by his
or her Option until the date of the issuance of a stock certificate for such
Shares. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property), distributions or other rights
for which the record date is prior to the date such stock certificate is issued,
except as provided in Section 9 hereof.
(k) Modification, Extension and Renewal of Option. Within the limitations
----------------------------------------------
of the Plan, the Board, or the Committee if there be one, may modify, extend or
renew outstanding Options or accept the cancellation of outstanding Options (to
the extent not previously exercised) for the granting of new Options in
substitution therefor. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, alter or impair any rights or
obligations under any Option previously granted.
(l) Other Provisions. The stock option agreements authorized under the
-----------------
Plan may contain such other provisions not inconsistent with the terms of the
Plan (including, without limitation, restrictions upon the exercise of the
Option) as the Board, or the Committee if there be one, shall deem advisable.
8. TERM OF PLAN. Options may be granted pursuant to the Plan until the
------------
expiration of ten years from the effective date of the Plan.
9. RECAPITALIZATIONS. The number of Shares covered by the Plan as provided in
-----------------
Section 6 hereof, the number of Shares covered by each outstanding Option and
the Exercise Price thereof shall be proportionately adjusted for any increase of
decrease in the number of issued Shares resulting from a subdivision or
consolidation of Shares or the payment of a stock dividend (but only of Common
Stock) or any other increase or decrease in the number of issued Shares effected
without receipt of consideration by the Company. Subject to any required action
by stockholders, if the Company is the surviving Company in any merger or
consolidation, each outstanding Option shall pertain and apply to the securities
to which a holder of the number of Shares subject to the Option would have been
entitled. In the event of a merger or consolidation in which the Company is not
the surviving Company, the date of exercisability of each outstanding Option
shall be accelerated to a date prior to such merger or consolidation, unless the
agreement of merger or consolidation provides for the assumption of the Option
by the successor to the Company. To the extent that the foregoing adjustments
relate to securities of the Company, such adjustments shall be made by the
Board, or the Committee if there be one, whose determination shall be conclusive
and binding on all persons. Except as expressly provided in this Section 9, the
Optionee shall have no rights by reason of subdivision or consolidation of
shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class or by reason
of any dissolution, liquidation, merger or consolidation or spin-off of assets
or stock of another Company, and any issue by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, shall
not affect, and no adjustment by reason thereof shall be made with respect to,
the number or Exercise Price of Shares subject to an Option.
<PAGE>
The grant of an Option pursuant to the Plan shall not affect in any way the
right or power to the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, to merge or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business assets.
10. SECURITIES LAW REQUIREMENTS.
---------------------------
(a) Legality of Issuance. The issuance of any Shares upon the exercise of
---------------------
any Option and the grant of any Option shall be contingent upon the following:
(1) the Company and the Optionee shall have taken all actions required
to register the Shares under the Securities Act of 1933, as amended (the "Act"),
and to qualify the Option and the Shares under any and all applicable state
securities or "blue sky" laws or regulations, or to perfect an exemption from
the respective registration and qualification requirements thereof;
(2) any applicable listing requirement of any stock exchange on which
the Common Stock is listed shall have been satisfied; and
(3) any other applicable provision of state of Federal law shall have
been satisfied.
(b) Restrictions on Transfer. Regardless of whether the offering and sale
-------------------------
of Shares under the plan has been registered under the Act or has been
registered or qualified under the securities laws of any state, the Company may
impose restrictions on the sale, pledge or other transfer of such Shares
(including the placement of appropriate legends on stock certificates) if, in
the judgment of the Company and its counsel, such restrictions are necessary or
desirable in order to achieve compliance with the provisions of the Act, the
securities laws of any state or any other law. In the event that the sale of
Shares under the Plan is not registered under the Act but an exemption is
available which required an investment representation or other representation,
each Optionee shall be required to represent that such Shares are being acquired
for investment, and not with a view to the sale or distribution thereof, and to
make such other representations as are deemed necessary or appropriate by the
Company and its counsel. Any determination by the Company and its counsel in
connection with any of the matters set forth in this Section shall be conclusive
and binding on all persons. Stock certificates evidencing Shares acquired under
the Plan pursuant to an unregistered transaction shall bear the following
restrictive legend and such other restrictive legends as are required or deemed
advisable under the provisions of any applicable law.
"THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT"). ANY TRANSFER OF SUCH SECURITIES WILL BE
INVALID UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH
TRANSFER OR IN THE OPINION OF COUNSEL FOR THE ISSUER SUCH REGISTRATION IS
UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT."
<PAGE>
(c) Registration or Qualification of Securities. The Company may, but
--------------------------------------------
shall not be obligated to register or qualify the issuance of Options and/or the
sale of Shares under the Act or any other applicable law. The Company shall not
be obligated to take any affirmative action in order to cause the issuance of
Options or the sale of Shares under the plan to comply with any law.
(d) Exchange of Certificates. If, in the opinion of the Company and its
-------------------------
counsel, any legend placed on a stock certificate representing shares sold under
the Plan is no longer required, the holder of such certificate shall be entitled
to exchange such certificate for a certificate representing the same number of
Shares but lacking such legend.
11. AMENDMENT OF THE PLAN. The Board may from time to time, with respect to
---------------------
any Shares at the time not subject to Options, suspend or discontinue the plan
or revise or amend it in any respect whatsoever accept that, without the
approval of the Company's stockholders, no such revision or amendment shall:
(a) Increase the number of Shares subject to the Plan;
(b) Change the designation in Section 6 hereof with respect to the classes
of persons eligible to receive Options; or
(c) Amend this Section to defeat its purpose.
12. EXECUTION. To record the adoption of the Plan in the form set forth above
---------
by the Board effective as of the Effective Date, the Company has caused this
Plan to be executed in the name and on behalf of the Company where provided
below by officers of the Company, thereunto duly authorized.
MSH ENTERTAINMENT CORPORATION
By: /s/ ROBERT MAERZ
-----------------------
Robert Maerz, Chairman
By: /s/ ROBERT MAERZ
-----------------------
Robert Maerz, Secretary
<PAGE>
MSH ENTERTAINMENT CORPORATION
1996 Stock Option Plan
----------------------
Stock Option Agreement
----------------------
This Agreement is made as of the ____ day of _______ , 1996, by and between MSH
Entertainment Corporation, a Utah corporation (the "Company"), and
(the "Optionee").
- ---------------------------------------------------------------
Recitals
A. The Board of Directors of the Company has adopted the MSH Entertainment
Corporation 1996 Stock Option Plan (the "Plan"); and
B. The Plan is to be administered by the Company's Board of Directors or a duly
appointed committee of such Board (such committee, or the Board acting in such
capacity, being referred to herein as the "Stock Option Committee"); and
C. The Stock Option Committee, at a meeting duly held, determined that Optionee
should be granted an option under the Plan for the purchase of that number of
shares of the Company's Common Stock specified in Section 1 hereof at the price
specified in Section 2 hereof, subject to the terms and conditions set forth in
the Plan and in this Agreement;
NOW, THEREFORE, IT IS AGREED:
Section 1.
Grant of Option
The Company hereby grants to Optionee the right and option to purchase all or
any part of an aggregate of __________________ shares of the Company's capital
stock, as presently constituted, subject to the terms and conditions of the Plan
and as hereinafter set forth.
A copy of the Plan has been delivered to Optionee, receipt of which is hereby
acknowledged. Except as otherwise expressly provided herein, all of the terms,
provisions and conditions of the Plan are hereby made a part hereof for all
purposes. To the extent that any provisions of this Agreement are inconsistent
with those set forth in the Plan, the provisions of the Plan shall be deemed to
be controlling.
Section 2.
Option Price
The option price shall be $________ per share, being at least eighty-five
percent (85 %) of the fair market value per share as of the date of this
Agreement as determined in the sole discretion of the Stock Option Committee.
<PAGE>
Section 3.
When Option May Be Exercised
This option shall become exercisable on the dates indicated in the following
table as to the number of shares set forth opposite said respective dates less
the number of shares previously purchased under this option:
<TABLE>
<CAPTION>
Date Number of Shares
---- ----------------
<S> <C>
------------------------ ----------------
------------------------ ----------------
------------------------ ----------------
------------------------ ----------------
------------------------ ----------------
</TABLE>
and such option shall remain exercisable as to all of such shares until and
including the tenth anniversary of the date of grant, subject however to the
provisions of Sections 5 and 6 hereof. Shares as to which such option becomes
exercisable pursuant to the foregoing provision may be purchased at any time
thereafter prior to the expiration or termination of the option.
Section 4.
Option Personal to Optionee.
This option may be exercised during the life of Optionee only by the Optionee
and may not be assigned, transferred, pledged, hypothecated, sold or otherwise
disposed of in whole or in part, either voluntarily or involuntarily. Any
attempted assignment, transfer, pledge, hypothecation, sale or other disposition
will be void and of no effect, and if voluntarily entered into by Optionee,
shall terminate the option. In the event of Optionee's death prior to the full
exercise of this option, it may be transferred under Optionee will to, and
exercised by, Optionee's personal representative or other such transferee or by
operation of the laws of descent and distribution in accordance with Section 6.
<PAGE>
Section 5.
Termination of Employment
No part of this option may be exercised more than ninety days after the
termination of Optionee's employment with the Company except in the case of his
death or disability (as defined in Section 105(d) (4) of the I.R.S. Code) during
said ninety day period. This option shall in no way confer upon Optionee any
rights to remain in the employ of the Company. Except as otherwise provided in
this Section 5, the maximum number of shares as to which this option may be
exercised during the aforesaid ninety day period following termination of
employment shall be the remaining number of shares which Optionee could have
purchased, pursuant to Section 3 hereof, on the date of termination of his
employment.
Section 6.
Death or Disability of Optionee
If Optionee should die or become disabled within the meaning of Section
105(d)(4) of the I.R.S. Code, while employed by the Company or within any ninety
day period after termination of Optionee's employment during which Optionee is
entitled to exercise the option pursuant to Section 5 hereof, this option, to
the extent not previously exercised and in an amount not exceeding the number of
shares Optionee could have purchased hereunder on the date of termination of
employment, may be exercised by the Optionee, or if the Optionee has died by his
personal representative, heir or legatee, in whole or in part, within twelve
months after the Optionee ceases to be an employee of the Company (but not later
than the final date set forth in Section 3 hereof).
Section 7.
Leave of Absence.
Military or sick leave shall not be considered a termination of employment for
any purpose under this Agreement unless such period exceeds 90 days and the
Optionee's right to reemployment is not guaranteed either by statute or by
contract, in which case the employment relationship shall be deemed to have
terminated on the 91st day of such leave.
Section 8.
Parents, Subsidiaries and Successors of the Company.
All references herein to the Company shall be deemed to include any parent or
subsidiary of the Company (as defined in Section 425 of the I.R.S. Code), unless
the context shall otherwise require or indicate.
<PAGE>
Section 9.
Exercise of Option
This option or any portion thereof shall be exercised by written notice
delivered to the Company at its then principal offices, setting forth the number
of shares with respect to which the option is being exercised, accompanied by
the full amount of the purchase price, in the form of a certified or cashier's
check, or cash, or stock of the Company with a fair market value equal to the
exercise price per share of the option multiplied by the number of shares being
purchased, or cancellation of indebtedness of the Company to the Optionee equal
to the Exercise Price. Upon receipt of notice and payment as aforesaid, the
Company shall promptly make arrangement for the issuance to Optionee of the
number of shares as to which this option was exercised; provided, however, that
if any law or any regulation of any regulatory agency or other body having
jurisdiction shall require any action to be taken in connection with the shares
specified in said notice, then the delivery date such shares shall be extended
for a period reasonably necessary to permit the Company to take such action.
The Company shall not be obligated to issue shares pursuant to the option if
counsel for the Company determines that such issuance would or would likely be
in violation of any applicable securities laws. The Company reserves the right
to require that the Optionee, prior to receipt of the shares, represent and
warrant in writing, in form and substance satisfactory to the Company, that the
shares purchased are being acquired without any view to the distribution thereof
and agree in writing to the imposition of legends on the stock certificates
setting forth any restrictions upon disposition under applicable securities
laws.
Section 10.
Fractional Shares
Notwithstanding any other provisions herein to the contrary, the Optionee shall
in no event be entitled to exercise his option for any fractional shares and any
such fractional interests shall be disregarded.
Section 11.
Adjustment Upon Changes in Capitalization
The shares subject to this option shall be subject to equitable and
proportionate adjustment by the Stock Option Committee in the manner set forth
in Paragraph 9 of the Plan in the event of the occurrence of any of the events
specified therein.
Section 12.
Entire Agreement
This Agreement represents the entire understanding between the parties with
respect to the subject matter hereof, and supersedes any prior agreements,
representations or understandings, including any prior agreements relating to
the issuance of stock or stock options.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Stock Option Agreement as of
the date first above written.
MSH ENTERTAINMENT CORPORATION
By:
---------------------------
Robert Maerz, Chairman
By:
---------------------------
, Secretary
OPTIONEE:
Sign:
------------------------
Print:
------------------------
<PAGE>
EXHIBIT 10.7
CREDIT AGREEMENT
----------------
This Credit Agreement is entered into as of the 11th day of December, 1996
by and between Robert Pozner, a US citizen ("Lenders") and MSH Entertainment
Corporation, a Utah corporation ("Borrower").
RECITALS:
---------
A. Lender is an experienced investor and a USA citizen; and
B. Due to the working capital needs of Borrower, Lender has agreed to make a
loan of capital to Borrower, with the borrowings to be convertible into Common
Stock of Borrower upon the completion of certain events.
Now, therefore, the parties agree as follows:
1. Loan
----
1.1 Amount of Loan. Lender hereby loans to Borrower the amount of
---------------
USD $200,000. Borrower shall execute a promissory note or notes evidencing the
borrowings.
1.2 Term. Subject to the provisions of this Agreement, the loan
-----
principal and interest may be repaid in whole or in part, at any time until the
first anniversary of the date of this Agreement.
1.3 Interest Rate. All amounts owing under this Agreement shall bear
--------------
interest at nine percent (9%) per annum. All interest shall be calculated based
on a 360 day year. In no event shall the rate of interest charged hereunder
exceed the maximum amount permitted by law.
1.4 Interest Payments. All interest accrued under this Agreement
------------------
shall be paid at maturity, unless earlier paid at the option of Borrower.
1.5 Maturity Date. All amounts owing to Lender under this Agreement,
--------------
including, without limitation, principal, interest and late charges, shall be
due and payable on the first anniversary of the date of this Agreement.
2. Representations and Warranties of Borrower. Borrower hereby makes the
-------------------------------------------
following representations and warranties in order to induce Lender to make the
loan available:
2.1 Organization of Borrower. Borrower is a corporation duly formed,
-------------------------
validly existing and in good standing under the laws of the state of Utah and
authorized to do business in the State of California.
2.2 Authorization. This Agreement is within Borrower's powers, has
--------------
been duly authorized, and does not conflict with its Articles of Incorporation
or Bylaws or any other agreement of Borrower.
1
<PAGE>
2.3 Enforceable Agreement. This Agreement is the legal, valid and
----------------------
binding agreement of Borrower, enforceable against Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
2.4 No Conflicts. This Agreement does not conflict with any law,
-------------
agreement, or obligation by which Borrower is bound.
3. Convenants. Borrower agrees, until Lender is repaid in full:
-----------
3.1 Use of Proceeds. To use the proceeds of the loan only for
----------------
financing working capital needs.
3.2 Negative Convenants. Not to, without Lender's written consent:
--------------------
(a) Engage in any business activities substantially different
from Borrower's present business,
(b) Liquidate or dissolve Borrower's business,
(c) Lease, or dispose of all or substantial part of Borrower's
business or Borrower's assets,
(d) Sell or otherwise dispose of any assets for less than fair
market value,
(e) Voluntarily suspend its business for more than 7 days in any
30 day period, and
(f) Declare or pay any divided, redeem or repurchase any of its
outstanding capital stock.
3.3 Default. If any of the following events occur, Lender may do one
--------
or more of the following: declare Borrower in default, and require Borrower to
repay its entire debt immediately and without prior notice. If a bankruptcy
petition is filed with respect to Borrower, the entire debt outstanding under
this Agreement will automatically become due immediately.
(i) Failure to Pay. Borrower fails to make any payment under this
---------------
Agreement when due, which failure is not cured within three days
after written notice.
(ii) Violation of Covenants. Borrower violates any of the covenants
-----------------------
set forth in Section 3.2.
(iii) Registration Statement. Borrower fails to file a Registration
-----------------------
Statement in accordance with Section 4.
2
<PAGE>
4. Conversion Rights. Upon the business day the Borrower's initial
------------------
Registration Statement becoming effective under the Securities Act of 1933, as
amended, the outstanding principal and all accrued interest of the loan shall
immediately and automatically be converted into restricted shares of the Common
Stock of the Borrower at the rate of the lower of $1.00 per share or sixty
percent (60%) discount (the "Discount") from the bid price for the common shares
on effective date of the registration (the "Conversion Price"). The Conversion
Price shall be adjusted to reflect any stock split, stock dividend,
reorganization or other related change in capitalization of the Borrower. This
conversion right shall relate only to loans made under this Agreement prior to
the effectiveness of any Registration Statement filed by Borrower with the
Securities and Exchange Commission providing for the sale of shares of Common
Stock. The issuance of the subject shares for the full amount of the principal
and interest shall be payment in full of the subject loan. Any fractional
shares shall be paid in cash. The Borrower will include the registration of the
Lender's restricted common shares in the filing of the initial Registration
Statement Borrower agrees to file its initial Registration Statement no later
than January 15, 1997. The Discount will increase an additional one percent
(1%) for each calendar week that the Registration Statement filing date exceeds
the scheduled deadline date. Should an agreement with an underwriter of the
offering require modification of this agreement, including the sale of the
Lender's shares in the subject offering, the Lender herewith agrees to same with
the understanding that the Lender has the option to withdraw the subject shares
from the offering and include them in a later filed Registration Statement.
5. Representation and Conditions. The Lender hereby represents and
------------------------------
warrants to the Borrower as follows:
5.1. The Lender has been afforded an opportunity to meet with the
officers and directors of the Company and to ask and receive answers to any
questions about the Loan/Shares and the business and affairs of the Company, and
has therefore obtained sufficient information to evaluate the merits and risks
of investment in the Shares. The Lender either (i) has a pre-existing personal
or business relationship with the Company or one or more of its officers,
directors or controlling persons, or (ii) by reason of the business or financial
experience of the undersigned, has the capacity to protect his interests in
connection with the purchase of the Shares.
5.2. Until the effective date of the registration of the subject
shares, the Shares are being acquired by the Lender solely for the account of
the Lender for investment and not with a view to, or for resale in connection
with, any distribution thereof or of any interest therein.
5.3. The Lender is an "Accredited Investor" as that term is defined in
Regulation D promulgated under the Securities Act of 1933 (the "Act"), and
understands and acknowledges that the Shares are being offered and sold pursuant
to an exemption from the registration requirements of the Act.
5.4. The Lender agrees that no disposition of the Shares will be made
unless:
(a) A registration statement under the Act is in effect with respect
to the sale or other disposition of the Shares; or
(b) An exemption from such registration is available and the
undersign shall obtain a similar statement of representations and warrants from
the transfer and provide a copy of same to the Company.
3
<PAGE>
6. General
-------
6.1 No Waiver, Consents. No alleged waiver by Lender shall be
--------------------
effective in writing, and no waiver shall be construed as of a continuing
waiver. No waiver shall be implied from any delay or failure by Lender to take
action on account of any default of Borrower. Consent by Lender to any act or
omission by Borrower shall not be construed as a consent to any other or
subsequent act or omission or as a waiver of the requirement for Lender's
consent to be obtained in any future or other instance.
6.2 No Third Parties Benefited. This Agreement is made and entered into
---------------------------
for the sole protection and benefit of Lender and Borrower and their successors
and assigns.
6.3 Notices. All notices given under this Agreement must be in writing
--------
and shall be effectively served upon delivery, or if mailed, upon the first to
occur of receipt or the expiration of forty-eight hours after deposit in first-
class or certified United States mail, postage prepaid, sent to the party at its
address appearing below its signature. Those addresses may be changed by either
party by notice to the other party.
6.4 Attorney's Fees. If any lawsuit, reference or arbitration is
----------------
commenced which arises out of, or which relates to, this Agreement, the
prevailing party shall be entitled to recover from each other party such sums as
the court, referee or arbitrator may adjudge to be reasonable attorneys' fees in
the action, reference or arbitration, in addition to costs and expenses
otherwise allowed by law.
6.5 Applicable Law. This Agreement shall be governed by and construed
---------------
in accordance with New Jersey law.
6.6 Successors and Assigns. The terms of this Agreement shall bind and
-----------------------
benefit the successors and assigns of the parties; provided, however, that
Borrower may not assign this Agreement, or assign or delegate any of its rights
or obligations, without the prior written consent of Lender in each instance.
6.7 Severability. The invalidity or unenforceability of any one or more
-------------
provisions of this Agreement shall in no way affect any other provisions.
6.8 Amendments. This Agreement may not be modified or amended except by
-----------
a written agreement signed by the parties.
By: /s/ ROBERT MAERZ
----------------------
Robert Maerz, Chairman
MSH Entertainment Corporation
768 Brannan Street, San Francisco, CA 94103
("Borrower")
/s/ ROBERT POZNER
----------------------
Robert Pozner
454 Stevens Avenue, Ridgewood, NJ 07450
("Lender")
4
<PAGE>
PROMISSORY NOTE
Amount: $200,000.00 Los Angeles, CA Date: December 11, 1996
MSH Entertainment Corporation, a Utah corporation, (Promisor) hereby promises to
pay to the order of Robert Pozner (Promisee) in shares of common stock of the
Promisor an amount equivalent to $200,000.00 Dollars and all accrued interest in
lawful money of the United States of America. The interest rate on the
outstanding balance of the amount is nine percent (9%) per annum. The
conversion ratio of shares to dollars is to be determined by terms and
conditions at the time of conversion which is the "Effective Date" of a
Registration Statement to be filed by the Promisor. The "Effective Date" is
also the due date of the this note.
The method of computing the conversion ratio, the "Effective Date," certain late
penalties, and other condition which are a part of this note are defined in, and
included herein by reference, an agreement between the parties, entitled Credit
Agreement, and dated December 18, 1996.
/s/ ROBERT MAERZ
- ------------------------------
Robert Maerz, Chairman
MSH Entertainment Corporation
5
<PAGE>
EXHIBIT 10.8
COOPERATION AGREEMENT
This Cooperation Agreement ("Agreement") is made and entered into on Nov. 4,
------
1996 ("Effective Date") by and between Intel Corporation, having a business
address at 2200 Mission College Blvd., Santa Clara, California 95052-8119
(hereinafter "Intel") and MSH Entertainment Corporation, having a business
address at 768 Brannan Street, San Francisco, California 94103 (hereinafter
"MSH").
