As filed with the Securities and Exchange Commission on June 12, 1997
Registration No. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UNITED FILM DISTRIBUTORS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7812 63-1145439
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
------------------------
</TABLE>
1990 Westwood Blvd., Penthouse Brian Shuster
Los Angeles, California 90025 United Film Distributors, Inc.
(310) 441-0900 1990 Westwood Blvd., Penthouse
Los Angeles, California 90025
(310) 441-0900
<TABLE>
<S> <C>
(Address and telephone number of (Name, address and telephone number of agent for service of
principal executive offices) principal executive offices)
</TABLE>
------------------------
Copies to:
Gerald M. Chizever, Esq. Michael Beckman, Esq.
Howard J. Kern, Esq. Laurence D. Paredes, Esq.
Madge S. Beletsky, Esq. Beckman & Millman, P.C.
Richman, Lawrence, Mann, Greene, 116 John Street, 13th Floor
Chizever, Friedman & Phillips New York, New York 10038
9601 Wilshire Blvd., Penthouse (212) 227-6777
Beverly Hills, CA 90210
(310) 274-8300
------------------------
Approximate date of proposed sale to
the public: As soon as possible after the effective
date of this Registration Statement.
------------------------
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 under 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.[ ]
------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
Title of each class of Proposed maximum Proposed maximum
securities to be registered Amount to be offering price per unit aggregate offering price Amount of registration
registered(1) fee(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 920,000 $5.00 $4,600,000 $1,394
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Consists of (i) 800,000 shares of Common Stock being underwritten by
Millennium Securities Corp. and (iii) 120,000 shares of Common Stock
covered by the underwriters' over-alloment option.
(2) The registration fee is calculated in accordance with Rule 457(o) of
the Securities Act of 1933, as amended.
------------------------
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 registation
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
UNITED FILM DISTRIBUTORS, INC.
------------------------
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-B
<TABLE>
<CAPTION>
Item Number and Captions Location in Prospectus
------------------------ ----------------------
<C> <C>
1. Front of Registration Statement and Outside
Front Cover Page of Prospectus....................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus........................................ Inside Front and Outside Back Cover
Pages
3. Summary Information and Risk Factors................... Prospectus Summary; Risk Factors
4. Use of Proceeds........................................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price........................ Outside Front Cover Page; Underwriting
6. Dilution............................................... Dilution
7. Selling Security Holders............................... Not Applicable
8. Plan of Distribution................................... Outside Front Cover Page; Underwriting
9. Legal Proceedings...................................... Business
10. Directors, Executive Officers, Promoters and Control
Persons.............................................. Management
11. Security Ownership of Certain Beneficial Owners and
Management........................................... Security Ownership of Certain Beneficial Owners and
Management
12. Description of Securities.............................. Description of Capital Stock
13. Interest of Named Experts and Counsel.................. Not Applicable
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... Not Applicable
15. Organization Within Last Five Years.................... Certain Relationships
16. Description of Business................................ Prospectus Summary; Business
17. Management's Discussion and Analysis or Plan of
Operation............................................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
18. Description of Property................................ Business
19. Certain Relationships and Related Transactions......... Certain Relationships
20. Market for Common Equity and Related Stockholder
Matters.............................................. Description of Capital Stock
21. Executive Compensation................................. Executive Compensation
22. Financial Statements................................... Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. Not Applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 12, 1997
PROSPECTUS
800,000 Shares of Common Stock
UNITED FILM DISTRIBUTORS, INC.
COMMON STOCK
United Film Distributors, Inc. ("UFD" or the "Company") is offering
800,000 shares of Common Stock, $0.01 par value ("Common Stock") (this
"Offering"). See "Description of Capital Stock."
Prior to this Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price of the
Common Stock will be $5.00 per share. The public offering price of the Common
Stock was determined by negotiation between the Company and Millennium
Securities Corp., the representative (the "Representative") of the Underwriters
(the "Underwriters"), and is not necessarily related to the Company's asset
value, net worth, results of operations or other established criteria of value.
See "Underwriting."
Application has been made to have the Common Stock approved for
quotation on the NASD Electronic Bulletin Board System under the symbol "HITS"
upon effectiveness of this Offering. However, there can be no assurance that the
Common Stock will be accepted for quotation, or, if accepted, that an active
trading market will develop, or if developed, will be sustained. See "Risk
Factors."
-----------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
====================================================================================================================================
Title of Each Class of Security Underwriting Discounts and Proceeds to Issuer
Being Registered Price to Public Commissions(1)(2) or Other Person(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock(4) ........... $5.00 $ .50 $ 4.50
- ------------------------------------------------------------------------------------------------------------------------------------
Totals ................. $4,000,000 $400,000 $3,600,000
====================================================================================================================================
</TABLE>
(1) See "Underwriting" for additional compensation to the Underwriters,
including a non-accountable expense allowance of $120,000 ($138,000 if
the underwriter's over-allotment is exercised in full). The Company has
agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
(2) Before deducting expenses estimated at $927,000, including the
Underwriters' non-accountable expense allowance of $120,000 ($1,005,000
if the Underwriters' over-allotment option is exercised in full).
(3) The Company has granted the Underwriters a 45-day option to purchase up
to 120,000 shares of Common Stock at the public offering price, less
underwriting discounts and commissions, solely to cover
over-allotments, if any. If the additional 120,000 shares of Common
Stock which the Company is making available are purchased, the total
Purchase Price to the Public, Underwriting Discounts and Commissions
and Proceeds to the Company will be $4,600,000, $460,000 and
$4,140,000, respectively. See "Underwriting."
-----------------
The Common Stock being offered by the Company is being offered on a
"firm commitment" basis by the Representative, when, as and if delivered to and
accepted by the Underwriters, and subject to their right to reject orders in
whole or in part and to certain other conditions.
-----------------
Millennium Securities Corp.
The date of this Prospectus is June 12, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of securities in any
State in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK OF
THE COMPANY AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
TABLE OF CONTENTS
ADDITIONAL INFORMATION.........................................................2
PROSPECTUS SUMMARY.............................................................2
RISK FACTORS...................................................................4
USE OF PROCEEDS ...............................................................9
DIVIDEND POLICY...............................................................10
DILUTION .....................................................................10
CAPITALIZATION................................................................11
SELECTED FINANCIAL DATA.......................................................12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................13
BUSINESS .....................................................................16
MANAGEMENT....................................................................25
EXECUTIVE COMPENSATION........................................................26
CERTAIN RELATIONSHIPS.........................................................27
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................................28
DESCRIPTION OF CAPITAL STOCK..................................................29
UNDERWRITING..................................................................31
CERTAIN PROVISIONS OF THE COMPANY'S
ARTICLES OF INCORPORATION AND BYLAWS.................................32
LEGAL MATTERS.................................................................32
EXPERTS .....................................................................32
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act, as
amended (the "Securities Act"), with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Common Stock offered hereby, reference is made to such Registration
Statement. Copies of the Registration Statement may be obtained from the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549
and at its regional offices at Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661-2511 and at 7 World Trade Center, New York, New
York 10048 upon payment of the fees prescribed by the Commission, or may be
examined without charge at the offices of the Commission or at the Commission's
Web site located at "http://www.sec.gov."
The Company is not currently subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a
result of this Offering, the Company will become subject to the informational
requirements of the Exchange Act, and in accordance therewith will file reports
and other information with the Commission in accordance with the Commission's
rules. Such reports and other information concerning the Company may be
inspected at the public reference facilities referred to above as well as
certain regional offices of the Commission, and copies of such materials may be
obtained upon payment of certain prescribed rates.
No person is authorized to give any information or make any
representation not contained in this Prospectus, and, if given or made, such
information or representation should not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this Prospectus,
in any jurisdiction, to or from any person to whom it is unlawful to make such
offer or solicitation of an offer in such jurisdiction. Neither the delivery of
this Prospectus nor any distribution of securities made hereunder shall, under
any circumstances, create an implication that there has been no change in the
affairs of the Company since the date of this Prospectus.
Certain statements contained in this Prospectus that are not related to
historical results, including, without limitation, statements regarding the
Company's business strategy and objectives, future financial position and
estimated cost savings, are forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act and
involve risks and uncertainties. Although the Company believes that the
assumptions on which these forward-looking statements are based are reasonable,
there can be no assurance that such assumptions will prove to be accurate and
actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under "Risk
Factors," "Management's Discussion and Analysis and Results of Operations" and
"Business," as well as those discussed elsewhere in this Prospectus. All
forward-looking statements contained in this Prospectus are qualified in their
entirety by this cautionary statement.
Until [ ], 1997 (90 days after the Effective Date of this Offering),
all dealers effecting transactions in the Common Stock may be required to
deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the more detailed information and financial data appearing
elsewhere in this Prospectus. An investment in the Common Stock offered hereby
is highly speculative in nature, involves a high degree of risk and should only
be made by investors who can bear the economic risk of a potential loss of their
entire investment. Prospective purchasers should carefully consider the
information set forth under "Risk Factors" on page 4 before purchasing such
securities.
THE COMPANY
United Film Distributors, Inc. (together with its subsidiaries, the
"Company") is engaged in the acquisition, development, financing, production,
distribution and licensing of motion pictures for exhibition in domestic and
international theatrical markets and for subsequent worldwide release in
different media, including, but not limited to, home video and pay and free
television. The Company was incorporated in Delaware in May 1995. Harry Shuster,
the Company's Chairman, has produced or co-produced 20 movies during the past 25
years. Brian Shuster, President and Chief Executive Officer of the Company, has
been involved in various aspects of film production for approximately 15 movies
during the past eight years. See "Management."
During the Company's first two years of operations, the Company has
completed production of eight films, consisting of The Secret Agent Club, Prey
of the Jaguar, Blood Money, The Elevator, Firestorm, Chase Morran, Santa with
Muscles, and Skeletons. Santa with Muscles was released in movie theaters in
November 1996; Chase Morran was released in February 1997 on the SCI-Fi channel;
and Skeletons was released on HBO in April 1997. Prey of the Jaguar, Blood
Money, and Firestorm have been licensed to HBO by Cabin Fever Entertainment,
Inc. ('CFE"), a distributor of six of the Company's motion pictures, but release
dates have not yet been determined. See "Business--Financing of Motion Picture
Production." The other movies are expected to be distributed by the end of the
year. In addition, the Company is currently in pre-production of several films,
one of which is Rear View Mirror, which should be completed in August 1997 and
released in the calendar 1998. All of the films produced by the Company to date
have been in a budget range of between $540,000 and $3,200,000 and have
generally taken between three and six weeks to film. The Company intends to
continue production of low-budget feature length motion pictures as its
principal business focus. See "Business--Motion Picture Production" for the
Company's current slate of motion picture projects.
To produce a project, the Company first acquires the rights to a story,
book or script ("property"). The Company then typically secures a financing or
production commitment for the project from third parties, such as private
investors, studios, and distributors, prior to expending substantial funds in
the development process. However, the Company does advance its own funds to meet
the interim costs of development and production which amounts are generally
repaid to the Company pursuant to the production contracts. See
"Business--Financing of Motion Picture Production" for a description of the
Company's financing activities.
The Company's strategy is to (i) develop long-term relationships with
talent who have demonstrated the ability to attract widespread audience
interest, both domestically and in significant international markets, (ii) seek
to limit the financial risk to the Company inherent in any one motion picture
project while preserving potential returns through the strategic use of its
long-term distribution agreements with companies such as HBO covering the United
States and Canada, and their respective territories, possessions, and
protectorates (the "Domestic Territories") as well as such foreign distributors
such as Highlight Communications (Germany), Saehan/Hollyvision/Digital Media
(South Korea), Consorcio Europa Serviano Ribiero (Brazil), Manga Films (Spain)
and Italian International Films (Italy), and (iii) exercise strong management
control of production costs of its motion pictures, as well as of general
overhead.
The Company's principal goal is to produce and arrange for the release
of three to five commercially successful low-budget motion pictures per year.
Although there can be no assurances, the Company believes that over time these
films will become the core of a library of films which management believes have
the capacity of generating revenues from their worldwide exploitation in
existing and future media and markets. The Company, as a small independent film
company, anticipates that many, if not all of its films, will not be released in
theaters but instead, will be released, if at all, on cable television,
television and other similar media.
The Company's principal executive offices are located at 1990 Westwood
Boulevard, Penthouse, Los Angeles, California 90025 and its telephone number is
(310) 441-0900.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock offered by the Company.......................................... 800,000 shares
Common Stock outstanding before this Offering................................ 3,000,000 shares(1)
Common Stock outstanding after this Offering................................. 3,800,000 shares(1)
Price per share being underwritten........................................... $5.00
Comparative Stock Ownership upon completion of this Offering
Present Shareholders................................................ 3,000,000(1)
Public Shareholders................................................. 800,000(1)
Estimated Net Proceeds to the Company........................................ $3,073,000
Use of Proceeds.............................................................. The net proceeds of this Offering will be
used for (1) repaying $2,000,000 in
indebtedness which is owed to the founders
of the Company, and (2) working capital,
including but not limited to, (a) motion
picture development and production,
including, but not limited to, (i)
supplying production financing for the
Company's motion picture projects, (ii)
retaining, generally on a
picture-to-picture basis, the services of
writers, directors and other artistic
elements in the development of motion
picture projects, (iii) purchasing or
obtaining options for rights to books,
screenplays and other artistic properties,
and (iv) general administrative expenses.
See "Use of Proceeds" and "Certain
Relationships."
Risk Factors................................................................. An investment in the Common Stock offered
hereby involves a high degree of risk and
immediate and substantial dilution of the
book value of the Common Stock and should
be considered only by persons who can
afford the loss of their entire
investment. See "Risk Factors" and
"Dilution."
Proposed NASD Electronic Bulletin Board Trading Symbol(2).................... "HITS"
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Unless otherwise indicated, all share and per share information in this
Prospectus (i) gives effect to the 5-for-1 stock split of the Company's
Common Stock effected in May 1997 and (ii) does not include Common
Stock to be issued upon exercise of the Underwriter's over-allotment
option or issuable upon exercise of outstanding options or warrants or
360,000 shares of Common Stock reserved for issuance pursuant to the
Company's stock option plan, pursuant to which options to purchase an
aggregate of 20,000 shares of Common Stock are currently outstanding.
See "Management--Stock Option Plan" and "Description of Capital Stock."
(2) Although the Company intends to cause a market maker to apply for
inclusion of the Common Stock on the NASD Electronic Bulletin Board,
there can be no assurance that the Common Stock will be included for
quotation, or if so included, that the Company will be able to continue
to meet the requirements for continued quotation, or that a public
trading market will develop or that if such market develops, it will be
sustained. See "Risk Factors--No Prior Public Market; Possible
Volatility of Stock Price; Negotiated Offering Price" and "--Lack of
Prior Market for Common Stock; No Assurance of Public Trading Market."
3
<PAGE>
RISK FACTORS
The factors discussed below and elsewhere in this Prospectus could
adversely affect the value of the Common Stock. In addition, the factors
discussed below and elsewhere in this Prospectus may constitute forward-looking
statements and, as such, may involve known or unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Any
forward-looking statements contained in this Prospectus should not be relied
upon as predictions of future events. Such forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "could," "seeks" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Such statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and they may be
incapable of being realized. The following factors may constitute or include
cautionary, forward-looking statements identifying important factors with
respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to vary materially from the
future results covered in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements. Actual results in the future could differ
materially from those described in the forward-looking statements or as a result
of the factors set forth below (which list does not purport to be exhaustive)
and the matters set forth in this Prospectus generally. See "Management's
Discussion and Analysis and Results of Operations" and "Business" for a
description of certain other factors generally affecting the Company's business.
RECENT OPERATING LOSSES; NO ASSURANCE OF PROFITABILITY; LIMITED OPERATING
HISTORY
The Company was founded in May 1995 and has a limited history of
operations on which an investor could base an evaluation of an investment in the
Company. Notwithstanding the fact that the Company had net income of $67,892 for
the fiscal year ended July 31, 1996, the Company incurred a net loss of $71,098
for the six months ended January 31, 1997. There can be no assurance that the
Company will return to profitability. Furthermore, although Harry Shuster has
substantial experience in the motion picture industry as a result of having
produced or co-produced 20 movies during the past 25 years, the Company itself
has been engaged in the production of motion pictures only since 1995. During
that time, eight motion pictures, consisting of The Secret Agent Club, Prey of
the Jaguar, Blood Money, The Elevator, Firestorm, Chase Morran, Santa with
Muscles, and Skeletons have been completed by the Company. Santa with Muscles
was released in movie theaters in November 1996; Chase Morran was released in
February 1997 on the SCI-Fi channel; and Skeletons was released on HBO in April
1997. Prey of the Jaguar, Blood Money, and Firestorm have been licensed to HBO
by CFE, but release dates have not yet been determined. See "Business--Financing
of Motion Picture Production." The other movies are expected to be distributed
by the end of the year. In addition, the Company is currently in pre-production
of several films, one of which is Rear View Mirror, which should be completed in
August 1997 and released in calendar 1998. All of the films produced by the
Company to date have been in a budget range of between $540,000 and $3,200,000.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and "Management."
DEPENDENCE ON KEY PERSONNEL
Harry Shuster is the founder of the Company and serves as its
Chairman. Mr. Shuster has substantial experience in the motion picture industry
and extensive relationships with the motion picture community, including
creative talent and leading distributors. The Company also relies on the
expertise of Brian Shuster, the Company's President and Chief Executive Officer.
Virtually all decisions concerning the conduct of the business of the Company,
including the properties and rights to be acquired by the Company and the
arrangements to be made for the development, financing, production and
distribution of the Company's motion pictures, are made by or significantly
influenced by Messrs. Harry or Brian Shuster. The loss of their services for any
reason would have a material adverse effect on the Company's business and
operations and its prospects for the future. The Company does not have a "key
man" life insurance on the lives of any of its executive officers. See
"Management." The Company also has recently entered into an employment agreement
with Brian Shuster for an initial term ending March 31, 2000, but which
automatically renews for additional terms of one year each unless 60 days notice
of termination is provided by either party. See "Executive
Compensation--Employment Contracts; Termination of Employment and
Change-In-Control Arrangements." The Company does not have any employment
agreement with Harry Shuster. See "--Conflicts of Interest."
4
<PAGE>
CONFLICTS OF INTEREST
The Company relies on the services of Harry Shuster, the Company's
Chairman. However, Mr. Shuster is the Chief Executive Officer of two other
public companies and intends to continue to devote substantial time to the
businesses and affairs of these two other companies. Although Mr. Shuster
intends to devote such time to the business of the Company as he deems necessary
for its operations, there can be no assurance that Mr. Shuster will be available
to handle any crisis situation that may arise, and if Mr. Shuster is
unavailable, it is possible that the resolution of such crises may be less
favorable than the resolution that could have been reached had Mr. Shuster been
available. See "Management."
RISKS OF MOTION PICTURE PRODUCTION
General. The motion picture industry is highly speculative and
inherently risky. There can be no assurance of the economic success of any
motion picture since the revenues derived from the production and distribution
of a motion picture (which do not necessarily bear a direct correlation to the
production or distribution costs incurred) depend primarily upon its acceptance
by the public, which cannot be predicted. The commercial success of a motion
picture also depends upon the quality and acceptance of other competing films
released into the marketplace at or near the same time, the availability of
alternative forms of entertainment and leisure time activities, general economic
conditions and other tangible and intangible factors, all of which can change
and cannot be predicted with certainty. Therefore, there is a substantial risk
that some or all of the Company's motion pictures will not be commercially
successful, resulting in costs not being recouped or anticipated profits not
being realized. Furthermore, the Company, as a small independent film company,
anticipates that many, if not all of its films, will not be released in theaters
but instead, will be released, if at all, on cable television, television and
other similar media.
Completion of a Motion Picture Subject to Uncertainties and Financial
Risks. The production, completion and distribution of motion pictures is subject
to numerous uncertainties, including financing requirements, personnel
availability and the release schedule of competitive films. Although the Company
plans to reduce the risks of its financial involvement in the production costs
of motion pictures through relationships with distributors such as HBO covering
the United States and Canada, and their respective territories, possessions, and
protectorates (the "Domestic Territories") as well as such foreign distributors
such as Highlight Communications (Germany), Saehan/Hollyvision/Digital Media
(South Korea), Consorcio Europa Serviano Ribiero (Brazil), Manga Films (Spain)
and Italian International Films (Italy), the Company may be subject to
substantial financial risks relating to the production, completion and release
of motion pictures. In addition, a significant amount of time may elapse between
the expenditure of funds by the Company and the receipt of revenues from the
motion pictures.
COMPETITION
Motion picture production and distribution are highly competitive. The
competition comes from both companies within the same business and companies in
other entertainment media which create alternative forms of leisure
entertainment. The Company's competition for the acquisition of literary
properties, the services of performing artists, directors, producers and other
creative and technical personnel and production financing includes several
"major" film studios including, but not limited to, The Walt Disney Company,
Paramount Pictures Corporation, MCA, Columbia Pictures, Tri-Star Pictures,
Twentieth Century Fox, Warner Brothers Inc. and MGM/UA, which are dominant in
the motion picture industry, as well as numerous independent motion picture and
television production companies, television networks and pay television systems.
Many of these organizations with which the Company competes have significantly
greater financial and other resources than does the Company. In addition, the
Company's films compete for audience acceptance and exhibition outlets with
motion pictures produced and distributed by other companies, including motion
pictures distributed by CFE, HBO and the Company's foreign distributors. As a
result, the success of any of the Company's films is dependent not only on the
quality and acceptance of that particular film, but also on the quality and
acceptance of other films.
RISKS OF INTERNATIONAL BUSINESS
At January 31, 1997 and July 31, 1996, foreign sales in Asia, South
America and Europe accounted for 41% and 48%, respectively, of total revenues
for these periods. Management of the Company anticipates that a significant
percentage of the Company's revenues and income, if any, will continue to come
from foreign sources. Accordingly, the Company is subject to the risks inherent
in conducting business across national borders, including, but not limited to,
currency exchange rate fluctuations, international incidents, military
outbreaks, economic downturns, government instability, nationalization of
foreign assets, government protectionism and changes in governmental policy, any
of which could have a material adverse effect on the Company's business and
operations and its prospects for the future.
5
<PAGE>
FLUCTUATION OF OPERATING RESULTS
Most of the Company's revenues are expected to be derived from the
exploitation of a limited number of motion pictures produced by the Company. As
a result of this factor, as well as uncertainties in the release schedules of
its motion pictures and audience responses thereto, the Company's revenues and
earnings are expected to fluctuate significantly from quarter to quarter.
Accordingly, the Company's revenues and earnings in any particular period may
not be indicative of the results for any future period.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
Upon completion of this Offering (assuming no exercise of the
Underwriter's over-allotment option or other outstanding options or warrants),
management and the existing stockholders of the Company will beneficially own
approximately 78.9% of the outstanding Common Stock. As a result, management and
the existing stockholders will continue to be in a position to elect all of the
members of the Board of Directors of the Company, to cause an increase in the
Company's authorized capital stock, to cause the dissolution, merger or sale of
the assets of the Company and, generally, to direct the affairs of the Company.
This concentration of ownership will likely have the effect of discouraging
third parties from acquiring substantial blocks of the Company's Common Stock to
cause a change in the management and control of the Company. Such concentration
of ownership with management could tend to limit the price that investors might
be willing to pay in the future for shares of Common Stock as it may reduce the
possibility of a change in control of the Company. A change in control of an
issuer frequently occurs at a premium over the historical trading prices of the
issuer's publicly traded Common Stock. There are no agreements or other
understandings between the officers and directors of the Company and the other
current stockholders with respect to voting or any other matters pertaining to
the Company. See "Security Ownership of Certain Beneficial Owners and
Management" and "Description of Capital Stock."
LABOR RELATIONS
Many individuals associated with the Company's productions, including
actors, writers and directors, are members of guilds or unions which bargain
collectively with producers on an industry-wide basis from time to time. The
Company's operations are dependent upon its compliance with the provisions of
collective bargaining agreements governing relationships with these guilds and
unions. Strikes or other work stoppages by members of these unions could delay
or disrupt the Company's activities. However, the extent to which the existence
of collective bargaining agreements may affect the Company in the future is not
currently determinable. See "Business--Employees."
NEED FOR ADDITIONAL FINANCING
The Company believes that its existing capital resources, together with
the proceeds of this Offering, will enable the Company to maintain its
operations and working capital requirements for at least twelve (12) months.
However, it is possible that additional financing will be required to fund
further growth in the Company's business beyond the next 12 months whether
through equity financing, debt financing or other sources. There can be no
assurance that such sources of financing will be available, or will be available
on terms acceptable to the Company. Inability to obtain additional financing
could limit the Company's ability to produce motion pictures, retain writers,
directors and other artistic elements, purchase rights to books, screenplays and
other artistic properties, or take other actions that would benefit the Company
and its stockholders and could therefore have a material adverse effect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
BROAD DISCRETION IN APPLICATION OF PROCEEDS
A significant portion of the estimated net proceeds of this Offering
has been allocated to working capital and general corporate purposes. Management
will have broad discretion as to the application of such proceeds. Excluding the
proceeds from the exercise of the Underwriters' over allotment option,
$1,073,000 or 34.9% of the net proceeds from this Offering will be used for
general corporate purposes. See "Use of Proceeds."
LIMITATION OF LIABILITY; INDEMNIFICATION
The Company's Articles of Incorporation and Bylaws contain provisions
that limit the liability of directors for monetary damages and provide for
indemnification of officers and directors under certain circumstances. Such
provisions may discourage stockholders from bringing a lawsuit against directors
for breaches of fiduciary duty and may also have the effect of reducing the
likelihood of derivative litigation against directors and officers even though
such action, if successful,
6
<PAGE>
might otherwise have benefitted the Company and its stockholders. In addition, a
stockholder's investment in the Company may be adversely affected to the extent
that costs of settlement and damage awards against the Company's officers or
directors are paid by the Company pursuant to the indemnification provisions of
its Articles of Incorporation and Bylaws. See "Certain Provisions of the
Company's Articles of Incorporation and Bylaws."
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
Bylaws and of Delaware law may delay, defer or prevent a change in control of
the Company and may adversely affect the voting and other rights of the holders
of Common Stock. In particular, the ability of the Company's Board of Directors
to issue "blank check" preferred stock without further stockholder approval may
have the effect of delaying, deferring or preventing a change in control of the
Company. See "Description of Capital Stock."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; NEGOTIATED OFFERING
PRICE
Prior to this Offering there has been no public market for the
Company's Common Stock, and there can be no assurance that an active public
trading market will develop after this Offering or be sustained. The initial
public offering price of the Common Stock to be sold in this Offering was
determined by negotiations between the Company and the Representative and may
not be indicative of the market price of the Common Stock after this Offering.
The initial public offering price also does not necessarily bear any
relationship to the Company's assets, book value, net worth or results of
operations of the Company or any other established criteria of value. Factors
not within the control of the Company, including public statements from
securities analysts and others concerning the Company's operations, public
acceptance of the Company's motion pictures, interest rates and changes in
general market conditions could have a significant impact on the future market
prices for shares of the Common Stock, which may be volatile.
LACK OF PRIOR MARKET FOR COMMON STOCK; NO ASSURANCE OF PUBLIC TRADING MARKET
Prior to this Offering, no public trading market existed for the Common
Stock. There can be no assurance that a public trading market for the Common
Stock will develop or that a public trading market, if developed, will be
sustained. Although the Company anticipates that upon completion of this
Offering, the Common Stock will be eligible for inclusion on the NASD Electronic
Bulletin Board System, no assurances can be given that the Common Stock will be
listed on the Bulletin Board. Consequently, there can be no assurance that a
regular trading market for the Common Stock will develop after the completion of
the Offering. If a trading market does in fact develop for the Common Stock
offered hereby, there can be no assurance that it will be maintained.
Furthermore, if for any reason the Common Stock is not listed on the Electronic
Bulletin Board or a public trading market does not otherwise develop, purchasers
of the Common Stock may have difficulty in selling their Common Stock should
they desire to do so. In any event, because certain restrictions may be placed
upon the sale of securities under $5.00, unless such securities qualify for an
exemption from the 'penny stock' rules, such as a listing on The NASDAQ SmallCap
Market, some brokerage firms will not effect transactions in the Company's
Common Stock and it is unlikely that any bank or financial institution will
accept such securities as collateral, which could have an adverse effect in
developing or sustaining any market for the Common Stock. See "--'Penny Stock'
Regulations May Impose Certain Restrictions on Marketability of Securities."
Although they have no legal obligation to do so, the Underwriters from
time to time may act as market makers and may otherwise effect and influence
transactions in the Common Stock. However, there is no assurance that the
Underwriters will continue to effect and influence transactions in the Common
Stock. The prices and liquidity of the Company's Common Stock may be
significantly affected by the degree, if any, of the Underwriters' participation
in the market. The Underwriters may voluntarily discontinue such participation
at any time. Further, the market for, and liquidity of, the Common Stock may be
adversely affected by the fact that a significant amount of the Common Stock may
be sold to customers of the Underwriters.
The Common Stock offered hereby will be traded in the over-the-counter
market in what are commonly referred to as the 'pink sheets' or on the
Electronic Bulletin Board. As a result, an investor may find it more difficult
to dispose of or to obtain accurate quotations as to the price of the Common
Stock offered hereby. The above-described rules may materially adversely affect
the liquidity of the market for the Company's Common Stock. See "Underwriting."
SUBSTANTIAL AND IMMEDIATE DILUTION
7
<PAGE>
The initial public offering price is substantially higher than the book
value per share of Common Stock. Investors purchasing shares of Common Stock
pursuant to this Prospectus therefore will incur immediate and substantial
dilution of $3.66 per share (approximately 73.2% of the per share offering
price). Existing stockholders acquired their shares of Common Stock at a nominal
price and, accordingly, new investors will bear virtually all of the risks
inherent in an investment in the Company. See "Dilution."
SHARES AVAILABLE FOR FUTURE SALE
Upon completion of this Offering, there will be 3,800,000 shares of
Common Stock outstanding (3,920,000 shares if the Underwriters' over-allotment
option is exercised in full), excluding shares issuable upon exercise of stock
options and warrants. Of these shares, the 800,000 shares sold in this Offering
(920,000 shares if the Underwriters' over-allotment is exercised in full) will
be freely tradeable under the Securities Act of 1933, as amended (the
"Securities Act"), except for any such shares purchased by an "affiliate" of the
Company. The remaining 3,000,000 shares (the "Restricted Shares") (which were
issued and sold by the Company in private transactions in reliance upon the
non-public offering exemption set forth in Section 4(2) of the Securities Act)
and any other shares hereafter acquired by an "affiliate" of the Company will be
eligible for sale under Rule 144 under the Securities Act, or at any time
pursuant to an effective registration statement relating to such shares. No
prediction can be made as to the effect, if any, that future sales, or the
availability of shares of capital stock for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of stock (including shares issuable upon the exercise of stock options
and warrants), or the perception that such sales could occur, could adversely
affect prevailing market prices for such shares.
SUBSTANTIAL NUMBER OF AUTHORIZED SHARES AVAILABLE FOR FUTURE ISSUANCE; POSSIBLE
DILUTIVE AND ANTI-TAKEOVER EFFECTS
The Company's Articles of Incorporation authorize the issuance of
20,000,000 shares of Common Stock. Upon completion of this Offering (assuming
the Underwriters' over-allotment option is not exercised), there will be
approximately 16,200,000 authorized but unissued shares of Common Stock
available for future issuance. The Company's Board of Directors has the power to
issue substantial amounts of additional shares without stockholder approval.
Although the Company currently has no commitments to issue any shares of Common
Stock other than as described in this Prospectus, the Company may issue a
substantial number of additional shares in connection with future financings or
acquisitions. To the extent that additional shares of Common Stock are issued,
dilution of the interests of the Company's stockholders will occur.
The Company's Articles of Incorporation also authorize the issuance of
3,000,000 shares of Preferred Stock with such designations, rights, and
preferences as may be determined from time to time by the Board of Directors.
The Board of Directors is empowered, without stockholder 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 addition, the issuance of Preferred Stock and
Common Stock could be utilized, under certain circumstances, as a method of
discouraging, delaying, or preventing a change in control of the Company.
Although the Company currently has no commitments to issue any shares of
Preferred Stock or Common Stock, there can be no assurance that the Company will
not do so in the future. See "Description of Capital Stock."
'PENNY STOCK' REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF
SECURITIES
The Securities and Exchange Commission (the "Commission"') has adopted
regulations which generally define 'penny stock' to be any security that has a
market price (as defined) less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. Therefore, if the market
price of the Common Stock is less than $5.00 per security, then such security
would fall within the definition of 'penny stock.' Since it is intended that the
Common Stock offered hereby will be authorized for quotation on the Electronic
Bulletin Board, such securities will not be exempt from the definition of 'penny
stock.' The Company's Common Stock may become subject to rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated by
the Commission relating to the penny stock market. The broker-dealer must also
disclose the commission payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and
8
<PAGE>
the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the 'penny stock' rules may restrict the ability of broker-dealers
to sell the Company's Common Stock and may affect the ability of purchasers in
this Offering to sell the Company's Common Stock in the secondary market and the
price at which such purchasers can sell any such securities.
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends on the Common Stock and no
cash dividends are expected to be paid on the Common Stock in the foreseeable
future. The Company anticipates that for the foreseeable future all of its cash
resources and earnings, if any, will be retained for the operation and expansion
of the Company's business. See "Dividend Policy."
IN ADDITION TO THE ABOVE RISKS, BUSINESSES ARE OFTEN SUBJECT TO RISKS NOT
FORESEEN OR FULLY APPRECIATED BY MANAGEMENT. IN REVIEWING THIS MEMORANDUM,
POTENTIAL INVESTORS SHOULD KEEP IN MIND OTHER POSSIBLE RISKS.
USE OF PROCEEDS
The net proceeds from the sale of the 800,000 shares of Common Stock
offered by the Company in this Offering, after deducting the estimated
underwriting discounts and commissions and expenses payable by the Company to
attorneys and accountants in connection with this Offering, are estimated to be
$3,073,000 ($3,583,000 if the Underwriters' over-allotment option is exercised
in full). The net proceeds of this Offering will be used for (1) repaying
$2,000,000 in indebtedness which is owed to the founders of the Company, and (2)
working capital, including but not limited to, (a) motion picture development
and production, including, but not limited to, (i) supplying production
financing for the Company's motion picture projects, (ii) retaining, generally
on a picture-to-picture basis, the services of writers, directors and other
artistic elements in the development of motion picture projects, (iii)
purchasing or obtaining options for rights to books, screenplays and other
artistic properties, and (iv) general administrative expenses. The money
borrowed from the founders of the Company was used to fund film productions and
operations. Interest on this indebtedness accrued at 7% per annum.
See "Certain Relationships."
The Company intends to maintain flexibility in order to adjust its
strategies in response to (i) the financial results of its motion pictures, (ii)
developments in the motion picture and entertainment industries, (iii) changing
needs of the Company, and (iv) new opportunities that may arise in the future.
Accordingly, the specific allocation and expenditure of the proceeds of this
Offering among the foregoing uses will remain within the discretion of
management and cannot be determined as of the date of this Prospectus. Pending
their ultimate application, the net proceeds will be invested in interest or
non-interest bearing accounts or invested in short-term government obligations,
investment-grade securities, money market funds or certificates of deposit.
Management believes that the net proceeds from this Offering, together
with its existing capital, funds from operations, advances from both domestic
and foreign distributors and other available sources of capital, will be
sufficient to enable the Company to fund its planned development, production and
overhead expenditures for the next 12 months.
The following table summarizes the expected use of proceeds described
above:
<TABLE>
<CAPTION>
Dollar Percentage of
Use of Proceeds Amount Net Proceeds
--------------- ------ ------------
<S> <C> <C>
Repayment of Indebtedness........................................$2,000,000 65.1%
Working Capital.................................................. 1,073,000 34.9%
Total...................................................$3,073,000 100.0%
</TABLE>
9
<PAGE>
DIVIDEND POLICY
The Company presently intends to retain future earnings, if any, to
finance the expansion and development of its business and not pay cash dividends
on the Common Stock in the foreseeable future. Any future decision of the
Company's Board of Directors to pay dividends will be made in light of the
Company's earnings, financial position, capital requirements and other relevant
factors then existing.
DILUTION
As of January 31, 1997, the Company has a net tangible book value of $
2.036 million or $0.68 per share. Net tangible book value per share of Common
Stock is defined as the tangible assets of the Company, less all liabilities,
divided by the number of shares of Common Stock outstanding, including the
shares resulting from the assumed exercise of all outstanding warrants and
options. After giving effect as of January 31, 1997 to the sale of 800,000
shares of Common Stock offered hereby and after deducting the estimated offering
expenses, the pro forma net tangible book value of the Common Stock at January
31, 1997 would have been $5.109 million or $1.34 per share. This represents an
immediate increase in net tangible book value of $0.66 per share to existing
stockholders and an immediate dilution of $3.66 per share or 73.1% of the
offering price, to new investors purchasing the shares offered hereby. The
following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price $ 5.00
Net tangible book value per share before offering $0.68
Increase in net tangible book value attributable to new investors 0.66
---------------
Pro forma net tangible book value after giving effect to public offering 1.34
-----------
Dilution per share to new investors (1) $ 3.66
===========
</TABLE>
- ------------------------
(1) Dilution to new investors does not take into account the issuance
of shares of Common Stock upon exercise of options or warrants, and
assumes no exercise of the Underwriter's over-allotment option. See
"Underwriting." To the extent any of these options or warrants are
exercised, there may be further dilution to new investors.
The following table, calculated as of January 31, 1997 on the same
basis as above, summarizes with respect to existing holders of Common Stock and
new investors of Common Stock in this Offering, a comparison of the number of
shares acquired from the Company, the percentage ownership of such shares, the
total consideration paid, the percentage total consideration paid and the
average price per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------- ------------------- Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stock holders 3,000,000 78.9% $ 2,035,931 33.7% $ 0.68
New Investors 800,000 21.1% 4,000,000 66.3% $ 5.00
-----------------------------------------------------
3,800,000 100.0% $ 6,035,931 100.0%
=====================================================
</TABLE>
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
January 31, 1997, and as adjusted to give effect to the sale of the Common Stock
offered hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds." This table should be read in conjunction with the
consolidated financial statements and related Notes thereto and "Management's
Discussion and Analysis and Results of Operation" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
January 31, 1997
----------------
Actual As Adjusted
------ -----------
(in thousands)
<S> <C> <C>
Minority Interest $ 3,132 $ 3,132
Shareholders' Equity:
Preferred stock, $0.01 par value -- --
3,000,000 shares authorized,
none issued
Common stock, $0.01 par value, 30 38
20,000,000 shares authorized,
3,000,000 shares issued and
outstanding; 3,800,000 shares
issued and outstanding, as
adjusted
Additional paid-in capital 2 ,041 5,106
Retained Earnings (35) (35)
---------- ----------
Total shareholders' equity 2,036 5,109
---------- ----------
Total Capitalization $ 2,036 $ 5,109
========== ----------
</TABLE>
-----------------------
(1) In accordance with Statement of Financial Accounting Standards No. 53
"Financial Reporting by Producers and Distributors of Motion Pictures,"
the Company has elected to present an unclassified balance sheet. For
information concerning the Company's debt and lease obligations, see
Notes to Consolidated Financial Statements.
11
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data are qualified by
reference to, and should be read in conjunction with, the Company's consolidated
financial statements, the Notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
in this Prospectus. The selected financial data for each of the two years ended
July 31, 1996 and 1995 are derived from Company's audited financial statements.
The selected financial data for the six-month periods ended January 31, 1997 and
1996 are derived from the Company's unaudited financial statements. Operating
results for the six months ended January 31, 1997 are not necessarily indicative
of the results that may be expected for the fiscal year ending July 31, 1997.
<TABLE>
<CAPTION>
Years Ended Six Months Ended
July 31, January 31,
--------------------------- ------------------------------
Consolidated Statement of Operations Data: 1996 1995 1997 1996
------------ ------------ ------------ ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Film revenue............................................ $ 2,626 $ - $ 4,030 $ -
Film amortization....................................... 1,609 - 3,185 -
------------- ------------ ------------ ---------------
Gross Profit............................................ 1,017 - 845 -
General, administrative and selling expenses....... 755 32 436 333
Interest expenses.................................. 127 - 77 42
Other income (expenses) net........................ 48 - (1) 9
Income (loss) before income taxes....................... 183 (32) 331 (366)
Provision (benefit) for income taxes.................... 27 - (27) (155)
------------- ------------ ------------ ---------------
Income (loss) before minority interests................. $ 156 $ (32) 358 (211)
============= ============ ============ ===============
Minority interests (1).................................. $ 88 $ - $ 429 -
Net Income (loss)....................................... $ 68 $ (32) (71) (211)
Net income (loss) per share............................. $ 0.03 $ (0.03) $ (0.02) (0.14)
============= ============ ============ ===============
Weighted average shares outstanding..................... 2,364 1,000 3,000 1,527
============= ============ ============ ===============
</TABLE>
<TABLE>
<CAPTION>
January 31, 1997
----------------------------
Actual Proforma(2)
------------- ------------
(Unaudited) (Unaudited)
Consolidated Balance Sheet Data:
<S> <C> <C>
Film costs, net......................................... $ 6,725 $ 6,725
Total assets............................................ 7,433 8,506
Shareholder advances.................................... 1,809 -
Total stockholders' equity (deficit).................... 2,036 5,109
</TABLE>
- ----------
(1) Certain related and third parties own minority interests in two limited
partnerships that financed three of the Company's motion pictures. See
"Business--Financing of Motion Picture Production."
(2) Adjusted to reflect the sale of the 800,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's consolidated financial statements and the Notes thereto appearing
elsewhere in this Registration Statement on Form SB-2 of which this Prospectus
forms a part. Certain statements contained in this Registration Statement on
Form SB-2 of which this Prospectus forms a part that are not related to
historical results, including, without limitation, statements regarding the
Company's business strategy and objectives, future financial position and
estimated cost savings, are forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act and
involve risks and uncertainties. Although the Company believes that the
assumptions on which these forward-looking statements are based are reasonable,
there can be no assurance that such assumptions will prove to be accurate and
actual results could differ materially from those discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed under "Risk Factors" and
"Business," as well as those discussed elsewhere in this Registration Statement
on Form SB-2 of which this Prospectus forms a part. All forward-looking
statements contained in this Registration Statement on Form SB-2 of which this
Prospectus forms a part are qualified in their entirety by this cautionary
statement.
The period from May 10, 1995, the Company's inception, to July 31, 1995
is referred to herein as FY 1995 and the fiscal year ended July 31, 1996 is
referred to herein as FY 1996.
OVERVIEW
The Company is primarily engaged in the production and distribution of
motion pictures in domestic and foreign markets. The Company produces low budget
movies striving for stories with wide appeal and high production quality. The
Company has produced eight movies and released seven through January 31, 1997
ranging in production costs from $540,000 to $3,200,000. The Company is in
pre-production for its ninth production and is in the development stage of
several more projects.
The Company plans to produce three to five low budget movies per year.
The Company expects its next several films to have budgets less than $1.0
million. The Company also believes that low budget films require less capital
resources, less general and administrative costs and limit the financial risk to
the Company in any one motion picture. Furthermore, the Company has had more
favorable experiences with film costing less than $1.0 million.
A substantial portion of the Company's film revenue since its inception
on May 10, 1995 has been derived from transactions with Cabin Fever
Entertainment, Inc. ("CFE"). The Company licensed domestic rights to CFE for
seven movies. In November 1996, after the Company already delivered the seven
films licensed, CFE refused to accept delivery of the last of the seven movies.
The relationship between the Company and CFE has subsequently deteriorated,
resulting in a lawsuit wherein the Company claims damages for copyright
infringement, breach of contract and fraud. The case was filed in federal
district court in New York in the first quarter of 1997. CFE did not answer the
complaint but instead moved to dismiss the copyright claim, which is the basis
for federal jurisdiction. If CFE is successful on its motion, the Company
intends to move forward with the remaining contract and fraud claims in state
court. Subsequent to the deterioration of the relationship with CFE, the Company
has licensed two other films domestically through other distributors. See
"Business-- Legal Proceedings."