WHEREAS, Intel wishes to see the widespread adoption of cost-effective
networked graphics rendering on personal computers, the demonstration of such
capabilities through the creation of digitally created content, and the
development of tools to allow production companies to use Intel Architecture
platforms to develop high performance capabilities; and
WHEREAS, MSH is a production house engaged in the production of industrial
and animation content and has prototyped a workflow management system for
networked graphics rendering called "Overlord" which MSH wishes to offer to the
industry through appropriate channels; and
WHEREAS, Intel will make an equity investment of [[text omitted for
confidentiality]], in the form of cash, for a warrant to purchase up to one
million (1,000,000) of MSH's common shares, as more fully reflected in the
Warrant and Warrant Purchase Agreement between the parties.
NOW, THEREFORE, in consideration of the covenants and conditions contained
herein, Intel and MSH agree as follows:
1. DEFINITIONS
1.1 "Overlord" means the code name for an MSH-designed product for managing
graphic animation rendering workflow using Intel Architecture based
platforms.
1.2 "Intel Architecture" means microprocessors implementing the Intel
instruction set and derivatives, for example, the i486(TM),
Pentium(R)/, and Pentium Pro processors .
1.3 "AGE" means Abrams-Gentile Entertainment, Inc.
1.4 "UPN" means Universal Paramount Network.
1.5 "Content" initially means [[text omitted for confidentiality]], AGE's
licensed script being produced in conjunction with MSH and UPN.
"Content" also includes a new original children's animation project or
series selected by Intel pursuant to Section 3.2.1 hereunder.
1.6 "MSH Products" means current and future hardware and software products
manufactured or sold by MSH that perform the function of managing
graphic rendering in a networked or non-networked environment.
1.7 "MSH Customers" means current and future purchasers of MSH Products,
Overlord and/or Content.
1.8 "Intel Bong" means the approved three (3) second, five (5) tone melody
to create, or used in connection with the creation, of an auditory only
Intel logo or an audio-visual Intel logo.
<PAGE>
2. INTEROPERABILITY/PORT OF CHOICE
2.1 During the term of this Agreement, MSH will use commercially reasonable
efforts to insure that MSH Products, Overlord and Content are (i) fully
interoperable with Intel Architecture based multiprocessor platforms,
(ii) created on an Intel Architecture based system, and (iii) made
available on Intel Architecture prior to other architectures.
2.2 Intel will use commercially reasonable efforts to provide MSH with
information or products to support such interoperability testing.
3. DELIVERABLES
3.1 Overlord
3.1.1 During the first six (6) months after the Effective Date of this
Agreement (the "Development Phase"), MSH will develop a plan
acceptable to Intel for the development and distribution of
Overlord. The plan will include deliverables and milestones and
will address at least: (a) the Overlord system architecture
definition (including features and functions); (b) interface
design; (c) benchmarking data; (d) interoperability testing on
various OEM platforms; (e) Beta program; and (f) a marketing and
licensing program to OEMs, Value Added Resellers or
resellers/integrators.
3.1.2 During the Development Phase of this Agreement, both Intel and
MSH would appoint Program Managers who would serve as primary
contacts for issues related to the project and which would hold
Program Reviews at regular intervals.
3.2 Content
3.2.1 [[TEXT OMITTED FOR CONFIDENTIALITY]]
3.2.2 MSH will create all Content according to Intel content
standards. MSH represents and warrants that it will not market
Content with explicit depictions (such as blood, gore and
organs) of the physical effects of violence on humans or human-
like characters, rape, explicit sexual contents, sex crimes,
disparagement of ethnic or religious groups, racial epithets,
hate speech, or profanity.
3.3 Support
3.3.1 MSH will provide all technical support to MSH Customers for MSH
Products and Content.
3.3.2 Intel will provide all technical support to Intel customers for
Intel products according to Intel's then-current standard terms
and conditions of sale.
4. INTELLECTUAL PROPERTY WARRANTIES AND INDEMNIFICATION
4.1 MSH represents and warrants that it owns or has all the necessary
rights in the intellectual property in Overlord or the Content and the
authority to enter this Agreement and grant Intel the rights to
Overlord or Content that are granted in this Agreement and that it has
not done any act or entered into any agreement which would prevent
performance of this Agreement.
-2-
<PAGE>
4.2 MSH represents and warrants to Intel that the adoption, publication,
incorporation, reproduction or distribution of Overlord or Content will
not infringe upon or misappropriate the proprietary rights of any third
party.
4.3 MSH agrees to indemnify, defend and hold Intel harmless for all loss,
cost, liability and expense (including legal fees) incurred by Intel
and any of its subsidiaries which may arise out of any claim or action
that MSH breached its representations and warranties set forth above.
Intel agrees to provide MSH with prompt notice of any such claims or
actions and shall provide MSH with reasonable assistance (at MSH's
expense) in the defense or settlement of such claims or actions. In no
event will a settlement affect Intel's rights hereunder without Intel's
prior written consent.
5. [[text omitted for confidentiality]]
[[text omitted for confidentiality]]
6. TRADEMARKS
6.1 Intel has the right, but not the obligation, to associate the Intel
Bong, and/or other Intel trademarks or designations, in or on any
Content, and any advertising and other promotional materials which are
for the purpose of marketing MSH Products and promoting networked
graphics rendering in connection with MSH Products.
6.2 MSH grants Intel the right to use any applicable trademarks relating to
MSH Products, Overlord or Content, for purposes relating to marketing
Intel Architecture solutions to third parties using, or contemplating
the use of, MSH Products, Overlord or Content.
7. CONFIDENTIALITY
(a) This Agreement, the terms hereof and the relationship of the parties
shall be governed by the Confidentiality and Nondisclosure Agreement,
dated as of August 22, 1996, between Intel and MSH. The terms and
existence of the transactions contemplated by this Agreement and the
Cooperation Agreement shall be deemed confidential information of both
parties.
(b) MSH shall not use Intel's name or refer to Intel directly or indirectly
in connection with Intel's relationship with MSH in any advertisement,
news release or professional or trade publication, or in any other
manner, unless otherwise required by law or with Intel's prior written
consent, which consent will generally not be granted. The parties
acknowledge that MSH may be required to disclose in a press release
and/or a registration statement certain information relating to the
transactions contemplated by this Agreement following consummation
hereof. Notwithstanding the foregoing, the provisions of this Section
7 shall apply to any such disclosure and MSH shall provide Intel a
reasonably adequate opportunity to review and comment on such
disclosure and shall not make any such disclosure without Intel's prior
written consent. The parties agree that at no time will there be any
press release or other public statement issued by either party relating
to this Agreement or the transactions contemplated hereby unless agreed
to in advance by both parties in writing.
8. TERM AND TERMINATION
8.1 This Agreement, and the licenses granted hereunder, shall continue for
a period of [[TEXT OMITTED FOR CONFIDENTIALITY]] from the Effective
Date, at which time this Agreement shall terminate without
-3-
<PAGE>
notice unless the parties agree to renew this agreement prior to the
expiration of the term by letter agreement signed by the authorized
representatives of both parties.
8.2 Intel may terminate this Agreement at any time if Licensee:
i. materially breaches any provision of this Agreement and fails to
cure such breach within thirty (30) days after receipt of written
notice thereof from Intel,
ii. files or has filed against it a petition in bankruptcy,
iii. ceases to do business in the ordinary course,
iv. has a receiver appointed to handle its assets or affairs,
v. undergoes a change in control through acquisition or merger,
except as provided for in Section 9.4, Assignment.
8.3 The rights and remedies provided in this Section 8.0 are in addition to
any other rights and remedies provided at law or equity.
8.4 The provisions of Sections 4, 7 and 9 shall survive any termination or
expiration of this Agreement.
9. MISCELLANEOUS PROVISIONS
9.1 Governing Law. This Agreement and matters connected with the
-------------
performance thereof shall be construed, interpreted, applied and
governed in all respects in accordance with the laws of the United
States of America and the State of Delaware, without reference to its
conflict of laws principles.
9.2 Jurisdiction. Intel and MSH agree that all disputes and litigation
------------
regarding this Agreement and matters connected with its performance
shall be subject to the exclusive jurisdiction of, and venue in, the
state and federal courts in Santa Clara County, California.
9.3 Dispute Resolution. The parties agree to negotiate in good faith to
------------------
resolve any dispute between them regarding this Agreement. If the
negotiations do not resolve the dispute to the reasonable satisfaction
of both parties, then each party shall nominate one senior officer of
the rank of Vice President or higher as its representative. These
representatives shall, within thirty (30) days of a written request by
either party to call such a meeting, meet in person and alone (except
for one assistant for each party) and shall attempt in good faith to
resolve the dispute. If the disputes cannot be resolved by such senior
managers in such meeting, the parties agree that they shall, if
requested in writing by either party, meet within thirty (30) days
after such written notification for one day with an impartial mediator
and consider dispute resolution alternatives other than litigation. If
an alternative method of dispute resolution is not agreed upon within
thirty (30) days after the one day mediation, either party may begin
litigation proceedings. This procedure shall be a required prerequisite
before taking any additional action hereunder. Notwithstanding the
foregoing, either party may apply to a court of competent jurisdiction
hereunder for temporary equitable relief while pursuing dispute
resolution as provided hereunder.
9.4 No Assignment. This Agreement is personal to the parties, and the
-------------
Agreement or any right or obligation hereunder is not assignable,
whether in conjunction with a change in ownership, merger, acquisition
or, the sale or transfer of all, or substantially all or any part of a
party's business or assets
-4-
<PAGE>
or otherwise, either voluntarily, by operation of law, or otherwise,
without the prior written consent of the other party. Any such
purported assignment or transfer shall be deemed a material breach of
this Agreement and shall be null and void.
9.5 Export Controls. MSH understands and acknowledges that Intel is subject
---------------
to regulation by agencies of the U.S. government, including the U.S.
Department of Commerce, which prohibit export or diversion of certain
products and technology to certain countries. Any and all obligations
of Intel to provide technical information, technical assistance, any
media in which any of the foregoing is contained, training and related
technical data (collectively, "Data") shall be subject in all respects
to such United States laws and regulations as shall from time to time
govern the license and delivery of technology and products abroad by
persons subject to the jurisdiction of the United States, including the
Export Administration Act of 1979, as amended, any successor
legislation, and the Export Administration Regulations issued by the
Department of Commerce, or the Bureau of Export Administration. MSH
warrants that it will comply in all respects with the export and re-
export restrictions set forth in any export license (if necessary) for
Data disclosed to MSH hereunder; provided that Intel informs MSH of
such restrictions.
9.6 Notice. All notices required or permitted to be given hereunder shall
------
be in writing and shall be mailed by first class mail, postage prepaid,
addressed as follows:
<TABLE>
<CAPTION>
If to MSH: If to Intel:
--------- -----------
<S> <C>
MSH Entertainment Corporation General Counsel
768 Brannan Street Intel Corporation
San Francisco, CA 94103 2200 Mission College Blvd.
Santa Clara, CA 95052
</TABLE>
Such notices shall be deemed to have been served when received by
addressee or, if delivery is not accomplished by reason of some fault
of the addressee, when tendered for delivery. Either party may give
written notice of a change of address and, after notice of such change
has been received, any notice or request shall thereafter be given to
such party as above provided at such changed address.
9.7 Entire Agreement. This Agreement embodies the entire understanding of
----------------
the parties with respect to the subject matter hereof, and merges all
prior discussions between them, and neither of the parties shall be
bound by any conditions, definitions, warranties, understandings, or
representations with respect to the subject matter hereof other than as
expressly provided herein. No oral explanation or oral information by
either party hereto shall alter the meaning or interpretation of this
Agreement.
9.8 Modification; Waiver. No modification or amendment to this Agreement,
--------------------
nor any waiver of any rights, will be effective unless assented to in
writing by the party to be charged, and the waiver of any breach or
default will not constitute a waiver of any other right.
9.9 Compliance with Laws. Anything contained in this Agreement to the
--------------------
contrary notwithstanding, the obligations of the parties hereto and of
the Subsidiaries of the parties shall be subject to all laws, present
and future, of any government having jurisdiction over the parties
hereto or the Subsidiaries of the parties, and to orders, regulations,
directions or requests of any such government.
9.10 Force Majeure. The parties hereto shall be excused from any failure
-------------
to perform any obligation hereunder to the extent such failure is
caused by war, acts of public enemies, strikes or other labor
-5-
<PAGE>
disturbances, fires, floods, acts of God, or any causes of like or
different kind beyond the control of the parties.
9.11 Partial Invalidity. If any paragraph, provision, or clause thereof in
------------------
this Agreement shall be found or be held to be invalid or unenforceable
in any jurisdiction in which this Agreement is being performed, the
remainder of this Agreement shall be valid and enforceable and the
parties shall use their respective best efforts to negotiate a
substitute, valid and enforceable provision which most nearly effects
the parties' intent in entering into this Agreement.
9.12 Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, all of which, taken together, shall be regarded as one
and the same instrument.
9.13 Section Headings. The section headings contained in this Agreement
----------------
are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.14 Relationship of Parties. Nothing herein shall be construed as forming
-----------------------
a partnership or joint venture between the parties.
UNDERSTOOD AND AGREED:
<TABLE>
<CAPTION>
INTEL CORPORATION MSH ENTERTAINMENT
CORPORATION
<S> <C>
/s/ P. S. OTELLINI /s/ ROBERT P. MAERZ
- ------------------ -------------------
Signature Signature
P. S. Otellini Robert P. Maerz
- ------------------ -------------------
Printed Name Printed Name
EVP Chairman
- ------------------ -------------------
Title Title
11/4/96 11/1/96
- ------------------ -------------------
Date Date
</TABLE>
WARRANT PURCHASE AGREEMENT
THIS WARRANT PURCHASE AGREEMENT (this "Agreement"), dated as of November 4,
1996, is entered into by and between MSH ENTERTAINMENT CORPORATION, a Utah
corporation (the "Company"), and INTEL CORPORATION, a Delaware corporation
(together with its successors and assigns, the "Purchaser").
RECITALS
A. The Company has agreed to sell to the Purchaser, and the Purchaser has
agreed to purchase a warrant to purchase shares of capital stock of the Company,
subject to the terms and conditions of this Agreement.
-6-
<PAGE>
B. As of the Closing Date (as defined below), the Company and the
Purchaser also shall enter into that certain Cooperation Agreement (the
"Cooperation Agreement"), which provides a framework for the parties to
cooperate on future infrastructure enhancements to enable networked graphics
rendering of episodic television content.
AGREEMENT
In consideration of the mutual covenants contained in this Agreement and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. ISSUANCE OF WARRANT; PURCHASE PRICE; CLOSING.
--------------------------------------------
1.1. Issuance of Warrant. Subject to the terms and conditions
-------------------
hereof, on the date of the Closing (as defined in Section 1.3 below), upon
payment of the Purchase Price (as defined in Section 1.2 below) by the Purchaser
to the Company, the Company shall issue to the Purchaser, and the Purchaser
shall accept from the Company, a Warrant in the form attached hereto as Exhibit
-------
A (the "Warrant"). The shares of capital stock issued or issuable upon exercise
- -
of the Warrant, as well as any shares of capital stock issued or issuable upon
conversion of such capital stock, shall be referred to collectively herein as
the "Warrant Stock", and the Warrant and the Warrant Stock shall be referred to
collectively herein as the "Securities."
1.2. Purchase Price. The purchase price for the Warrant shall be
--------------
[[TEXT OMITTED FOR CONFIDENTIALITY]] (the "Purchase Price"), which shall be
payable in cash. The Purchase Price shall be paid at the Closing by check made
payable to the order of the Company or by wire transfer of funds to a designated
account of the Company, provided that wire transfer instructions are delivered
to the Purchaser at least one (1) business day prior to the Closing.
1.3. Closing. The closing of the transactions contemplated hereby
-------
("Closing") shall be held at the offices of Intel Corporation on November 4,
1996, at 10:00 a.m., Pacific Time, or at such other place, date and time as may
be agreed upon by the parties (the "Closing Date"). At the Closing, the Company
shall deliver to the Purchaser the Warrant against payment of the Purchase Price
therefor, and the parties shall deliver to each other such other agreements,
instruments and documents as are required to be delivered pursuant hereto.
1.4 Use of Proceeds. The cash portion of the Purchase Price shall
---------------
be used by the Company solely for the purchases of Intel Architecture-based
computer and server equipment for the Company's rendering farm as agreed to in
advance by the Purchaser in writing. "Intel Architecture" means microprocessors
implementing the Intel instruction set and derivatives, for example, the
I486,(TM), Pentium(R) and Pentium(R) Pro processors.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
---------------------------------------------
represents and warrants to the Purchaser, as of the date hereof, as of the date
of Closing and as of the date of exercise of the Warrant (but not during the
periods between such dates), except as set forth in the Schedule of Exceptions
("Schedule of Exceptions") attached to this Agreement as Exhibit B (which
---------
Schedule of Exceptions shall be deemed to be representations and warranties to
the Purchaser, and may be updated by the Company to the
-7-
<PAGE>
extent reasonably necessary to make the representations and warranties set forth
herein true and complete as of the Closing and as of the exercise of the
Warrant), as follows:
2.1. Organization, Good Standing and Qualification; Subsidiaries.
-----------------------------------------------------------
The Company is a corporation duly organized, validly existing and in good
standing under, and by virtue of, the laws of the State of Utah and has all
requisite corporate power and authority to own its properties and assets and to
carry on its business as now conducted and as presently proposed to be
conducted. The Company is qualified to do business as a foreign corporation in
each jurisdiction where failure to be so qualified would have a material adverse
effect on its financial condition, business, prospects or operations. The
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, trust, joint venture, association, or
other entity.
2.2. Due Authorization; Consents. All corporate action on the part
---------------------------
of the Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of, and the performance of all obligations
of the Company under, this Agreement and the Cooperation Agreement, the
authorization, issuance and delivery of the Warrant, and the authorization,
issuance, reservation for issuance and delivery of all of the Warrant Stock, has
been taken or will be taken prior to the Closing. Each of this Agreement and
the Cooperation Agreement is a valid and binding obligation of the Company
enforceable in accordance with its terms, subject, as to enforcement of
remedies, to applicable bankruptcy, insolvency, moratorium, reorganization and
similar laws affecting creditors' rights generally and to general equitable
principles. All consents, approvals and authorizations of, and registrations,
qualifications and filings with, any federal or state governmental agency,
authority or body, or any third party, required in connection with the
execution, delivery and performance of this Agreement and the Cooperation
Agreement and the consummation of the transactions contemplated hereby and
thereby shall have been obtained prior to and be effective as of the Closing.
2.3. Status of Proprietary Assets.
----------------------------
(a) Ownership. The Company has full title and ownership of, or
---------
has license to, all patents, patent applications, trademarks, service marks,
trade names, copyrights, moral rights, mask works, trade secrets, confidential
and proprietary information, compositions of matter, formulas, designs,
proprietary rights, know-how and processes (all of the foregoing collectively
hereinafter referred to as the "Proprietary Assets") necessary to enable it to
carry on its business as now conducted and as presently proposed to be conducted
without any conflict with or infringement of the rights of others. To the best
of the Company's knowledge, no governmental agency, authority or body or third
party has any ownership right, title, interest, claim in or lien on any of the
Company's Proprietary Assets and the Company has taken, and in the future the
Company will use its best efforts to take, all steps reasonably necessary to
preserve its legal rights in, and the secrecy of, all its Proprietary Assets,
except those for which disclosure is required for legitimate business or legal
reasons. The Company has all rights, in conjunction with Abrams-Gentile
Entertainment and Universal Paramount Network, to develop, enhance, market and
create products related to the [[TEXT OMITTED FOR CONFIDENTIALITY]] concept and
the scripts for the [[TEXT OMITTED FOR CONFIDENTIALITY]] animation programs.
[[TEXT OMITTED FOR CONFIDENTIALITY]] All rights, title, claim, trademarks and
copyrights to the concepts, characters,
-8-
<PAGE>
products, use of names, merchandising and toys shall be owned or controlled by
the Company (subject to Section 6 of the Cooperation Agreement), and the Company
shall have the unencumbered right to develop, enhance, script, market and create
animated programs related to the concepts (subject to Section 3.2.2 of the
Cooperation Agreement). The Purchaser shall have the right to select the
property of its choice for further development by the Company, or in conjunction
with the Purchaser.
(b) Licenses; Other Agreements. Except as set forth in the
--------------------------
Cooperation Agreement, the Company has not granted, and, to the best of the
Company's knowledge, there are not outstanding, any options, licenses or
agreements of any kind relating to any Proprietary Asset of the Company, nor is
the Company bound by or a party to any option, license or agreement of any kind
with respect to any of its Proprietary Assets. The Company is not obligated to
pay any royalties or other payments to third parties with respect to the
marketing, sale, distribution, manufacture, license or use of any Proprietary
Asset or any other property or rights.
(c) No Infringement. To the best of the Company's knowledge, the
---------------
Company has not violated or infringed, and is not currently violating or
infringing, and the Company has not received any communications alleging that
the Company (or any of its employees or independent contractors) has violated or
infringed or, by conducting its business as proposed, would violate or infringe,
any Proprietary Asset of any other person or entity.
(d) No Breach by Employee. To the Company's best knowledge, the
---------------------
Company is not aware that any employee or independent contractor of the Company
is obligated under any agreement (including licenses, covenants or commitments
of any nature), or subject to any judgment, decree or order of any court or
administrative agency or any other restriction, that would interfere with the
use of his or her best efforts to carry out his or her duties for the Company or
to promote the interests of the Company or that would conflict with the
Company's business as proposed to be conducted.
2.4. Litigation. There is no action, suit, proceeding, claim,
----------
arbitration or investigation ("Action") pending (or, to the best of the
Company's knowledge, threatened) against the Company, its activities, properties
or assets or, to the best of the Company's knowledge, against any officer,
director or employee of the Company in connection with such officer's,
director's or employee's relationship with, or actions taken on behalf of, the
Company. To the best of the Company's knowledge, there is no factual or legal
basis for any such Action that might result, individually or in the aggregate,
in any material adverse change in the business, properties, assets, financial
condition, affairs or prospects of the Company.
2.5. Reports; Accuracy of Information. The Company does not have any
--------------------------------
securities registered under the Securities Act of 1933, as amended, and is not a
reporting company under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"). The Company shall provide the Purchaser with true and complete
copies of the Company's financial reports and all other reports, proxy
statements and other documents required to be filed by the Company with the
Securities and Exchange Commission ("SEC") as soon as practicable after such
documents have been filed with the SEC. As of their respective dates (or, if
any such
-9-
<PAGE>
report or proxy statement shall have been amended, as of the date of
such amendment), such reports and proxy statements, if any, (A) complied with
all applicable provisions, rules and regulations of federal securities laws and
(B) did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances in which such statements were
made, not misleading. Since January 1, 1994, the Company has timely filed all
reports and registration statements, if any, required to be filed by the Company
with the SEC under the rules and regulations of the SEC.