Management of the Company anticipates that the majority of the total
estimated revenue for the Company will be from licensing to foreign
distributors. The Company attends film markets such as the Cannes Film Festival
to promote and license its films to territories such as Germany, South Korea,
Latin America and Spain. As of January 31, 1997, the Company has not licensed
films in some major territories such as Japan and Scandinavia. Although there
can be no assurances, the Company hopes to have licensing agreements in these
territories by December 1997. As of January 31, 1997, the Company has a backlog
of foreign sales orders of approximately $2,988,000.
The Company generally amortizes film costs using the
individual-film-forecast computation method, under which film costs are
amortized for each film in the proportion that revenue recognized during the
current period for the film bears to management's estimate of the total film
revenue to be realized from all media and markets for that film. Film costs
include acquisition costs, print and advertising costs (including costs for
advertising which is intended to benefit the films in other markets such as home
video or television), and, with respect to home video, the costs of
manufacturing (if applicable) and distributing the motion picture. Management
regularly reviews and revises its revenue estimates for each film, which may
result in a change in the rate of amortization and a write-down of the asset
(thereby affecting stockholders' equity and the Company's gross profit).
13
<PAGE>
The Company's unamortized film costs are comprised as of the dates set
forth below of the following:
<TABLE>
<CAPTION>
July 31, 1995 January 31, 1996 July 31, 1996 January 31, 1997
------------- ---------------- ------------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Film costs, net............. $ -- $3,694 $9,200 $6,725
</TABLE>
The Company believes gross film revenue with respect to a motion
picture is typically realized in the first few years following the film's
availability. As of January 31, 1997, approximately 70% of film costs have been
amortized for films available for delivery prior to July 31, 1996.
RESULTS OF OPERATIONS
The table sets forth, for the periods indicated, the percentage of
total revenues represented by certain items included in the Statement of
Operations.
<TABLE>
<CAPTION>
Years Ended Six Months Ended
July 31, January 31,
----------------------- ----------------------
1996 1995 1997 1996
--------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Film Revenue 100.0% - 100.0% -
Amortization of Film Costs 61.3 - 79.0 -
Gross Margin 38.7 - 21.0 -
Selling, General and Administrative 28.7 - 10.8 -
Expenses
Interest, Net (4.4) - (1.9) -
Income Before Income Taxes 6.9 - 8.2 -
Benefit (Provision) for taxes (1.0) - 0.7 -
Minority Interests (3.3) - (10.7) -
Net Income (Loss) 2.6 - (1.8) -
</TABLE>
YEAR ENDED JULY 31, 1996 COMPARED TO INCEPTION (MAY 10, 1995) THROUGH JULY 31,
1995
Film revenue. Film revenue for the year ended July 31, 1996 was $2.626 million.
For the period from inception in May 1995 to July 31, 1995 there was no revenue
recognized. There were four films available for foreign and domestic
distribution in FY 1996. During FY 1995, the Company's efforts were directed to
production of films and start-up of the Company. Approximately 74.6% of the
Company's film revenue for the year ended July 31, 1996 was attributable to one
film released in the period.
Film Amortization. Film amortization primarily represents the amortization of
the Company's film costs. Film amortization was $1.610 million in FY 1996 and
there was no amortization for the period ended July 31, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to approximately $0.755 million for FY 1996
from approximately $0.032 for FY 1995, which represented only three months.
During FY 1995, which represented only three months, the Company's efforts were
directed to production of films and start-up of the Company.
Interest. Interest expense for the year ended July 31, 1996 increased to
approximately $0.117 million from $0 for the period ended July 31, 1995. The
increase was primarily attributable to the increase in stockholders' advances
used to fund production efforts.
SIX MONTHS ENDED JANUARY 31, 1997 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1996
Film revenue. Film revenue for the six months ended January 31, 1997 increased
to approximately $4.030 million from no revenues for the comparable period in
1996. The film revenue in 1997 was primarily attributable to the availability of
seven movies for both foreign and domestic distribution at some period in the
six months ended January 31, 1997 compared to no movies available for the
comparable period in 1996. Approximately 48.5% of the Company's film revenue
during the six months ended January 31, 1997 was attributable to one of the
films initially released during the period. In addition, the
14
<PAGE>
Company expects to increase the backlog of sales to foreign territories and upon
delivery a significant portion of the existing and increased backlog,
recognizing revenue accordingly in the final two quarters of 1997.
Film Amortization. Film amortization primarily represents the amortization of
the Company's film costs. Film amortization increased from $3.185 million during
the six month period ended January 31, 1996 compared to no expense for the six
month period ended January 31, 1996. The increase was due to the increase in the
Company's revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to approximately $0.436 million for the six
months ended January 31, 1997 from approximately $0.333 for the six months ended
January 31, 1996. For each six month period ended January 31, 1996 and 1997, the
total selling, general and administrative costs, in absolute dollars were
approximately $1.0 million. However, in connection with the production and
pre-release marketing efforts during the six months ended January 31, 1996, the
Company capitalized certain selling, personnel and administrative costs
attributable to the production or initial marketing of films. During the six
months ended January 31, 1997, less costs were capitalized as the Company's
selling, personnel and administrative costs were allocated to both production
and selling efforts for previously released films. The Company expects selling,
general and administrative expenses, in absolute dollars, to remain level in the
near future.
Interest. Interest expense for the six months ended January 31, 1997 increased
to approximately $0.077 million from approximately $0.042 million for the
corresponding period in 1996. The 239% percent increase was primarily
attributable to the increase in stockholders' advances used to fund production
efforts. Interest expense, as a percentage of advances due to stockholders, was
consistent for each period.
Provision (Benefit) for Income Taxes. The benefit for income taxes for the six
month period ended January 31, 1997 decreased to $0.027 million from $0.155
million. The 82.8% decrease was attributable to a smaller operating loss for the
six months ended January 31, 1997 as compared to the corresponding period in
1996. The effective rate remained relatively constant, net of usage of net
operating loss carryforwards, of pre-tax income for the six months ended January
31, 1996 and for the six months ended January 31, 1997.
Minority Interests. Minority interests represents the pro-rata portion (based on
revenues of films financed by minority interests) of amounts due minority
limited partners in excess of their initial investment in the Company's limited
partnerships subsidiaries. Minority interest increased to $0.429 million during
the six month period ended January 31, 1997 compared to no expense for the six
month period ended January 31, 1996 due to the increase in the Company's
revenues for the applicable three films.
INFLATION.
The Company believes that inflation, including periodic increases in
movie admission and video rental prices, has not had a material impact on the
Company's financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception on May 10, 1995, the Company has satisfied its
liquidity requirements principally through advances and equity financing
provided from its shareholders or investments from the sale of limited
partnership interests in two limited partnerships. The Company's cash flow from
operating, investing, and financing activities for FY 1995 and FY 1996 and for
the six-month periods ended January 31, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
July 31, January 31,
1995 1996 1996 1997
-------------- --------------- -------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Cash Flow Provided by (Used in):
Operating activities $ (32) $ 2,186 $ 344 $ 3,165
Investing activities - (10,810) (3,674) (710)
Financing activities 500 8,155 6,405 (2,160)
</TABLE>
15
<PAGE>
As set forth above, cash flows provided by financing (primarily equity
and advances provided by shareholders and investments in limited partnership
interests in its subsidiaries) and cash provided from operating activities
(mostly film revenues in domestic and international markets) have been
sufficient to cover cash flows used for the Company's investing activities
(primarily the Company's film acquisition and production costs). The Company
experienced positive cash flow from operations of $3.165 million for the six
months ending January 31, 1997. As the Company increases the number of films it
acquires or produces, it can be expected that net negative cash flow from
investing will continue to be offset, in part by cash flows provided by cash
flows provided by operating activities.
The Company will continue to be significantly dependent upon its
ability to deliver movies to its customers. As of July 31, 1996, the Company had
licenses with its customers for approximately $7.357 million, of which
approximately $3.134 million was collected. The remaining $4.223 million of
backlog will be collected at various periods depending on license terms between
the Company and its customers and when movies are delivered. As the Company
continues its selling efforts in film markets such as Cannes, America Film
Market and Milan International Film, backlog is expected to increase, offset by
collections upon delivery of movies to its customers.
The Company actively seeks to acquire motion pictures to produce and
distribute. The Company's ability to acquire suitable films has, in the past,
been limited by its ability to raise capital through subsidiaries (see
"Financing of Motion Picture Production - Limited Partnerships") and its
founding stockholders ability to provide adequate capital. The founding
stockholders do not currently intend to make any further advances or investments
to the Company.
The Company has no material commitments for capital expenditures at
July 31, 1996 and January 31, 1997.
The Company believes that its existing capital resources, together with
the proceeds of this Offering, will enable the Company to maintain its
operations and working capital requirements for at least twelve (12) months.
However, it is possible that additional financing will be required to fund
further growth in the Company's business beyond the next 12 months whether
through equity financing, debt financing or other sources. There can be no
assurance that such sources of financing will be available, or will be available
on terms acceptable to the Company. Inability to obtain additional financing
could limit the Company's ability to produce motion pictures, retain writers,
directors and other artistic elements, purchase rights to books, screenplays and
other artistic properties, or take other actions that would benefit the Company
and its stockholders and could therefore have a material adverse effect on the
Company.
BUSINESS
MOTION PICTURE INDUSTRY OVERVIEW
GENERAL
The motion picture industry consists of two principal activities:
production, which involves the development, financing and production of motion
pictures; and distribution, which involves the promotion and exploitation of
feature-length motion pictures in a variety of media, including theatrical
exhibition, home video, television and other ancillary markets, both
domestically and internationally. The United States motion picture industry is
dominated by the "major" studios, including The Walt Disney Company, Paramount
Pictures Corporation, Warner Brothers, Inc., MCA, Twentieth Century Fox,
Columbia Pictures, Tri-Star Pictures and MGM/UA. The major studios are typically
large diversified corporations that have strong relationships with creative
talent, exhibitors and others involved in the entertainment industry and whose
libraries of motion pictures provide a stable source of earnings which offset
the variations in the financial performance of their motion picture releases and
other aspects of their motion picture operations. The major studios have
historically produced and distributed the vast majority of high grossing
theatrical motion pictures released annually in the United States.
In recent years, "independent" films have been successfully marketed
and have received commercial acclaim. Of the five pictures nominated for "best
picture" in 1996, four, Fargo, The English Patient, Shine and Secrets and Lies,
are independent films. In addition, an independent film, The English Patient,
won the Oscar for the Best Picture of 1996. Furthermore, the major recipients of
Oscar nominations were independent films rather than the films produced by the
larger studios. The public's acceptance of these movies not produced by a major
studio indicates that companies such as the Company can be competitive in an
industry that traditionally has been dominated by the larger studios. Harvey
Weinstein, co-Chairman of Miramax, the New York based and Disney-owned company,
commented that the Oscar nominations indicate "that there are actually two movie
businesses now: the big studio event movies and the smaller, more innovative
independent film." He added that all the nominations "have one thing in common:
they were writer-driven with good sound stories." The
16
<PAGE>
results of the 1996 Oscars further solidify the importance of independent film
makers. The independent studios earned most of the major Oscars, including, best
picture, best actor, best actress, best supporting actress, and best director.
The Company has also profited from the success of the independent film
companies in 1996. Since the nominations were announced, management of the
Company has been able to speak with well-known actors, actresses, and directors
about working with the Company to develop independent productions. In the past,
these people would not have discussed any possible projects with the Company.
However, management of the Company believes that the success of the independents
in 1996 may be the beginning of a cycle from which the Company will be able to
benefit. Management of the Company believes that over time the Company can
develop a solid reputation for producing quality, market-accepted lower-budget
movies.
MOTION PICTURE PRODUCTION AND FINANCING
The production of a motion picture begins with the screenplay
adaptation of a popular novel or other literary work acquired by the producer or
the development of an original screenplay having its genesis in a story line or
scenario conceived or acquired by the producer. In the development phase, the
producer typically seeks production financing and tentative commitments from a
director, the principal cast members and other creative personnel. A proposed
production schedule and budget are also prepared during this phase. Upon
completing the screenplay and arranging financing commitments, pre-production of
the motion picture begins. In this phase, the producer engages creative
personnel to the extent not previously committed; finalizes the filming schedule
and production budget; obtains insurance and secures completion guaranties, if
necessary; establishes filming locations and secures any necessary studio
facilities and stages; and prepares for the start of actual filming. For the
Company, principal photography (the actual filming of the screenplay) generally
extends from three to six weeks, depending upon such factors as budget,
location, weather and complications inherent to the screenplay. This varies
considerably from the major studios which may be in principal photography for as
long as 30 to 40 weeks. Following completion of principal photography in what is
typically referred to as post-production, the motion picture is edited,
opticals, dialogue, music and any special effects are added, and voice, effects
and music sound tracks and pictures are synchronized. This results in the
production of the negative from which release prints of the motion picture are
made.
Production costs consist of acquiring or developing the screenplay,
film studio rental, principal photography, post-production and the compensation
of creative and other production personnel. Distribution expenses, which consist
primarily of the costs of advertising and preparing release prints, are not
included in direct production costs. The major studios generally fund production
costs from cash flow generated by motion picture and related activities or, in
some cases, from unrelated businesses or through off-balance sheet methods.
Substantial overhead costs, consisting largely of salaries and related costs of
the production staff and physical facilities maintained by the major studios,
also must be funded. Independent production companies generally avoid incurring
overhead costs as substantial as those incurred by the major studios by hiring
creative and other production personnel and retaining the other elements
required for pre-production, principal photography and post-production
activities on a picture-by-picture basis. Sources of funds for independent
production companies may include bank loans, "pre-licensing" of distribution
rights, equity offerings and joint ventures. Independent production companies
generally attempt to obtain all or a substantial portion of their financing of a
motion picture prior to commencement of principal photography, at which point
substantial production costs begin to be incurred and require payment.
"Pre-Licensing" of film rights is often used by independent film
companies to finance all or a portion of the direct production costs of a motion
picture. By "pre-licensing" film rights, a producer obtains amounts from third
parties in return for granting such parties a license to exploit the completed
motion picture in various markets and media. Production companies with
distribution divisions may retain the right to distribute the completed motion
picture either domestically or in one or more international markets. Other
production companies may separately license theatrical, home, video, television
and all other distribution rights among several licensees. See "Business --
Financing of Motion Picture Production."
In connection with the production and distribution of a motion picture,
major studios and independent production companies often grant contractual
rights to actors, directors, screen writers, and other creative and financial
contributors to share in revenues or net profits (as defined in their respective
agreements) from such motion picture. Except for the most sought-after talent,
these third-party participations are generally payable after all distribution
fees, marketing expenses, direct production costs and financing costs are
recouped in full.
17
<PAGE>
MOTION PICTURE DISTRIBUTION
General
-------
Distribution of a motion picture involves domestic and international
licensing of the picture for (a) theatrical exhibition, (b) non-theatrical
exhibition, which includes airlines, hotels and armed forces facilities, (c)
video cassettes, (d) presentation on television, including pay-per-view, pay,
network, syndication or basic cable and (e) marketing of the other rights in the
picture and underlying literary property, which may include books, merchandising
and soundtracks. In recent years, revenues from the licensing of rights to
distribute motion pictures in ancillary (i.e., other than domestic theatrical)
markets, particularly home video and international pay and free television, have
increased significantly.
The distributor typically acquires rights from the producer to
distribute a motion picture in one or more markets and/or media. For its
distribution rights, the distributor generally agrees to pay to the producer a
certain minimum advance or guarantee upon the delivery of the completed motion
picture, which amount is to be recouped by the distributor out of revenues
generated from the distribution of the motion picture in particular media or
territories. After the distributor has recouped the amount advanced (if any)
plus its distribution costs, the distributor is then entitled to retain ongoing
distribution fees computed as a percentage of the gross revenues generated from
its distribution of the picture. The producer is thereafter entitled to receive
all remaining revenues in excess of the ongoing distribution fee retained by the
distributor.
A substantial portion of a film's ultimate revenues are generated in a
film's initial distribution cycle (generally the first five years after the
film's initial domestic theatrical release). Commercially successful motion
pictures, however, may continue to generate revenues after the film's initial
distribution cycle from the relicensing of distribution rights in certain media,
including television and home video, and from the licensing of distribution
rights with respect to new media and technologies.
Below is a summary of the potential distribution cycle of a motion
picture. It is important to realize that the distribution cycle of a motion
picture varies from picture to picture and from company to company. The Company,
as a small independent film company, anticipates that many, if not all, of its
films will not be released in theaters and instead, will be released, if at all,
on television or other similar media. The movie industry is highly competitive,
and there is no guarantee that any of the Company's movies will be released in
any media, or if released, will be able to generate enough revenues to recoup
the direct negative costs associated with the movie's production. See
"--Competition" and "Risk Factors--Risks of Motion Picture Production."
Theatrical
----------
The theatrical distribution of a motion picture involves the licensing
and booking of the motion picture to theatrical exhibitors, the promotion of the
picture through advertising and publicity campaigns and the manufacture of
release prints from the film negative. Expenditures on these activities,
particularly on promotion and advertising, are often substantial and may have a
significant impact on the ultimate success of the film's theatrical release.
Moreover, as the vast majority of these costs (primarily advertising costs) are
incurred prior to the first weekend of the film's domestic theatrical release,
there is not necessarily a correlation between these costs and the film's
ultimate box office performance. In addition, the ability to distribute a
picture during peak exhibition seasons, including the summer months and the
Christmas holidays, may affect the theatrical success of the picture.
While arrangements for the exhibition of a film vary greatly, there are
certain fundamental economic relationships applicable to domestic theatrical
distribution. Theater owners (the "exhibitors") retain a portion of the
admission paid at the box office ("gross box office receipts"). The share of the
gross box office receipts retained by an exhibitor generally includes a fixed
amount per week (in part to cover overhead), plus a percentage of receipts that
escalates over time. The balance ("gross film rentals") is remitted to the
distributor. The distributor then retains a distribution fee from the gross film
rentals and recoups the costs incurred in distributing the film which consist
primarily of the cost of advertising and the cost of release prints for
exhibition. The balance of gross film rentals, after deducting distribution fees
and any additional distribution costs recouped by the distributors ("net film
rentals"), is then remitted to the producer of the film.
18
<PAGE>
Home Videos
-----------
A motion picture typically becomes available for videocassette
distribution within four to six months after its initial domestic theatrical
release. Home video distribution consists of the promotion and sale of video
cassettes to local, regional and national video retailers which rent or sell
video cassettes to consumers primarily for home viewing.
Television
----------
Television rights are generally licensed first to pay-per-view for an
exhibition period within six to nine months following initial domestic
theatrical release, then to pay television approximately twelve to fifteen
months after initial domestic theatrical release, thereafter in certain cases to
free television for an exhibition period, and then to pay television again.
These films are then syndicated to either independent stations or basic cable
outlets. Pay-per-view allows subscribers to pay for individual programs. Pay
television allows cable television subscribers to view such services as HBO,
Cinemax, Showtime, The Movie Channel or Encore Media Services offered by their
cable system operators for a monthly subscription fee. Since groups of motion
pictures are typically packaged and licensed as a group for exhibition on
television over a period of time, revenues from these television licensing
"packages" may be received over a period that extends beyond five years from the
initial domestic theatrical release of a particular film. Motion pictures are
also "packaged" and licensed for television broadcast in international markets.
Non-Theatrical and Other Rights
-----------------'--------------
Films may be licensed for use by airlines, schools, public libraries,
community groups, the military, correctional facilities, ships at sea and
others. Music contained in a film may be licensed for sound recording, public
performance and sheet music publication. Rights in motion pictures may be
licensed to merchandisers for the manufacture of products such as video games,
toys, T-shirts, posters and other merchandise. Rights may also be licensed to
create novelizations of the screenplay and other related book publications.
International Markets
---------------------
In addition to their domestic distribution activities, motion picture
producers and distributors generate substantial revenues from distribution of
motion pictures in international markets (in the same media in which films are
distributed in the domestic market).
COMPANY HISTORY
The Company was organized under the laws of the State of Delaware in
May 1995. The Company is engaged in the acquisition, development, financing,
production, distribution and licensing of motion pictures for exhibition in
domestic and international theatrical markets and for subsequent worldwide
release in different media, including, but not limited to, home video and pay
and free television. The Company was incorporated in Delaware in May 1995. Harry
Shuster, the Company's Chairman, has produced or co-produced 20 movies during
the past 25 years. Brian Shuster, President and Chief Executive Officer of the
Company, has been involved in various aspects of film production for
approximately 15 movies during the past eight years. See "Management."
During the Company's first two years of operations, the Company has
completed production of eight films, consisting of The Secret Agent Club, Prey
of the Jaguar, Blood Money, The Elevator, Firestorm, Chase Morran, Santa with
Muscles, and Skeletons. Santa with Muscles was released in movie theaters in
November 1996; Chase Morran was released in February 1997 on the SCI-Fi channel;
and Skeletons was released on HBO in April 1997. Prey of the Jaguar, Blood
Money, and Firestorm have been licensed by HBO from CFE, but release dates have
not yet been determined. See "Business--Financing of Motion Picture Production."
The other movies are expected to be distributed by the end of the year. In
addition, the Company is currently in pre-production of several films, one of
which is Rear View Mirror, which should be completed in August 1997 and released
in calendar 1998. All of the films produced by the Company to date have been in
a budget range of between $540,000 and $3,200,000. See "--Motion Picture
Production" for the Company's current slate of motion picture projects.
To produce a project, the Company first acquires the rights to a story,
book or script ("property"). The Company then typically secures a financing or
production commitment for the project from third parties, such as private
investors, studios, and distributors, prior to expending substantial funds in
the development process. However, the Company does advance its own funds to meet
the interim costs of development and production which amounts are generally
repaid to the
19
<PAGE>
Company pursuant to the production contracts. See "Business--Financing of Motion
Picture Production" for a description of the Company's financing activities.
STRATEGIC OBJECTIVE
The Company's strategy is to (i) develop long-term relationships with
talent who have demonstrated the ability to attract widespread audience
interest, both domestically and in significant international markets, (ii) seek
to limit the financial risk to the Company inherent in any one motion picture
project while preserving potential returns through the strategic use of
long-term distribution agreement with companies such as HBO covering the United
States and Canada, and their respective territories, possessions, and
protectorates (the "Domestic Territories") as well as such foreign distributors
such as Highlight Communications (Germany), Saehan/Hollyvision/Digital Media
(South Korea), Consorcio Europa Serviano Ribiero (Brazil), Manga Films (Spain)
and Italian International Films (Italy), and (iii) exercise strong management
control of production costs of its motion pictures, as well as of general
overhead.
The Company's principal goal is to produce and arrange for the release
of three to five commercially successful low-budget motion pictures per year.
Although there can be no assurances, the Company believes that over time these
films will become the core of a library of films which management believes have
the capacity of generating revenues from their worldwide exploitation in
existing and future media and markets. The Company, as a small independent film
company, anticipates that many, if not all of its films, will not be released in
theaters but instead, will be released on cable television, television and other
similar media.
The Company attempts to balance the financial risk in its productions
with the potential return from exploitation of the rights in its motion pictures
by entering into selective, strategic financing and distribution arrangements
with certain domestic and international distributors. These distributors provide
advances and minimum guarantees in return for the right to distribute the
Company's motion pictures in the licensed territory or media. Generally, the
Company's goal is to receive licensing advances and guarantees (referred to
herein as "prelicensing") in an amount equal to a substantial percentage of the
aggregate direct negative cost of its motion pictures and, in this way, arrange
for distribution of the Company's motion pictures without incurring the
substantial overhead or financial risk often associated with distribution.
Management believes, based upon its experience, that it can obtain
advances from pre-licensing pursuant to distribution agreements in an amount
equal to a substantial percentage of the aggregate direct negative cost of each
motion picture. However, there can be no assurance with respect to any
particular motion picture that such advances will equal such film's direct
negative cost.
The Company attempts to strictly control the cost of each motion
picture through active management involvement in all phases of the production
process. Management is actively involved in the budgeting process, including the
development of economic assumptions used in determining whether a particular
project is approved for production.
Management of the Company believes that its extensive experience in the
motion picture industry will enable the Company to control and maintain its
general overhead expenditures at appropriate levels given its production
schedule. For each motion picture that is approved for production, additional
personnel are employed to work on that motion picture only, and the costs of
these personnel are included in the budgeted cost for such motion picture.
Management of the Company believes that there will be adequate qualified
personnel available from time to time to meet the Company's needs for additional
personnel. As a result, when no motion pictures are in production, the Company
maintains a relatively small staff (currently 11 full-time employees), which
management believes is sufficient to conduct the Company's current business
activities. Management intends to keep its permanent, full-time staff members
needed to operate the Company on a day-to-day basis at a small number in order
to keep its fixed overhead expenses low. See "Business--Employees."
MOTION PICTURE PRODUCTION
Much of the Company's first two years of operations was spent acquiring
the rights to and developing motion picture projects, as well as producing eight
motion pictures. The Company has completed production of eight motion pictures
to date, consisting of: The Secret Agent Club, Prey of the Jaguar, Blood Money,
The Elevator, Firestorm, Chase Morran, Santa with Muscles, and Skeletons. In
addition, as indicated below, the Company has several projects in
pre-production, one of which is entitled Rear View Mirror, which has an
anticipated completion date August 1997 and should be released in calendar 1998.
The aggregate direct negative costs of the Company's eight completed films was
approximately $10,000,000.
20
<PAGE>
<TABLE>
<CAPTION>
Completed and Pending Motion Picture Productions
Title Major Creative Elements Storyline Release Date
----- ----------------------- --------- ------------
<S> <C> <C> <C>
Skeletons Director: David DeCoteau After suffering a heart attack, a Pulitzer Released on HBO in
(Prey of the Jaguar, Puppet Prize winning journalist relocates his family April 1997.
Master 3, Lady Avenger) to a picture perfect town in Maine. When he
becomes involved in a murder investigation he
Cast: Ron Silver discovers the evil truth behind the town.
(Time Cop, Reversal of Since the 19th Century, the residents have
Fortune) kept the outside world away by murdering
anyone who attempts to infiltrate their
James Coburn pristine village.
(Maverick, Eraser)
Christopher Plummer
(12 Monkeys, Wolf)
Santa with Muscles Director: John Murlowski When a small town falls victim to the devious Released domestically
(Automatic, Amityville: A New plans of an arch villain, they must turn to in November 1996.
Generation, The Secret Agent the only person capable of helping
Club) them...Santa Claus. Two weeks before
Christmas, a miracle arrives in the form of a
Cast: Hulk Hogan mysterious stranger -- who is convinced he is
(No Holds Barred, Suburban the real Santa Claus. In no time at all,
Commando, Mr. Nanny, The criminals are quaking in fear and the town
Secret Agent Club) begins to come alive again.
The Elevator Directors: Arthur Borman A desperate young writer traps a movie mogul To be released
(...And God Spoke) in an elevator in order to read him a series domestically by the
of shorts that he had written. end of 1997.
Nigel Dick
(Private Investigations)
Rafal Zielinski
(Fun)
Cast: Martin Landau
(Ed Wood, Crimes and
Misdemeanors)
Martin Sheen
(The American President,
Apocalypse Now)
The Secret Agent Director: John Murlowski Ray (Hulk Hogan) leads a double life. Known To be released
Club (Automatic, Amityville: A New by his community and son as a clumsy toy domestically by the
Generation, Santa with Muscles) store owner, he is really the best secret end of 1997.
agent in 1997. America. After returning from
Tibet and seizing the most powerful weapon
Cast: Hulk Hogan ever invented, Ray is kidnapped by evil-doers
(No Holds Barred, Suburban who want the weapon to control the universe.
Commando, Mr. Nanny, With help from his friend, Ray's son locates
Santa with Muscles) the super-weapon and rescues Ray.
21
<PAGE>
Title Major Creative Elements Storyline Release Date
----- ----------------------- --------- ------------
Prey of the Jaguar Director: David DeCoteau Damien Bandera escapes from prison and To be released
(Skeletons, Puppet Master 3, murders the family of Special Operations domestically by the
Lady Avenger) agent Derek Leigh, the man who put him in end of 1997.
prison. Filled with grief, Leigh assumes the
Cast: Stacy Keach identity of JAGUAR, a fantasy super-hero, to
(Escape from L.A., Up in upon seek revenge upon Bandera and his entire
Smoke, The Heart is a Lonely operation.
Hunter)
Blood Money Director: John Shepphird Lester Grisam escapes from prison and holds To be released
(Firestorm, Teenage Bonnie & hostage the girlfriend of the man who domestically by the
Klepto Clyde) testified against him. Grisam demands a end of 1997.
ransom of $100,000. However, as the plot
Cast: James Brolin unfolds it becomes apparent that the man's
(The Amityville Horror, girlfriend was quite different than how she
Westworld) appeared.
Chase Morran Director: Gilbert Po A psychotic criminal escapes from the highest Released on the
(Magnificent Scoundrel) security prison of the 24th Century in a SCI-FI network in
stolen shuttle. He lands on Dome 4, a small February 1997.
Cast: Bruce Campbell and peaceful space colony. Within minutes he
(Army of Darkness, McHale's kills the head of security, enslaves the
Navy) residents and takes control of the Dome. His
plans begin to fall apart, when Chase Morran,
a peacekeeper from Earth, arrives on Dome 4
to surprise his wife.
Firestorm Director: John Shepphird In the early 21st Century, on the planet To be released
(Firestorm, Teenage Bonnie & Markus 4, a group of androids capable of domestically by the
Klepto Clyde, Blood Money) human feelings and emotions are enslaved by a end of 1997.
heartless villain named Brinkman (John
Cast: John Savage Savage). Tarmac, the android leader starts a
(White Squall, The Onion rebellion to free his people aided by an
Field) employee of Brinkman's.
Rear View Mirror Director: David DeCoteau A housewife finds out her husband is cheating Not yet in production.
(Skeletons, Prey of the on her. She kills her husband and becomes a Scheduled to be
Jaguar, Puppet Master 3, fugitive with a man with a secret. completed in August
Lady Avenger) 1997 and released in
the first half of 1998.
Cast: Lorraine Bracco (Someone
to Watch Over Me,
GoodFellas)
John Heard
(Home Alone, Home Alone2:
Lost in New York)
</TABLE>
There can be no assurance that the Company will be able to complete any
future pictures or that future pictures will be completed in accordance with the
anticipated schedules or budgets, as the production, completion and distribution
of motion pictures is subject to numerous uncertainties, including financing
requirements, personnel availability and the release schedule of competitive
films. There also is no assurance that the Company's motion pictures will be
profitable and enable the Company to recoup its direct negative costs. See
"--Competition" and "Risk Factors--Risks of Motion Picture Production."
22
<PAGE>
FINANCING OF MOTION PICTURE PRODUCTION
General
Prior to the commencement of production of a motion picture, the
Company attempts to enter into license agreements with distributors pursuant to
which distributors acquire the right to distribute such motion picture (or
series of motion pictures pursuant to an output agreement) in a certain
geographic territory and media for a specific term. In consideration for these
distribution rights, the distributor is typically required to pay the producer a
fixed amount upon delivery of the motion picture to the distributor ("Minimum
Guarantee"). Once the distributor has recouped an amount equal to its Minimum
Guarantee and costs of distribution, the distributor is entitled to retain
ongoing distribution fees computed as a percentage of the gross revenues
generated from the distribution of the motion picture. The Company is thereafter
entitled to receive all remaining revenues generated from distribution of the
picture in such territory in excess of the ongoing distribution fee retained by
the distributor. In connection with each license agreement, the Company also
receives an advance generally equal to 20% of the Minimum Guarantee (the
"Advance"). The Company typically utilizes the Advance toward the production
costs of the motion picture.
Distribution Agreements
From 1995 to the present, the Company entered into both domestic and
foreign licensing agreements. The Company has been able to license each of its
motion pictures, including the pictures that are still in pre-production. Among
the licensees of the Company's motion pictures are Cabin Fever Entertainment,
Inc. ("CFE") and HBO (United States), Highlight Communications (Germany),
Saehan/Hollyvision/Digital Media (Korea), Consorcio Europa Serviano Ribiero
(Brazil), Manga Films (Spain), and Italian International Films (Italy). Revenues
received by the Company pursuant to its licensing agreements during the fiscal
years ended July 31, 1995 and 1996 were $0 and $2.626 million, respectively.
However, revenues are only realized at the time the motion pictures are
delivered to the respective licensee. Backlogs, which indicate the revenues that
will be realized upon delivery of the motion pictures, were $0 and $5.448
million, respectively, for the same periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Limited Partnerships
In addition to the licensing agreements and the advances thereunder,
the Company also raised approximately $4,105,000 in connection with the sale of
limited partnership interests in two (2) limited partnerships, HEP I, L.P. ("HEP
I") and HEP II, L.P. ("HEP II") (collectively, the "Partnerships") of which the
Company is the sole general partner. The third party limited partners of HEP I
and HEP II invested an aggregate of $1,050,000 and $3,000,000, respectively, in
the Partnerships. The Company also invested $1,200,000 as a limited partner in
HEP I. HEP I partners financed and participate in the exploitation of the movie
The Secret Agent Club. HEP II partners financed and participate in the
exploitation of the movies Santa with Muscles and Skeletons. Pursuant to the
distribution agreement between the Company and the Partnerships, the
Partnerships are entitled to receive revenue collected from sales net of a 20%
distribution fee and selling expenses not to exceed $75,000 per film
(collectively, "Net Partnership Revenue"). Pursuant to terms of the limited
partnership agreements, ninety-nine percent (99%) of Net Partnership Revenue is
to be distributed to the limited partners and one percent (1%) to the Company as
the sole general partner until the limited partners have received 110% of their
original investment. After the limited partners have been disbursed their
original investment plus ten (10%) percent, the distribution of Net Partnership
Revenue is to be distributed equally between the general partner and the limited
partners as a group. Both Partnerships terminate when the limited partners
receive a return equal to 200% of their investment.
United Leisure Corporation ("ULC"), a company in which Harry Shuster is
also Chairman of the Board, is one of two limited partners of HEP II. ULC
originally invested $1,500,000 in May 1996. In October 1996, the Company paid
each of HEP II's limited partners approximately $380,000 pursuant to HEP II's
partnership agreement and the Company's exploitation of Santa with Muscles and
Skeletons. See "Certain Relationships."
MAJOR CUSTOMERS
For the six months ended January 31, 1997, revenue from one customer
accounted for $1,290,000 or 32% of total revenues for the period. For the year
ended July 31, 1996, revenues from two customers accounted for $1,225,000 and
$275,000, or 47% and 10%, respectively, of total revenues for the year.
Management of the Company believes that it can negotiate new distribution
agreements on terms similar to those contained in existing agreements in the
event that any such existing agreement is terminated or expires. Accordingly,
management of the Company believes that the profitability of the Company is not
dependent on any single customer.
23
<PAGE>
EMPLOYEES
The Company, like other independent production companies, does not
maintain a substantial staff of creative or technical personnel. Management of
the Company believes that sufficient motion picture properties and creative and
technical personnel (such as screenwriters, directors and performers) are
available in the market at acceptable prices to enable the Company to produce as
many motion pictures as it currently plans or anticipates, at the level of
commercial quality the Company may require.
At June 4, 1997, the Company employed a total of 11 full-time
employees. The Company also hires additional employees on a picture-by-picture
basis in connection with the production of the Company's motion pictures. The
salaries of these additional employees, as well as the salaries of certain
full-time employees of the Company who provide direct production services, are
typically allocated to the capitalized cost of the related pictures. The Company
and certain of its subsidiaries are subject to the terms in effect from time to
time of various industry-wide collective bargaining agreements, including the
Writers Guild of America, the Directors Guild of America, the Screen Actors
Guild and the International Alliance of Theatrical Stage Employees. A strike,
job action or labor disturbance by the members of any of these organizations may
have a material adverse effect on the production of a motion picture within the
United States. None of the Company's full-time employees are represented by a
labor union. The Company believes that its current relationship with its
employees is satisfactory.
COMPETITION
Motion picture production and distribution are highly competitive. The
competition comes from both companies within the same business and companies in
other entertainment media which create alternative forms of leisure
entertainment. The Company's competition for the acquisition of literary
properties, the services of performing artists, directors, producers and other
creative and technical personnel and production financing includes several
"major" film studios including, but not limited to, The Walt Disney Company,
Paramount Pictures Corporation, MCA, Columbia Pictures, Tri-Star Pictures,
Twentieth Century Fox, Warner Brothers Inc. and MGM/UA, which are dominant in
the motion picture industry, as well as numerous independent motion picture and
television production companies, television networks and pay television systems.
Many of these organizations with which the Company competes have significantly
greater financial and other resources than does the Company. In addition, the
Company's films compete for audience acceptance and exhibition outlets with
motion pictures produced and distributed by other companies, including motion
pictures distributed by CFE, HBO and the Company's foreign distributors. As a
result, the success of any of the Company's films is dependent not only on the
quality and acceptance of that particular film, but also on the quality and
acceptance of other films.
PROPERTIES
The Company leases office space in Westwood, California. The total
office space is approximately 3,446 square feet. The leases expire on various
dates through June 30, 2001. Total rental on the office space is $9,477 per
month. The office building is owned by 1990 Westwood Blvd, Inc., which is a
private corporation, of which Harry Shuster, the Company's Chairman, is a
majority shareholder. See "Certain Relationships."
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings that could have a
material adverse affect on the Company's operations or financial condition. It
is anticipated that from time to time it will be subject to claims, suits and
complaints that arise in the ordinary course of business. A substantial portion
of the Company's film revenue since its inception on May 10, 1995 has been
derived from transactions with Cabin Fever Entertainment, Inc. ("CFE"). The
Company licensed domestic rights to CFE for seven movies. In November 1996,
after the Company already delivered the seven films licensed, CFE refused to
accept delivery of the last of the seven movies. The relationship between the
Company and CFE has subsequently deteriorated, resulting in a lawsuit wherein
the Company claims damages for copyright infringement, breach of contract and
fraud. The case was filed in federal district court in New York in the first
quarter of 1997. CFE did not answer the complaint but instead moved to dismiss
the copyright claim, which is the basis for federal jurisdiction. If CFE is
successful on its motion, the Company intends to move forward with the remaining
contract and fraud claims in state court. Subsequent to the deterioration of the
relationship with CFE, the Company has licensed two other films domestically
through other distributors.
24
<PAGE>
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Harry Shuster....................................... 60 Chairman
Brian Shuster....................................... 39 President, Chief Executive Officer, Director
David M. Kane....................................... 34 Chief Financial Officer and Secretary
J. Brooke Johnston, Jr.............................. 57 Director
George Folsey, Jr................................... 52 Director
</TABLE>
Harry Shuster has been Chairman of the Company since its inception in
May 1995. Mr. Shuster has been Chairman, President and Chief Executive Officer
of United Leisure Corporation ("United Leisure"), a publicly-traded leisure time
services company, for over 20 years. Mr. Shuster also acts as an independent
consultant and as Chairman, President and Chief Executive Officer of Grand
Havana Enterprises, Inc., a publicly traded company formed in 1993, that
operates private membership cigar rooms. In 1990, Lion Country Safari, Inc.,
California, a subsidiary of United Leisure, in connection with major litigation
with its landlord, was forced to seek protection under the United States
Bankruptcy Code by the filing of a voluntary petition under Chapter 11 of such
Code. By filing the petition, the subsidiary was able to protect its assets from
the claims of the landlord. The bankruptcy petition has been dismissed by
stipulation of the parties, but the litigation still is pending.
Brian Shuster has served as Chief Executive Officer, President and a
director of the Company since its inception in May 1995. Since he has been with
the Company, Mr. Shuster has served as the producer of seven films. Prior to
joining the Company, he served as President of Beverly Hills Producers Group, a
private production company, where he produced one motion picture, served as
executive producer of another motion picture, and oversaw production of three
other motion pictures. From 1990 until 1993, he served as vice president of
Worldwide Entertainment Group, where he produced three motion pictures. Mr.
Shuster also is a director of United Leisure.
David M. Kane has served as Secretary and Chief Financial Officer of
the Company since March 1997. Mr. Kane has also been the Chief Financial Officer
of two other public companies since March 1997, Grand Havana Enterprises, Inc.
and United Leisure. See "Certain Relationships." From July 1995 until March 1997
he was director of finance for Virgin Records America, Inc., a private record
company. From May 1994 until June 1995, he was controller of Hemdale Home Video,
Inc., a public video and foreign programming distributor. From October 1992
until May 1994, Mr. Kane was a senior accountant in the audit division for
Kenneth Leventhal & Company, Los Angeles, California. From June 1991 until
December 1991, he was a financial analyst for Walt Disney Imagineering, Inc.,
Glendale, California. From June 1987 until May 1991, Mr. Kane was a senior
accountant in the audit division for Arthur Andersen & Co., Los Angeles,
California.
J. Brooke Johnston, Jr. has been a director of the Company since April
1997. Since April 1996, Mr. Johnston has served as Senior Vice President and
General Counsel of MedPartners, Inc., a physician practice management company.
Prior to joining MedPartners, Inc., Mr. Johnston was a senior principal in the
law firm of Haskell Slaughter Young & Johnston, Professional Association,
Birmingham, Alabama, where he practiced corporate and securities law for over
seventeen years. Before joining Haskell Slaughter, Mr. Johnston practiced law in
New York, New York and at another firm in Alabama. Mr. Johnston is a member of
the Alabama State Bar and the New York and American Bar Associations. Mr.
Johnston is a member of the Board of Directors of United Leisure. See "Certain
Relationships."
George Folsey, Jr. has been a director of the Company since April 1997.
Mr. Folsey is the son of the late Hollywood cinematographer, George Folsey, who
received fourteen Academy Award nominations. After graduating from Pomona
College, Mr. Folsey worked as an editor at KABC-TV in Los Angeles and formed a
company that filmed and edited all the filmed segments of Laugh-In. Mr. Folsey's
work as a film editor includes: Animal House; The Blues Brothers; Coming to
America; Michael Jackson's Thriller; Bulletproof; the American version of
Michelangelo Antonioni's The Passenger; and re-editing The Great Santini and
John Duigan's Romero. Among Mr. Folsey's producing credits are: An American
Werewolf in London; Trading Places; Spies Like Us; Thriller; Clue; Greedy; The
Three Amigos; Into the Night; and Grumpier Old Men. He is currently producing a
TV pilot based on the motion picture Fargo. After fifteen years of
25
<PAGE>
partnership with director John Landis, Mr. Folsey was asked, in 1988, to become
Chairman of QSound Labs, a Canadian corporation specializing in sound
enhancement and localization, where he continues to serve as a member of the
Board of Directors. Mr. Folsey also is a member of the Directors Guild of
America and a member of the Board of Directors of Paulist Productions, which
produced Romero.
Harry Shuster is the father of Brian Shuster. There are no other
relationships between the executive officers and the directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation for the Chief Executive
Officer of the Company. No other executive officer received remuneration in
excess of $100,000 for the fiscal year ended July 31, 1996 (the "Named
Executive"):
SUMMARY COMPENSATION TABLE
Annual
Compensation
Name and Principal Position Year Salary (1)
--------------------------- ---- ----------
Brian Shuster 1996 $90,000
President and Chief 1995(2) $12,500
Executive Officer
----------
(1) Mr. Shuster was paid as a consultant for the two years stated above.
(2) The amount paid for 1995 was for the period from May 1995 through July
1996.
DIRECTOR COMPENSATION
Each non-employee director of the Company receives options to purchase
10,000 shares of Common Stock upon his election to the Board of Directors plus
reimbursement of reasonable expenses for each meeting they attend. The options
vest in equal quarterly installments on the anniversary date of the grant date
over four years. The exercise price of the options is equal to the fair market
value of the Common Stock as of the grant date.
1997 STOCK OPTION PLAN
The Company has a Stock Option Plan that is designed to provide
incentive to officers, key employees, consultants, and directors of the Company
or the Company's subsidiaries. There are 360,000 shares of Common Stock
authorized for issuance under the plan, and to date options to purchase 20,000
shares have been issued under the plan in May 1997.
Under the plan, such persons may be granted, at the discretion of the
Board or the Compensation Committee, options at an exercise price equal to at
least 100% of the fair market value of the Common Stock covered by the option on
the grant date, as determined by the Board or the Compensation Committee. In
addition, non-employee Directors of the Company are automatically granted
options to purchase 10,000 shares of Common Stock on the date they become
Directors. Options granted under the plan may be incentive stock options or
non-statutory stock options. Options granted under the plan become immediately
exercisable upon a "change of control" of the Company, as defined in the plan.