2.6. Share Ownership. The 1,000,000 shares of Warrant Stock
---------------
currently represent approximately 7.6% of the outstanding Common Stock of the
Company on a fully-diluted basis, assuming the exercise of and conversion of all
outstanding options, warrants, convertible securities and other rights to
acquire the Company's Common Stock, and those contemplated to be issued by the
Company in the near future, as reflected on the Schedule of Exceptions.
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser
-----------------------------------------------
represents and warrants to the Company as follows:
3.1. Authorization. Each of this Agreement and the Cooperation
-------------
Agreement when executed and delivered by the Purchaser will constitute a valid
and legally binding obligation of the Purchaser.
3.2. Investigation; Economic Risk. The Purchaser acknowledges that
----------------------------
it has had an opportunity to discuss the business, affairs and current prospects
of the Company with its officers. The Purchaser further acknowledges having had
access to information about the Company that it has requested. The Purchaser
acknowledges that it is able to fend for itself in the transactions contemplated
by this Agreement and has the ability to bear the economic risks of its
investment pursuant to this Agreement.
3.3. Purchase for Own Account. The Securities will be acquired for
------------------------
the Purchaser's own account, not as a nominee or agent, and not with a view to
or in connection with the sale or distribution of any part thereof.
3.4. Exempt from Registration; Restricted Securities. The Purchaser
-----------------------------------------------
understands that the Warrant will not be registered under the Securities Act of
1933, as amended (the "Act"), on the ground that the sale provided for in this
Agreement is exempt from registration under of the Act, and that the reliance of
the Company on such exemption is predicated in part on the Purchaser's
representations set forth in this Agreement. The Purchaser understands that
the Securities are restricted securities within the meaning of Rule 144 under
the Act, and must be held indefinitely unless they are subsequently registered
or an exemption from such registration is available.
3.5. Restrictive Legends. It is understood that the Warrant and each
-------------------
certificate representing the Warrant Stock and any other securities issued in
respect of the Warrant Stock upon any stock split, stock dividend,
recapitalization, merger or similar event (unless no longer required in the
opinion of counsel for the Company) shall be stamped or otherwise imprinted
-10-
<PAGE>
with a legend substantially in the following form (in addition to any legend
that may now or hereafter be required by applicable state law):
THE WARRANT/SECURITIES EVIDENCED OR CONSTITUTED HEREBY AND THE SHARES
OF COMMON STOCK ISSUABLE HEREUNDER HAVE BEEN AND WILL BE ISSUED WITHOUT
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY
NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT
REGISTRATION UNDER THE ACT UNLESS EITHER (i) THE COMPANY HAS RECEIVED AN OPINION
OF COUNSEL TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED IN CONNECTION WITH
SUCH DISPOSITION OR (ii) THE SALE OF SUCH SECURITIES IS MADE PURSUANT TO
SECURITIES AND EXCHANGE COMMISSION RULE 144.
The legend set forth above shall be removed by the Company from any
certificate evidencing Warrant Stock upon delivery to the Company of an opinion
by counsel, reasonably satisfactory to the Company, that a registration
statement under the Act is at that time in effect with respect to the legend
security or that such security can be freely transferred in a public sale
without such a registration statement being in effect and that such transfer
will not jeopardize the exemption or exemptions from registration pursuant to
which the Company issued the Warrant Stock.
4. REGISTRATION RIGHTS.
-------------------
4.1. Definitions. As used in this Section 4:
-----------
(a) The terms "register", "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement in
compliance with the Act and the declaration or ordering of the effectiveness of
such registration statement;
(b) The term "Registrable Securities" means: (i) any Common
Stock issued or to be issued pursuant to exercise of the Warrant, and (ii) any
Common Stock or other securities issued as a dividend or other distribution with
respect to, or in exchange for, or in replacement of, the Common Stock described
in subsections (i) and (ii) of this Section 4.1(b); provided, however, that any
-------- -------
such securities shall cease to be Registrable Securities with respect to a
proposed offer or sale thereof when such securities shall have been disposed of
under SEC Rule 144 or in accordance with the plan of distribution set forth in
an effective registration statement under the Act.
(c) The term "Holder" means any holder of outstanding
Registrable Securities or any person to which the registration rights provided
for in this Section 4 shall have been properly assigned in accordance with
Section 4.10 hereof;
(d) The term "Initiating Holders" means any Holder or Holders
making a request for registration pursuant to the provisions of Section 4.2; and
(e) The term "Substantial Amount of Registrable Securities"
means either (i) at least fifty-one (51%) of the Registrable Securities then
outstanding that have not been
-11-
<PAGE>
resold to the public in a registered public offering, or (ii) a number of
Registrable Securities such that the anticipated net proceeds from the sale of
Registrable Securities would be greater than $750,000.
4.2. Requested Registration.
----------------------
(a) Requested Registration. If, at any time from and after the first
----------------------
anniversary of the Closing Date, the Company shall receive from any Holder or
Holders of a Substantial Amount of Registrable Securities a written request that
the Company effect any registration, qualification or compliance with respect to
all or a part of the Registrable Securities, the Company will:
(1) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
(2) as soon as practicable, use its diligent best efforts to
effect such registration, qualification and compliance (including, without
limitation, the execution of an undertaking to file post-effective amendments,
appropriate qualification under the applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations issued
under the Act and any other governmental requirements or regulations) as may be
so requested and as would permit or facilitate the sale and distribution of all
or such portion of the Registrable Securities of such Holder(s) as are specified
in such request, together with all or such portion of the Registrable Securities
of any other Holders joining in such request as are specified in a written
notice given within fifteen (15) days after receipt of written notice of the
proposed registration from the Company. Without limiting the generality of the
foregoing, the Company shall file a registration statement covering the
Registrable Securities so requested to be registered as soon as practicable, but
in any event within forty-five (45) days after receipt of the request or
requests of the Initiating Holders.
(b) Underwriting. If the Initiating Holders intend to distribute the
------------
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company and shall designate the underwriter or
underwriters to be employed in connection therewith (who shall be selected by
the majority in interest of the Initiating Holders and who shall be subject to
the Company's right of reasonable approval) as a part of their request made
pursuant to Section 4.2(a) and the Company shall include such information in the
written notice referred to in Section 4.2(a)(1). In such event, the right of
any Holder to registration pursuant to this Section 4.2 shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise mutually
agreed by a majority in interest of the Initiating Holders and such Holder) to
the extent provided herein. The Company shall (together with all Holders
proposing to distribute their securities through such underwriting) enter into
an underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by a majority in interest of the Initiating
Holders. Notwithstanding any other provision of this Section 4.2, if the
underwriter advises the Initiating Holders in writing that marketing factors
require a limitation of the number of shares to be underwritten, the securities
of the Company (other than Registrable Securities) held by officers or directors
and by other shareholders shall be excluded from such registration to
-12-
<PAGE>
the extent so required by such limitation and if a limitation of the number of
shares is still required, then the Initiating Holders shall so advise all
Holders of Registrable Securities that would otherwise be registered and
underwritten pursuant hereto, and the number of shares included in the
registration and underwriting shall be allocated among the Holders of
Registrable Securities requesting registration in proportion, as nearly as
practicable, to the total number of Registrable Securities held by such Holders
at the time of filing of the registration statement and requested to be included
in the registration. If any Holder disapproves of the terms of the underwriting,
it may elect to withdraw therefrom by written notice to the Company, the
underwriter and the Initiating Holders. The Registrable Securities so withdrawn
shall also be withdrawn from registration.
(c) Inclusion of Other Securities. The Company shall have the right
-----------------------------
to include in any registration statement effected pursuant to this Section 4.2
securities to be sold on behalf of the Company. Notwithstanding any other
provision of this Section 4.2, if the underwriter advises the Initiating Holders
in writing that marketing factors require a limitation of the number of shares
to be underwritten, then the Initiating Holders shall so advise the Company and
the number of shares to be included in the registration and underwriting on
behalf of the Company shall be reduced first, and prior to any reduction in the
number of shares of Registrable Securities to be included in the offering on
behalf of the Holders, to the extent necessary to comply with the underwriters'
limitation.
(d) Deferral by Company. If the Company shall furnish to the
-------------------
Initiating Holders, within ten (10) days of the delivery of their request for
registration pursuant to this Section 4.2, a certificate signed by the President
of the Company stating that, in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company and
its shareholders for such registration to be effected at such time, the Company
shall have the right to defer the filing of the registration' statement for a
period of not more than one hundred twenty (120) days after the receipt of the
request of the Initiating Holders under this Section 4.2, except that the
Company shall not utilize this right more than once in any two (2) year period.
(e) Limitations. Notwithstanding the foregoing provisions of this
-----------
Section 4.2, the Holder's right to request registration of Registrable
Securities under this Section 4.2 shall be subject to the following limitations:
(1) The Company shall not be obligated to take any action to
effect any such registration, qualification or compliance pursuant to this
Section 4.2 after the Company has effected two (2) registrations, qualifications
or compliances pursuant to requests under this Section 4.2. A registration,
qualification or compliance shall not be deemed "effected" for purpose of this
Section 4.2 (i) unless it has become effective and is maintained effective until
all Registrable Securities are sold thereunder, (ii) if, after it has become
effective, such registration is interfered with by any stop order, injunction or
other order or requirement of the SEC or any other governmental agency,
authority or body for any reason other than a material misrepresentation or
omission by the Holders of Registrable Securities included therein, or (iii) if
the conditions to closing specified in the purchase or underwriting agreement
entered into in
-13-
<PAGE>
connection with such registration are not satisfied other than by reason of some
act or omission by any of the Holders of Registrable Securities included
therein;
(2) The Company shall not be obligated to effect any registration
hereunder in any particular jurisdiction in which the Company would be required
to qualify to do business or to execute a general consent to the service of
process in effecting such registration.
4.3. Company Registration.
--------------------
(a) Notice of Registration. If, at any time or from time to time from
----------------------
and after the first anniversary of the Closing Date, the Company shall determine
to register any of its securities, either for its own account or for the account
of a security holder or holders (other than a registration relating solely to
employee stock option or purchase plans or relating solely to an SEC Rule 145
transaction), the Company will:
(1) promptly and in any event within twenty (20) days prior to the
anticipated filing date of such registration statement, give to each Holder
written notice thereof which shall include a list of the jurisdictions in which
the Company intends to attempt to qualify such securities under the applicable
blue sky or other state securities laws;
(2) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in any written request or
requests, made within ten (10) days after receipt of such written notice from
the Company, by any Holder or Holders, except as set forth in Section 4.3(b)
below.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 4.3(a)(1). In such event, the right of any Holder to
registration pursuant to this Section 4.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and other holders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 4.3, if the
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the Company shall include in such registration (i)
first, all of the securities to be included in such registration for the
Company's own account, and (ii) second, up to the full number of Registrable
Securities and other securities of the Company sought to be included in such
registration by Holders and other security holders to whom the Company has
granted registration rights ("Other Holders"); and, if less than the full number
of such securities is to be included, the number to be included shall be
allocated pro rata on the basis of the total number of Registrable Securities
and other securities sought to be included in such registration by the Holders
and Other Holders; provided, however, that in no event shall the securities
-------- -------
being offered by the Holders be less than thirty percent (30%) of the total
number of securities requested by the Holders to be included in
-14-
<PAGE>
such registration and underwriting. The Company shall advise all Holders of
Registrable Securities which would otherwise be registered and underwritten
pursuant hereto of any such limitations, and the number of shares of Registrable
Securities that may be included in the registration. If any Holder disapproves
of the terms of any such underwriting, such Holder may elect to withdraw
therefrom by written notice to the Company and the underwriter. The Registrable
Securities so withdrawn shall also be withdrawn from registration.
4.4. Form S-3 Registration. If, at any time from and after the first
---------------------
anniversary of the Closing Date, the Company shall receive, from any Holder or
Holders, a written request or requests that the Company effect a registration on
Form S-3 (or any substantially equivalent registration form under the Act
subsequently adopted by the SEC that permits incorporation by reference to other
documents filed by the Company with the SEC), and any related qualification or
compliance, with respect to all or a part of the Registrable Securities owned by
such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of the
Registrable Securities of such Holder(s) as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holders joining in such request as are specified in a written notice given
within fifteen (15) days after receipt of written notice of the proposed
registration from the Company; provided, however, that the Company shall not be
-------- -------
obligated to effect any such registration, qualification or compliance pursuant
to this Section 4.4:
(1) if Form S-3 is not then available for such offering by the
Holders; or
(2) if the Company shall furnish to the Holders, within ten (10)
days of the delivery of their request for registration pursuant to this Section
4.4, a certificate signed by the President of the Company stating that, in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such Form S-3
registration to be effected at such time, in which event the Company shall have
the right to defer the filing of a Form S-3 registration statement for a period
of not more than one hundred twenty (120) days after receipt of the request of
the Holder or Holders under this Section 4.4, except that the Company shall not
utilize this right more than once in any two (2) year period; or
(3) if the Company has, within the twelve (12) month period
preceding the date of such request, already effected one registration on Form S-
3 for the Holders pursuant to this Section 4.4; or
(4) in any particular jurisdiction in which the Company would be
required to qualify to do business or to execute a general consent to service of
process in effecting such registration, qualification or compliance.
-15-
<PAGE>
Subject to the foregoing, the Company shall file a Form S-3
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. Registrations effected pursuant to this
Section 4.4 shall not be counted as demands for registration or registrations
effected pursuant to Section 4.2 or Section 4.3, respectively.
4.5. Expenses of Registration. All expenses incurred in connection
------------------------
with any registration, qualification or compliance pursuant to Section 4.2,
Section 4.3 or Section 4.4, including without limitation, all registration,
filing and qualification fees, printing expenses, fees and disbursements of
counsel for the Company, expenses of any special audits incidental to or
required by such registration and the fees and disbursements of one counsel
retained by the Holders of Registrable Securities covered by such registration,
qualification or compliance shall be borne by Company, except that:
(a) the Company shall not be required to pay for expenses of any
registration proceeding begun pursuant to Section 4.2, the request of which has
been subsequently withdrawn by the Initiating Holders, in which case such
expenses shall be borne by the Initiating Holders requesting or causing such
withdrawal; and
(b) the Company shall not be required to pay any underwriters'
discounts, commissions or stock transfer taxes relating to Registrable
Securities.
4.6. Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 4,
the Company will keep each Holder participating therein advised in writing as to
the initiation of such registration, qualification and compliance and as to the
completion thereof. At its expense (except as otherwise provided in Section 4.5
above), the Company will:
(a) keep any such registration, qualification or compliance
pursuant to Sections 4.2 and 4.3 above effective for a period of ninety (90)
days or until the Holder or Holders have completed the distribution described in
the registration statement relating thereto, whichever first occurs;
(b) furnish such number of prospectuses and other documents
incident thereto as a Holder from time to time may reasonably request;
(c) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statements as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement;
(d) notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto covered
by such registration statement is required to be delivered under the Act, of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
-16-
<PAGE>
necessary to make the statements therein not misleading in the light of the
circumstances then existing; and
(e) furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to this Section 4, on the date
that such Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Section 4, if such securities
are being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statements with respect
to such securities becomes effective, (i) an opinion, dated such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities.
4.7. Indemnification.
---------------
(a) Indemnification by the Company. The Company will indemnify
------------------------------
each Holder of Registrable Securities with respect to which registration,
qualification or compliance has been effected pursuant to this Section 4, each
of its officers and directors, and each person controlling such Holder, and each
underwriter, if any, of such Registrable Securities and each person who controls
any such underwriter, against all claims, losses, damages, costs, expenses and
liabilities of any nature whatsoever (or actions in respect thereof) arising out
of or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other documents (including any related registration, statement, notification or
the like) incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or any violation by the Company of the Act or any state securities
law or of any rule or regulation promulgated under the Act or any state
securities law applicable to the Company and relating to action or inaction
required of the Company in connection with any such registration, qualification
or compliance, and will reimburse each such Holder, each of its officers and
directors, and each person controlling such Holder, and each such underwriter
and each person who controls any such underwriter, for any legal and other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, cost, expense, liability or action, except that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, cost, expense, liability or action arises out of or is based on
any untrue statement or omission based upon written information furnished to the
Company in an instrument duly executed by any Holder or underwriter and stated
to be specifically for use therein, and except that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to any such
untrue statement (or alleged untrue statement) or omission (or alleged omission)
made in the preliminary prospectus but eliminated or remedied in the amended
prospectus on file with the SEC at the time the registration statement becomes
effective or in the amended prospectus filed with the SEC pursuant to Rule
424(b) (the "Final Prospectus"), such indemnity agreement shall
-17-
<PAGE>
not inure to the benefit of any underwriter or any Holder, if there is no
underwriter, if a copy of the Final Prospectus was furnished to the person or
entity asserting the claim, loss, damage, cost, expense, liability or action at
or prior to the time such action is required by the Act.
(b) Indemnification by the Holders. Each Holder will, if Registrable
------------------------------
Securities held by or issuable to such Holder are included in the securities to
which such registration, qualification or compliance is being effected,
indemnify the Company, each of its directors and officers, each underwriter, if
any, of the Company's securities covered by such a registration statement, each
person who controls the Company within the meaning of the Act, and each other
Holder, each of such other Holder's officers and directors and each person
controlling such other Holder, against all claims, losses, damages, costs,
expenses and liabilities of any nature whatsoever (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other documents (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse the
Company, such other Holders, such directors, officers, persons or underwriters
for any legal or other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, cost, expense,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company in an instrument duly executed by such Holder and
stated to be specifically for use therein, except that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to any such
untrue statement (or alleged untrue statement) or omission (or alleged omission)
made in the preliminary prospectus but eliminated or remedied in the Final
Prospectus, such indemnity agreement shall not inure to the benefit of the
Company or any underwriter or any Holder, if there is no underwriter, if a copy
of the Final Prospectus was furnished to the person or entity asserting the
claim, loss, damage, cost, expense, liability or action at or prior to the time
such action is required by the Act. In no event shall the indemnity under this
Section 4.7(b) exceed the gross proceeds from the offering received by such
Holder.
(c) Procedures for Indemnification. Each party entitled to
------------------------------
indemnification under this Section 4.7 (the "Indemnified Party"), shall give
notice to the party required to provide indemnification (the "Indemnifying
Party") promptly after such Indemnified Party has actual knowledge of any claim
as to which indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting therefrom,
provided that counsel for the Indemnifying Party, who shall conduct the defense
of such claim or litigation, shall be approved by the Indemnified Party (whose
approval shall not unreasonably be withheld), and the Indemnified Party may
participate in such defense. Failure of the Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 4.7, unless the failure or delay in giving notice has a
material adverse impact on the ability of the Indemnifying Party to defend
against such claim. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement that does
-18-
<PAGE>
not include as an unconditional term thereof, the giving of a release from all
liability in respect to such claim or litigation. If any such Indemnified Party
shall have been advised by counsel chosen by it that there may be one or more
legal defenses available to such Indemnified Party that are different from or
additional to those available to the Indemnifying Party, the Indemnifying Party
shall not have the right to assume the defense of such action on behalf of such
Indemnified Party and will reimburse such Indemnified Party and any person
controlling such Indemnified Party for the reasonable fees and expenses of any
counsel retained by the Indemnified Party, it being understood that the
Indemnifying Party shall not, in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys for such Indemnified Party
or controlling person, which firm shall be designated in writing by the
Indemnified Party to the Indemnifying Party.
4.8. Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders and the distribution proposed by
such Holder or Holders as the Company may reasonably request in writing and as
shall be required in connection with any registration, qualification or
compliance referred to in this Section 4.
4.9. Rule 144 Reporting. From and after such time that the Company
------------------
becomes a reporting company under the Exchange Act, with a view to making
available the benefits of certain rules and regulations of the SEC which may
permit the sale of Warrant Stock or Registrable Securities to the public without
registration, the Company agrees to:
(a) at all times make and keep public information available, as
those terms are understood and defined in SEC Rule 144;
(b) take such action as soon as practicable, including the
voluntary registration of its Common Stock under Section 12 of the Exchange Act,
as is necessary to enable the Holders to utilize Form S-3 for the sale of their
Registrable Securities;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the Exchange Act; and
(d) furnish to the Purchaser, so long as the Purchaser owns any
Warrant Stock or Registrable Securities, forthwith upon written request a
written statement by the Company that it has complied with the reporting
requirements of Rule 144, the Act and the Exchange Act, a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents so filed by the Company as may be reasonably requested in availing the
Purchaser of any rule or regulation of the SEC permitting the selling of any
such securities without registration.
4.10. Transfer of Registration Rights. The registration rights
-------------------------------
granted by the Company under this Section 4 may be assigned by any Holder to any
permitted transferee or permitted assignee of the Warrant, Warrant Stock or
Registrable Securities, provided that such transfer may otherwise be and is
effected in accordance with applicable federal and state securities laws and
provided further that the Company is given written notice of such transfer at
-19-
<PAGE>
the time of or within a reasonable time after such transfer, stating the name
and address of the transferee or assignee and identifying the securities with
respect to which such registration rights are being assigned.
4.11. Limitations on Subsequent Registration Rights. Any right given
---------------------------------------------
by Company to any holder or prospective holder of Company's securities in
connection with the registration of securities shall be conditioned such that it
shall be consistent with the provisions of this Section 4 and with the rights of
the Holders provided in this Agreement. This Section 4 shall not limit the
right of the Company to enter into any agreements with any holder or prospective
holder of any securities of the Company giving such holder or prospective holder
the right to require the Company, upon any registration of any of its
securities, to include, among the securities which the Company is then
registering, securities owned by such holder, but only if such rights provide
that, if the underwriter in any such registration requires a reduction in the
number of securities to be included in such registration, then the amount of
securities included in any such registration at the request and on behalf of
such holder shall be reduced (or eliminated, if necessary) prior to any
reduction in the securities requested by the Purchaser to be included in such
registration.
4.12. Limitation on Registration. The Company shall not be obligated
--------------------------
to effect any registration pursuant to Sections 4.2, 4.3 or 4.4 hereof if the
Registrable Securities intended to be included in such registration on behalf of
the Holders could be sold by the Holders to the public in an offering without
registration within a period of three consecutive months.
5. CONDITIONS TO CLOSING. The Purchaser's obligation to purchase the
---------------------
Warrant at the Closing is subject to the fulfillment to the satisfaction of the
Purchaser on or prior to the Closing of the following conditions:
5.1. Representations and Warranties. The representations and
------------------------------
warranties made by the Company in Section 2 hereof shall be true when made, and
shall be true as of the Closing with the same force and effect as if they had
been made on and as of such date, subject to changes contemplated by this
Agreement.
5.2. Performance. The Company shall have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing and
shall have obtained all approvals, consents and qualifications necessary to
complete the purchase and sale described herein.
5.3. Securities Laws. The offer and sale of the Warrant to the
---------------
Purchaser pursuant to this Agreement shall be exempt from the registration
requirements of the Act and the registration and/or qualification requirements
of all applicable state securities laws.
5.4. Consents and Waivers. The Company shall have obtained any and
--------------------
all consents and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement.
5.5. Compliance Certificate. At the Closing, the Company shall have
----------------------
delivered to the Purchaser a certificate, dated as of the date of Closing and
signed by the Company's
-20-
<PAGE>
President, certifying that the conditions specified in Sections 5.1, 5.2, 5.3
and 5.4 have been fulfilled.
5.6. Cooperation Agreement. The Purchaser and the Company shall
---------------------
have executed and delivered the Cooperation Agreement.
5.7. Agreement with AGE. The Company and AGE shall have entered
------------------
into an agreement, on terms and conditions satisfactory to the Purchaser, with
respect to the production and merchandising of [[TEXT OMITTED FOR
CONFIDENTIALITY]]
5.8. Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Closing hereby and all
documents and instruments incident to such transactions shall be satisfactory in
substance and form to the Purchaser, and the Purchaser shall have received all
such counterpart originals or certified or other copies of such documents as it
may reasonably request.
5.9. Ownership of Technology. The Purchaser shall have received from
-----------------------
the Company all documents and other materials requested by the Purchaser for the
purpose of examining and determining the Company's rights in and to any
Proprietary Assets now used or proposed to be used in or necessary to the
Company's business as now conducted and proposed to be conducted, and the status
of the Company's ownership rights in and to all such Proprietary Assets shall be
reasonably satisfactory to the Purchaser.
6. OTHER AGREEMENTS AND COVENANTS.
------------------------------
6.1. Inspection Rights. The Purchaser shall have the right, upon
-----------------
reasonable notice to the Company and during normal business hours, to inspect
the Company's rendering farm in order to confirm that the proceeds from the
purchase of the Warrant have been used by the Company to acquire the equipment
specified in Section 1.4.
6.2. [[TEXT OMITTED FOR CONFIDENTIALITY]]
7. GENERAL PROVISIONS.
------------------
7.1. Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the state of Delaware without regard to provisions of such laws
concerning conflicts or choice of law.
7.2. Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive any investigation made by any party hereto
and the closing of the transactions contemplated hereby.
7.3. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
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<PAGE>
7.4. Entire Agreement. This Agreement and the exhibits hereto
----------------
constitute the entire understanding and agreement between the parties with
regard to the subjects hereof and thereof; provided, however, that nothing in
-------- -------
this Agreement shall be deemed to terminate or supersede the provisions of any
confidentiality and nondisclosure agreements executed by the parties hereto
prior to the date hereof, which agreements shall continue in full force and
effect until terminated in accordance with their respective terms.
7.5. Notices. Except as otherwise provided, all notices and other
-------
communications required or permitted hereunder shall be in writing and shall be
mailed by first class mail, postage prepaid, addressed (a) if to the Purchaser,
to 2200 Mission College Boulevard, Mail Stop SC4-210, Santa Clara, California
95052-8119, Attn: Treasurer, and (b) if to the Company, to MSH Entertainment
Corporation, 768 Brannan Street, San Francisco, California 94103, or (c) to such
other address as the receiving party shall have furnished to the other in
writing.
7.6. Amendments and Waivers. Any term of this Agreement may be
----------------------
amended, and the observance of any term of the Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Purchaser
and only to the extent specifically set forth in such writing.
7.7. Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to any party hereto upon any breach or default
of the other party hereto under this Agreement shall impair any such right,
power or remedy, nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of any similar breach of default
thereafter occurring. All remedies, either under this Agreement or by law or
otherwise afforded to the Company or the Purchaser shall be cumulative and not
alternative.
7.8. Legal Fees. In the event of any action at law, suit in equity
----------
or arbitration proceeding in relation to this Agreement or any securities of
Company issued or to be issued to the Purchaser, the prevailing party shall be
paid by the other party a reasonable sum for attorney's fees and expenses for
such prevailing party.
7.9. Finder's Fees. Each party (a) represents and warrants to the
-------------
other party hereto that it has retained no finder or broker in connection with
the transactions contemplated by this Agreement, and (b) hereby agrees to
indemnify and to hold harmless the other party hereto from and against any
liability for any commission or compensation in the nature of a finder's fee of
any broker or other person or firm (and the costs and expenses of defending
against such liability or asserted liability) for which the indemnifying party
or any of its employees or representatives are responsible.
7.10. Titles and Subtitles. The titles of the paragraphs and
--------------------
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
7.11. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
-22-
<PAGE>
7.12. Severability. Should any provision of this Agreement be
------------
determined to be illegal or unenforceable, such determination shall not affect
the remaining provisions of this Agreement.
7.13. Confidentiality; Public Disclosure.
----------------------------------
(a) This Agreement, the terms hereof and the relationship of
the parties shall be governed by the Confidentiality and Nondisclosure
Agreement, dated as of August 22, 1996, between the Purchaser and the Company.
The terms and existence of the transactions contemplated by this Agreement and
the Cooperation Agreement shall be deemed confidential information of both
parties.
(b) The Company shall not use the Purchaser's name or refer to
the Purchaser directly or indirectly in connection with the Purchaser's
relationship with the Company in any advertisement, news release or professional
or trade publication, or in any other manner, unless otherwise required by law
or with the Purchaser's prior written consent, which consent will generally not
be granted. The parties acknowledge that the Company may be required to disclose
in a press release and/or a registration statement certain information relating
to the transactions contemplated by this Agreement following consummation
hereof. Notwithstanding the foregoing, the provisions of this Section 7.13 shall
apply to any such disclosure and the Company shall provide Intel a reasonably
adequate opportunity to review and comment on such disclosure and shall not make
any such disclosure without Intel's prior written consent. The parties agree
that at no time will there be any press release or other public statement issued
by either party relating to this Agreement or the transactions contemplated
hereby unless agreed to in advance by both parties in writing.
-23-
<PAGE>
The parties have executed this Agreement to be effective as of the date first
set forth above.
<TABLE>
<S> <C>
INTEL CORPORATION MSH ENTERTAINMENT CORPORATION
/s/ SATISH RISH /s/ ROBERT P. MAERZ
- -------------------- ----------------------------------------
Signature Signature
Satish Rish Robert P. Maerz
- -------------------- ----------------------------------------
Printed Name Printed Name
Assistant Treasurer-Int'l Chairman
- ------------------------------- ----------------------------------------
Title Title
</TABLE>
LIST OF EXHIBITS
- ----------------
Exhibit A Warrant
- ---------
Exhibit B Schedule of Exceptions
- ---------
-24-
<PAGE>
Exhibit A
---------
WARRANT
-------
-25-
<PAGE>
Exhibit B
---------
SCHEDULE OF EXCEPTIONS
WARRANT
THE WARRANT EVIDENCED OR CONSTITUTED HEREBY AND THE SHARES OF COMMON STOCK
ISSUABLE HEREUNDER HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), AND MAY NOT BE SOLD, OFFERED FOR
SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT REGISTRATION UNDER THE ACT
UNLESS EITHER (i) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL TO THE EFFECT
THAT REGISTRATION IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (ii)
THE SALE OF SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND EXCHANGE
COMMISSION RULE 144.
WARRANT TO PURCHASE 1,000,000 SHARES OF
COMMON STOCK OF MSH ENTERTAINMENT CORPORATION
(Subject to Adjustment)
NO. I-1
THIS CERTIFIES THAT, in consideration of the receipt by MSH Entertainment
Corporation, a Utah corporation (the "Company"), of [[TEXT OMITTED FOR
-------
CONFIDENTIALITY]] in cash from Intel Corporation, a Delaware corporation
("Intel"), Intel or its permitted registered assigns ("Holder"), is entitled,
----- ------
subject to the terms and conditions of this Warrant, at any time after November
4, 1996 (the "Effective Date"), and before 5:00 p.m. Pacific Time on [[TEXT
--------------
OMITTED FOR CONFIDENTIALITY]] (the "Expiration Date"), to purchase from the
---------------
Company, One Million (1,000,000) fully paid and nonassessable shares of the
Company's Common Shares, $.001 par value per share (the "Warrant Stock"), at the
-------------
Exercise Price (as defined in Section 1.5 below). Both the number of shares of
Warrant Stock purchasable under this Warrant and the Exercise Price are subject
to adjustment as provided herein. This Warrant is issued pursuant to that
certain Warrant Purchase Agreement between the Company and Intel Corporation of
even date herewith (the "Purchase Agreement"). This Warrant shall terminate on
------------------
the Expiration Date.
1. CERTAIN DEFINITIONS. As used in this Warrant:
1.1. The term "Warrant Stock" shall mean the Common Shares, $0.001 par
-------------
value per share, of the Company, and any other securities and property at any
time receivable or issuable upon exercise of this Warrant, unless the context
otherwise requires.
1.2. The term "Warrant" as used herein, shall include this Warrant and any
-------
warrant delivered in substitution or exchange therefor as provided herein.
<PAGE>
1.3. The term "Registered Holder" shall mean any Holder in whose name this
-----------------
Warrant is registered upon the books and records maintained by the Company.
1.4. The term "Fair Market Value" of a share of Warrant Stock as of a
-----------------
particular date (the "Determination Date") shall mean:
------------------
(a) If traded on a securities exchange or the Nasdaq National Market,
the Fair Market Value shall be deemed to be the average of the closing prices of
the Common Stock of the Company on such trading market over the 10 business days
ending three (3) days prior to the Determination Date;
(b) If actively traded over-the-counter, the Fair Market Value shall
be deemed to be the average of the closing bid prices over the 20-day period
ending three (3) days prior to the Determination Date; and
(c) If there is no active public market, the Fair Market Value shall
be the value thereof, as determined in good faith by the Board of Directors of
the Company.
1.5. The term "Exercise Price" shall mean [[TEXT OMITTED FOR
--------------
CONFIDENTIALITY]]
2. EXERCISE OF WARRANT
2.1. Payment.
-------
Subject to compliance with the terms and conditions of this Warrant
and applicable securities laws, this Warrant may be exercised, in whole or in
part at any time on or before the Expiration Date, by surrendering this Warrant
at the principal office of the Company together with:
(a) the form of Notice of Exercise attached hereto as Exhibit 1 (the
"Notice of Exercise") duly executed by the Holder, and
- -------------------
(b) payment, (i) in cash (by check) or by wire transfer, (ii) by
cancellation by the Holder of indebtedness of the Company to the Holder or (iii)
by a combination of (i) and (ii), of an amount equal to the product obtained by
multiplying the number of shares of Warrant Stock being purchased upon such
exercise by the then effective Exercise Price (the "Exercise Amount").
---------------
2.2. Net Issue Exercise
------------------
In lieu of the payment methods set forth in Section 2.1(b) above, the
Holder may elect to exchange the Warrant for shares of Warrant Stock equal to
the value of the amount of the Warrant being exchanged on the date of exchange.
If Holder elects to exchange this Warrant as provided in this Section 2.2,
Holder shall tender to the Company the Warrant for the amount being exchanged,
along with written notice of Holder's election to exchange up to the full amount
of the Warrant, and the Company shall issue to Holder the number of shares of
the Company's Warrant Stock computed using the following formula:
-3-
<PAGE>
X = Y (A-B)
-------
A
Where X = the number of shares of Warrant Stock to be issued to
Holder.
Y = the number of shares of Warrant Stock purchasable under the
amount of the Warrant being exchanged (as adjusted to the date of such
calculation).
A = the Fair Market Value of one share of the Company's Common Stock.
B = Exercise Price (as adjusted to the date of such calculation).
All references herein to an "exercise" of the Warrant shall include an
exchange pursuant to this Section 2.2.
2.3. Partial Exercise; Effective Date of Exercise.
--------------------------------------------
In case of any partial exercise of this Warrant, the Company shall
cancel this Warrant upon surrender hereof and shall execute and deliver a new
Warrant of like tenor and date for the balance of the shares of Warrant Stock
purchasable hereunder. This Warrant shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided above. The person entitled to receive the shares of
Warrant Stock issuable upon exercise of this Warrant shall be treated for all
purposes as the holder of record of such shares as of the close of business on
the date the Holder is deemed to have exercised this Warrant.
2.4. Stock Certificates; Fractional Shares.
-------------------------------------
As soon as practicable on or after such date, the Company shall issue
and deliver to the person or persons entitled to receive the same a certificate
or certificates for the number of whole shares of Warrant Stock issuable upon
such exercise, together with cash in lieu of any fraction of a share equal to
such fraction of the Fair Market Value of one whole share of Warrant Stock as of
the date of exercise of this Warrant. No fractional shares or scrip
representing fractional shares shall be issued upon an exercise of this Warrant.
3. VALID ISSUANCE; TAXES.
All shares of Warrant Stock issued upon the exercise of this Warrant shall
be validly issued, fully paid and non-assessable, and the Company shall pay all
taxes and other governmental charges that may be imposed in respect of the issue
or delivery thereof. The Company shall not be required to pay any tax or other
charge imposed in connection with any transfer involved in the issuance of any
certificate for shares of Warrant Stock in any name other than that of the
Registered Holder of this Warrant, and in such case the Company shall not be
required to issue or deliver any stock certificate or security until such tax or
other charge has been paid, or it has been established to the Company's
reasonable satisfaction that no tax or other charge is due.
-4-
<PAGE>
4. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES.
The number of shares of Warrant Stock issuable upon exercise of this
Warrant (or any shares of stock or other securities or property receivable or
issuable upon exercise of this Warrant) and the Exercise Price are subject to
adjustment upon occurrence of the following events:
4.1. Adjustment for Stock Splits, Stock Subdivisions or Combinations of
------------------------------------------------------------------
Shares.
- ------
The Exercise Price of this Warrant shall be proportionally decreased
and the number of shares of Warrant Stock issuable upon exercise of this Warrant
(or any shares of stock or other securities at the time issuable upon exercise
of this Warrant) shall be proportionally increased to reflect any stock split or
subdivision of the Company's Common Stock. The Exercise Price of this Warrant
shall be proportionally increased and the number of shares of Warrant Stock
issuable upon exercise of this Warrant (or any shares of stock or other
securities at the time issuable upon exercise of this Warrant) shall be
proportionally decreased to reflect any combination of the Company's Common
Stock.
4.2. Adjustment for Dividends or Distributions of Stock or Other
-----------------------------------------------------------
Securities or Property.
- ----------------------
In case the Company shall make or issue, or shall fix a record date
for the determination of eligible holders entitled to receive, a dividend or
other distribution with respect to the Warrant Stock (or any shares of stock or
other securities at the time issuable upon exercise of the Warrant) payable in
(i) securities of the Company or (ii) assets (excluding cash dividends paid or
payable solely out of retained earnings), then, in each such case, the Holder of
this Warrant on exercise hereof at any time after the consummation, effective
date or record date of such dividend or other distribution, shall receive, in
addition to the shares of Warrant Stock (or such other stock or securities)
issuable on such exercise prior to such date, and without the payment of
additional consideration therefore, the securities or such other assets of the
Company to which such Holder would have been entitled upon such date if such
Holder had exercised this Warrant on the date hereof and had thereafter, during
the period from the date hereof to and including the date of such exercise,
retained such shares and/or all other additional stock available by it as
aforesaid during such period giving effect to all adjustments called for by this
Section 4.
4.3. Reclassification.
----------------
If the Company, by reclassification of securities or otherwise, shall
change any of the securities as to which purchase rights under this Warrant
exist into the same or a different number of securities of any other class or
classes, this Warrant shall thereafter represent the right to acquire such
number and kind of securities as would have been issuable as the result of such
change with respect to the securities that were subject to the purchase rights
under this Warrant immediately prior to such reclassification or other change
and the Exercise Price therefore shall be appropriately adjusted, all subject to
further adjustment as provided in this Section 4.
-5-
<PAGE>
4.4. Adjustment for Capital Reorganization, Merger or Consolidation.
--------------------------------------------------------------
In case of any capital reorganization of the capital stock of the
Company (other than a combination, reclassification, exchange or subdivision of
shares otherwise provided for herein), or any merger or consolidation of the
Company with or into another corporation, or the sale of all or substantially
all the assets of the Company then, and in each such case, as a part of such
reorganization, merger, consolidation, sale or transfer, lawful provision shall
be made so that the Holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified herein and
upon payment of the Exercise Price then in effect, the number of shares of stock
or other securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this Warrant would have been entitled to
receive in such reorganization, consolidation, merger, sale or transfer if this
Warrant had been exercised immediately before such reorganization, merger,
consolidation, sale or transfer, all subject to further adjustment as provided
in this Section 4. The foregoing provisions of this Section 4.4 shall similarly
apply to successive reorganizations, consolidations, mergers, sales and
transfers and to the stock or securities of any other corporation that are at
the time receivable upon the exercise of this Warrant. If the per-share
consideration payable to the Holder hereof for shares in connection with any
such transaction is in a form other than cash or marketable securities, then the
value of such consideration shall be determined in good faith by the Company's
Board of Directors. In all events, appropriate adjustment (as determined in
good faith by the Company's Board of Directors) shall be made in the application
of the provisions of this Warrant with respect to the rights and interests of
the Holder after the transaction, to the end that the provisions of this Warrant
shall be applicable after that event, as near as reasonably may be, in relation
to any shares or other property deliverable after that event upon exercise of
this Warrant.
4.5. Reservation of Securities and Assets.
------------------------------------
The Company shall reserve, for the life of the Warrant, such
securities or such other assets of the Company the Holder is entitled to receive
pursuant to this Section 4.
5. CERTIFICATE AS TO ADJUSTMENTS.
In each case of any adjustment in the Exercise Price, or number or type of
shares issuable upon exercise of this Warrant, the Chief Financial Officer of
the Company shall compute such adjustment in accordance with the terms of this
Warrant and prepare a certificate setting forth such adjustment and showing in
detail the facts upon which such adjustment is based, including a statement of
the adjusted Exercise Price. The Company shall promptly send (by facsimile and
by either first class mail, postage prepaid or overnight delivery) a copy of
each such certificate to the Holder.
6. LOSS OR MUTILATION.
Upon receipt of evidence reasonably satisfactory to the Company of the
ownership of and the loss, theft, destruction or mutilation of this Warrant, and
of indemnity reasonably satisfactory to it, and (in the case of mutilation) upon
surrender and cancellation of this Warrant, the
-6-
<PAGE>
Company will execute and deliver in lieu thereof a new Warrant of like tenor as
the lost, stolen, destroyed or mutilated Warrant.
7. RESERVATION OF COMMON STOCK.
The Company hereby covenants that at all times there shall be reserved for
issuance and delivery upon exercise of this Warrant such number of shares of
Common Stock or other shares of capital stock of the Company as are from time to
time issuable upon exercise of this Warrant and, from time to time, will take
all steps necessary to amend its Articles of Incorporation to provide sufficient
reserves of shares of Common Stock issuable upon exercise of this Warrant. All
such shares shall be duly authorized, and when issued upon such exercise, shall
be validly issued, fully paid and non-assessable, free and clear of all liens,
security interests, charges and other encumbrances or restrictions on sale and
free and clear of all preemptive rights, except encumbrances or restrictions
arising under federal or state securities laws. Issuance of this Warrant shall
constitute full authority to the Company's officers who are charged with the
duty of executing stock certificates to execute and issue the necessary
certificates for shares of Common Stock upon the exercise of this Warrant.
8. TRANSFER AND EXCHANGE.
Subject to the terms and conditions of this Warrant and compliance with all
applicable securities laws, this Warrant and all rights hereunder may be
transferred, in whole or in part, on the books of the Company maintained for
such purpose at the principal office of the Company referred to above, by the
Registered Holder hereof in person, or by duly authorized attorney, upon
surrender of this Warrant properly endorsed and upon payment of any necessary
transfer tax or other governmental charge imposed upon such transfer. Upon any
permitted partial transfer, the Company will issue and deliver to the Registered
Holder a new Warrant or Warrants with respect to the shares of Warrant Stock not
so transferred. Each taker and holder of this Warrant, by taking or holding the
same, consents and agrees that when this Warrant shall have been so endorsed,
the person in possession of this Warrant may be treated by the Company, and all
other persons dealing with this Warrant, as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented hereby,
any notice to the contrary notwithstanding; provided, however that until a
transfer of this Warrant is duly registered on the books of the Company, the
Company may treat the Registered Holder hereof as the owner for all purposes.
9. RESTRICTIONS ON TRANSFER.
The Holder, by acceptance hereof, agrees that, absent an effective
registration statement filed with the U.S. Securities and Exchange Commission
("SEC") under the Act covering the disposition or sale of this Warrant or the
Warrant Stock issued or issuable upon exercise hereof, as the case may be, and
registration or qualification under applicable state securities laws, such
Holder will not sell, transfer pledge, or hypothecate any or all such Warrants
or Warrant Stock, as the case may be, unless either (i) the Company has received
an opinion of counsel to the effect that such registration is not required in
connection with such disposition or (ii) the sale of such securities is made
pursuant to SEC Rule 144.
-7-
<PAGE>
10. COMPLIANCE WITH SECURITIES LAWS.
By acceptance of this Warrant, the holder hereby represents, warrants and
covenants that any shares of stock purchased upon exercise of this Warrant shall
be acquired for investment only and not with a view to, or for sale in
connection with, any distribution thereof; that the Holder has had such
opportunity as such Holder has deemed adequate to obtain from representatives of
the Company such information as is necessary to permit the holder to evaluate
the merits and risks of its investment in the Company; that the Holder is able
to bear the economic risk of holding such shares as may be acquired pursuant to
the exercise of this Warrant for an indefinite period; that the Holder
understands that the shares of stock acquired pursuant to the exercise of this
Warrant will not be registered under the Act (unless otherwise required
pursuant to exercise by the holder of the registration rights, if any,
previously granted to the registered Holder) and will be "restricted securities"
within the meaning of Rule 144 under the Act and that the exemption from
registration under Rule 144 currently is not available for at least two years
from the date of exercise of this Warrant, subject to any special treatment by
the Securities and Exchange Commission for exercise of this Warrant pursuant to
Section 2.2, and even then will not be available unless a public market then
exists for the stock, adequate information concerning the Company is then
available to the public, and other terms and conditions of Rule 144 are complied
with; and that all stock certificates representing shares of stock issued to the
Holder upon exercise of this Warrant may have affixed thereto a legend
substantially in the following form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE BEEN AND WILL BE
ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
("THE ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR
HYPOTHECATED WITHOUT REGISTRATION UNDER THE ACT OR UNLESS EITHER (i) THE
COMPANY HAS RECEIVED AN OPINION OF COUNSEL TO THE EFFECT THAT REGISTRATION
IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (ii) THE SALE OF
SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE
144.