26
<PAGE>
EMPLOYMENT CONTRACTS; TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
On April 1, 1997, the Company entered into a three year employment
agreement with Brian Shuster, the Company's President, Chief Executive Officer
and a director. The agreement is for a term of three years and provides for an
annual salary of Two Hundred Six Thousand Four Hundred Dollars ($206,400),
subject to annual increases at the sole discretion of the Board of Directors.
The agreement is terminable by the Company for good cause including, but not
limited to, dishonesty, improper disclosure of confidential information, or
neglect of duties under certain circumstances. The agreement is also terminable
by Mr. Shuster for any reason upon 60 days written notice. The agreement is
binding upon any successor corporation to the Company and may have the effect of
discouraging, delaying, or preventing a change of control of the Company.
CERTAIN RELATIONSHIPS
The Company leases certain of its executive office space at a rental of
$9,477 per month, from a corporation of which Harry Shuster, the Company's
Chairman of the Board, is the majority shareholder. The Company is advised that
the rental paid by the Company for its Westwood, California executive offices is
no more favorable to Mr. Shuster than could have been obtained in a similar
location from an unrelated third party.
Between June 2, 1995 and June 27, 1996, the founders of the Company
lent the Company approximately $3,184,333, of which $1,809,333 remained
outstanding at January 31, 1997. The loans were made to fund the Company's
operations and bore interest at the rate of 7% per annum. The interest expense
for these loans was $114,038. The balance of the loans will be repaid out of the
proceeds from this Offering. See "Use of Proceeds."
In April 1996, United Leisure Corporation ("ULC") acquired fifty
percent of the limited partnership interests in HEP II, L.P. ("HEP II") for a
capital contribution of $1,500,000. HEP II made an initial capital distribution
to ULC of $379,500 on July 25, 1996. The Company is the general partner of HEP
II. Harry Shuster, the Chairman of the Board of the Company, is the Chairman of
the Board and the Chief Executive Officer of ULC, and Brian Shuster, the
President, Chief Executive Officer and a director of the Company, is a director
of ULC. In addition, J. Brooke Johnston, Jr. is a director of both the Company
and ULC. See "Business--Limited Partnerships."
On July 9, 1996, ULC made a loan to HEP II of $250,000, which loan was
repaid in October 1996. ULC made an additional loan to HEP II of $500,000 on
July 22, 1996, which loan was repaid on July 25, 1996.
As a general rule, all transactions among the Company and its officers,
directors or 5% or greater stockholders have been, and in the future will be,
made on terms no less favorable than terms available form unaffiliated third
parties.
27
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information with respect to (i)
each director of the Company, (ii) the Named Executive, (iii) all directors and
executive officers of the Company as a group at June 4, 1997, including the
number of shares of Common Stock beneficially owned by each of them, and (iv)
each person known by the Company to own beneficially or of record more than 5%
of the outstanding shares of Common Stock. Unless otherwise indicated below, the
business address of each individual is the same as the address of the Company's
principal executive offices.
<TABLE>
<CAPTION>
Prior to the Offering After the Offering
--------------------- ------------------
Number of Number of
Shares Shares
Beneficially Beneficially
Beneficial Owner Owned Percentage(1) Owned Percentage(1)(2)
---------------- ------------ ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Harry Shuster(3) 500,000 16.7% 500,000 13.2%
Brian Shuster(4) 750,000 25.0% 750,000 19.7%
J. Brooke Johnston(5) 0 * 0 *
George Folsey, Jr.(6) 0 * 0 *
Executive Officers and Directors as a Group 1,250,000 41.7% 1,250,000 32.9%
(5 people)
5% Shareholders
---------------
Stanley Shuster(7) 500,000 16.7% 500,000 13.2%
Stephen J. Drescher(8) 750,000 25.0% 750,000 19.7%
Nadine Belfort(9) 750,000 25.0% 750,000 19.7%
</TABLE>
- ----------
* Less than one percent.
(1) Based on 3,000,000 shares outstanding and shares issuable upon the
exercise of options or warrants that are exercisable within 60 days of
June 4, 1997 which are deemed to be outstanding for the purpose of
computing the percentage of outstanding stock owned by such persons
individually and by each group of which they are a member, but are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Includes 800,000 shares to be issued in connection with this Offering,
but does not include any shares issuable upon exercise of the
Underwriter's over-allotment option.
(3) Chairman of the Company.
(4) President, Chief Executive Officer and a director of the Company.
Includes 250,000 shares of Common Stock held by a trust of which Mr.
Shuster is the sole trustee and 250,000 shares of Common Stock held by
a trust of which Mr. Shuster is a co-trustee with Stanley Shuster. Mr.
Shuster disclaims beneficial ownership of the shares of Common Stock
held by this trust.
(5) Director of the Company. Mr. Johnston's address is 3000 Galeria Tower,
Suite 1000, Birmingham, Alabama 35244.
(6) Director of the Company. Mr. Folsey's address is 350 North Cliffwood
Avenue, Los Angeles, California 90049-2618.
(7) Consists of 250,000 shares of Common Stock held by a trust of which Mr.
Shuster is the sole trustee and 250,000 shares of Common Stock held by
a trust of which Mr. Shuster is a co-trustee with Brian Shuster. Mr.
Shuster disclaims beneficial ownership of the shares of Common Stock
held by this trust. Mr. Shuster's address is 1990 Westwood Boulevard,
Penthouse, Los Angeles, California 90025
(8) Held by a trust of which Stephen J. Drescher is the sole trustee. Mr.
Drescher disclaims beneficial ownership of the shares of Common Stock
held by this trust. Mr. Drescher's address is 101 West 67th Street,
Penthouse 2B, New York, New York 10023. Mr. Drescher does not have any
management and/or consulting role with the Company.
(9) Ms. Belfort's address is 3830 Woodside Avenue, Long Island City, New
York 11104.
28
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue up to 20,000,000 shares of Common
Stock, par value $0.01 per share, 3,000,000 shares of which were issued and
outstanding as of June 4, 1997 and were owned by approximately seven holders of
record. In addition, the Company is authorized to issue up to 3,000,000 shares
of preferred stock, $0.01 par value (the "Preferred Stock"). As of June 4, 1997,
there were no shares of Preferred Stock outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to the rights of holders
of Preferred Stock (if there are any shares outstanding), the holders of Common
Stock are entitled to receive such dividends as may be declared from time to
time by the Board of Directors out of funds legally available therefor and in
the event of liquidation, dissolution or winding-up of the Company, to share
ratably in all assets remaining after payment of all liabilities. The holders of
Common Stock have no preemptive or conversion rights and are not subject to
further calls or assessments by the Company. There are no redemption or sinking
fund provisions applicable to the Common Stock.
PREFERRED STOCK
The Articles of Incorporation of the Company provide that the Board of
Directors may issue an aggregate of 3,000,000 shares of Preferred Stock from
time to time in one or more series. As of June 4, 1997, there were no shares of
Preferred Stock outstanding.
The Board of Directors is authorized to determine, among other things,
with respect to each series of Preferred Stock which may be issued: (i) the
dividend rate, conditions and preferences, if any; (ii) whether dividends will
be cumulative and, if so, the date from which dividends will accumulate; (iii)
whether, and to what extent, the holders of a series will enjoy voting rights,
if any, in addition to those prescribed by law; (iv) whether and upon what
terms, a series will be convertible into or exchangeable for shares of any other
class of capital stock or other series of Preferred Stock; (v) whether, and upon
what terms, a series will be redeemable; (vi) whether a sinking fund will be
provided for the redemption of a series and, if so, the terms and conditions of
the sinking fund; and (vii) the preference if any, to which a series will be
entitled on voluntary or involuntary liquidation, dissolution or winding up of
the Company. With regard to dividends, redemption and liquidation preference,
any particular series of Preferred Stock may rank junior to, on a parity with,
or senior to any other series of Preferred Stock and Common Stock. The Board of
Directors, without shareholder approval, can issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of the
holders of Common Stock. The issuance of Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change of
control of the Company or other corporate action. The Board of Directors could
issue Preferred Stock having terms that could discourage an acquisition attempt
or other transaction that some, or a majority, of the stockholders, might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then market price of such stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Chase Mellon
Shareholder Services, Los Angeles, California.
Shares Eligible for Future Sale
Prior to this Offering, there has been no public market for the Common
Stock. Sales of substantial amounts of shares of Common Stock in the public
market could adversely affect market prices of the shares and make it more
difficult for the Company to sell equity securities in the future at a time and
price it deems appropriate.
Upon completion of the Offering, there will be 3,800,000 shares of
Common Stock outstanding, excluding (a) an aggregate of 120,000 shares issuable
upon exercise of the over-allotment option; and (b) an aggregate of 360,000
shares reserved for issuance pursuant to the Company's 1997 Stock Option Plan.
Of these shares, the 800,000 shares sold in this Offering and the maximum of
120,000 shares issuable upon full exercise of the over-allotment option will be
freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended, (the "Securities Act"), except for any such
shares purchased by an "affiliate" of the Company, which will be subject to the
resale limitations of Rule 144 under
29
<PAGE>
the Securities Act. As defined in Rule 144, an affiliate of the issuer is a
person who, directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with, such issuer, and
generally includes members of the Board of Directors and senior management.
The 3,000,000 shares outstanding as of the date of this Prospectus and
the 360,000 shares issuable upon exercise of stock options that have been or may
be granted under the 1997 Stock Option Plan are "restricted shares" as defined
in Rule 144 under the Securities Act ("Rule 144") (collectively, the "Restricted
Shares") and may not be sold without registration under the Securities Act
unless pursuant to an applicable exemption therefrom. In addition, the Company
expects to register under the Securities Act the shares reserved for issuance
under the 1997 Stock Option Plan.
In general, Rule 144 allows a stockholder who has beneficially owned
Restricted Shares for at least one year (including persons who may be deemed
"affiliates" of the Company under Rule 144) to sell a number of shares within
any three-month period that does not exceed the greater of (i) one percent of
the then outstanding shares of Common Stock (approximately 38,000 shares after
giving effect to this Offering) or (ii) the average weekly trading volume in the
Common Stock during the four calendar weeks immediately preceding such sale.
Sales under Rule 144 are also subject to certain requirements as to the manner
and notice of sale and the availability of public information about the Company.
A stockholder who is not an "affiliate" of the Company at any time during the 90
days immediately preceding a sale, and who has beneficially owned his shares for
at least two years (as computed under Rule 144), is entitled to sell such shares
under Rule 144 without regard to the volume and manner of sale limitations
described above. Rule 144A under the Securities Act permits the immediate sale
by the current holders of Restricted Shares of all or a portion of their shares
to certain qualified institutional buyers, as defined in Rule 144A.
In addition, subject to certain limitations on the aggregate offering
price of a transaction and other conditions, Rule 701 may be relied upon with
respect to the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants, or advisers prior to the date the
issuer becomes subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), pursuant to written compensatory
benefit plans or written contracts relating to the compensation of such persons.
The Securities and Exchange Commission has also indicated that Rule 701 will
apply to stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
the exercise of such options (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this Prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirement. As of the date of this Prospectus, options to purchase 20,000
shares were issued and outstanding as to which Rule 701 may apply.
DELAWARE ANTI-TAKEOVER LAW
The Company is governed by the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "GCL"), an anti-takeover law. In
general, the law prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
"Business combinations" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with its affiliates and associates, owns (or within
three years, did own) 15% or more of the corporation's voting stock.
The provisions regarding certain business combinations under the GCL
could have the effect of delaying or preventing a change in control of the
Company or the removal of existing management. A takeover transaction frequently
affords stockholders the opportunity to sell their shares at a premium over
current market prices.
30
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement between the Company and the Underwriters named below, for which
Millennium Securities Corp. is acting as Representative (a copy of which
agreement is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part), the Company has agreed to sell to each of the
Underwriters named below, and each of such Underwriters has severally agreed to
purchase, the number of shares of Common Stock set forth opposite its name. All
800,000 shares of Common Stock offered must be purchased by the several
Underwriters if any are purchased. The shares of Common Stock are being offered
by the Underwriters subject to prior sale, when, as and if delivered to and
accepted by the Underwriters and subject to approval of certain legal matters by
counsel and certain other conditions.
Underwriter No. of Shares
----------- -------------
Millennium Securities Corp.
Total 800,000
The Representative has advised the Company that the Underwriters
propose to offer the shares of Common Stock to the public at the offering prices
set forth on the cover page of this Prospectus. The Representative has further
advised the Company that the Underwriters propose to offer the Common Stock
through members of the National Association of Security Dealers, Inc. (the
"NASD"), and may allow a concession, in their discretion, to certain dealers who
are members of the NASD and who agree to sell the Common Stock in conformity
with the NASD Conduct Rules. Such concessions shall not exceed the amount of
underwriting discount that the Underwriters are to receive.
The Company has granted the Underwriters an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 120,000 shares of
Common Stock at the public offering price less the underwriting discounts set
forth on the cover page of this Prospectus (the "Over-Allotment Option"). The
Underwriters may exercise this option solely to cover over-allotments in the
sale of the shares of Common Stock offered hereby.
Officers and directors of the Company may introduce the Representative
to persons to consider this Offering and purchase shares of Common Stock either
through the Representative, other Underwriters, or through participating
dealers. In this connection, officers and directors will not receive any
commissions or any other compensation.
The Company has agreed to pay to the Underwriters a commission of ten
percent (10%) of the gross proceeds of the Offering, including the gross
proceeds from the sale of the Over-Allotment Option, if exercised. In addition,
the Company has agreed to pay to the Representative a non-accountable expense
allowance of three percent (3%) of the gross proceeds of this Offering. The
Company has paid to the Representative a $50,000 advance in respect of such
non-accountable expense allowance. The Representative's expenses in excess of
its non-accountable expense allowance will be paid by the Representative. To the
extent that the expenses of the Representative are less than the amount of the
non-accountable expense allowance received, such excess shall be deemed to be
additional compensation to the Representative.
The Company has agreed to engage the Representative as its investment
banker for a period of twelve (12) months on the first day of the month
following the closing of the Offering at an aggregate fee of $5,000 for eight
months for a total of $40,000. The Representative also has agreed, at the
Company's request, to provide advice and consulting services to the Company
concerning potential merger and acquisition and financing proposals, whether by
public financing or otherwise. The Company has agreed, at the closing of the
Offering, to enter into a merger and acquisition agreement with the
Representative. The merger and acquisition agreement will provide that the
Representative will be paid a finder's fee of five (5%) percent of the first
$5,000,000, four (4%) of next $5,000,000 and 3% of the excess, if any, over
$10,000,000 of the consideration received or paid to the other party by the
Company in any such transactions.
Holders of 3,000,000 shares of Common Stock have agreed not to sell any
of such Common Stock for a period of 24 months from the Effective Date, without
the prior written consent of the Representative. See "Description of Capital
Stock--Shares Eligible for Future Sale."
The Company has agreed to indemnify the Underwriters against any costs
or liabilities incurred by the Underwriters by reason of misstatements or
omissions to state material facts in connection with the statements made in the
Registration Statement and the Prospectus. The Underwriters have in turn agreed
to indemnify the Company against any liabilities by reason of misstatements or
omissions to state material facts in connection with the statements made in the
Registration Statement, of which this Prospectus is a part, based on information
relating to the Underwriters and furnished in writing by the Underwriters. To
the extent that these provisions may purport to provide exculpation from
possible liabilities arising under the federal securities laws, in the opinion
of the Securities and Exchange Commission, such indemnification is contrary to
public policy and therefore unenforceable.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement, which are filed as exhibits to the Registration
Statement. See "Additional Information."
PRICING OF THE OFFERING
Prior to this Offering, there has been no public trading market for the
Common Stock. Consequently, the initial offering price of the shares of Common
Stock has been determined by negotiations between the Company and the
Representative. Among the factors considered in determining the offering price
were the financial condition and prospects of the Company, the industry in which
the Company is engaged, certain financial and operating information of companies
engaged in activities similar to those of the Company and the general market
condition of the securities markets. The offering price does not necessarily
bear any relationship to any established standard or criteria of value based
upon assets, earnings, book value or other objective measures.
31
<PAGE>
The Company anticipates that the Common Stock will be listed for
quotation on the NASD Electronic Bulletin Board under the symbol "HITS," but
there can be no assurance that an active trading market will develop, even if
the Common Stock is accepted for quotation. The Underwriters intend to make a
market in the Common Stock.
CERTAIN PROVISIONS OF THE COMPANY'S
ARTICLES OF INCORPORATION AND BYLAWS
The Company's Articles of Incorporation provide that the liability of
directors for monetary damages shall be limited to the fullest extent
permissible under Delaware law. The Articles of Incorporation and the Company's
Bylaws provide for indemnification of its officers and Directors to the fullest
extent permitted under Delaware law. See "Risk Factors--Limitation on Director
Liability."
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered
hereby will be passed upon for the Company by the law firm of Richman, Lawrence,
Mann, Greene, Chizever, Friedman & Phillips, Beverly Hills, California. The law
firm of Beckman & Millman, P.C., New York, New York will pass upon certain
aspects of this Offering on behalf of the Underwriters.
EXPERTS
The audited financial statements of the Company as of July 31, 1995 and
1996 and for the fiscal years then ended are included herein and in the
registration statement in reliance upon the report of Moore Stephens, P.C.,
certified public accountants, as indicated in the reports with respect thereto,
and are included herein in reliance upon the authority of said firm as experts
in accounting and auditing.
32
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
United Film Distributors, Inc.
Los Angeles, California
We have audited the accompanying consolidated balance sheet of
United Film Distributors, Inc. and its subsidiaries as of July 31, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended, and for the period from May 10, 1995 [date of
inception] through July 31, 1995. 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 audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated 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 United Film Distributors, Inc. and its subsidiaries as of July 31,
1996, and the consolidated results of their operations and their cash flows for
the year then ended, and for the period from May 10, 1995 [date of inception]
through July 31, 1995, in conformity with generally accepted accounting
principles.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
November 15, 1996
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1 9 9 7 1 9 9 6
[UNAUDITED]
ASSETS:
<S> <C> <C>
Cash $ 295,774 $ --
Deposits 318,870 341,501
Deferred Tax Asset 26,658 --
Prepaid and Other Current Assets 7,556 7,556
Film Costs - Net 6,724,776 9,200,319
Equipment - Net 60,198 66,526
--------------- ----------------
TOTAL ASSETS $ 7,433,832 $ 9,615,902
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Cash Overdraft $ -- $ 160,687
Accounts Payable 35,003 187,987
Accrued Interest Payable - Stockholders 190,664 114,038
Income Taxes Payable 26,657 26,657
Deferred Income 204,050 508,050
Due to Affiliates -- 14,325
Advances from Stockholders 1,809,333 2,359,333
--------------- ----------------
TOTAL LIABILITIES 2,265,707 3,371,077
--------------- ----------------
COMMITMENT AND CONTINGENCIES [8] -- --
--------------- ----------------
MINORITY INTEREST 3,132,193 4,137,795
--------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred Stock, Authorized 3,000,000 Shares, Issued
and Outstanding -0- Shares, Par Value $.01 -- --
Common Stock, Authorized 20,000,000 Shares, Issued
and Outstanding 3,000,000 Shares, Par Value $.01 30,000 30,000
Paid-in Capital 2,040,666 2,040,666
Retained Earnings [Deficit] (34,734) 36,364
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 2,035,932 2,107,030
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,433,832 $ 9,615,902
=============== ================
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
F-2
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
--------------
MAY 10, 1995
------------
[DATE OF
--------
INCEPTION]
----------
SIX MONTHS ENDED YEAR ENDED THROUGH
---------------- ---------- -------
JANUARY 31, JULY 31, JULY 31,
----------- -------- --------
1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5
------- ------- ------- -------
[UNAUDITED] [UNAUDITED]
REVENUES:
<S> <C> <C> <C> <C>
Revenues - Completed Film Contracts $ 4,029,908 $ -- $ 2,626,000 $ --
---------------- --------------- ---------------- ---------------
EXPENSES:
General and Administrative Expenses 194,016 206,021 439,769 31,528
Film Festivals 117,283 74,914 252,753 --
Rent - Related Party 118,734 45,456 49,380 --
Depreciation on Equipment 6,328 6,326 12,653 --
Amortization - Film Cost 3,185,276 -- 1,609,466 --
---------------- --------------- ---------------- ---------------
TOTAL EXPENSES 3,621,637 332,717 2,364,021 31,528
---------------- --------------- ---------------- ---------------
OPERATING INCOME [LOSS] 408,271 (332,717) 261,979 (31,528)
---------------- --------------- ---------------- ---------------
INCOME AND [EXPENSES]:
Interest Income -- 8,200 11,608 --
Interest Expense -- -- (12,936) --
Interest Expense - Related Party (76,629) (41,589) (114,037) --
Other Income -- -- 35,730 --
---------------- --------------- ---------------- ---------------
OTHER [EXPENSES] - NET (76,629) (33,389) (79,635) --
---------------- --------------- ---------------- ---------------
INCOME [LOSS] BEFORE MINORITY INTEREST 331,642 (366,106) 182,344 (31,528)
MINORITY INTEREST (429,398) -- (87,795) --
---------------- --------------- ---------------- ---------------
[LOSS] INCOME BEFORE INCOME TAXES (97,756) (366,106) 94,549 (31,528)
BENEFIT [PROVISION] FOR INCOME TAXES 26,658 154,868 (26,657) --
---------------- --------------- ---------------- ---------------
NET [LOSS] INCOME $ (71,098) $ (211,238) $ 67,892 $ (31,528)
================ =============== ================ ===============
NET [LOSS] INCOME PER SHARE $ (.02) $ (.14) $ .03 $ (.03)
================ =============== ================ ===============
WEIGHTED AVERAGE NUMBER OF
SHARES 3,000,000 1,526,541 2,363,512 1,000,000
================ =============== ================ ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK RETAINED TOTAL
--------------- ------------ -------- -----
NUMBER OF NUMBER OF PAID-IN EARNINGS STOCKHOLDERS'
--------- --------- ------- -------- -------------
SHARES AMOUNT SHARES AMOUNT CAPITAL [DEFICIT] EQUITY
------ ------ ------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Contribution -- $ -- 1,000,000 $ 10,000 $ 43,333 $ -- $ 53,333
Net [Loss] for the period
May 10, 1995 [Date of
Inception] through
July 31, 1995 -- -- -- -- -- (31,528) (31,528)
----------- ---------- ----------- --------- ------------ ---------- -----------
BALANCE - JULY 31, 1995 -- -- 1,000,000 10,000 43,333 (31,528) 21,805
Issuance of Common Stock
September 1995 -- -- 1,000,000 10,000 43,333 -- 53,333
Issuance of Common Stock
October 1995 -- -- 343,687 3,437 671,563 -- 675,000
Issuance of Common Stock
November 1995 -- -- 138,493 1,385 270,615 -- 272,000
Issuance of Common Stock
February 1996 -- -- 178,207 1,782 348,218 -- 350,000
Issuance of Common Stock
March 1996 -- -- 89,104 891 174,109 -- 175,000
Issuance of Common Stock
June 1996 -- -- 250,509 2,505 489,495 -- 492,000
Net Income for the year ended
July 31, 1996 -- -- -- -- -- 67,892 67,892
----------- ---------- ----------- --------- ------------ ---------- -----------
BALANCE - JULY 31, 1996 -- -- 3,000,000 30,000 2,040,666 36,364 2,107,030
Net Loss for the six
months Ended
January 31, 1997 -- -- -- -- -- (71,098) (71,098)
----------- ---------- ----------- --------- ------------ ---------- -----------
BALANCE - JANUARY 31, 1997
[UNAUDITED] $ -- $ -- 3,000,000 $ 30,000 $ 2,040,666 $ (34,734) $ 2,035,932
=========== ========== =========== ========= ============ ========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
F-4
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
--------------
MAY 10, 1995
------------
[DATE OF
--------
INCEPTION]
----------
SIX MONTHS ENDED YEAR ENDED THROUGH
---------------- ---------- -------
JANUARY 31, JULY 31, JULY 31,
----------- -------- --------
1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5
------- ------- ------- -------
[UNAUDITED] [UNAUDITED]
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net Income [Loss] $ (71,098) $ (211,238) $ 67,892 $ (31,528)
---------------- --------------- ---------------- ---------------
Adjustments to Reconcile Net Income
[Loss] to Net Cash Provided by
[Used For] Operating Activities:
Amortization of Film Costs 3,185,276 -- 1,609,466 --
Depreciation 6,328 6,326 12,653 --
Deferred Tax Asset (26,658) -- -- --
Minority Interest 429,398 -- 87,795 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Prepaid Expenses -- (7,998) (7,556) --
Deposits from Film Contracts 22,631 141,409 (341,501) --
Equipment Purchases -- (66,526) (79,179) --
Increase [Decrease] in:
Accounts Payable (152,987) 126,846 187,987 --
Accrued Interest 76,629 41,589 114,037 --
Income Taxes Payable -- (155,942) 26,657 --
Deferred Income (304,000) 469,975 508,050 --
---------------- --------------- ---------------- ---------------
Total Adjustments 3,236,617 555,679 2,118,409 --
---------------- --------------- ---------------- ---------------
NET CASH - OPERATING ACTIVITIES -
FORWARD 3,165,519 344,441 2,186,301 (31,528)
---------------- --------------- ---------------- ---------------
INVESTING ACTIVITIES:
Capitalizable Assets -- -- (897,240) --
Film Advances - Net (709,733) (3,673,582) (9,912,545) --
---------------- --------------- ---------------- ---------------
NET CASH - INVESTING ACTIVITIES -
FORWARD (709,733) (3,673,582) (10,809,785) --
---------------- --------------- ---------------- ---------------
FINANCING ACTIVITIES:
Cash Overdraft (160,687) -- 160,687 --
Finance from Limited Partners (1,435,000) 4,050,000 4,050,000 --
Advances from Related Party (14,325) -- 14,325 --
Advances from Stockholders (550,000) 1,354,667 1,912,666 446,667
Collection on Stock Subscription -- 1,000,333 2,017,334 53,333
---------------- --------------- ---------------- ---------------
NET CASH - FINANCING ACTIVITIES -
FORWARD $ (2,160,012) $ 6,405,000 $ 8,155,012 $ 500,000
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
F-5
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
--------------
MAY 10, 1995
------------
[DATE OF
--------
INCEPTION]
----------
SIX MONTHS ENDED YEAR ENDED THROUGH
---------------- ---------- -------
JANUARY 31, JULY 31, JULY 31,
----------- -------- --------
1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5
------- ------- ------- -------
[UNAUDITED] [UNAUDITED]
<S> <C> <C> <C> <C>
NET CASH - OPERATING ACTIVITIES -
FORWARDED $ 3,165,519 $ 344,441 $ 2,186,301 $ (31,528)
NET CASH - INVESTING ACTIVITIES -
FORWARDED (709,733) (3,673,582) (10,809,785) --
NET CASH - FINANCING ACTIVITIES -
FORWARDED (2,160,012) 6,405,000 8,155,012 500,000
---------------- --------------- ---------------- ---------------
NET INCREASE [DECREASE] IN CASH 295,774 3,075,859 (468,472) 468,472
CASH - BEGINNING OF PERIODS -- 468,472 468,472 --
---------------- --------------- ---------------- ---------------
CASH - END OF PERIODS $ 295,774 $ 3,544,331 $ -- $ 468,472
================ =============== ================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ -- $ -- $ 12,936 $ --
Income Taxes $ -- $ -- $ -- $ --
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-6
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS
UNAUDITED]
- --------------------------------------------------------------------------------
[1] ORGANIZATION AND OPERATIONS
United Film Distributors, Inc. [formerly Hit Entertainment, Inc.] [the
"Company"] was incorporated under the laws of the State of Delaware on May 10,
1995. The Company is engaged in the development, production, and distribution of
motion pictures on a world-wide basis.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries Hit Productions, United
Film Distributors, HEP I, L.P. and HEP II, L.P. Amounts invested by and income
attributable to third party limited partners HEP I, L.P. and HEP II, L.P. are
presented as minority interest in the accompanying financial statements. All
other significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION - Amounts received as fees for projects in production are
deferred until the project becomes available for release in accordance with the
terms of the agreement and are recognized as revenues at such time. Revenues
from the sale of completed productions are recognized upon their sale.
CASH EQUIVALENTS - The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents. The
Company did not have any cash equivalents at July 31, 1996.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash. The Company places its cash with high credit quality financial
institutions. At times the cash in any one bank may exceed the FDIC $100,000
limit. At July 31, 1996, there was approximately $50,300 in financial
institutions which was subject to such risk. The Company does not require
collateral or other security to support financial instruments.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FILM COSTS AND AMORTIZATION - Film costs include the cost of completed projects,
costs of projects in production and costs expended on projects in development.
Film costs are stated at the lower of amortized cost or estimated net realizable
value. Amortization of completed projects is charged to operations on an
individual project basis in a ratio that the current year's revenue bears to
management's estimate of total revenues [current and future years] from all
sources. This is commonly referred to as the individual-film-forecast method.
Adjustments of amortization resulting from changes in estimates of total
revenues are recognized in the current year's amortization. When a completed
project is fully amortized, its cost and related accumulated amortization are
removed from the accounts. If, in the opinion of management, any property in the
development stage is not planned for use, the net carrying value of such
property is charged to current year's operations.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization of fixed assets
[consisting of furniture, and computer equipment] is provided on the
straight-line method over the estimated useful lives of the related assets which
range from three to seven years.
STOCK OPTIONS ISSUED TO EMPLOYEES - The Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation"
on January 1, 1996 for financial statement note disclosure purposes and will
continue to apply the intrinsic value method of Accounting Principles Board
["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees" for financial
reporting purposes.
F-7
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #2
[INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS
UNAUDITED]
- --------------------------------------------------------------------------------
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
OPERATIONS IN FOREIGN COUNTRIES - The Company is subject to numerous factors
relating to conducting business in a foreign country [including, without
limitation, economic, political and currency risks] any of which could have a
significant impact on the Company's operations.
MINORITY INTEREST - Minority interest represents the amount due to outside
parties for their investment in the financing of the films through the Company's
two limited partnership subsidiaries. For the six months ended January 31, 1997
and the year ended July 31, 1996, the amount due to the minority interest
shareholders was $3,132,193 and $4,137,795, respectively.
EARNINGS PER SHARE - Earnings per share are computed based on the weighted
average number of shares outstanding during each period presented. Common stock
equivalents are included in the computation when there effect is considered
dilutive.
[3] EQUIPMENT
Equipment consists of the following:
January 31, July 31,
----------- --------
1 9 9 7 1 9 9 6
------- -------
Computer Equipment $ 23,433 $ 23,433
Office Equipment 55,746 55,746
-------------- ---------------
Totals 79,179 79,179
Less: Accumulated Depreciation 18,981 12,653
-------------- ---------------
TOTAL - NET $ 60,198 $ 66,526
----------- ============== ===============
Depreciation expense for the six months ended January 31, 1997 and the year
ending July 31, 1996 was $6,328 and $12,653, respectively.
[4] FILM COSTS
Film costs consist of the following:
January 31, July 31,
----------- --------
1 9 9 7 1 9 9 6
------- -------
Completed Projects $ 8,671,897 $ 4,221,003
Less: Accumulated Amortization 4,794,742 1,609,466
-------------- ---------------
Net of Amortization 3,877,155 2,611,537
Productions in Progress 2,847,621 6,588,782
-------------- ---------------
TOTALS $ 6,724,776 $ 9,200,319
------ ============== ===============
Based on management's present estimate of future revenues at July 31, 1996,
substantially all of the unamortized costs of completed projects will be
amortized by July 31, 1998.
F-8
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3
[INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS
UNAUDITED]
- --------------------------------------------------------------------------------
[5] RELATED PARTY TRANSACTIONS
LEASES - The Company leases office space from a related party, an entity whose
major stockholder is also a major stockholder of the Company [See Note 8]. The
rent expense for the year ended July 31, 1996 and the six months ended January
31, 1997 was $147,747 and $63,750, respectively.
ADVANCES - The Company received advances from two stockholders and or entities
affiliated with the stockholders to fund its operations. Interest payable at
July 31, 1996 and interest expense on these advances for the year then ended
amounted to $114,038. Interest was calculated at 7% interest during the period.
It is anticipated that these advances will be repaid from an initial public
offering [See Note 12].
[6] FAIR VALUE OF FINANCIAL INSTRUMENTS
At its inception, the Company adopted SFAS No. 107, fair value of financial
instruments which requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed therein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
<TABLE>
<CAPTION>
January 31, 1997 July 31, 1996
----------------------------- ---------------------
Carrying Carrying
-------- --------
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Advances from Stockholders $ 1,809,333 $ 1,809,333 $ 2,359,333 $ 2,359,333
Accrued Interest Payable - Stockholders 190,664 212,381 114,038 145,430
-------------- --------------- -------------- ---------------
$ 1,999,997 $ 2,021,714 $ 2,473,371 $ 2,504,763
============== =============== ============== ===============
</TABLE>
For certain financial instruments, including cash, trade receivables and
payables and short-term debt, the carrying amount approximates fair value
because of the near term maturities of such obligations. Interest was calculated
on all debt at 7% per annum. The prime rate at July 31, 1996 was 8-1/4%.
[7] INCOME TAXES
Temporary differences between financial reporting and tax bases of assets and
liabilities related to depreciation, vacation and sick pay accruals are
immaterial.
Provision for income taxes has been made as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
--------------
MAY 10, 1995
------------
[DATE OF
--------
SIX MONTHS INCEPTION]
---------- ----------
ENDED YEAR ENDED THROUGH
----- ---------- -------
JANUARY 31, JULY 31, JULY 31,
----------- -------- --------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
<S> <C> <C> <C>
Income [Loss] Before Income Taxes $ (97,756) $ 94,548 $ (31,528)
Net Operating [Loss] Carryforward -- (31,528) --
------------ ------------ ------------
TAXABLE [LOSS] INCOME $ (97,756) $ 63,020 $ (31,528)
--------------------- ============ ============ ============
Federal Income Tax $ 33,237 $ (20,840) $ --
State Income Tax 9,023 (5,817) --
Tax Benefit Reserve (15,602) -- --
------------ ------------ ------------
TOTAL INCOME TAX BENEFIT [EXPENSE] $ 26,658 $ (26,657) $ --
---------------------------------- ============ ============ ============
</TABLE>
F-9
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4
[INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS
UNAUDITED]
- --------------------------------------------------------------------------------
[7] INCOME TAXES [CONTINUED]
A reconciliation between the statutory federal income tax rate and the effective
income tax rates is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
----------
ENDED YEAR ENDED
----- ----------
JANUARY 31, JULY 31,
----------- --------
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Statutory Federal Income Tax Rate (34.0)% 34.0 %
State and Local Taxes, Net of Federal Tax Benefits (9.2)% 9.2 %
Net Operating [Loss] Carryforward -- (15.0)%
Tax Benefit Reserve 16.0 % -- %
EFFECTIVE INCOME TAX RATE (27.2)% 28.2 %
------------------------- ========= =========
</TABLE>
[8] COMMITMENTS AND CONTINGENCIES
The Company's leases office from a related party at a monthly rental of $9,477
per month. The lease term expires June 30, 2001 [See Note 5].
Future minimum lease payments are as follows:
1997 $ 127,500
1998 119,075
1999 46,200
2000 46,200
2001 46,200
Thereafter 42,350
------------
Total $ 427,525
----- ============
[9] SIGNIFICANT CUSTOMERS
For the six months ended January 31, 1997, revenue from one customer amounted to
$1,290,000 or 32% of total revenues. Revenues from two customers accounted for
$1,225,000 and $275,000, or 47% and 10%, respectively, of total revenues for the
year ended July 31, 1996.
[10] FOREIGN SALES
Export sales for the six months ended January 31, 1997 and the year ended July
31, 1996, are principally concentrated in the following areas:
SIX MONTHS
----------
ENDED YEAR ENDED
----- ----------
JANUARY 31, JULY 31,
----------- --------
1 9 9 7 1 9 9 6
------- -------
Asia $ 543,850 $ 486,000
South America $ 32,970 $ 275,000
Europe $ 1,071,238 $ 495,500
These amounts collectively account for 41% and 48%, respectively, of total
revenues for the six months ended January 31, 1997 and the year ended July 31,
1996.
F-10
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5
[INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS
UNAUDITED]
- --------------------------------------------------------------------------------
[11] NEW AUTHORITATIVE PRONOUNCEMENT
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company. The FASB deferred some
provisions of SFAS No. 125, which are not expected to be relevant to the
Company.
The FASB issued SFAS No. 128, "Earnings Per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure" in February 1997. SFAS No.
128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
[12] SUBSEQUENT EVENTS [UNAUDITED]
[A] PROPOSED INITIAL PUBLIC OFFERING - The Company is offering for public sale
800,000 common shares at $5.00 per share. Although no assurance can be given
that the offering will be successful, the Company intends to utilize the net
proceeds from the proposed offering of approximately $3,073,000 to develop,
produce and distribute movies, to repay certain indebtedness, and for general
working capital needs.
The following supplementary earnings per share reflects on a pro forma basis the
repayment of indebtedness of $2,000,000 and the resulting reduction of interest
expense and increase in net income as if it had taken place at the beginning of
the respective periods.
Six months ended Year ended
---------------- ----------
January 31, July 31,
----------- --------
1 9 9 7 1 9 9 6
------- -------
[Loss] Income $ (27,572) $ 132,665
=============== ==============
[Loss] Income Per Share $ (.01) $ 0.05
=============== ==============
Number of Shares 3,000,000 2,313,512
=============== ==============
[B] STOCK SPLIT - In May of 1997, the Company declared a five-for-one stock
split. All share data has been retroactively restated for the split.
F-11
<PAGE>
UNITED FILM DISTRIBUTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6
[INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JANUARY 31, 1997 AND 1996 IS
UNAUDITED]
- --------------------------------------------------------------------------------
[12] SUBSEQUENT EVENTS [UNAUDITED] [CONTINUED]
[C] EMPLOYMENT AGREEMENT - On April 1, 1997, the Company entered into a three
year employment agreement with the Company's president and chief executive
officer and a director. The agreement is for a term of three years and provides
for an annual salary of two hundred six thousand four hundred dollars
[$206,400]. Subject to annual increases at the sole discretion of the Board of
Directors.
[D] STOCK OPTION PLAN - In May of 1997, the Board of Directors adopted the 1997
Stock Option Plan, whereby, the aggregate number of shares which may be issued
upon exercise of options shall not exceed 360,000 shares. Any nonemployee
director, employee or consultant of the Company shall be eligible to be granted
options. On May 28, 1997, the Board of Directors granted two directors 10,000
options each at an option price of $5.00 per share and expire May 28, 2007.
[13] UNAUDITED INTERIM STATEMENTS
The financial statements as of January 31, 1997 and for the six months ended
January 31, 1997 and 1996 are unaudited; however, in the opinion of management
all adjustments [consisting solely of normal recurring adjustments] necessary in
order to make the interim financial statements not misleading have been made.
The results of the interim periods are not necessarily indicative of the results
to be obtained for a full fiscal year.
. . . . . . . . . .
F-12
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation provide that the liability of
Directors for monetary damages shall be limited to the fullest extent
permissible under Delaware law. The Articles and the Company's Bylaws provide
for indemnification of its officers and Directors to the fullest extent
permitted under Delaware law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable in connection with
the registration of the Common Stock that is the subject of this Registration
Statement, all of which shall be borne by the Company. All the amounts shown are
estimates except for the Securities and Exchange Commission registration fee and
the National Association of Securities Dealers listing and filing fees.
<TABLE>
<CAPTION>
To Be Paid By
-------------
Registrant
----------
<S> <C>
Securities and Exchange Commission registration fee............... $1,394
National Association of Securities Dealers filing fee............. 960
Blue sky fees and expenses........................................ *
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... 90,000
Miscellaneous..................................................... *
-------------
Total......................................................... $ *
=============
</TABLE>
----------
*To be filed by Amendment
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant has sold the following unregistered securities:
1. In connection with the Company's organization in June 1995, the
registrant sold 1,000,000 shares of Common Stock to one of its
founders, Ms. Nadine Belfort, for approximately $.05 per share. The
transaction was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act").
2. In September 1995, the registrant sold 1,000,000 shares of Common Stock
to its other founder, Mr. Harry Shuster, for approximately $.05 per
share. The transaction was exempt from registration under Section 4(2)
of the Securities Act.
3. In October 1995, the registrant sold 132,382 and 211,303 shares of
Common Stock to Mr. Harry Shuster and Ms. Nadine Belfort, respectively,
for approximately $1.96 per share. The transactions were exempt from
registration under Section 4(2) of the Securities Act.
4. In November 1995, the registrant sold 138,493 shares of Common Stock to
Mr. Harry Shuster for approximately $1.96 per share. The transaction
was exempt from registration under Section 4(2) of the Securities Act.
5. In February 1996, the registrant sold 50,916 and 127,291 shares of
Common Stock to Mr. Harry Shuster and Ms. Nadine Belfort, respectively,
for approximately $1.96 per share. The transactions were exempt from
registration under Section 4(2) of the Securities Act.
II-1
<PAGE>
6. In March 1996, the registrant sold 89,104 shares of Common Stock to Ms.
Nadine Belfort for approximately $1.96 per share. The transaction was
exempt from registration under Section 4(2) of the Securities Act.
7. In June 1996, the registrant sold 178,208 and 72,301 shares of Common
Stock to Mr. Harry Shuster and Ms. Nadine Belfort, respectively, for
approximately $1.96 per share. The transactions were exempt from
registration under Section 4(2) of the Securities Act.
The numbers of shares and exercise prices set forth above reflect a
5-for-1 stock split effective in May 1997.
ITEM 27. EXHIBITS.
(a) The following is a list of exhibits furnished:
<TABLE>
<CAPTION>
Exhibit Page
------- ----
Number Exhibit Number
------ ------- ------
<S> <C>
1.1 Form of Underwriting Agreement**
1.2 Letter of Intent between the Company and Millennium Securities Corp.*
3.1 Restated Articles of Incorporation*
3.2 Certificate of Amendment of Certificate of Incorporation**
3.3 Bylaws*
4.1 Specimen Stock Certificate**
5 Opinion of Counsel as to legality of the securities being
registered**
10.1 Employment Agreement between the Company and Brian Shuster dated
April 1, 1997*
10.2 Revolving Demand Note between the Company and Harry Shuster**
10.3 Revolving Demand Note between the Company and Nadine Belfort**
10.4 Lease agreement between the Company and 1990 Westwood Blvd., Inc.
dated July 1, 1995 and Addendum to Lease dated November 1, 1996*
10.5 Lease Agreement between the Company and 1990 Westwood Blvd., Inc.
dated July 1, 1996 and Addendum to Lease dated November 1, 1996*
10.6 1997 Stock Option Plan*
10.7 Distribution Agreement between the Company and HEP I, L.P. dated July
17, 1995*
10.8 Distribution Agreement between the Company and HEP II, L.P. dated
March 4, 1996*
10.9 Agreement of Limited Partnership of HEP I, L.P. dated as of July 17,
1995*
10.10 Agreement of Limited Partnership of HEP II, L.P. dated as of March 4,
1996*
10.11 Amendment No. 1 to Agreement of Limited Partnership of HEP II, L.P.
dated as of April 23, 1996*
21.1 List of Subsidiaries*
23.1 Consent of independent accountants*
23.2 Consent of counsel (included as part of Exhibit 5)**
24.1 Power of attorney (included as part of signature page)
27.1 Financial Data Schedule*
- ---------------
* Filed herewith.
** To be filed by amendment.
</TABLE>
II-2
<PAGE>
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To provide to the Underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act
of 1933, as amended (the "Securities Act"), the information omitted from the
form of prospectus filed as part of a registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the registration statement as of the time it was declared
effective.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California on June 12, 1997.
UNITED FILM DISTRIBUTORS, INC.
By: /s/ Brian Shuster
-----------------------------
Brian Shuster
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Brian Shuster and David M. Kane, and each
of them, his attorney-in-fact with power of substitution for him in any and all
capacities, to sign any amendments, supplements, subsequent registration
statements relating to the offering to which this Registration Statement
relates, or other instructions he deems necessary or appropriate, and to file
the same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact or his substitute may do or cause to be done by
virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
/s/ Brian Shuster President, Director and Chief June 12, 1997
--------------------------- Executive Officer (Principal
Brian Shuster Executive Officer)
/s/ Harry Shuster Chairman and Director June 12, 1997
---------------------------
Harry Shuster
/s/ David M. Kane Chief Financial Officer and June 12, 1997
--------------------------- Secretary (Principal Financial
David M. Kane Officer)
/s/ J. Brooke Johnston, Jr. Director June 12, 1997
------------------------------
J. Brooke Johnston, Jr.
/s/ George Folsey, Jr. Director June 12, 1997
---------------------------
George Folsey, Jr.