11. NO RIGHTS OR LIABILITIES AS SHAREHOLDERS.
This Warrant shall not entitle the Holder to any voting rights or other
rights as a shareholder of the Company. In the absence of affirmative action by
such Holder to purchase Warrant Stock by exercise of this Warrant, no provisions
of this Warrant, and no enumeration herein of the rights or privileges of the
Holder hereof shall cause such Holder hereof to be a shareholder of the Company
for any purpose.
12. REGISTRATION RIGHTS.
All shares of Common Stock issuable upon exercise of this Warrant shall be
"Registrable Securities" as defined in the Purchase Agreement and entitled,
subject to the terms and conditions of that agreement, to all registration
rights granted to holders of Registrable Securities thereunder.
-8-
<PAGE>
13. NOTICES.
All notices and other communications from the Company to the Holder shall
be given in accordance with Paragraph 7.5 of the Purchase Agreement.
14. HEADINGS.
The headings in this Warrant are for purposes of convenience in reference
only, and shall not be deemed to constitute a part hereof.
15. LAW GOVERNING.
This Warrant shall be construed and enforced in accordance with, and
governed by, the laws of the State of Delaware.
16. NO IMPAIRMENT.
The Company will not, by amendment of its Articles of Incorporation or
bylaws, or through reorganization, consolidation, merger, dissolution, issue or
sale of securities, sale of assets or any other voluntary action, avoid or seek
to avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Registered Holder of this Warrant against impairment.
Without limiting the generality of the foregoing, the Company (a) will not
increase the par value of any shares of stock issuable upon the exercise of this
Warrant above the amount payable therefor upon such exercise, and (b) will take
all such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and non-assessable shares of Warrant Stock
upon exercise of this Warrant.
17. NOTICES OF RECORD DATE. In case:
17.1. the Company shall take a record of the holders of its Common Stock
(or other stock or securities at the time receivable upon the exercise of this
Warrant) for the purpose of entitling them to receive any dividend or other
distribution, or any right to subscribe for or purchase any shares of stock of
any class or any other securities or to receive any other right; or
17.2. of any consolidation or merger of the Company with or into another
corporation, any capital reorganization or the Company, any reclassification of
the Capital Stock of the Company, or any conveyance of all or substantially all
of the assets of the Company to another corporation in which holders of the
Company's stock are to receive stock, securities or property of another
corporation; or
17.3. of any voluntary dissolution, liquidation or winding-up of the
Company; or
17.4. of any redemption or conversion of all outstanding Common Stock;
then, and in each such case, the Company will mail or cause to be mailed to
the Registered Holder of this Warrant a notice specifying, as the case may be,
(i) the date on which a
-9-
<PAGE>
record is to be taken for the purpose of such dividend, distribution or right,
or (ii) the date on which such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation, winding-up, redemption or
conversion is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or such stock or securities as at the
time are receivable upon the exercise of this Warrant) shall be entitled to
exchange their shares of Common Stock (or such other stock or securities) for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
winding-up. Such notice shall be delivered at least thirty (30) days prior to
the date therein specified.
18. SEVERABILITY.
If any term, provision, covenant or restriction of this Warrant is held by
a court of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated.
19. COUNTERPARTS.
For the convenience of the parties, any number of counterparts of this
Warrant may be executed by the parties hereto and each such executed counterpart
shall be, and shall be deemed to be, an original instrument.
20. NO INCONSISTENT AGREEMENTS.
The Company will not on or after the date of this Warrant enter into any
agreement with respect to its securities which is inconsistent with the rights
granted to the Holders of this Warrant or otherwise conflicts with the
provisions hereof. The rights granted to the Holders hereunder do not in any
way conflict with and are not inconsistent with the rights granted to holders of
the Company's securities under any other agreements, except rights that have
been waived.
-10-
<PAGE>
21. SATURDAYS, SUNDAYS AND HOLIDAYS.
If the Expiration Date falls on a Saturday, Sunday or legal holiday, the
Expiration Date shall automatically be extended until 5:00 p.m. the next
business day.
AGREED:
<TABLE>
<CAPTION>
INTEL CORPORATION MSH ENTERTAINMENT CORPORATION
<S> <C>
- ------------------------ ------------------------------
Signature Signature
- ------------------------ ------------------------------
Printed Name Printed Name
- ------------------------ ------------------------------
Title Title
- ------------------------ ------------------------------
Date Date
</TABLE>
-11-
<PAGE>
EXHIBIT 1
NOTICE OF EXERCISE
(To be executed upon exercise of Warrant)
MSH ENTERTAINMENT CORPORATION:
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
shares of Common Stock, as provided for therein, and (check the applicable box):
[_] tenders herewith payment of the exercise price in full in the form of cash
or a certified or official bank check in same-day funds in the amount of
$____________ for _________ shares of Common Stock.
[_] Elects the Net Issue Exercise option pursuant to Section 2.2 of the
Warrant, and accordingly requests delivery of a net of ______________
shares of Common Stock.
Please issue a certificate or certificates for such Common Stock in the name of,
and pay any cash for any fractional share to (please print name, address and
social security number):
Name:
---------------------------------------------
Address:
---------------------------------------------
Signature:
---------------------------------------------
Note: The above signature should correspond exactly with the name on the first
page of this Warrant Certificate or with the name of the assignee appearing in
the assignment form below.
If said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder rounded up to the next higher whole number of shares.
<PAGE>
EXHIBIT 2
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received, hereby sells, assigns and transfers unto
________________________ the within Warrant Certificate, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint ____________________________ attorney, to transfer said Warrant
Certificate on the books of the within-named Company with respect to the number
of Warrants set forth below, with full power of substitution in the premises:
<TABLE>
<CAPTION>
Name(s) of Assignee(s) Address # of Warrants
- --------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
And if said number of Warrants shall not be all the Warrants represented by the
Warrant Certificate, a new Warrant Certificate is to be issued in the name of
said undersigned for the balance remaining of the Warrants registered by said
Warrant Certificate.
Dated: 19
-----------------------------------
Signature: --------------------------------
Notice: The signature to the foregoing Assignment must correspond to the name
as written upon the face of this security in every particular, without
alteration or any change whatsoever; signature(s) must be guaranteed by an
eligible guarantor institution (banks, stock brokers, savings and loan
associations and credit unions with membership in an approved signature
guarantee medallion program) pursuant to Securities and Exchange Commission Rule
17Ad-15.
-2-
<PAGE>
EXHIBIT 10.9
AGREEMENT
---------
This AGREEMENT made this 1st day of November, 1996 between MSH Entertainment
Corporation, Inc. ( hereinafter referred to as "MSHE"), a Utah corporation whose
address is 768 Brannan Street, San Francisco, California 94103 and
Abrams/Gentile Entertainment, Inc. (referred to as "AGE"), whose address is 244
West 54th Street, 9th floor, New York, New York, 10019 (with MSHE and AGE being
collectively called "Parties").
WITNESSETH
----------
WHEREAS AGE warrants and represents that AGE owns all the rights, title and
interest, including all materials including, but not limited to, scripts, story
ideas, treatments, adaptations, trademarks, toy designs, merchandising and the
titles, characters, drawings, plots, themes and storylines for a proposed
television series and merchandising and toy line entitled "Vanpires"
(hereinafter the "Property"); and
WHEREAS the Parties desire to enter into a co-production arrangement ("Co-
Production Agreement") as outlined herein for the purpose of producing the
Property; and
WHEREAS the Parties desire to produce thirteen (13) episodes of the Property to
be sold as a television series ("Series") and toy line and merchandising items
(collectively "Merchandising"); and
WHEREAS the Parties desire to establish each Party's rights in connection with
the Property and the proceeds derived from any sales, production and/or
distribution of the Property and share profits therefrom with each other as set
forth herein; and
WHEREAS, the Parties hereby agree as follows:
NOW THEREFORE, in consideration of the mutual promises contained herein, the
Parties agree as follows:
1. Adoption of Recitals: The Parties hereto adopt the above recitals as being
---------------------
true and correct.
2. Co-Production: The Parties are undertaking a co-production ("Co-
--------------
Production") for the production of the Series.
3. Term: The term of this Agreement shall be in perpetuity unless sooner
-----
terminated by mutual agreement of the Parties and shall continue for:
a. the duration of any and all copyrights shared and/or owned by the Co-
Production; or
<PAGE>
b. so long as the Parties shall be entitled to compensation with respect
to any Agreements and/or licenses to third parties in connection with the
Property and/or the Series, including all modifications, additions, options,
extensions, renewals, substitutions for, and replacement of such agreements,
directly or indirectly; and
c. for purposes herein, any agreements made, entered into or resumed
within six (6) months immediately following the termination of any particular
prior agreements with the Parties, shall be deemed a substitution or replacement
of such agreements; and
d. as used herein, the term "Agreements" means any and every written
agreement entered into, in existence, directly or indirectly relating to the
Property and/or the Series.
4. Title to Assets: Except as provided below, any and all assets and all
----------------
forms of exploitation of the Property including, but not limited to, all
ancillary and allied rights thereto, including but not limited to toys, games,
merchandising, music rights, stage rights, television rights, radio broadcasting
rights, book publishing, motion pictures and all other rights including the
copyright (herein collectively referred to as the "Rights") shall be owned by
and title held by AGE.
5. Concept: It is acknowledged that the Property is the creation of AGE, and
--------
that the further creation of the Series shall be the contribution of AGE and
MSHE.
6. Ownership: All ownership rights including the underlying rights of the
----------
Property and Series, rights of trademark and copyright and renewals thereof,
shall, except as noted herein, be in the name of AGE. The care, custody and
control of all master tapes produced hereunder shall remain with MSHE and at its
facility in San Francisco, unless otherwise instructed by AGE.
7. Capital and Other Contributions: Each of the Parties have agreed to
--------------------------------
contribute in cash and/or a combination of cash and services the following:
a. AGE:
(1). AGE shall provide cash and services of One Million Three Hundred
Thousand Dollars ($1,300,000.00) for the production of the thirteen (13)
episodes of the Series, according to the schedule of payments as outlined in the
attached addendum ("Addendum").
(2). AGE shall be the Producer of the Series;
(3). AGE shall maintain creative control over the production of the
Series but agrees to engage in active and meaningful consultation with MSHE;
however, in the event of a dispute, the decision of AGE shall govern.
<PAGE>
(4). AGE agrees to deliver to MSHE complete design work for the
Property on or about January 12, 1997.
(5). AGE agrees to the deliverables outlined in the attached
Addendum.
b. MSHE:
------
(1) MSHE shall be the co-producer of the Series;
(2). MSHE shall provide cash and services of Six Hundred and Fifty
Thousand Dollars ($650,000) for the production of the thirteen (13) episodes of
the Series, a schedule of payments as outlined in the attached Addendum;
(3). MSHE shall provide the necessary amount, expected to be up to
fifty (50) Intel computer work stations to properly implement the "Overlord"
animation system in order to produce the Series. The system must be installed
and functioning on a beta basis on or about November 21, 1996 and have produced
a test program acceptable and satisfactory to AGE, in its sole descretion, of
approximately two (2) minutes in duration, based on AGE storyboards, character
and background design. MSHE agrees to the deliverables schedule outlined in the
attached Addendum;
(4). In order to meet the above mentioned threshold, AGE shall
deliver to MSHE complete design work on or about January 12, 1997.
(5). The use of MSHE Communications' production facility, (formally
East End Communications) on a priority basis, at no additional cost, for both
the production and post-production of the Series;
(6). Arrangement of all necessary insurance for the production
including E&O insurance, in a manner subject to AGE's approval.
(7). All the necessary hardware and software to meet the creative
criteria of AGE and deliver 13 half hour episodes of high broadcast quality CGI
animation;
(8). MSHE shall arrange to have Chris Haigh available to work on the
episodes of the Series on a priority basis;
(9). MSHE shall cause to be opened and each Party shall deposit its
respective funds in a mutually agreed upon bank account solely for the purpose
of producing the Series. Any and all expenditures related to the production of
the Property shall be made from this account. Prior to the opening of the
account, AGE and MSHE shall each designate a signatory on the account, subject
to the approval of AGE. Additionally, MSHE will provide, if requested, from
time to time, detailed explanations of how MSHE intends to finance its working
capital needs both specifically related to the production contributions and
working capital for general corporate needs.
<PAGE>
8. Control of the Property: All decisions relating to the activities of the
------------------------
Property, and any and all decisions with respect to third party contractual
Agreements, creative, business, financial and legal matters in connection with
the Property, and all subsidiary and ancillary rights thereto and all
exploitation thereof, shall be remain with AGE.
9. Warrants: MSHE shall issue warrants to AGE, for nominal consideration, for
---------
the right to purchase up to one (1) million common shares of MSHE for a period
up to four (4) years from the execution date of this Agreement. The warrants
shall be covered in a separate agreement (the "Warrant Agreement").
10. Intel: MSHE will execute a cooperation agreement with Intel, as previously
------
presented to AGE. Should MSHE be unable to complete such an agreement or should
MSHE complete an agreement that contradicts the spirit of the role intended for
Intel within this Agreement, AGE may in its own discretion automatically
terminate this Co-Production Agreement with MSHE by seven (7) days written
notice of same, and shall thereafter have no further obligation to MSHE.
11. Participation. Subject to the production of the Series and to the
--------------
performance of MSHE's obligations hereunder, it is agreed to by the Parties
hereto that both AGE and MSHE shall be placed in first position to both fully
recoup, pari passu, their initial investments in the production of the Series
($1.3 million to AGE, and $650,000 to MSHE) from 100% of revenues received by
AGE from the domestic and foreign broadcast of the Series; video licenses and
sales; and CD-ROM licenses and sales. Thereafter, once both Parties have fully
recouped, MSHE shall receive an economic interest from the licensing activities
relating to the Property as follows:
a. Series - 5% of the net advertising sales revenue earned by AGE in the
U.S. from the broadcast of the Series;
Toys, domestic - 1% of the net Toy revenues earned by AGE in the U.S.;
Toys, international - 2% of the net Toy revenues earned by AGE
internationally;
Merchandising - 2% of the net merchandising revenues earned by AGE
including, but not limited to, Video, CD-ROM and Foreign Broadcast
rights.
b. "Net revenue" is defined as those revenues actually received by AGE
after deduction of any fees paid to independent agents.
c. From time to time, and with proper notice to AGE, MSHE shall have
reasonable access to the books and records of AGE as they pertain to the
Property only.
12. "VANPIRES" Credits: Subject to the Production of the Series, and subject
------------------
to the performance of all obligations hereunder, MSHE shall be entitled to a
mutually agreed upon co-production credit on a separate card, and those persons
from MSHE who perform pre-approved, by AGE, services on the Series shall receive
a credit related to the services which they provided.
<PAGE>
13. Warranties, Indemnification:
----------------------------
a. AGE hereby warrants and represents that AGE:
(1). has the right and capacity to enter into this Agreement and is
not prevented by law or otherwise from so doing;
(2). owns the rights and the underlying rights to the Property and
is able by law to enter into this Agreement and can produce proof of same;
(3). has not entered into any other agreement whatsoever with third
parties which adversely effects the Parties' rights hereunder or is inconsistent
in any manner with any term set forth hereunder; and
(4). shall have authorized the signing party to execute this
Agreement on behalf of AGE.
b. AGE hereby indemnifies and holds harmless MSHE from and against
any and all claims, liabilities, damages, and costs including but not limited to
reasonable attorney's fees and court costs arising from any breach by AGE of any
representations, warranty or agreement made by AGE hereunder.
c. MSHE hereby warrants and represents that MSHE:
(1) owns all the necessary rights to the Overlord Animation System;
(2) has the right and capacity to enter into this Agreement and is
not prevented by law or otherwise from so doing;
(3) has not entered into any other agreement whatsoever with third
parties which adversely affects the Parties' rights hereunder or is inconsistent
in any manner with any term set forthe hereunder; and
(4) shall have authorized the signing party to execute this
Agreement on behalf of MSHE.
d. MSHE hereby indemnifies and holds harmless AGE from and against any
and all claims, liabilities, damages and costs including, but not limited to,
reasonable attorney's fees and court costs arising from any breach by MSHE of
any representations, warranty or agreement made by MSHE hereunder
15. Budget: The budget for the Series shall be prepared by MSHE and AGE, with
-------
AGE having final approval.
<PAGE>
16. Additional Documents: Each Party hereto shall execute and deliver any and
---------------------
all additional papers, documents and other instruments and shall do any and all
further acts and things reasonably necessary in connection with the performance
of his obligations hereunder to carry out the intent of the Agreement.
17. Merchandising: AGE shall have the exclusive right to merchandise the
--------------
Property including all toys, merchandising and games and any ancillary
products created or derived from the Property.
18. Default/Takeover Rights: MSHE acknowledges that AGE will be entering into
------------------------
binding commitments to deliver fully produce episodes of the Series to third
parties and will incur substantial liability in the event of late-delivery or
non-delivery of Series episodes. Accordingly, it is agreed that in the event
that MSHE defaults in making delivery of technically satisfactory animation of
the Series episodes on the schedule set forth on the Addendum annexed hereto,
which default persists after seven (7) days written notice of default from AGE
to MSHE, then if such event, and without limiting AGE's other rights or remedies
under this Agreement or pursuant to law. AGE shall have immediate right to take
over further production of the Series episodes. In the event of such uncured
default, MSHE shall, upon AGE's written notice, deliver to AGE (or to any third
party designee) any and all program materials including, without limitation, any
computer programs and any pictorial or audio/visual works created, by computer
or otherwise, in the course of MSHE's producing the animation for the Series
episodes. Furthermore, in such event, MSHE shall make available to AGE (or
AGE's designee) the Overlord Software and will provide such technical personnel
as may be necessary to enable AGE (or its designee) to utilize such Overlord
Software to complete production and delivery of the animation for the Series
episodes uncompleted as of the time such default and takeover of production, if
ever.
19. Entire Agreement: This Agreement and all the exhibits attached represents
-----------------
the entire and complete Agreement among the Parties hereto with respect to the
subject matter hereof and supersedes all previous agreements , understandings or
representations whether oral or written, between the Parties regarding the
subject matter hereof.
20. Non-Waiver: No delay or failure by a Party to exercise any right under
-----------
this Agreement, and no partial or single exercise of that right, shall
constitute a waiver of that or any other right, unless otherwise expressly
provided herein, and no waiver shall be effective unless made in writing.
21. Captions: The captions of the various paragraphs and sections of this
---------
Agreement are intended to be used solely for convenience of reference and are
not intended and shall not be deemed for any purpose whatsoever to modify or
explain or to be used as an aid in the construction of any provision.
22. Counterparts: This Agreement may be executed in counterparts with each
-------------
original being deemed a whole and complete copy.
<PAGE>
23. Assignment: MSHE may not assign, sell, grant a security interest in, or
-----------
otherwise dispose of their interest in the Property unless agreed to in writing
by AGE.
24. Amendments: This Agreement cannot be amended, modified or changed in any
-----------
way whatsoever except by a written instrument duly signed by the Parties hereto.
25. Authority: The corporations which are Parties hereto warrant and represent
----------
that they have the power and authority to enter into this Agreement.
26. Void Provisions: If any provision hereof as applied to any Party or to any
----------------
circumstance shall be adjudged by a Court to be void or unenforceable, the same
shall in no way affect any other provisions hereof, the application of such
provision in any other circumstances or the validity or enforceability hereof.
27. Successors and Assigns: Except where provided to the contrary, this
-----------------------
Agreement, and all provisions hereof, shall inure to the benefit of and be
binding upon the Parties hereto, their successors in interest, assigns,
administrators, executors, heirs and devisees.
28. Governing Law: This Agreement shall be construed in accordance with and
--------------
governed by the laws of the State of New York and consent to jurisdiction of the
Federal courts located in New York City with respect to resolution of any
disputes arising hereunder.
The Parties herein have fully read, understood and executed this Agreement
freely and voluntarily. By signing in the spaces provided below, the Parties
accept and agree to all the terms and conditions of this Agreement.
In Witness Whereof the Parties hereto have caused this Agreement to be duly
executed.
<TABLE>
<S> <C>
/s/ JOHN GENTILE /s/ ROBERT MAERZ
- ---------------------------------- -----------------------------
Abrams/Gentile Entertainment, Inc. MSH Entertainment Corporation
John Gentile Robert Maerz
- ---------------------------------- -----------------------------
Print Name Print Name
Its President Its Chairman
------------------------------ -------------------------
Title Title
Date 11/1/96 Date 11/1/96
------------------------------ -------------------------
</TABLE>
<PAGE>
WARRANT
THE WARRANT EVIDENCE OR CONSTITUTED HEREBY AND THE SHARES OF COMMON STOCK
HEREUNDER HAVE BEEN AND WILL BE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED ("THE ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE,
TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT REGISTRATION UNDER THE ACT UNLESS
EITHER (i) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL TO THE EFFECT THAT
REGISTRATION IS NOT REQUIRED IN CONNECTION WITH SUCH DISPOSITION OR (ii) THE
SALE OF SUCH SECURITIES IS MADE PURSUANT TO SECURITIES AND EXCHANGE COMMISSION
RULE 144.
WARRANT TO PURCHASE 1,000,000 SHARES
OF COMMON STOCK OF MSH ENTERTAINMENT CORPORATION
(Subject to Adjustment)
NO. ____
THIS CERTIFIES THAT, in consideration of the receipt by MSH Entertainment
Corporation, a Utah Corporation (the "Company"), of $1.00 in cash from Abrams
Gentile Entertainment Inc., (the "Purchaser"), Purchaser or its permitted
registered assigns (the "Holder"), is entitled subject to terms and conditions
of this Warrant, at any time after October 8, 1996 (the "Effective Date"), and
before 5:00 p.m. Pacific Standard Time on October 8, 2000 (the "Expiration
Date"), to purchase from the Company, One Million (1,000,000) fully paid and non
assessable shares of the Company's Common Shares, $.001 par value per share
(the "Warrant Stock"), at the exercise price as defined in Section 1.5. Both
the number of shares of Warrant Stock purchasable under this Warrant and the
Exercise Price are subject to adjustment as provided herein. This Warrant is
issued pursuant to a certain Vanpires Production Agreement (the "Vanpires
Production Agreement") between the Company and the Purchaser of even date
herewith. This Warrant shall terminate on the Expiration Date.