</TABLE>
II-4
MILLENNIUM SECURITIES CORP.
United Films Distributors, Inc. June 11, 1997
1990 Westwood Boulevard
Penthouse
Los Angeles, California 90025
Re: Proposed Public Offering of United Films Distributors, Inc.
(the Company") Pursuant to a Registration Statement (the
"Registration Statement") under The Securities Act of 1933,
as amended (the "Act")
Gentlemen:
We are pleased to submit this Letter of Intent with respect to a
proposed public offering (the "Offering") by the Company of 800,000 Shares of
its Common Stock (the "Shares"). The Offering price shall be $5.00 per Share, or
such other price as shall be mutually agreed upon by Millennium Securities Corp.
(the "Co-Underwriter") and by the "Lead Underwriter", as defined below, and by
the Company immediately prior to the effective date (the "Effective Date") of
the Registration Statement, based upon a due diligence review of the Company's
business, operations, industry and prospects. This letter states certain
conditions and assumptions upon which the proposed Offering by us and the Lead
Underwriter (collectively the "Underwriters"), as the Underwriters or as
representatives (the "Representative") of several other underwriters is
intended.
It is the Underwriters' intent, immediately prior to the Effective
Date, to enter into a "firm commitment" Underwriting Agreement with the Company
and, upon execution thereof, to immediately commence a bona fide public offering
of the Shares. The Underwriters may, at their discretion, negotiate with other
underwriters who shall be members in good standing of the NASD (as defined
herein) who, acting severally, would contract to purchase as principals,
portions of the Shares directly from the Underwriters. The Underwriting
Agreement shall provide that the Underwriters (or the underwriters if we
determine to act as Representative) shall be committed to take and pay for all
of the Shares, if any are purchased.
You acknowledge that we have advised you that although we have the
ability to co-manage the Offering, we do not have the authority under applicable
regulations to act
<PAGE>
as the lead managing underwriter of the Offering. Following execution hereof we
shall enter into an arrangement with an Underwriter in good standing with the
NASD who is authorized to act as managing underwriter, acceptable to you, in
your sole discretion, to act as managing underwriter (the "Lead Underwriter").
The obligation of Co-Underwriter and the Company (except for your obligations
pursuant to paragraphs A and C below) are subject to retention of the Lead
Underwriter, which Millennium will use its reasonable efforts to retain (and
with respect to which efforts the Company will provide its cooperation and
facilitation) prior to filing of Pre-Effective Amendment No. 1 to the
Registration Statement. The provisions hereof applicable to the payment of
compensation to and expenses entering into agreements with Underwriters shall be
the subject of separate allocation arrangements between the Co-Underwriter and
the Lead Underwriter, to be determined in their sole discretion and subject to
applicable laws and regulations; provided however, it is acknowledged that the
compensation payable to the Underwriters' hereunder is the aggregate
compensation to be paid by the Company to the Underwriters, and that the Lead
Underwriter shall agree to the compensation to be paid to the Underwriters as
set forth herein prior to the engagement of such Lead Underwriter.
The Underwriting Agreement and related agreements shall contain such
terms and conditions as are customarily contained in agreements of such
character, including the following:
(A) $50,000.00 (payable upon acceptance of this Agreement) as
an advance against the non-accountable expense provided for below,
which is intended to cover actual out-of-pocket expenses actually
anticipated to be incurred by the Underwriter in connection with the
preparation of this Offering.
(B) There shall be an underwriting discount of 10%. The
proceeds of the Offering shall be used for purposes reasonably
acceptable to the Underwriters, including but not limited to, the
repayment of approximately $2,000,000.00 in indebtedness to certain
promoters of the Company and other creditors of the Company.
(C) The Company will bear all fees, disbursements and expenses
in connection with the proposed Offering, including without limitation,
the Company's legal and accounting fees and disbursements, the costs of
preparing, printing, mailing and delivering the Registration
Statements, prospectus and amendments, post-effective amendments and
supplements thereto, the Underwriting Agreement and related documents
and "Blue Sky" memoranda (all in such quantities as the Underwriters
may require), preparing and printing stock certificates, filing fees
(including the filing fees incurred in registering the Offering with
the National Association of Securities Dealers, Inc. (the "NASD")),
seeking listing of the Shares on such Exchanges as the Underwriters may
suggest, filing fees, costs and expenses (including reasonable fees and
disbursements of counsel) incurred in qualifying the Offering under the
"blue sky" laws of the States specified by the Underwriters, transfer
taxes, transfer agent and registrar fees.
2
<PAGE>
(D) In order to reimburse those costs, fees and expenses
customarily incurred by an underwriter during the registration process
the Company shall pay to the Underwriters, a nonaccountabie expense
allowance in the amount of 3% of the gross proceeds of the Offering
(including the over-allotment option to the extent actually exercised
by the Underwriters), without deduction for any expenses enumerated in
the next preceding paragraph. The balance shall be paid upon
consummation of the Offering. The sum when paid, shall be
non-refundable and non-accountable until the Underwriting Agreement is
signed, after which time they shall become accountable in accordance
with the terms of the Underwriting Agreement.
(E) For the purpose of covering over-allotments, if any, which
may occur during the distribution and sale of Shares, the Company shall
grant to the Underwriters an option to purchase all or part of an
additional number of Shares as will be equal to 15% of the total number
of Shares initially offered to the public, for a period of 45 days from
the Effective Date (the "Over-Allotment Option"). Such Over-Allotment
shall be exercisable by the Underwriters pursuant to the terms of the
Underwriting Agreement and shall be resold to the public on the same
terms as the Shares initially offered.
(F) The Company and all the stockholders of the Company agree
not to cause a private or public offering of any its Shares in any
manner, including pursuant to Rule 144 under the Act, of shares owned
nominally or beneficially by the Company s officers and directors and
holders of in excess of 10% of the Company's outstanding common stock
after the public offering, for a period of 24 months following the
Effective Date (or such longer period not to exceed 36 months as may be
required by any applicable state blue sky laws) without obtaining prior
approval of the Underwriters (and, if required by applicable blue sky
laws, and the securities commissions in any such states). The Company
shall cause such persons to execute an agreement with the Underwriters
in form and substance satisfactory to the Underwriters and our counsel
regarding such restrictions.
(G) The Company shall retain as its lawyers, a firm expert in
securities laws matters acceptable to the Underwriters, such as
Richman, Lawrence, Mann, Greene, Chizever, Friedman & Phillips which
shall have the responsibility for drafting the Registration Statement.
The Company shall also retain independent certified public accountants
acceptable to the Underwriters. Such accounting firm shall have the
responsibility for reviewing financial statements and schedules to be
included in the Registration Statement, shall certify such financial
statements and schedules which are required to be audited and included
in the Registration Statement and shall provide certain "comfort" with
respect thereto and with respect to financial and other information
included therein as is usual and common in initial public offerings.
(H) The Company shall apply to have its common stock approved
for quotation on the so called "OTC Bulletin Board," to be effective on
the Effective Date.
3
<PAGE>
(I) Concurrently with the delivery of the Underwriting
Agreement, the Company shall provide the Underwriters with an opinion
of counsel reasonably satisfactory to the Underwriters and their
counsel, in form and substance customary in initial public offerings.
(L) If the sale of Shares is completed:
(1) The Company will engage the Underwriters as its
investment banker for a period of 12 months on the first day
of the month following the Closing Date, at an aggregate
monthly fee of $5,000.00 for the first eight months and $6,000
for the ninth month for a total of $46,000 (exclusive of any
accountable out-of-pocket expenses). In addition, the
consulting agreement (or separate M&A agreement) shall provide
that the Company will pay the Underwriters a finder s fee in
the event that we originate, and the Company accepts, within 3
years of the Closing Date, a merger, acquisition, joint
venture or other transaction to which the Company is a party
in an amount equal to 5% of the first $5,000,000.00, 4% of the
next $5,000,000.00 and 3% of the excess, if any, over
$10,000,000.00 of the consideration received or paid to the
other party by the Company in any such transactions.
(2) During the two year period following the Effective
Date, the Underwriters shall have the right to purchase for
the Underwriters' own accounts or to sell for the account of
the Company s officers and directors any securities sold
pursuant to Rule 144 under the Act by the officers and
directors of the Company. Each of the officers and directors
(the ' 144 Seller") will agree to consult with the
Underwriters with regard to any such sales and will offer to
the Underwriters the exclusive opportunity to purchase or sell
such securities on terms at least favorable to the 144 Sellers
as they can secure elsewhere. If the Underwriters fail to
accept in writing any such proposal for sale by the 144
Sellers within S business days after receipt of a copy of the
proposal, the Underwriters shall be deemed to have released
any claim or right with respect to any such sales contained in
the proposal. If, thereafter, the proposal is modified in any
material respect, the 144 Sellers shall adopt the procedure
set forth in this paragraph with respect to the original
proposal.
(3) By the Effective Date, the Company shall have
registered its Common Stock with the SEC under the provisions
of Section 12(b) of the Securities of 1934 and will use its
best efforts to maintain such registration in effect for a
period of three years from the Effective Date.
(4) The Company shall retain a transfer agent
acceptable to the Underwriters for the Shares, for a period of
three years following the Effective Date. At the Underwriters'
request, the Company shall provide the Underwriters with
copies of the Company's daily stock transfer sheets from
4
<PAGE>
such transfer agent and from the Depository Trust Company, at
the Company's sole cost and expense.
(5) For a period of three years from the Effective
Date, the Company will provide to the Underwriters, on a
timely basis, quarterly statements setting forth such
information regarding the Company's results of operations and
financial position (including balance sheet, profit and loss
statements) as is regularly prepared by management of the
Company and filed with the SEC.
(M) Prior to the filing of the Registration Statement, the
Company will provide: (i) documentation to the Underwriter to
substantiate that no less than $2,000,000.00 in equity has been paid
into the Company; and (ii) documentation to the Underwriter to
substantiate that the capitalization of the Company is in accordance
with the foregoing subparagraph (i) and prior to the Offering there
shall be 3,000,000 shares outstanding. Prior to the filing of
Pre-Effective Amendment No. 1 to the Registration Statement the Company
will provide the Underwriters with satisfactory results of a UCC lien
and title search effected in all appropriate jurisdictions, showing
that Company's assets, including its intellectual properties, if any,
are unencumbered except to the extent set forth in the financial
statements for the year ended July 31, 1996.
(N) Commencing on the date hereof and continuing for a period
prescribed by Rule 174 promulgated under the Securities Act of 1933, as
amended, the Company will not issue a press release or engage in other
publicity without prior written notification to us.
The Underwriters reserve the right, in their sole discretion, to reduce
any item of the Underwriters' compensation or adjust for the benefit of the
Company the terms thereof as specified herein in the event that a determination
should be made by the NASD and/or the securities department of any jurisdiction
to which the Offering is submitted to the effect that the Underwriters'
aggregate compensation is excessive or that the terms thereof require
adjustment. Any such reduction or adjustment shall not effect any other terms or
provisions of this Letter of Intent.
The Company represents and warrants to the Underwriters that it is not
obligated to pay a finder's fee to anyone in connection with the introduction of
the Company to the Underwriters and that it has not paid or delivered any
monies, securities or other compensation to any member of the NASD or to any
affiliate of such a member during the prior 12 months.
It is understood that his letter is merely a letter and statement of
intent and not a legally binding agreement except as to matters set forth in
paragraphs (A) and (C) above, and that if this Letter of Intent should be
terminated by either party, and/or if the Underwriting Agreement shall not be
entered into, for whatever cause, then the Company shall only be obligated to
pay to the Underwriters the advance of non-accountable expenses
5
<PAGE>
as set forth in paragraph (A) above, and any additional actual costs as set
forth in paragraph (C) above actually incurred by the Underwriter in excess of
the amount previously paid by the Company pursuant to paragraph (A) above.
Except as otherwise expressly set forth herein neither the Company nor
the Underwriters will be under any obligation to the other until the Company and
the Underwriters have executed and delivered the Underwriting Agreement. It is
understood that, except as otherwise expressly indicated herein, this letter is
merely a statement of intent and any legal obligations between the parties shall
be deemed in existence only if, as and when the Underwriting Agreement is
executed and delivered.
This letter shall be deemed to have been made and delivered in New York
City and shall be governed as to its validity, interpretation, construction,
effect and in all other respects by the laws of the State of New York. The
Company and the Underwriters (i) agree that any legal suit, action or proceeding
arising out or relating to this letter shall be instituted exclusively in New
York State Supreme Court, County of New York or in the United States District
Court of the Southern District of New York; (ii) waives any objection to venue
or inconvenient forum of any such suit, action or proceeding; and (iii)
irrevocably consents to the jurisdiction of the New York State Supreme Court,
County of New York or in the United States District Court of the Southern
District of New York in any such suit, action or proceeding. The Company and the
Underwriters further accept to accept and acknowledge service of any and all
process which may be served in any such suit, action or proceeding in the New
York State Supreme Court, County of New York or in the United States District
Court of the Southern District of New York and agree that service of process
upon it mailed by certified mail, return receipt requested, to its address shall
be deemed in every respect effective service of process upon it in any such
suit, action or proceeding.
Any notice, election or demand given or made pursuant hereto shall be
given or made in writing and signed by the sending party or its attorney, and
shall be deemed given when: (i) personally delivered; (ii) one business
following delivery to a reputable courier service, or (iii) two days following
the day when sent concurrently with such mailing, in all cases to the respective
party at its address given above, with copies to counsel.
If the foregoing correctly sets forth your understanding with respect
to the proposed Offering on behalf of the Company, please so confirm by signing
and returning one copy of this letter, whereupon we will instruct our counsel to
cooperate with counsel for the Company in the preparation of the appropriate
Registration Statement under the Act, the Underwriting Agreement and other
related documents so as to expedite the successful consummation of the Offering.
This Agreement supersedes any and all prior agreements between the
parties hereto respecting the subject matter hereof, may be amended only in
writing and shall be binding upon our respective legal representatives and
assigns.
6
<PAGE>
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
Very truly yours,
MILLENNIUM SECURITIES CORP.
By: /s/ Richard A. Sitomer
---------------------------
Richard A. Sitomer
Chief Executive Officer
Accepted & Agreed to:
UNITED FILM DISTRIBUTORS, INC.
By: /s/ Harry Shuster
--------------------------
Harry Shuster
Chairman of the Board
7
RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1
OF
HIT ENTERTAINMENT, INC.
Hit Entertainment, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of the Corporation is Hit Entertainment, Inc. The original
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of the State of Delaware on May 10, 1995.
2. This Restated Certificate of Incorporation amends and restates the
Certificate of Incorporation of the Corporation by inserting therein a new
Article FIFTH, removing Article SIXTH and renumbering the subsequent Articles
contained therein, and amending new Article SIXTH to delete language therefrom.
3. That by Unanimous Written Consent of the Board of Directors of this
Corporation resolutions were duly adopted setting forth the proposed amended and
restated Certificate of Incorporation of this Corporation, declaring said
amendment and restatement to be advisable and providing that the written consent
of the stockholders to such amendment and restatement should be obtained.
4. That thereafter, pursuant to resolution of its Board of Directors,
the written consent of the stockholders of the Corporation was obtained in
accordance with Section 228 of the General Corporation Law, by which consent all
of the shares unanimously consented to the amendment and restatement, which
consent satisfied the necessary number of shares as required by statute to
consent to the amendment.
5. That said amendment and restatement was duly adopted in accordance
with the provisions of Sections 242 and 245 of the General Corporation Law of
the State of Delaware.
6. The text of the Certificate of Incorporation, as amended or
supplemented heretofore, is further amended hereby to read as herein set forth
in full:
FIRST: The name of the Corporation is Hit Entertainment, Inc.
SECOND: The Corporation shall have perpetual duration.
THIRD: The address of the Corporation's registered office in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
FOURTH: The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which Corporations may
be organized under the General Corporation Law of the State of Delaware.
FIFTH: The total number of shares which the Corporation shall have
authority to issue is 23,000,000 shares (23,000,000), consisting of
Twenty-Million (20,000,000) shares of
<PAGE>
Common Stock, par value $.01 per share, and Three Million (3,000,0000) shares of
Preferred Stock, par value $.01 per share.
Shares of Preferred Stock may be issued form time to time in one or
more series, each such series to have such distinctive designation or title as
may be stated and expressed in this Article Fifth or as may be fixed by the
Board of Directors prior to the issuance of any shares thereof. Each such series
of Preferred Stock shall have such voting powers, full or limited, or no voting
powers, and such preferences and such relative, participating, optional or other
special rights (including, without limitation, the right to convert the shares
of such Preferred Stock into shares of the Corporation's Common Stock at such
rate and upon such terms and conditions as may be fixed by the Corporations'
Board of Directors), with such qualifications, limitations or restrictions of
such preferences or rights as shall be stated and expressed in this Article
Fifth or in the resolution or resolutions providing for the issue of such series
of Preferred Stock as may be adopted from time by the Board of Directors prior
to the issuance of any shares thereof, in accordance with the laws of the State
of Delaware.
Except as may be otherwise provided in this Article FIFTH or in the
resolution or resolutions providing for the issue of a particular series, the
Board of Directors may from time to time increase the number of shares of any
series already created by providing that any unissued shares of Preferred Stock
shall constitute part of such series, or may decrease (but not below the number
of shares thereof then outstanding) the number of shares of any series already
created by providing that any unissued shares previously assigned to such series
shall no longer constitute part thereof.
Each share of Common Stock, par value $.01 per share, of the
Corporation outstanding at the time this Restated Certificate of Incorporation
becomes effective is hereby changed into 5 shares of Common Stock, par value
$.01 per share, of the Corporation. No fractional shares will be issued in
connection with such change. Each stockholder of the Corporation at the time
this Restated Certificate of Incorporation becomes effective will become the
holder of that number of whole shares of Common Stock to which the change
entitles such stockholder, rounded to the nearest whole share.
SIXTH: The Board of Directors shall have the power to make, alter or
repeal the Bylaws of the Corporation at any meeting at which a quorum is present
by the affirmative vote of a majority of the whole Board of Directors. Election
of Directors need not be by written ballot.
SEVENTH: A Director of the Corporation shall have no personal liability
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director; provided, however, that this Article SEVENTH shall
not eliminate or limit the liability of a Director, except to the extent
permitted by applicable law (i) for any breach of the Director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the General Corporation Law of the State of Delaware
as the same now exists or may hereafter be amended, or (iv) for any transaction
from which the Director derived an improper personal benefit. No amendment to,
or repeal of, this
2
<PAGE>
Article SEVENTH shall apply to, or have an effect on the liability or alleged
liability of any Director for, or with respect to, any acts or omissions of such
director occurring prior to such amendment or repeal.
IN WITNESS WHEREOF, said Hit Entertainment, Inc. has caused this
Certificate to be executed by its duly authorized officers as of the 7th day of
May, 1997
HIT ENTERTAINMENT, INC.
By /s/ Brian Shuster
---------------------------------
Brian Shuster, President
ATTEST:
/s/ David M. Kane
--------------------------
David M. Kane
Secretary
3
BYLAWS Exhibit 3.3
OF
HIT ENTERTAINMENT, INC.
(a Delaware corporation)
ARTICLE I
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in
the corporation shall be signed by, or in the name of, the corporation by the
Chairman or Vice-Chairman of the Board of Directors, if any, or by the President
or a Vice-President and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the corporation. Any or all the
signatures on any such certificate may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
Whenever the corporation shall be authorized to issue more than one
class of stock or more than one series of any class of stock, and whenever the
corporation shall issue any shares of its stock as partly paid stock, the
certificates representing shares of any such class or series or of any such
partly paid stock shall set forth thereon the statements prescribed by the
General Corporation Law. Any restrictions on the transfer or registration of
transfer of any shares of stock of any class or series shall be noted
conspicuously on the certificate representing such shares.
The corporation may issue a new certificate of stock or uncertificated
shares in place of any certificate theretofore issued by it, alleged to have
been lost, stolen, or destroyed, and the Board of Directors may require the
owner of the lost, stolen, or destroyed certificate, or his legal
representative, to give the corporation a bond sufficient to indemnify the
corporation against any claim that may be made against it on account of the
alleged loss, theft, or destruction of any such certificate or the issuance of
any such new certificate or uncertificated shares.
2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the
General Corporation Law, the Board of Directors of the corporation may provide
by resolution or resolutions that some or all of any or all classes or series of
the stock of the corporation shall be uncertificated shares. Within a reasonable
time after the issuance or transfer of any uncertificated shares, the
corporation shall send to the registered owner thereof any written notice
prescribed by the General Corporation Law.
<PAGE>
3. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be
required to, issue fractions of a share. If the corporation does not issue
fractions of a share, it shall (1) arrange for the disposition of fractional
interests by those entitled thereto, (2) pay in cash the fair value of fractions
of a share as of the time when those entitled to receive such fractions are
determined, or (3) issue scrip or warrants in registered form (either
represented by a certificate or uncertificated) or bearer form (represented by a
certificate) which shall entitle the holder to receive a full share upon the
surrender of such scrip or warrants aggregating a full share. A certificate for
a fractional share or an uncertificated fractional share shall, but scrip or
warrants shall not unless otherwise provided therein, entitle the holder to
exercise voting rights, to receive dividends thereon, and to participate in any
of the assets of the corporation in the event of liquidation. The Board of
Directors may cause scrip or warrants to be issued subject to the conditions
that they shall become void if not exchanged for certificates representing the
full shares or uncertificated full shares before a specified date, or subject to
the conditions that the shares for which scrip or warrants are exchangeable may
be sold by the corporation and the proceeds thereof distributed to the holders
of scrip or warrants, or subject to any other conditions which the Board of
Directors may impose.
4. STOCK TRANSFERS. Upon compliance with provisions restricting the
transfer or registration of transfer of shares of stock, if any, transfers or
registration of transfers of shares of stock of the corporation shall be made
only on the stock ledger of the corporation by the registered holder thereof, or
by his attorney thereunto authorized by power of attorney duly executed and
filed with the Secretary of the corporation or with a transfer agent or a
registrar, if any, and, in the case of shares represented by certificates, on
surrender of the certificate or certificates for such shares of stock properly
endorsed and the payment of all taxes due thereon.