1. CERTAIN DEFINITIONS. As used is this Warrant:
1.1 The term "Warrant Stock" shall mean the common shares, $0.001 par
value per share, of the Company, and any other securities and property any time
receivable or issuable upon exercise of this Warrant, unless the context
otherwise requires.
1.2 The term "Warrant" as used herein, shall include this Warrant and any
warrant delivered in substitution or exchanged therefor as provided herein.
1.3 The term "Register Holder" shall mean any holder in whose name this
Warrant is registered upon the books and records maintained by the Company.
1.4 The term "Fair Market Value" of a share of Warrant Stock as of a
particular date (the "Determination Date") shall mean:
(a) If traded on a securities exchange or the NASDAQ national market,
the Fair Market Value shall be deemed to be the average of the closing prices of
the Common Stock of the Company on such trading market over the 10 business
days ending three (3) days prior to the Determination Date;
<PAGE>
(b) If actively traded over the counter, the Fair market value shall
be deemed to be the average of the closing bid prices over the twenty - day
period ending three (3) days prior to the determination date; and
(c) If there is no active public market, the Fair Market Value shall
be the value thereof, as determined in good faith by the Board of Directors of
the Company.
1.5 The term "Exercise Price" shall mean the lowest of (a) $1.75; or (b)
75% of the currently proposed secondary offering price to the underwriters (net
of underwriting discounts) of the common shares pursuant to the first
underwritten public offering of the Common Shares by the Company following the
Effective Date but before the effective date of the exercise of this Warrant.
2. EXERCISE OF WARRANT
2.1 Payment
-------
Subject to compliance with the terms and conditions of this Warrant
and applicable securities laws, this Warrant may be exercised, in whole or in
part at any time on or before the Expiration Date, by surrendering this Warrant
at the principal office of the Company together with:
(a) the form of Notice of Exercise attached hereto as Exhibit 1 (the
"Notice of Exercise") duly executed by the Holder, and
(b) payment, (i) in cash (by check) or by wire transfer, (ii) by
cancellation by the Holder of indebtedness of the Company to the Holder or (iii)
by a combination of (i) and (ii), of an amount equal to the product obtained by
multiplying the number of shares of Warrant Stock being purchased upon such
exercise by the then effective Exercise Price (the "Exercise Amount").
2.2 Net Issue Exercise
------------------
In lieu of the payment methods set forth in Section 2.1(b) above, the
Holder may elect to exchange the Warrant for shares of Warrant Stock equal to
the value of the amount of the Warrant being exchanged on the date of exchange.
If Holder elects to exchange this Warrant as provided in this Section 2.2,
Holder shall tender to the Company the Warrant for the amount of the Warrant,
and the Company shall issue to Holder the number of shares of the Company's
Warrants Stock computed using the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Warrant Stock to be issued to Holder.
Where: Y = the number of shares of Warrant Stock purchasable under the
amount of the Warrant being exchanged (as adjusted to the date of such
calculation).
Where: A = the Fair Market Value of one share of the Company's Common
stock.
Where: B = Exercise Price (as adjusted to the date of such calculation).
<PAGE>
All references herein to an "exercise" of the Warrant shall include an
exchange pursuant to this Section 2.2.
2.3 Partial Exercise; Effective Date of Exercise.
--------------------------------------------
In case of any partial exercise of this Warrant, the Company shall
cancel this Warrant upon surrender hereof and shall execute and deliver a new
Warrant of like tenor and date for the balance of the shares of Warrant Stock
purchasable hereunder. This Warrant shall be deemed to have been exercised
immediately prior to the close of business of the date of its surrender for
exercise as provided above. The person entitled to receive the shares of
Warrant Stock issuable upon exercise of this Warrant shall be treated for all
purposes as the holder of record of such shares as of the close of business on
the date the Holder is deemed to have exercised this Warrant.
2.4 Stock Certificates; Fractional Shares.
--------------------------------------
As soon as practicable on or after such date, the Company shall issue
and deliver to the person or persons entitled to receive the same a certificate
or certificates for the number of whole shares of Warrant Stock issuable upon
such exercise, together with cash in lieu of any fraction of a share equal to
such fraction of the Fair Market Value of one whole share of Warrant Stock as of
the date of exercise of this Warrant. No fractional shares of scrip
representing fractional shares shall be issued upon an exercise of this Warrant.
2.5 Purpose of Warrant.
-------------------
The Company and Purchaser specifically acknowledge and agree (i) that
this Warrant is being entered into to enhance the long term relationship between
Purchaser and the Company and (ii) that there is no assurance to maintain
existing business with the Company.
2.6 Exercise Rights.
----------------
In the event that any person commences a tender offer to purchase all
or a controlling interest of the outstanding shares of equity securities of the
Company, this Warrant shall become exercisable in full upon the commencement of
such tender offer.
3. VALID ISSUANCE; TAXES.
All shares of Warrant Stock issued upon the exercise of this Warrant shall
be validly issued, fully paid and non-assessable, and the Company shall pay all
taxes and other governmental charges that may be imposed in respect of the issue
or delivery thereof. The Company shall not be required to pay any tax or other
charge imposed in connection with any transfer involved in the issuance of any
certificate for shares of Warrant Stock in any name other than that of the
Registered Holder of this Warrant, and in such case the Company shall not be
required to issue or deliver any stock certificate of security until such tax or
other charge has been paid, or it has been established to the Company's
reasonable satisfaction that no tax or other charge is due.
<PAGE>
4. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES.
The number of shares of Warrant Stock issuable upon exercise of this
Warrant (or any shares of stock or other securities or property receivable or
issuable upon exercise of the Warrant) and the Exercise Price are subject to
adjustment upon occurrence of the following events:
4.1 Adjustment for Stock Splits, Stock Subdivisions or Combination of
-----------------------------------------------------------------
Shares.
- ------
The Exercise Price of this Warrant shall be proportionally decreased
and the number of shares of Warrant Stock issuable upon exercise of the Warrant
(or any shares of stock or other securities at the time issuable upon exercise
if this Warrant) shall be proportionally increased to reflect any stock split or
subdivision of the Company's Common Stock. The Exercise Price of this Warrant
shall be proportionally increased and the number of shares of Warrant Stock
issuable upon exercise of this Warrant (or any shares of stock or other
securities at the time issuable upon exercise of this Warrant) shall be
proportionally decreased to reflect any combination of the Company's Common
Stock.
4.2 Adjustment for Dividends or Distributions of Stock or Other Securities
----------------------------------------------------------------------
or Property.
- -----------
In case the Company shall make or issue, or shall fix a record date
for the determination of eligible holders entitled to receive, a dividend or
other distribution with respect to the Warrant Stock (or any shares of stock or
other securities at the time issuable upon exercise of the Warrant) payable in
(i) securities of the Company or (ii) assets (excluding cash dividends paid or
payable solely out of retained earnings), then, in each such case, the Holder of
this Warrant on exercise thereof at any time after the consummation, effective
date or record date of such dividend or other distribution, shall receive, in
addition to the shares of Warrant Stock (or such other stock or securities)
issuable on such exercise prior to such date, and without the payment of
additional consideration therefore, the securities or such other assets of the
Company to which such Holder would have been entitled upon such date if such
Holder had exercised this Warrant on the date hereof and had thereafter, during
the period from the date hereof to and including the date of such exercise,
retained such shares and/or all other additional stock available by it as
aforesaid during such period giving effect to al adjustment call for by this
Section 4.
4.3 Reclassification.
----------------
If the Company, by reclassification of securities or otherwise, shall
change any of the securities as to which purchase rights under this Warrant
exist in the name of a different number of securities of any other class or
classes, the Warrant shall thereafter represent the right to acquire such number
and kind of securities as would have been issuable as the result of such change
with respect tot he securities that were subject to the purchase rights under
this Warrant immediately prior to such reclassification or other change and the
Exercise Price therefore shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 4.
<PAGE>
4.4 Adjustment for Capital Reorganization, Merger or Consolidation.
--------------------------------------------------------------
In case of any capital reorganization of the capital stock of the
Company (other than a combination , reclassification, exchange or subdivision of
shares otherwise provided or here), or any merger or consolidation of the
Company with or into another corporation, or the sale of all or substantially
all the assets of the Company then, and in each such case, as part of such
reorganization, merger, consolidation, sale or transfer, lawful provision shall
be made so that the Holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified herein and
upon payment of the Exercise Price then in effect, the number of shares of stock
or other securities or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a holder of the
shares deliverable upon exercise of this Warrant would have been entitled to
receive in such reorganization, consolidation, merger, sale or transfer if this
Warrant had been exercised immediately before such reorganization,
consolidation, merger, sale or transfer, all subject to further adjustment as
provided in the Section 4.
The foregoing provisions of the Section 4.4 shall similarly apply to
successive reorganizations, consolidations, mergers, sales and transfers and to
the stock or securities of any other corporation that are at the time receivable
upon the exercise of this Warrant. If the per-share consideration payable to
the Holder hereof for shares in connection with any such transaction is in a
form other than cash or marketable securities, then the value of such
consideration shall be determined in good faith by the Company's Board of
Directors. In all events, appropriate adjustment (as determined in good faith
by the Company's Board of Directors) shall be made in the application of the
provision of this Warrant with respect to the rights and interest of the Holder
after the transaction, to the end that the provisions of this Warrant shall be
applicable after that event, as near as reasonably may be, in relation to any
shares or other property deliverable after that event upon exercise of this
Warrant.
4.5 Reservation of Securities and Assets.
------------------------------------
The Company shall reserve, for the life of the Warrant, such securities or
such other assets of the Company the Holder is entitled to receive pursuant to
the Section 4.
5. CERTIFICATE AS TO ADJUSTMENTS.
In each case of any adjustment in the Exercise Price,, or number or type of
shares issuable upon exercise of this Warrant, the Chief Financial Officer of
the Company shall compute such adjustment in accordance with the terms of the
Warrant and prepare a certificate setting forth such adjustment and showing in
detail the facts upon which such adjustment is based, including a statement of
the adjusted Exercise Price. The Company shall promptly send (by facsimile and
by either first class mail, postage prepaid or overnight delivery) a copy of
each such certificate to the Holder.
6. LOSS OR MUTILATION.
Upon receipt of evidence reasonably satisfactory to the Company of the
ownership of and the loss, theft, destruction or mutilation of the Warrant, and
of indemnity reasonably satisfactory to it, and (in the case if mutilation) upon
surrender and cancellation of the Warrant, the Company will execute and deliver
in lieu thereof a new Warrant of like tenor as the lost, stolen, destroyed or
mutilated Warrant.
<PAGE>
7. RESERVATION OF COMMON STOCK.
The Company hereby covenants that at all times there shall be reserved for
issuance and delivery upon exercise of the Warrant such number of shares of
Common Stock or other shares of capital stock of the Company as are from time to
time issuable upon exercise of this Warrant and, form time to time, will take
all steps necessary to amend it Articles of Incorporation to provide sufficient
reserves of shares of Common Stock issuable upon exercise of this Warrant. All
such shares shall be dully authorized, and when issued upon such exercise, shall
be validly issued, fully paid and non-assessable, free and clear of all liens,
security interest, charges and other encumbrances or restrictions on sale and
free and clear of al preemptive rights, except encumbrances or restrictions
arising under federal or state securities laws. Issuance of this Warrant shall
constitute full authority to the Company's officers who are charged with the
duty of executing stock certificates to execute and issue the necessary
certificates for shares of Common Stock upon the exercise of the Warrant.
8. TRANSFER AND EXCHANGE.
Subject to the terms and conditions of this Warrant and compliance with all
applicable securities laws, this Warrant and all rights hereunder may be
transferred, in whole or in part, on the books of the Company maintained for
such purpose at the principal office of the Company referred to above, by the
Registered Holder hereof in person, or by duly authorized attorney, upon
surrender of this Warrant properly endorsed and upon payment of any necessary
transfer tax or other governmental charge imposed upon such transfer. Upon any
permitted partial transfer, the Company will issue and deliver to the Registered
holder a new Warrant or Warrants with respect to the shares of Warrant Stock not
so transferred.
Each taker and holder of this Warrant, by taking or holding the same,
consents and agrees that when this Warrant shall have been so endorsed, the
person in possession of this Warrant may be treated by the Company, and all
other persons dealing with the Warrant, as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented hereby,
any notice to the contrary notwithstanding; provide, however that until a
transfer of the is Warrant is duly registered on the books of the Company, the
Company may treat the Registered Holder hereof as the owner for all purposes.
9. RESTRICTIONS OF TRANSFER.
The Holder, by acceptance hereof, agrees that, absent an effective
registration statement filed with U.S. Securities and Exchange Commission
("SEC") under the Act covering the disposition or sale of this Warrant or the
Warrant Stock issued or issuable upon exercise hereof, as the case may be, and
registration or qualification under applicable state securities laws, such
Holder will not sell, transfer pledge, or hypothecate or all such Warrants or
Warrant Stock, as the case may be, unless either (i) the Company has received an
of counsel to the effect that such registration is not required in connection
with such disposition or (ii) the sell of such securities is made pursuant to
SEC Rule 144.
<PAGE>
10. COMPLIANCE WITH SECURITIES LAWS.
By acceptance of this Warrant, the holder hereby represents, warrants and
covenants that any shares of stock purchased upon exercise of this Warrant shall
be acquired for investment only and not with a view to, or for sale in
connection with, any distribution thereof, that the Holder has had such
opportunity as such Holder has deemed adequate to obtain from representative of
the Company such information as is necessary to permit the holder to evaluate
the merits and risks of its investment in the Company; that the Holder is able
to bear the economic risk of holding such shares as may be acquired pursuant to
the exercise of this Warrant for an indefinite period; that the Holder
understands that the shares of stock acquired pursuant to the exercise of the
Warrant will not be registered under the Act (unless otherwise required pursuant
to exercise by the holder of the registration rights, if any, previously granted
to the registered Holder) and will be 'restricted securities" within the meaning
of Rule 144 under the Act and that the exemption from registration under Rule
144 currently is not available for at least two years from the date of exercise
of this Warrant, subject to any special treatment by the Securities and Exchange
Commissioner for exercise of the Warrant pursuant to Section 2.2, and even then
will not be available unless a public market then exists for the stock, adequate
information concerning the Company is then available to the public, and other
terms and conditions of Rule 144 are complied with; and that all stock
certificates representing shares of stock issued to the Holder upon exercise of
this Warrant may have affixed thereto a legend substantially in the following
form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE BEEN AND WILL
BE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED ("THE ACT"), AND MAY NOT BE SOLD, OFFERED FOR SALE,
TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT REGISTRATION UNDER THE
ACT UNLESS EITHER (i) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL
TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED IN CONNECTION WITH
SUCH DISPOSITION OR (ii) THE SALE OF SUCH SECURITIES IS MADE PURSUANT
TO SECURITIES AND EXCHANGE COMMISSION RULE 144.
11. NO RIGHTS OR LIABILITIES AS SHAREHOLDERS.
This Warrant shall not entitle the Holder to any voting rights or
other rights as shareholder of the Company. In the absence of affirmative
action by such Holder to purchase Warrant Stock by exercise of this Warrant, no
provisions of this Warrant, and no enumeration herein of the rights or
privileges of the Holder hereof shall cause such Holder hereof to be a
shareholder of the Company for any purpose.
<PAGE>
12. REGISTRATION RIGHTS.
All shares of Common Stock issuable upon exercise of this Warrant
shall be "Registrable Securities" and entitled, subject to the terms and
conditions to all registration rights granted to holders of Registrable
Securities. Holder shall gain registration rights twelve months subsequent to
the signing of this agreement. Such Registration shall be at Company's expense.
13. NOTICES.
All notices and other communications from the Company to the Holder
shall be given in accordance with Paragraph _____ of the Vanpires Production
Agreement.
14. HEADINGS.
The headings in this Warrant are for purposes of convenience in
reference only, and shall not be deemed to constitute a part hereof.
15. LAW GOVERNING.
This Warrant shall be construed and enforced in accordance with, and
governed by, the laws of the State of California.
16. NO IMPAIRMENT.
The Company will not, by amendment of its Articles of Incorporation or
bylaws, or through reorganization, consolidation, merger, dissolution, issue or
sale of securities, sale of assets or any other voluntary action, avoid or seek
to avoid the observance or performance of an of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Registered Holder of this Warrant against impairment.
Without limiting the generality of the foregoing, the Company (a) will not
increase the par value of any shares of stock issuable upon the exercise of this
Warrant above the amount payable therefor upon such exercise, and (b) will take
al such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and non-assessable shares of Warrant Stock
upon exercise of this Warrant.
17. NOTICE OF RECORD DATE, In case:
17.1 the Company shall take a record of the holders of its Common
Stock (or other stock or securities at the time receivable upon the exercise of
the Warrant) for the purpose of entitling them to receive any dividend or other
distribution, or any right to subscribe for or purchase any shares of stock of
any class of any other securities or to receive any other right; or
17.2 of any consolidation nor merger of the Company with or into
another corporation, any capital reorganization or the Company, any
reclassification of the Capital Stock of the Company, or any conveyance of al or
substantially all of the assets of the Company to another corporation in which
holders of the Company's stock are to receive stock, securities or property of
another corporation; or
<PAGE>
17.3 of any voluntary dissolution, liquidation or wind-up of the
Company, or
17.4 of any redemption or conversion of all outstanding Common Stock;
then, and in each such case, the Company will mail or cause to be
mailed to the Registered Holder of this Warrant a notice specifying, as the case
may be, (i) the date on which a record is to be taken for the purpose of such
dividend, distribution or right, or (ii) the date on which such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation,
winding-up, redemption or conversion is to take place, and the time, if any is
to be fixed, as to which the holders of record of Common Stock (or such stock or
securities as at the time are receivable upon the exercise of this Warrant)
shall be entitled to exchange their shares of Common Stock (or such other stock
or securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up. Such notice shall be delivered at least
thirty (30) days prior to the date therein specified.
18. SERVERABILITY.
If any term, provision, covenant or restriction of this Warrant is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidate.
19. COUNTERPARTS.
For the convenience of the parties, any number of counterparts of this
Warrant may be executed by the parties hereto and each such executed counterpart
shall be, and shall be deemed to be, an original instrument.
20. NO INCONSISTENT AGREEMENTS.
The Company will not on or after the date of this Warrant enter into
any agreement with respect to its securities which is inconsistent with the
rights granted to the Holders of this Warrant or otherwise conflicts with the
provisions hereof. The rights granted to the Holders hereunder do not in any
way conflict with and are not inconsistent with the rights granted to holders of
the Company's securities under any other agreements, except rights that have
been waived.
21. SATURDAYS, SUNDAYS, AND HOLIDAYS.
If the Expiration Date falls on a Saturday, Sunday or legal holiday,
The Expiration Date shall automatically be extended until 5:00 p.m. the next
business day.
<PAGE>
<TABLE>
AGREED
<S> <C>
ABRAMS GENTILE ENTERTAINMENT INC. MSH ENTERTAINMENT CORPORATION
/s/ JOHN GENTILE /s/ ROBERT MAERZ
- --------------------------------- -----------------------------
Signature Signature
John Gentile Robert Maerz
- --------------------------------- -----------------------------
Printed Name Printed Name
President Chairman
- --------------------------------- -----------------------------
Title Title
11/1/96 11/1/96
- --------------------------------- -----------------------------
Date Date
</TABLE>
EXHIBIT 1
NOTICE OF EXERCISE
(To be executed upon exercise of Warrant)
MSH ENTERTAINMENT CORPORATION:
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
shares of Common Stock, as provided for therein, and (check the applicable box):
[_] Tenders herewith payment of the exercise price in full in the form of
cash or a certified or official bank check in same-day funds in the amount
of $________ for __________ shares of Common Stock.
[_] Elects the Net Issue Exercise option pursuant to Section 2.2 of the
Warrant, and accordingly requests delivery of a net of __________ shares of
Common Stock.
Please issue a certificate or certificates for such Common Stock in the name of,
and pay any cash for any fractional share to (please print name, address and
social security number):
<PAGE>
Name: ____________________________________
Address: ____________________________________
Signature: ____________________________________
Note: The above signature should correspond exactly with the name of the first
page of this Warrant Certificate or with the name of the assignee appearing in
the assignment form below.
If said number of shares shall not be all the shares purchasable under the
within Warrant Certificate, a new Warrant Certificate is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder rounded up to the next higher whole number of shares.
EXHIBIT 2
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received, hereby sells, assigns and transfers unto
______________________ the within Warrant Certificate, together with all right,
title and interest therein, and does hereby irrevocably constitute and appoint
___________________________ attorney, to transfer said Warrant Certificate on
the books of the within-named Company with respect to the number of Warrants set
forth below, with full power of substitution in the premises:
Number of Warrants: _________________________________
Name of Recipient: _________________________________
Address of Recipient: _________________________________
_______________________________________________________
Number of Warrants: __________________________________
Name of Recipient: ___________________________________
Address of Recipient: _________________________________
_______________________________________________________
<PAGE>
And if said number of Warrants shall not be all the Warrants represented by the
Warrant Certificate, a new Warrant Certificate is to be issued in the name of
said undersigned for the balance remaining of the Warrants registered by said
Warrant Certificate.
Dated: ________________________________ 19__
Signature: _____________________________________
Notice: The signature to the foregoing Assignment must correspond to the name
as written upon the face of this security in every particular, without
alternation or any change whatsoever, signature(s) must be guaranteed by an
eligible guarantor institution (banks, stock brokers, saving and loan
associations and credit unions with membership in an approved signature
guarantee medallion program) pursuant to Securities and Exchange Commission Rule
17Ad-15.
<PAGE>
EXHIBIT 10.10
COOPERATION AGREEMENT
between
HAPPY ZONE ENTERTAINMENT CORPORATION (HZE) AS SPONSOR
and
MSH ENTERTAINMENT CORPORATION (MSHE) AS CONTRACTOR
THIS COOPERATION AGREEMENT ("Agreement") is made and entered into this 1st day
of September 1996, by and between Happy Zone Entertainment Corporation (HZE) a
California corporation, (hereinafter "Sponsor") and MSH Entertainment
Corporation (MSHE) a Utah corporation, (hereinafter "Contractor"):
WITNESSETH:
WHEREAS, Sponsor desires to engage Contractor from time to time pursuant to one
or more Project Work Statements to develop, create, test, and deliver certain
programming materials as works made for hire, and Contractor is interested in
accepting such engagements, subject to the parties' further agreement on the
scope and terms of each such Project Work Statement; and
WHEREAS, Sponsor and Contractor mutually desire to set forth in this Agreement
certain terms applicable to all such Project Work Statement engagements;
NOW, THEREFORE, Sponsor and Contractor, intending to be legally bound, hereby
agree as follows:
Section 1
GENERAL TERMS
In consideration of the Contractors receipt of an equity ownership interest of
6,000,000 shares of the common stock of the Sponsor, and the exclusive right to
be a Contractor to Sponsor, the Contractor agrees to the following specific
terms and conditions and this total agreement.
1.1 Product and Property Rights. Sponsor shall have first right of refusal to
----------------------------
all children's projects and properties which are presented to Sponsor and
Contractor from outside parties and created in-house by either of the parties.
The Contractor shall have the right to independently pursue any children's
projects which are not accepted for production by Sponsor.
1.2. Exclusive Contractor. During the period of this agreement the Contractor
---------------------
shall be the exclusive Contractor to Sponsor for production services and other
related services which from time to time the Sponsor shall, under a PWS, engage
the Contractor to perform such activities under this MWS.
1
<PAGE>
1.3 Work Statements (MWS and PWS). This agreement is the Master Work Agreement
------------------------------
and the Master Work Statement hereinafter the (MWS). All projects which
Contractor performs will be Project Work Statements (PWS) which are subordinate
to and an addendum to this MWS.
1.4 Conflict of Interest. All parties are aware and accept that both Sponsor
---------------------
and Contractor are in the business of development, production, distribution and
related activities associated with the entertainment industry and that from time
to time conflicts of interest will arise between the parties in pursuit of
opportunities. Both parties agree to use fairness and cooperation in the
resolution of these opportunities.
1.5 Property Ownership Rights. Consistent with other sections of this
--------------------------
agreement the Sponsor shall maintain all property ownership rights associated
with its activities, including but not limited to: development, production,
publication and distribution; of such items as, but not limited to: games,
merchandising, toys, music rights, publishing, software publishing, book
publishing, TV, cable, satellite, radio, internet, video, CD-ROM, motion picture
and others.
1.6 License Rights to Animation Management System. Subject to mutually agreed
----------------------------------------------
upon compensation, Contractor herewith grants to Sponsor a perpetual end user
license to the Animation Management System and production software which is
being developed by Contractor.
1.7 Facilities and Equipment. Subject to mutually agreed upon compensation,
-------------------------
Contractor shall provide Sponsor with office space, equipment and other
facilities associated with operation of its business.
1.8 Management Services. All parties are aware and accept that a major part,
--------------------
and possible all, senior management team of the Sponsor are also members of the
Contractors management team.
1.9 Management Change. Without the written consent of a majority of the Board
------------------
of Directors of the Sponsor, during the period of this agreement, Contractor
agrees not to change the rules, responsibilities and title of Robert Maerz,
Chairman, Jonathan Stathakis, President, Fred Aurelio, Chief Financial Officer
and Glenn L. Gearhart, Chief Counsel. The Contractor agrees to cooperate with
the Sponsor in the development of conditional warranty rights, conditional
access to share voting control of Contractor and other actions and agrees to
execute all procedures, documents and conditional rights to any and all equity
ownership in Contractor which will insure the enforcement of this right.
1.10 Capital Commitment. The Contractor agrees to loan Sponsor such capital,
-------------------
from time to time, as the Sponsor requests to provide for operating and working
capital.
2
<PAGE>
All parties agree this is a Master Work Agreement and that the Contractor is
performing Works For Hire for the Sponsor and that when used in this Agreement
and in each Project Work Statement issued hereunder, the terms shall have the
following meanings:
1.11 Code and Data. If not otherwise specified, "Code" shall include both
--------------
Object Code and Source Code. "Code" shall include any Maintenance Modifications
or Basic Enhancements thereto in existence from time to time, and shall include
Major Enhancements thereto when added to the Code in connection with a Project
Work Statement. As used in this definition the term "Object Code" means a
machine-readable form of the Code and the term "Source Code" means human-
readable form of the Code and related system documentation, including all
comments and any procedural code such as job control language. "Data" shall
mean all data in all forms of media which is required to operate the product or
deliver the product or support in any way the deliverable product or properties.
1.12 Deliverables. All Video tapes, Digital Files, Data Digital Tapes,
-------------
Computer Code, Documentation, and other materials developed for or delivered to
Sponsor by Contractor under this Agreement and under any Project Work Statement
issued hereunder.
1.13 Derivative Work. A work that is based upon one or more pre-existing
----------------
works, such as a revision, modification, translation, abridgment, condensation,
expansion, or any other form in which such pre-existing works may be recast,
transformed, or adapted, and which, if prepared without authorization of the
owner of the copyright in such pre-existing work, would constitute a copyright
infringement. For purposes hereof, a Derivative Work shall also include any
compilation that incorporates such a pre-existing work.
1.14 Documentation. User manuals and other written materials that relate to
--------------
particular Data and Code, including materials useful for design (for example,
logic manuals, flow charts, and principles of operation). Documentation shall
include any Maintenance Modifications of Basic Enhancements thereto in existence
from time to time, and shall include Major Enhancements thereto when added to
the Documentation in connection with a Project Work Statement issued hereunder.
1.15 Enhancements. Changes or additions, other than Maintenance Modifications,
-------------
to Code, Data and related Documentation, including all new releases, that
improve functions, add new functions, or significantly improve performance by
changes in system design or coding.
1.16 Error. Any error, problem, or defect resulting from (1) an incorrect
------
functioning of Code, or Data, or (2) an incorrect or incomplete statement or
diagram in Documentation, if such error, problem, or defect renders the Code or
Data inoperable, causes the Code or Data to fail to meet the specifications
thereof, causes the Documentation to be inaccurate or incomplete in any material
respect, causes incorrect results, or causes incorrect functions to occur when
any such materials are used.
3
<PAGE>
1.17 Maintenance Modifications. Any modifications or revisions, other than
--------------------------
Enhancements, to the Data, Code or Documentation that correct errors, and/or
support new releases of the product.
1.18 Project Work Statement. A purchase order of Sponsor, a proposal of
-----------------------
Contractor, or another written instrument that is signed on behalf of both
parties by their authorized representatives; and contains either actually, or
incorporate by reference, the following five mandatory items: (1) Descriptions
and/or specifications of the services to be performed and the Deliverables to be
provided to the Sponsor; (2) The name and address of a Technical Coordinator for
both the Sponsor and Contractor; (3) The amount, schedule, and method of
payment; (4) The time schedule for performance and for delivery of the
Deliverables; (5) Completion and acceptance criteria for the Deliverables. In
addition, when applicable, the Project Work Statement may include: (1)
Provisions for written and/or oral progress reports by Contractor; (2) Detailed
functional and technical specifications and standards for all services and
Deliverables, including quality standards; (3) Documentation standards; (4) A
list of any special equipment to be procured by Contractor or provided by
Sponsor for use in performance of the work; (5) Plans, story boards and scripts;
and (6) Such other terms and conditions as may be mutually agreed on between the
parties.
Section 2
CONTRACT ADMINISTRATION
2.1 Contract Coordinators. Upon execution of this Agreement, each party shall
----------------------
notify the other party of the name, business address, and telephone number of
its Contract Coordinator. The Contract Coordinator of each party shall be
responsible for arranging all meetings, visits, and consultations between the
parties that are of a non-technical nature. The Contract Coordinators shall
also be responsible for receiving all notices under this Agreement and for all
administrative matters such as invoices, payments, and amendments.
2.2 Technical Coordinators. Each Project Work Statement shall state the name,
-----------------------
business address, and telephone number of the Technical Coordinators of each
party. The Technical Coordinators of each party designated for a particular
Project Work Statement shall be responsible for technical and performance
matters, and transmission and receipt of Deliverables and of technical
information between the parties, insofar as they relate to such Project Work
Statement.
2.3 Issuance of Project Work Statements. The initial Project Work Statement(s)
------------------------------------
agreed to by the parties are set forth as attachments to this Agreement.
Additional Work Statements, regardless of whether they relate to the same
subject matter as the initial Project Work Statement(s), shall become effective
upon written execution by authorized representatives of both parties.
4
<PAGE>
Section 3
CHANGES
3.1 Project Work Statement. Changes in any Project Work Statement or in any of
-----------------------
the Specifications or Deliverables under any Project Work Statement shall become
effective only when a written change request is executed by authorized
representatives of both parties.
3.2 Minor Changes. Change requests that do not substantially affect the nature
--------------
of Deliverables, their performance, or their functionality, and that do not
change schedules by more than a few days or dollar amounts by more than one (1%)
percent of the statement of work may be requested and/or accepted by the
parties' Technical Coordinators.
3.3 Major Changes. All other change requests with respect to this Agreement,
--------------
any Project Work Statement, or any Specifications or Deliverables must be
requested and/or accepted by both parties' Contract Coordinators.
3.4 Acceptance. Contractor may not decline to accept any change requests that
-----------
reduce the cost of performance, provided that an equitable adjustment in
compensation is made for the out-of-pocket costs of any performance or
preparation already undertaken. Contractor further may not decline any change
requests that increase the cost or magnitude of performance, provided that the
changes are supported with a commensurate increase in compensation. The Sponsor
agrees to cooperate with Contractor in scheduling revisions in delivery dates
caused by any increase in tasks and resources required by Contractors to fulfill
the change request of Sponsor.
Section 4
NOTICE
4.1 Performance Notice. Contractor agrees to notify Sponsor promptly of any
-------------------
factor, occurrence, or event coming to its attention that may affect
Contractor's ability to meet the requirements of any Project Work Statement
issued under this Agreement, or that is likely to occasion any material delay in
delivery of Deliverables. Such notice shall be given in the event of any loss
or reassignment of key employees, threat of strike, or major equipment failure.
4.2 Opportunity Notice. Contractor agrees to notify Sponsor of any and all
-------------------
children's projects which are presented to Contractor or which are identified
in-house by Contractor.
4.3 Pass Notice. Sponsor agrees to notify Contractor in writing of any and all
------------
children's project opportunities which the Sponsor chooses to pass over to
Contractor. Upon delivery of such written notice Sponsor waives all first right
of refusal rights to the subject project.
5
<PAGE>
Section 5
COMPENSATION
Amounts and modes of payment for all services to be performed and Deliverables
shall be set forth in each Project Work Statement. The mode of payment shall be
one of the following:
5.1 Fixed Price. If Contractor quotes a price for particular services or
------------
Deliverables and such price is specified without qualification in the applicable
Project Work Statement, the amount quoted shall be deemed a fixed price. Unless
the Project Work Statement provides for progress payments or deferral of payment
until after completion, Sponsor shall pay the full amount of the fixed price
upon Contractor's satisfactory completion of the specified services or upon
Sponsor's acceptance of particular Deliverables. A Project Work Statement may
alternatively provide for payment to be based on a fixed price for certain
services to be rendered over a specified period of time. Unless otherwise
specified in the Project Work Statement, such payment for periodic services
shall accrue on a monthly basis and be prorated for any partial periods.
5.2 Time and Materials. For services and Deliverables that are not suitable
-------------------
for payment on the basis of a fixed price, the Project Work Statement may
provide for payment on the basis of time and materials. Payment under this
method shall be determined according to the hourly rates set for Contractor's
employees by skill level in the Statement of Rates set forth in Exhibit A to the
specific Project Work Statement. The Statement of Rates differentiates the
employees of Contractor assigned to Project Work Statements issued hereunder
according to their skill level, designating each employee as to a specific skill
classification. Sponsor shall have the right to challenge the classification of
any particular employee by review of such employee's work experience, training,
and performance. If the parties cannot agree upon a mutually acceptable
classification of any such employee, Contractor shall not assign such employee
to any of the Project Work Statements issued hereunder.
5.3 Time and Materials Subject to Fixed Ceiling. For certain Project Work
--------------------------------------------
Statements, time and materials charges pursuant to the Statement of Rates may be
authorized subject to a maximum aggregate amount, designated as the level of
effort expected or imposed for particular services or Deliverables. Contractor
shall use all reasonable effort to complete the specified services and/or
Deliverables for no more than such aggregate amount. Furthermore, should
Contractor determine at any time that it may be necessary to exceed such
aggregate amount, Contractor shall immediately notify Sponsor in writing. In
such notice, Contractor shall set forth Contractor's best estimate of the cost
to complete the services and/or Deliverables. Following receipt of such notice,
Sponsor shall instruct Contractor to halt work with respect to such services
and/or Deliverables, to continue on a time and materials basis, or to suspend
work pending further negotiation of a fixed price for completion.
6
<PAGE>
5.4 Statement of Rates. The hourly rates prescribed by the Statement of Rates
-------------------
shall be in lieu of compensation or reimbursement for any costs or burden
incurred by Contractor, including (without limitation) occupancy, supplies,
utilities, payroll, management, and overhead. Unless specifically defined and
granted in a Project Work Statement, no royalty or profit-sharing whatsoever is
to be provided Contractor for the Deliverables. Rates quoted by Contractor in
its Statement of Rates are subject to change upon advance notice, provided that
any such change shall have no effect upon rates or charges for work already
rendered or scheduled to be rendered under a project which has been commenced
under a Project Work Statement.
Section 6
INVOICING
6.1 Submittal. Contractor shall submit invoices to Sponsor for payment for
----------
work and/or Deliverables at such time or times as payment becomes due under each
Project Work Statement. Invoices shall be net 30 days and shall be addressed to
Sponsor's Contract Coordinator. Invoices shall be submitted no more frequently
than monthly for charges due or accruing in each calendar month.
6.2 Content. Invoices shall specifically refer to the Project Work Statement
--------
to which they relate. Whenever an invoice includes charges for time and
materials, the invoice shall indicate the names, skill levels, and hours of the
employees performing the work. Each invoice shall separately set forth travel
expenses (if any) authorized by Sponsor for reimbursement. Supporting
documentation (such as receipts for air travel, hotels, and rental cars) called
for by Sponsor's standard reimbursement policies shall accompany any such
invoice. Any extraneous terms on Contractor's invoices shall be void and of no
effect.
Section 7
RECORDS AND AUDIT
Contractor shall maintain complete and accurate accounting records in accordance
with sound accounting practices to substantiate Contractor's charges under each
Project Work Statement and on each invoice. Such records shall include payroll
records, job cards, attendance cards, and job summaries. Contractor shall
preserve such records for a period of at least three years after completion of
the work. Sponsor shall have access to such records for purposes of audit,
either through its own representatives or through an accounting firm selected
and paid by Sponsor. Any such review of Contractor's records shall be conducted
at reasonable times, and no more than twice annually, during normal business
hours.
7
<PAGE>
Section 8
MOST FAVORED CUSTOMER
Contractor warrants to Sponsor that the charges established under this Agreement
and all Project Work Statements issued hereunder shall not exceed those offered
or imposed with respect to similar services provided to other customers of
Contractor. If during the term of this Agreement, Contractor offers or accepts
lower charges for similar services involving other customers under similar terms
and conditions, Contractor shall so notify Sponsor and remit as a credit to
Sponsor the difference between the amount of the payments theretofore made by
Sponsor for such similar services and the amount that would have been payable if
such lower charges had been in effect.
Section 9
EXPENSES
Except as expressly agreed otherwise by Sponsor in a Project Work Statement,
Contractor shall bear all of its own expenses arising from its performance of
its obligations under this Agreement and each Project Work Statement issued
hereunder, including (without limitation) facilities, work space, utilities,
management, clerical, reproduction services, supplies, and related items.
Section 10
REPORTS
10.1 Monthly Reports. Contractor agrees to provide to Sponsor at least monthly
----------------
a written report of the progress of the work required under each Projects Work
Statement issued hereunder, any anticipated problems (resolved or unresolved),
and any indication of delay in fixed or tentative schedules.
10.2 Quarterly Reports. Approximately once every three months, the parties
------------------
shall meet for a formal progress presentation, during which Contractor's
management shall describe the status of the work required under each Project
Work Statement issued hereunder. Such presentation shall provide projections of
the time of completion and the status of Contractor's services and Deliverables,
and shall address any problems that have come to Contractor's attention and
Contractor's views as to how such problems may be resolved.
10.3 Site Visits. Contractor shall, from time to time and upon reasonable
------------
notice, allow access to its premises by Sponsor for purposes of design reviews,
"walk-throughs," and discussions by Sponsor with management and personnel of
Contractor concerning the status and conduct of work being performed under any
Project Work Statements issued hereunder.
8
<PAGE>
Section 11
DELIVERY AND ACCEPTANCE
Contractor shall deliver all Deliverables, upon completion, to Sponsor's
Technical Coordinator for review, testing and acceptance. Contractor shall
memorialize such delivery in a Delivery Confirmation, which sets forth the
nature and condition of the Deliverables, the medium of delivery, and the date
of delivery. Sponsor's Technical Coordinator shall countersign such Delivery
Confirmation in order to indicate its receipt of the contents described therein,
and the Delivery Confirmation shall thereupon be transmitted to the parties'
Contract Coordinators. Unless a different procedure for reviewing, testing and
acceptance is set forth in a Project Work Statement, Sponsor's Technical
Coordinator shall commence acceptance, reviewing and testing following its
receipt of the Deliverables. Upon completion of such activities, Sponsor shall
issue to Contractor's Technical Coordinator notice of acceptance or rejection of
the Deliverables. In the event of rejection, Sponsor shall provide reasons for
rejection to Contractor's Technical Coordinator in reasonable detail.
Contractor shall use all reasonable effort to correct any deficiencies or
nonconformities and resubmit the rejected items as promptly as possible.
Section 12
OWNERSHIP AND RIGHTS
12.1 Ownership of Work Product. All Deliverables shall be owned by Sponsor and
--------------------------
shall be considered works made for hire. Sponsor shall own all rights to and in
the Deliverables and undelivered, in work, properties including all United
States and international copyrights.
12.2 Vesting of Rights. With the sole exception of any pre-existing works
------------------
identified in Section 12.3 hereof, Contractor agrees to assign, and hereby
assigns, to Sponsor, its successors and assigns, ownership of all rights to and
in the Deliverables and undelivered, in work, properties including all United
States and international copyrights in each and every Deliverable. Insofar as
any such Deliverable, by operation of law, may not be considered a work made for
hire, from time to time, upon Sponsor's request, Contractor and/or its personnel
shall confirm such assignment by execution and delivery of such assignments,
confirmations of assignment, or other written instruments as Sponsor may
request. Sponsor, its successors and assigns, shall have the right to obtain
and hold in its own name all copyright registrations and other protection that
may be available for Deliverables and work in progress.
12.3 Pre-existing Works. In the event that any Deliverable constitutes a
-------------------
Derivative Work of any pre-existing work, Contractor shall ensure that the
Project Work Statement pertaining to such Deliverable so indicates by reference
to (1) the nature of such pre-existing work, (2) its owner, (3) any restrictions
or royalty terms applicable to Contractor's use of such pre-existing work or
Sponsor's exploitation of the Deliverable as a Derivative Work thereof, and (4)
the source of Contractor's authority to employ the pre-
9
<PAGE>
existing work in the preparation of the Deliverable. Before initiating the
preparation of any such Deliverable that is a Derivative Work of a pre-existing
work, Contractor shall cause Sponsor, its successors and assigns, to have and
obtain the irrevocable, nonexclusive, worldwide, royalty-free right and license
to, or such other restrictive rights as the Sponsor may obtain, which shall be
provided to the Contractor in writing, as to the (1) use, execute, reproduce,
display, perform, distribute internally or externally, sell copies of, and
prepare Derivative Works based upon all pre-existing works and Derivative Works
thereof, and (2) authorize or sublicense others from time to time to do any or
all of the foregoing.
12.4 Patent License. In addition, Contractor hereby grants to Sponsor, its
---------------
successors and assigns, the royalty-free, worldwide, nonexclusive right and
license under any patents owned by Contractor, or with respect to which
Contractor has a right to grant such rights and licenses, to the extent required
by Sponsor to exploit the Deliverables and exercise its full rights in the
Deliverables, including (without limitation) the right to make, use, and sell
products and services based on or incorporating such Deliverables.
12.5 Majority Ownership. Should changes occur in the current controlling
-------------------
ownership or current senior management of MSHE, upon such event HZE reserves the
right to issues shares of common stock of HZE to current minority owners of HZE
at a ratio of 3 new shares of HZE for every currently owned share of HZE.
Execution of this right will result in MSHE becoming a minority shareholder of
HZE.
Section 13
INVENTIONS
13.1 Invention Defined. An "Invention" shall mean any idea, design, concept,
------------------
technique, invention, discovery, or improvement, whether or not patentable, made
solely or jointly by Contractor and/or Contractor's employees, or jointly by
Contractor and/or Contractor's employees with one or more employees of Sponsor,
during the term of this Agreement and in the performance of any work under any
Project Work Statement issued hereunder, provided that either the conception or
reduction to practice thereof occurs during the term of this Agreement and in
the performance of work under a Project Work Statement issued hereunder.
13.2 Vesting of Rights. Contractor hereby assigns to Sponsor, its successors
------------------
and assigns, all Inventions, together with the right to seek protection by
obtaining patent rights therefor and to claim all rights or priority thereunder,
and the same shall become and remain Sponsor's property whether or not such
protection is sought. Contractor shall promptly make a complete written
disclosure to Sponsor of each Invention not otherwise clearly disclosed to
Sponsor in the pertinent Deliverables, specifically pointing out features or
concepts that Contractor believes to be new or different. Contractor shall,
upon Sponsor's request and at Sponsor's expense, cause patent applications to be
filed thereon, through solicitors designated by Sponsor, and shall forthwith
sign all such applications over to Sponsor, its successors and assigns.
Contractor shall give Sponsor
10
<PAGE>
and its solicitors all reasonable assistance in connection with the preparation
and prosecution of any such patent applications and shall cause to be executed
all such assignments or other instruments or documents as Sponsor may consider
necessary or appropriate to carry out the intent of this Agreement.
13.3 Avoidance of Infringement. In performing services under this Agreement,
--------------------------
Contractor agrees to avoid knowingly designing or developing any items that
infringe one or more patents or other intellectual property rights of any third
party. If Contractor becomes aware of any such possible infringement in the
course of performing work under any Project Work Statement issued hereunder,
Contractor shall so notify Sponsor promptly in writing.
Section 14
CONFIDENTIAL INFORMATION
14.1 Confidential Information of Contractor. From time to time Contractor may
---------------------------------------
provide its own confidential business and technical information to Sponsor in
connection with the work to be performed by Contractor under Project Work
Statements issued hereunder. Such information shall be designated as
confidential upon or prior to disclosure by Contractor. All confidential
written materials shall be marked with the legend "MSHE - Confidential."
Sponsor shall use its best efforts to prohibit any use or disclosure of
Contractor's confidential information, except as necessary to perform work under
the Project Work Statements issued hereunder.
14.2 Confidential Information of Sponsor. From time to time Sponsor may
------------------------------------
provide its own confidential business and technical information to Contractor in
connection with the work to be performed by Contractor under Project Work
Statements issued hereunder. Such information shall be designated as
confidential upon or prior to disclosure by Sponsor. In addition, the
preparation and specifications of the Deliverables shall in all instances be
treated as confidential, unless and until disclosed publicly by Sponsor. All
confidential written materials shall be marked with the legend "HZE -
Confidential." Contractor shall use its best efforts to prohibit any use or
disclosure of Sponsor's confidential information, except as necessary to perform
work under the Project Work Statements issued hereunder.
Section 15
AGREEMENTS WITH EMPLOYEES
Contractor shall obtain and maintain in effect written agreements with each of
its employees and consultants who participate in any of Contractor's work under
any Project Work Statements issued hereunder. Such agreements shall contain
terms sufficient for Contractor to comply with all provisions of this Agreement
and to support all grants and assignments of rights and ownership hereunder.
Such agreements also shall impose an obligation of confidentiality on such
employees with respect to Sponsor's confidential information.
11
<PAGE>
Section 16
REPRESENTATIONS AND WARRANTIES
The Parties hereby make the following representations and warranties for the
benefit of Parties, as a present and ongoing affirmation of facts in existence
at all times when this Agreement or any Project Work Statement issued hereunder
is in effect:
16.1 No Conflict. Subject to the common management and conditioned warrant
------------
rights to equity ownership of Contractor, share voting rights and other
conditions defined by this agreement, Sponsor represents and warrants that it is
under no obligation or restriction, nor will it assume any such obligation or
restriction, that does or would in any way interfere or conflict with, or that
does or would present a conflict of interest concerning, the work to be
performed by Contractor under this Agreement and each Project Work Statement
issued hereunder.
16.2 Ownership Rights. Contractor represents and warrants (1) that, except as
-----------------
provided in Section 12.3 hereof with respect to certain identified pre-existing
works licensed to Sponsor, it is the sole author of all works employed by
Contractor in preparing any and all Deliverables; (2) that it has full and
sufficient right to assign or grant the rights and/or licenses granted in the
Deliverables pursuant to this Agreement; (3) that no Deliverables, including any
pre-existing works addressed in Section 12.3 hereof, have been published under
circumstances that have caused a loss of copyright therein; and (4) that no
Deliverables, including any pre-existing works addressed in Section 12.3 hereof,
infringe any patent, copyright, trademark, or other intellectual property rights
(including trade secrets), or privacy or similar rights, of any third party, nor
has any claim (whether or not embodied in an action, past or present) of such
infringement been threatened or asserted, nor is such a claim pending, against
Contractor (or, insofar as Contractor is aware, any entity from which Contractor
has obtained such rights).
16.3 Conformity, Performance, and Compliance. Contractor represents and
----------------------------------------
warrants (1) that all Deliverables shall be prepared in a workmanlike manner and
with professional diligence and skill, (2) that all Deliverables will function
on the video system, computers and equipment and with the operating systems and
software for which they are designed, (3) that all Deliverables will conform to
the specifications and functions set forth in the Project Work Statements
relating thereto, and (4) that Contractor will perform all work called for by
each Project Work Statement issued hereunder in compliance with applicable law.
Section 17
TERM AND TERMINATION
17.1 Term of Agreement. This Agreement shall be effective upon the date
------------------
specified at the beginning of this Agreement, and shall remain in force for a
period of ten years with the full complete and sole right of the Sponsor to
extend the agreement for and additional ten years, unless otherwise terminated
as provided herein; provided, however, that this
12
<PAGE>
Agreement shall continue to remain in effect with respect to any Project Work
Statements already issued hereunder at the time of such termination, until such
Project Work Statements are themselves terminated and performance thereunder is
completed.
17.2 Termination of Project Work Statements. Sponsor may, at its sole option,
---------------------------------------
terminate any or all Project Work Statements outstanding, or any portion
thereof, upon 15 days written notice. Upon receipt of notice of such
termination, Contractor shall inform Sponsor of the extent to which performance
has been completed through such date, and collect and deliver to Sponsor
whatever work product then exists in a manner prescribed by Sponsor. Contractor
shall be paid for all work performed through the date of termination, provided
that such payment shall not be greater than the payment that would have become
due if the work had been completed. Contractor may not terminate any Project
Work Statement once Contractor has entered into such Project Work Statement.
17.3 Survival. In the event of any termination of this Agreement, Sections 1,
---------
9, and 11 through 18 hereof shall survive and continue in effect and shall inure
to the benefit of and be binding upon the parties and their legal
representatives, heirs, successors, and assigns.
Section 18
MISCELLANEOUS
18.1 Force Majeure. Either party shall be excused from delays in performing or
--------------
from its failure to perform hereunder to the extent that such delays or failures
result from causes beyond the reasonable control of such party; provided,
however, that in order to be excused from delay or failure to perform, such
party must act diligently to remedy the cause of such delay or failure.
18.2 No Agency. Contractor, in rendering performance under Project Work
----------
Statements issued hereunder from time to time, is acting solely as an
independent Contractor. Sponsor does not undertake by this Agreement or
otherwise to perform any obligation of Contractor, whether by regulation or
contract. In no way is Contractor to be construed as the agent or acting as the
agent of Sponsor in any respect, any other provisions of this Agreement or any
Project Work Statements issued hereunder notwithstanding.
18.3 Multiple Counterparts. This Agreement may be executed in several
----------------------
counterparts, all of which taken together shall constitute one single Agreement
between the parties.
18.4 Section Headings; Exhibits. The section and subsection headings used
---------------------------
herein are for reference and convenience only, and shall not enter into the
interpretation hereof. The exhibits referred to herein and attached hereto, or
to be attached hereto, including all Project Work Statements issued hereunder
from time to time, are incorporated herein to the same extent as if set forth in
full herein.
13
<PAGE>
18.5 Required Approvals. Where agreement, approval, acceptance, or consent by
-------------------
either party is required by any provision of this Agreement, such action shall
not be unreasonably delayed or withheld.
18.6 No Waiver. No delay or omission by either party hereto to exercise any
----------
right or power occurring upon any noncompliance or default by the other party
with respect to any of the terms of this Agreement shall impair any such right
or power or be construed to be a waiver thereof. A waiver by either of the
parties hereto of any of the covenants, conditions, or agreements to be
performed by the other shall not be construed to be a waiver of any succeeding
breach thereof or of any covenant, condition, or agreement herein contained.
Unless stated otherwise, all remedies provided for in this Agreement shall be
cumulative and in addition to and not in lieu of any other remedies available to
either party at law, in equity, or otherwise.
18.7 Authority of Contractor. Contractor has the sole right and obligation to
------------------------
supervise, manage, contract, direct, procure, perform, or cause to be performed
all work to be performed by Contractor hereunder unless otherwise provided
herein.
18.8 Governing Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of California.
18.9 Entire Agreement. This Agreement and the exhibits annexed hereto,
------------------
together with the Project Work Statements issued from time to time hereunder,
constitute the entire agreement between the parties. No change, waiver, or
discharge hereof shall be valid unless it is in writing and is executed by the
party against whom such change, waiver, or discharge is sought to be enforced.
18.10 Notices. Under this Agreement, if one party is required to give notice
--------
to the other, such notice shall be deemed given if mailed by US mail, first
class, postage prepaid, and addressed to the undersigned at the stated address
or to such other parties or addresses as from time to time the parties so
designate.
18.11 No Assignment. Neither party may, without the prior written consent of
---------------
the other party, assign or transfer this Agreement or any obligation incurred
hereunder, except by merger, reorganization, consolidation, or sale of all or
substantially all of such party's assets. Any attempt to do so in contravention
of this Section shall be void and of no force and effect.
//
//
14
<PAGE>
IN WITNESS WHEREOF, Sponsor and Contractor have caused this Agreement to be
signed and delivered by their duly authorized officers.
CONTRACTOR:
MSH Entertainment Corporation
768 Brannan Street
San Francisco, CA 94103
Phone: 415-703-8100
Fax: 415-864-5809
By: /s/ Robert Maerz
-----------------------
Robert Maerz, Chairman
SPONSOR:
Happy Zone Entertainment Corporation
768 Brannan Street
San Francisco, CA 94103
Phone: 415-703-8100
Fax: 415-864-5809
By: /s/ Jonathan Stathakis
----------------------
Jonathan Stathakis, President
15
<PAGE>
OUTLINE OF PROJECT WORK STATEMENT
1. General
a. Identification of parties and date of execution
b. Reference to Master Work Statement Agreement by date and title
2. Names of Technical Coordinators
3. Summary of Purpose for Project Work Statement
a. General description of work or services
b. Acknowledgment of classification as a work made for hire
c. General description of pre-existing works, if any
4. Identification of Pre-existing Works
5. Equipment and Programming to Be Provided by Sponsor, if Any
6. Other Contractor Resources
a. If desired, provision for the Contractor's commitment of its own staff,
facilities, and other resources by nature or item
7. Description of Deliverables
a. Description of functional and technical specifications of code and
documentation, including reference to any specific enhancements that
may be sought
b. Description of prototype or components to be delivered
c. Inclusion of copies of the reports of all project reviews, inspections,
and tests conducted during the course of performance
d. Provision for treatment of property or development environment
8. Special Terms (if Any)
9. Payment Terms and Schedule
10. Schedule and Performance Milestones
11. Acceptance, Review and Testing Procedures
16
<PAGE>
EXHIBIT 10.11
PROMISSORY NOTE
$75,000 STONE HARBOR, NEW JERSEY
------------ ----------
CITY STATE
JULY 11, 1996
FOR VALUE RECEIVED, the undersigned, promises to pay to the order of MSH
Entertainment Corporation ("MSHE") of 11205 Third Avenue, Stone Harbar, New
Jersey 08247, in the manner hereinafter specified, the principal sum of Seventy-
Five Thousand Dollars and 00/100 ($75,000) with simple interest from the date
hereof at the rate of 9% per annum on the balance from time to time remaining
unpaid. The said principal and all accrued interest thereon shall be payable in
lawful money of the United States of America at the offices of MSHE set forth
above or at such place as may hereafter be designated by written notice from the
holder to the maker hereof, on or before July 11, 2001.
If default be made in the payment of of the sums or interest mentioned
herein, then the entire principal sum and accrued interest shall at the option
of the holder hereof become at once due and collectible without further notice,
time being of the essence; and said principal sum and accrued interest shall
both bear interest from such time until paid at the highest rate allowable under
the laws of the State of Utah; provided, however, failure to exercise this
option shall not constitute a waiver of the right to exercise the same in the
event of any subsequent default.
Each person liable hereon whether maker or endorser, hereby waives
presentment, protest, notice, notice of protest and notice of dishonor and
agrees to pay all costs, including a reasonable attorneys' fee, whether suit be
brought or not, if, after maturity of this note or default hereunder, counsel
shall be employed to collect this note and the holder shall be entitled to
recover from the maker the costs and fees associated therewith.
/s/ ROBERT MAERZ
----------------
Signature of Maker
Robert Maerz
------------
Print Name
------------
<PAGE>
EXHIBIT 10.12
PROMISSORY NOTE
$ 10,000 STAMFORD, CONNECTICUT
-------- -----------
CITY STATE
JULY 11, 1996
FOR VALUE RECEIVED, the undersigned, promises to pay to the order of MSH
Entertainment Corporation ("MSHE") of 11205 Third Avenue, Stone Harbar, New
Jersey 08247, in the manner hereinafter specified, the principal sum of Ten
Thousand Dollars and 00/100 ($10,000) with simple interest from the date hereof
at the rate of 9% per annum on the balance from time to time remaining unpaid.
The said principal and all accrued interest thereon shall be payable in lawful
money of the United States of America at the offices of MSHE set forth above or
at such place as may hereafter be designated by written notice from the holder
to the maker hereof, on or before July , 2001.
If default be made in the payment of of the sums or interest mentioned
herein, then the entire principal sum and accrued interest shall at the option
of the holder hereof become at once due and collectible without further notice,
time being of the essence; and said principal sum and accrued interest shall
both bear interest from such time until paid at the highest rate allowable under
the laws of the State of Utah; provided, however, failure to exercise this
option shall not constitute a waiver of the right to exercise the same in the
event of any subsequent default.
Each person liable hereon whether maker or endorser, hereby waives
presentment, protest, notice, notice of protest and notice of dishonor and
agrees to pay all costs, including a reasonable attorneys' fee, whether suit be
brought or not, if, after maturity of this note or default hereunder, counsel
shall be employed to collect this note and the holder shall be entitled to
recover from the maker the costs and fees associated therewith.
/s/ ALFRED MORGAN
-----------------
Signature of Maker
Alfred Morgan
-------------
Print Name
----------
<PAGE>
EXHIBIT 10.13
PROMISSORY NOTE
$ 5,000 BOCA RATON, FLORIDA
---------- -------
CITY STATE
JULY 15, 1996
FOR VALUE RECEIVED, the undersigned, promises to pay to the order of MSH
Entertainment Corporation ("MSHE") of 11205 Third Avenue, Stone Harbar, New
Jersey 08247, in the manner hereinafter specified, the principal sum of Five
Thousand Dollars and 00/100 ($5,000) with simple interest from the date hereof
at the rate of 9% per annum on the balance from time to time remaining unpaid.
The said principal and all accrued interest thereon shall be payable in lawful
money of the United States of America at the offices of MSHE set forth above or
at such place as may hereafter be designated by written notice from the holder
to the maker hereof, on or before July 15, 2001.
If default be made in the payment of of the sums or interest mentioned
herein, then the entire principal sum and accrued interest shall at the option
of the holder hereof become at once due and collectible without further notice,
time being of the essence; and said principal sum and accrued interest shall
both bear interest from such time until paid at the highest rate allowable under
the laws of the State of Utah; provided, however, failure to exercise this
option shall not constitute a waiver of the right to exercise the same in the
event of any subsequent default.
Each person liable hereon whether maker or endorser, hereby waives
presentment, protest, notice, notice of protest and notice of dishonor and
agrees to pay all costs, including a reasonable attorneys' fee, whether suit be
brought or not, if, after maturity of this note or default hereunder, counsel
shall be employed to collect this note and the holder shall be entitled to
recover from the maker the costs and fees associated therewith.
/s/ RICK SIEBOLD
----------------
Signature of Maker
Rick Siebold
------------
Print Name
----------
<PAGE>
EXHIBIT 10.14
PROMISSORY NOTE
$ 30,000 MIAMI, FLORIDA
----- -------
CITY STATE
JULY 11, 1996
FOR VALUE RECEIVED, the undersigned, promises to pay to the order of MSH
Entertainment Corporation ("MSHE") of 11205 Third Avenue, Stone Harbar, New
Jersey 08247, in the manner hereinafter specified, the principal sum of Thirty
Thousand Dollars and 00/100 ($30,000) with simple interest from the date hereof
at the rate of 9% per annum on the balance from time to time remaining unpaid.
The said principal and all accrued interest thereon shall be payable in lawful
money of the United States of America at the offices of MSHE set forth above or
at such place as may hereafter be designated by written notice from the holder
to the maker hereof, on or before July 11, 2001.
If default be made in the payment of of the sums or interest mentioned
herein, then the entire principal sum and accrued interest shall at the option
of the holder hereof become at once due and collectible without further notice,
time being of the essence; and said principal sum and accrued interest shall
both bear interest from such time until paid at the highest rate allowable under
the laws of the State of Utah; provided, however, failure to exercise this
option shall not constitute a waiver of the right to exercise the same in the
event of any subsequent default.
Each person liable hereon whether maker or endorser, hereby waives
presentment, protest, notice, notice of protest and notice of dishonor and
agrees to pay all costs, including a reasonable attorneys' fee, whether suit be
brought or not, if, after maturity of this note or default hereunder, counsel
shall be employed to collect this note and the holder shall be entitled to
recover from the maker the costs and fees associated therewith.
/s/ JONATHAN STATHAKIS
----------------------
Signature of Maker
Jonathan Stathakis
------------------
Print Name
----------
<PAGE>
EXHIBIT 10.15
CREDIT AGREEMENT
----------------
This Credit Agreement is entered into as of the 1st day of September 1996
by and between MSH Entertainment Corporation, a Utah corporation ("Lenders") and
Happy Zone Entertainment Corporation, a California corporation ("Borrower").
RECITALS:
---------
A. Lender is the majority shareholder of the Borrower; and
B. Due to the working capital needs of Borrower, Lender has agreed to make a
line of credit available to Borrower.
Now, therefore, the parties agree as follows:
1. Loan
----
1.1 Amount of Credit, Procedure for Borrowing. Lender hereby
------------------------------------------
establishes a line of credit in favor of Borrower in the amount of $500,000.
Borrower may, from time to time during the term hereof, upon written notice to
Lender, make draws against the line of credit. This is a revolving line of
credit, so that Borrower may repay principal amounts and reborrow them. The
amounts borrowed shall be reflected on the books and records of Lender;
provided, however, that at Lender's request, Borrower shall execute a promissory
not or notes evidencing the borrowings.
1.2 Term. Subject to the provisions of this Agreement, the line of
-----
credit may be drawn upon, in whole or in part, from time to time, and the amount
of any borrowing may be repaid in whole or in part and reborrowed, at any time
until the first anniversary of the date of this Agreement.
1.3 Interest Rate. All amounts owing under this Agreement shall bear
--------------
interest at nine percent (9%) per annum. All interest shall be calculated based
on a 360 day year. In no event shall the rate of interest charged hereunder
exceed the maximum amount permitted by law.
1.4 Interest Payments. All interest accrued under this Agreement
------------------
shall be paid at maturity, unless earlier paid at the option of Borrower.
1.5 Principal Payments. Borrower may make payments of principal at
-------------------
any time during the term of this Agreement upon three days' prior written notice
to Lender.
1.6 Maturity Date. All amounts owing to Lender under this Agreement,
--------------
including, without limitation, principal, interest and late charges, shall be
due and payable on the first anniversary of the date of this Agreement.
2. Representations and Warranties of Borrower. Borrower hereby makes the
-------------------------------------------
following representations and warranties in order to induce Lender to make the
line of credit available:
1
<PAGE>
2.1 Organization of Borrower. Borrower is a corporation duly formed,
-------------------------
validly existing and in good standing under the laws of the State of California.
2.2 Authorization. This Agreement is within Borrower's powers, has
--------------
been duly authorized, and does not conflict with its Articles of Incorporation
or Bylaws or any other agreement of Borrower.
2.3 Enforceable Agreement. This Agreement is the legal, valid and
----------------------
binding agreement of Borrower, enforceable against Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
2.4 No Conflicts. This Agreement does not conflict with any law,
-------------
agreement, or obligation by which Borrower is bound.
3. Convenants. Borrower agrees, so long as the line of credit is
-----------
available under this Agreement and until Lender is repaid in full:
3.1 Use of Proceeds. To use the proceeds of the loan only for
----------------
financing working capital needs.
3.2 Negative Convenants. Not to, without Lender's written consent:
--------------------
(a) Engage in any business activities substantially different
from Borrower's present business,
(b) Liquidate or dissolve Borrower's business,
(c) Lease, or dispose of all or substantial part of Borrower's
business or Borrower's assets,
(d) Sell or otherwise dispose of any assets for less than fair
market value,
(e) Voluntarily suspend its business for more than 7 days in any
30 day period, and
(f) Declare or pay any divided, redeem or repurchase any of its
outstanding capital stock.
3.3 Default. If any of the following events occur, Lender may do one
--------
or more of the following: declare Borrower in default, stop making any
additional credit available to Borrower and require Borrower to repay its entire
debt immediately and without prior notice. If a bankruptcy petition is filed
with respect to Borrower, the entire debt outstanding under this Agreement will
automatically become due immediately.
(i) Failure to Pay. Borrower fails to make any payment under this
---------------
Agreement when due, which failure is not cured within three days after written
notice.
2
<PAGE>
(ii) Violation of Covenants. Borrower violates any of the covenants
-----------------------
set forth in Section 3.2.
4. General
-------
4.1 No Waiver, Consents. No alleged waiver by Lender shall be
--------------------
effective unless in writing, and no waiver shall be construed as of a continuing
waiver. No waiver shall be implied from any delay or failure by Lender to take
action on account of any default of Borrower. Consent by Lender to any act or
omission by Borrower shall not be construed as a consent to any other or
subsequent act or omission or as a waiver of the requirement for Lender's
consent to be obtained in any future or other instance.
4.2 No Third Parties Benefited. This Agreement is made and entered
---------------------------
into for the sole protection and benefit of Lender and Borrower and their
successors and assigns.
4.3 Notices. All notices given under this Agreement must be in
--------
writing and shall be effectively served upon delivery, or if mailed, upon the
first to occur of receipt or the expiration of forty-eight hours after deposit
in first-class or certified United States mail, postage prepaid, sent to the
party at its address appearing below its signature. Those addresses may be
changed by either party by notice to the other party.
4.4 Attorney's Fees. If any lawsuit, reference or arbitration is
----------------
commenced which arises out of, or which relates to, this Agreement, the
prevailing party shall be entitled to recover from each other party such sums as
the court, referee or arbitrator may adjudge to be reasonable attorneys' fees in
the action, reference or arbitration, in addition to costs and expenses
otherwise allowed by law.
4.5 Applicable Law. This Agreement shall be governed by and
---------------
construed in accordance with California law.
4.6 Successors and Assigns. The terms of this Agreement shall bind
-----------------------
and benefit the successors and assigns of the parties; provided, however, that
Borrower may not assign this Agreement, or assign or delegate any of its rights
or obligations, without the prior written consent of Lender in each instance.
4.7 Severability. The invalidity or unenforceability of any one or
-------------
more provisions of this Agreement shall in no way affect any other provisions.
4.8 Amendments. This Agreement may not be modified or amended except
-----------
by a written agreement signed by the parties.
By: /s/ ROBERT MAERZ
---------------------------------------
Robert Maerz, Chairman
MSH Entertainment Corporation ("Lender")
By: /s/ JONATHAN STATHAKIS
---------------------------------------------------
Jonathan Stathakis, President
Happy Zone Entertainment Corporation ("Borrower")
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MSH
ENTERTAINMENT CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,791
<SECURITIES> 0
<RECEIVABLES> 39,210
<ALLOWANCES> 32,529
<INVENTORY> 58,044
<CURRENT-ASSETS> 314,705
<PP&E> 337,255
<DEPRECIATION> 200,676
<TOTAL-ASSETS> 1,384,113
<CURRENT-LIABILITIES> 376,507
<BONDS> 965,000
0
0
<COMMON> 703,658
<OTHER-SE> 701,806
<TOTAL-LIABILITY-AND-EQUITY> 1,384,113
<SALES> 26,106
<TOTAL-REVENUES> 26,106
<CGS> (231,657)
<TOTAL-COSTS> (202,551)
<OTHER-EXPENSES> 590,720
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (793,271)
<INCOME-TAX> 800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (794,071)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> 0
</TABLE>