5. TRANSFER AGENT. The Board of Directors shall have power to appoint
one or more Transfer Agents and Registrars for the transfer and registration of
certificates of stock of any class, and may require that stock certificates
shall be countersigned and registered by one or more of such Transfer Agents and
Registrars.
6. RECORD DATE FOR STOCKHOLDERS. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date shall not be more than sixty nor less than ten days before the date of such
meeting. If no record date is fixed by the Board of Directors, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
In order that the corporation may determine the stockholders entitled to consent
to corporate action in writing without a meeting, the Board of Directors
2
<PAGE>
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. If no
record date has been fixed by the Board of Directors, the record date for
determining the stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors is required by
the General Corporation Law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the corporation by delivery to its registered office in the State of Delaware,
its principal place of business, or an officer or agent of the corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by the General Corporation Law, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board of Directors adopts the resolution taking such prior action. In order that
the corporation may determine the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty days prior to such action. If
no record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
7. MEANING OF CERTAIN TERMS. As used herein in respect of the right to
notice of a meeting of stockholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term "share" or "shares" or "share of stock" or "shares of
stock" or "stockholder" or "stockholders" refers to an outstanding share or
shares of stock and to a holder or holders of record of outstanding shares of
stock when the corporation is authorized to issue only one class of shares of
stock, and said reference is also intended to include any outstanding share or
shares of stock and any holder or holders of record of outstanding shares of
stock of any class upon which or upon whom the certificate of incorporation
confers such rights where there are two or more classes or series of shares of
stock or upon which or upon whom the General Corporation Law confers such rights
notwithstanding that the certificate of incorporation may provide for more than
one class or series of shares of stock, one or more of which are limited or
denied such rights thereunder; provided, however, that no such right shall vest
in the event of an increase or a decrease in the authorized number of shares of
stock of any class or series which is otherwise denied voting rights under the
provisions of the certificate of incorporation, except as any provision of law
may otherwise require.
3
<PAGE>
8. STOCKHOLDER MEETINGS.
(a) TIME. The annual meeting shall be held on the date and at the time
fixed, from time to time, by the directors, provided, that the first annual
meeting shall be held on a date within thirteen months after the organization of
the corporation, and each successive annual meeting shall be held on a date
within thirteen months after the date of the preceding annual meeting. A special
meeting shall be held on the date and at the time fixed by the directors.
(b) PLACE. Annual meetings and special meetings shall be held at such
place, within or without the State of Delaware, as the directors may, from time
to time, fix. Whenever the directors shall fail to fix such place, the meeting
shall be held at the registered office of the corporation in the State of
Delaware.
(c) CALL. Annual meetings and special meetings may be called by the
directors or by any officer instructed by the directors to call the meeting.
(d) NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be
given, stating the place, date, and hour of the meeting and stating the place
within the city or other municipality or community at which the list of
stockholders of the corporation may be examined. The notice of an annual meeting
shall state that the meeting is called for the election of directors and for the
transaction of other business which may properly come before the meeting, and
shall (if any other action which could be taken at a special meeting is to be
taken at such annual meeting) state the purpose or purposes. The notice of a
special meeting shall in all instances state the purpose or purposes for which
the meeting is called. The notice of any meeting shall also include, or be
accompanied by, any additional statements, information, or documents prescribed
by the General Corporation Law. Except as otherwise provided by the General
Corporation Law, a copy of the notice of any meeting shall be given, personally
or by mail, not less than ten days nor more than sixty days before the date of
the meeting, unless the lapse of the prescribed period of time shall have been
waived, and directed to each stockholder at his record address or at such other
address which he may have furnished by request in writing to the Secretary of
the corporation. Notice by mail shall be deemed to be given when deposited, with
postage thereon prepaid, in the United States Mail. If a meeting is adjourned to
another time, not more than thirty days hence, and/or to another place, and if
an announcement of the adjourned time and/or place is made at the meeting, it
shall not be necessary to give notice of the adjourned meeting unless the
directors, after adjournment, fix a new record date for the adjourned meeting.
Notice need not be given to any stockholder who submits a written waiver of
notice signed by him before or after the time stated therein. Attendance of a
stockholder at a meeting of stockholders shall constitute a waiver of notice of
such meeting, except when the stockholder attends the meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice.
4
<PAGE>
(e) STOCKHOLDER LIST. The officer who has charge of the stock ledger of
the corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city or other municipality or community where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the corporation, or to vote at any meeting of
stockholders.
(f) CONDUCT OF MEETING. Meetings of the stockholders shall be presided
over by one of the following officers in the order of seniority and if present
and acting - the Chairman of the Board, if any, the Vice-Chairman of the Board,
if any, the President, a Vice-President, or, if none of the foregoing is in
office and present and acting, by a chairman to be chosen by the stockholders.
The Secretary of the corporation, or in his absence, an Assistant Secretary,
shall act as secretary of every meeting, but if neither the Secretary nor an
Assistant Secretary is present the Chairman of the meeting shall appoint a
secretary of the meeting.
(g) PROXY REPRESENTATION. Every stockholder may authorize another
person or persons to act for him by proxy in all matters in which a stockholder
is entitled to participate, whether by waiving notice of any meeting, voting or
participating at a meeting, or expressing consent or dissent without a meeting.
Every proxy must be signed by the stockholder or by his attorney-in-fact. No
proxy shall be voted or acted upon after three years from its date unless such
proxy provides for a longer period. A duly executed proxy shall be irrevocable
if it states that it is irrevocable and, if, and only as long as, it is coupled
with an interest sufficient in law to support an irrevocable power. A proxy may
be made irrevocable regardless of whether the interest with which it is coupled
is an interest in the stock itself or an interest in the corporation generally.
(h) INSPECTORS. The directors, in advance of any meeting, may, but need
not, appoint one or more inspectors of election to act at the meeting or any
adjournment thereof. If an inspector or inspectors are not appointed, the person
presiding at the meeting may, but need not, appoint one or more inspectors. In
case any person who may be appointed as an inspector fails to appear or act, the
vacancy may be filled by appointment made by the directors in advance of the
meeting or at the meeting by the person presiding thereat. Each inspector, if
any, before entering upon the discharge of his duties, shall take and sign an
oath faithfully to execute the duties of inspectors at such meeting with strict
impartiality and according to the best of his ability. The inspectors, if any,
shall determine the number of shares of stock outstanding and the voting power
of each, the shares of stock represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and
5
<PAGE>
shall receive votes, ballots, or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots, or consents, determine the result, and do such acts as are
proper to conduct the election or vote with fairness to all stockholders. On
request of the person presiding at the meeting, the inspector or inspectors, if
any, shall make a report in writing of any challenge, question, or matter
determined by him or them and execute a certificate of any fact found by him or
them. Except as otherwise required by subsection (e) of Section 231 of the
General Corporation Law, the provisions of that Section shall not apply to the
corporation.
(i) QUORUM. The holders of a majority of the outstanding shares of
stock shall constitute a quorum at a meeting of stockholders for the transaction
of any business. The stockholders present may adjourn the meeting despite the
absence of a quorum.
(j) VOTING. Each share of stock shall entitle the holder thereof to one
vote. Directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors. Any other action shall be authorized by a majority of
the votes cast except where the General Corporation Law prescribes a different
percentage of votes and/or a different exercise of voting power, and except as
may be otherwise prescribed by the provisions of the certificate of
incorporation and these Bylaws. In the election of directors, and for any other
action, voting need not be by ballot.
9. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the
General Corporation Law to be taken at any annual or special meeting of
stockholders, or any action which may be taken at any annual or special meeting
of stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. Action taken pursuant to this paragraph shall be
subject to the provisions of Section 228 of the General Corporation Law.
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION. The business and affairs of the
corporation shall be managed by or under the direction of the Board of Directors
of the corporation. The use of the phrase "whole board" herein refers to the
total number of directors which the corporation would have if there were no
vacancies.
6
<PAGE>
2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a
citizen of the United States, or a resident of the State of Delaware. The Board
of Directors shall consist of a minimum of one member and a maximum of 7
members, as may be fixed from time to time by the vote of a majority of the
Board.
3. ELECTION AND TERM. The first Board of Directors, unless the members
thereof shall have been named in the certificate of incorporation, shall be
elected by the incorporator or incorporators and shall hold office until the
first annual meeting of stockholders and until their successors are elected and
qualified or until their earlier resignation or removal. Any director may resign
at any time upon written notice to the corporation. Thereafter, directors who
are elected at an annual meeting of stockholders, and directors who are elected
in the interim to fill vacancies and newly created directorships, shall hold
office until the next annual meeting of stockholders and until their successors
are elected and qualified or until their earlier resignation or removal. Except
as the General Corporation Law may otherwise require, in the interim between
annual meetings of stockholders or of special meetings of stockholders called
for the election of directors and/or for the removal of one or more directors
and for the filling of any vacancy in that connection, newly created
directorships and any vacancies in the Board of Directors, including unfilled
vacancies resulting from the removal of directors for cause or without cause,
may be filled by the vote of a majority of the remaining directors then in
office, although less than a quorum, or by the sole remaining director.
4. MEETINGS.
(a) TIME. Meetings shall be held at such time as the Board shall fix,
except that the first meeting of a newly elected Board shall be held as soon
after its election as the directors may conveniently assemble.
(b) PLACE. Meetings shall be held at such place within or without the
State of Delaware as shall be fixed by the Board.
(c) CALL. No call shall be required for regular meetings for which the
time and place have been fixed. Special meetings may be called by or at the
direction of the Chairman of the Board, if any, the Vice-Chairman of the Board,
if any, of the President, or of a majority of the directors in office.
(d) NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be
required for regular meetings for which the time and place have been fixed.
Written, oral, or any other mode of notice of the time and place shall be given
for special meetings in sufficient time for the convenient assembly of the
directors thereat. Notice need not be given to any director or to any member of
a committee of directors who submits a written waiver of notice signed by him
before or after the time stated therein. Attendance of any such person at a
meeting shall constitute a waiver of notice of such meeting, except when he
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened.
7
<PAGE>
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the directors need be specified in any written waiver of
notice.
(e) QUORUM AND ACTION. A majority of the whole Board shall constitute a
quorum except when a vacancy or vacancies prevents such majority, whereupon a
majority of the directors in office shall constitute a quorum, provided, that
such majority shall constitute at least one-third of the whole Board. A majority
of the directors present, whether or not a quorum is present, may adjourn a
meeting to another time and place. Except as herein otherwise provided, and
except as otherwise provided by the General Corporation Law, the vote of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board. The quorum and voting provisions herein stated
shall not be construed as conflicting with any provisions of the General
Corporation Law and these Bylaws which govern a meeting of directors held to
fill vacancies and newly created directorships in the Board or action of
disinterested directors.
Any member or members of the Board of Directors or of any committee
designated by the Board, may participate in a meeting of the Board, or any such
committee, as the case may be, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other.
(f) CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if
present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman
of the Board, if any and if present and acting, or the President, if present and
acting, or any other director chosen by the Board, shall preside.
5. REMOVAL OF DIRECTORS. Except as may otherwise be provided by the
General Corporation Law, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
6. COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of any member of any such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation with the exception of
any authority the delegation of which is prohibited by Section 141 of the
General Corporation Law, and may authorize the seal of the corporation to be
affixed to all papers which may require it.
8
<PAGE>
7. WRITTEN ACTION. Any action required or permitted to be taken at any
meeting of the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
8. COMPENSATION. The directors shall receive such compensation for
their services as directors and as members of any committee appointed by the
Board as may be prescribed by the Board of Directors and shall be reimbursed by
the corporation for ordinary and reasonable expenses incurred in the performance
of their duties.
ARTICLE III
OFFICERS
The officers of the corporation shall consist of a President, a
Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by the
Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board, an
Executive Vice-President, one or more other Vice-Presidents, one or more
Assistant Secretaries, one or more Assistant Treasurers, and such other officers
with such titles as the resolution of the Board of Directors choosing them shall
designate. Except as may otherwise be provided in the resolution of the Board of
Directors choosing him, no officer other than the Chairman or Vice-Chairman of
the Board, if any, need be a director. Any number of offices may be held by the
same person, as the directors may determine.
Unless otherwise provided in the resolution choosing him, each officer
shall be chosen for a term which shall continue until the meeting of the Board
of Directors following the next annual meeting of stockholders and until his
successor shall have been chosen and qualified.
All officers of the corporation shall have such authority and perform
such duties in the management and operation of the corporation as shall be
prescribed in the resolutions of the Board of Directors designating and choosing
such officers and prescribing their authority and duties, and shall have such
additional authority and duties as are incident to their office except to the
extent that such resolutions may be inconsistent therewith. The Secretary or an
Assistant Secretary of the corporation shall record all of the proceedings of
all meetings and actions in writing of stockholders, directors, and committees
of directors, and shall exercise such additional authority and perform such
additional duties as the Board shall assign to him. Any officer may be removed,
with or without cause, by the Board of Directors. Any vacancy in any office may
be filled by the Board of Directors.
Unless otherwise ordered by the Board of Directors, the President or a
Vice- President thereunto duly authorized by the President shall have full power
and authority on behalf of the corporation to attend and to vote at any meeting
of stockholders of any corporation in which this corporation may hold stock, and
may exercise on behalf of this corporation any and all of the rights and powers
incident to the ownership of such stock at
9
<PAGE>
any such meeting, and shall have power and authority to execute and deliver
proxies and consents on behalf of this corporation in connection with the
exercise by this corporation of the rights and powers incident to the ownership
of such stock. The Board of Directors, from time to time, may confer like powers
upon any other person or persons.
ARTICLE IV
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND OTHER PERSONS
1. The corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
2. The corporation shall indemnify any person who was or is a party, or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
10
<PAGE>
3. To the extent that a director, officer, employee or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in sections 1 or 2 of this Article, or in
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
4. Any indemnification under sections 1 or 2 of this Article (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in such section. Such determination
shall be made:
(a) By the board of directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or
proceeding, or
(b) If such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or
(c) By the stockholders.
5. Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this Section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
6. The indemnification and advancement of expenses provided by, or
granted pursuant to the other sections of this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
7. The corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article.
11
<PAGE>
8. For purposes of this Article, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this Article with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation of its
separate existence had continued.
9. For purposes of this Article, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
Article.
10. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
11. No director or officer of the corporation shall be personally
liable to the corporation or to any stockholder of the corporation for monetary
damages for breach of fiduciary duty as a director or officer, provided that
this provision shall not limit the liability of a director or officer (i) for
any breach of the director's or the officer's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law of Delaware, or (iv) for any
transaction from which the director or officer derived an improper personal
benefit.
ARTICLE V
RELIANCE UPON BOOKS, REPORTS AND RECORDS
Each Director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation, shall, in the performance of his
duties,-be fully protected in relying in good faith upon the books of account or
other records of the Corporation, including reports made to the Corporation by
any of its officers, by an independent certified public accountant, or by an
appraiser selected with reasonable care.
12
<PAGE>
ARTICLE VI
CORPORATE SEAL
The corporate seal shall be in such form as the Board of Directors
shall prescribe.
ARTICLE VII
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall be subject
to change, by the Board of Directors.
ARTICLE VIII
CONTROL OVER BYLAWS
Subject to the provisions of the certificate of incorporation and the
provisions of the General Corporation Law, the power to amend, alter, or repeal
these Bylaws and to adopt new Bylaws may be exercised by the Board of Directors
or by the stockholders.
13
<PAGE>
I HEREBY CERTIFY that the foregoing is a full, true, and correct copy
of the Bylaw of Hit Entertainment, Inc., a Delaware corporation, as in effect on
the date hereof.
Dated: As of May 10, 1995
/s/ David M. Kane
---------------------------------
David M. Kane, Secretary
(SEAL)
14
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered
into as of the 1st day of April, 1997, between Hit Entertainment, Inc., with its
principal place of business at 1990 Westwood Boulevard, Penthouse, Los Angeles,
California 90025 ("Employer") and Brian Shuster, whose address is 1990 Westwood
Boulevard, Penthouse, Los Angeles, California 90025 ("Employee").
1
TERM OF EMPLOYMENT
1.1 Employer hereby employs Employee, and Employee hereby
accepts employment with Employer, beginning on the date first above written and
continuing thereafter until March 31, 2000 (the "Term") subject to earlier
termination as provided in this Agreement. The Term hereunder shall be
automatically extended additional one (1) year periods (each an "Option
Period"), each commencing April 1 and continuing until March 31 of the following
year, unless Employer or Employee notifies the other party by written notice as
provided hereunder on or before January 31 immediately preceding the next Option
Period of an election not to extend the Term and to terminate this Agreement as
of the expiration of the original Term or the current Option Period, as the case
may be.
2
DUTIES OF EMPLOYEE
2.1 Employee is hired and employed as President and Chief
Executive Officer of Employer. Employee shall do and perform all services, acts
or things necessary or advisable to fulfill the duties of a corporate President
and Chief Executive Officer. Employee shall also serve as a member of the Board
of Directors of Employer. Employee shall, at all times, be subject to all
policies established by the Board of Directors of Employer.
<PAGE>
2.2 Employee agrees that to the best of his ability and
experience he will at all times loyally and conscientiously perform all of the
duties and obligations required of him either expressly or implicitly by the
terms of this Agreement.
2.3 The specific duties to be performed by Employee shall be
determined from time to time by the Board of Directors of Employer.
2.4 Employee shall be required to devote only so much of his
time and energies to the business of Employer during the employment term as
shall be necessary to fulfill his duties as President and Chief Executive
Officer of Employer.
3
COMPENSATION TO EMPLOYEE
3.1 As compensation for his services hereunder, Employee shall
receive an annual base salary of Two Hundred Six Thousand Four Hundred Dollars
($206,400.00) payable in equal bi-monthly installments in accordance with
Employer's normal payroll policies. The base salary of Employee shall be subject
to annual increases at the sole discretion of the Board of Directors.
3.2 Employer shall have the right to deduct from the
compensation due to Employee hereunder any and all sums required for social
security and withholding taxes, and for any other federal, state or local charge
which may now be in effect or hereafter enacted or required as a charge on the
compensation of Employee.
4
EMPLOYEE BENEFITS
4.1 Employee shall be entitled to coverage under the
Employer's group medical insurance plan, in the same manner as other executive
officers of Employer.
- 2 -
<PAGE>
4.2 Employee shall be eligible to participate in the
Employer's retirement plans (if any) and in any incentive compensation plans now
or hereafter established by Employer, in the same manner as other executive
officers of Employer.
4.3 If Employee becomes disabled during the employment term
because of sickness, physical or mental disability, or for any other reason, so
that he is unable to materially perform his duties hereunder, Employer agrees to
continue Employee's salary during such disability until disability payments
commence under the disability insurance maintained for Employee, if any, but in
no event for more than one hundred and eighty (180) calendar days.
4.4 Employee shall be entitled to such other fringe benefits
(including, but not limited to vacation pay) as are now or hereafter afforded to
other executive officers of Employer, or as shall be agreed to from time to time
by Employer and Employee.
4.5 Employer agrees to provide Employee with a private office,
stenographic and secretarial help, office equipment and supplies, and such other
facilities and services, which are suitable to Employee's position and adequate
for the performance of his duties.
5
REIMBURSEMENT OF EXPENSES INCURRED BY EMPLOYEE
5.1 Employer will promptly reimburse Employee for all
reasonable business expenses incurred by Employee in promoting the business of
Employer, including expenditures for entertainment, gifts, and travel, provided
that:
(a) Each such expenditure is of a nature qualifying it
as a proper deduction on the federal and state income tax return of Employer or
such expenditure was incurred at the express request of Employer, whether or not
deductible; and
- 3 -
<PAGE>
(b) Employee furnishes to Employer adequate records and
other documentary evidence required by federal and state statutes and
regulations issued by the appropriate taxing authorities for the substantiation
of each such expenditure as an income tax deduction, or similar records if the
expenditure is not deductible.
6
TERMINATION OF EMPLOYMENT
6.1 This Agreement may be terminated by Employer "for good
cause" by giving thirty (30) days' written notice of termination to Employee.
Termination "for good cause" shall mean the willful and continued failure to
follow Employer's directions following Employer's written notice to Employee
directing Employee to follow Employer's instructions and requests and Employee's
failure to take appropriate and timely corrective action; dishonesty; improper
disclosure of confidential information; or failure to perform Employee's duties
under this Agreement following Employer's written notice to Employee of such
failure and Employee's failure to take appropriate and timely corrective action.
Upon such termination, Employee shall forfeit any and all rights to compensation
beyond the date upon which this Agreement shall have been so terminated by
Employer. In addition, in the event of any of the above-mentioned offenses, at
the election of Employer the operation of this Agreement may be suspended for
and during the continuance of Employee's period of failure, neglect or refusal,
and Employer may, at its election, add a period of time equal to all or any part
of such period of suspension to the applicable year of the term of this
Agreement, and the dates for the commencement of any subsequent years of the
Agreement, and the dates for the exercise and commencement of any subsequent
option thereof, shall be correspondingly postponed.
6.2 This Agreement shall terminate immediately on the
occurrence of any of the following events:
- 4 -
<PAGE>
(a) Death of Employee;
(b) Loss by Employee of legal capacity;
(c) Permanent mental or physical disability of
Employee such that he is unable to materially perform the
duties of his employment 6.3 If during the term of this
Agreement Employee should become incapable
of fulfilling his obligations hereunder because of injury or physical or mental
illness and such incapacity shall exist for on hundred and eighty (180) calendar
days in the aggregate during any one (1) contract year, Company may, at its
option and upon five (5) days' written notice to Employee, terminate this
Agreement. The reasonable good faith determination by Employer that Employee is
incapable of fulfilling his obligations under this Agreement because of injury
or physical or mental illness shall be final and binding. In addition, during
any period of disability, Employer shall have the right to reduce Employee's
salary by the amount of the disability benefits to which Employee is entitled to
under applicable law.
6.4 This Agreement may be terminated by Employee for any
reason upon sixty (60) days' written notice to Employer.
6.5 In the event of the termination of this Agreement prior to
the completion of the employment term specified herein, Employee shall be
entitled to the full compensation earned by him prior to the date of termination
as provided for in this Agreement, computed pro-rata up to and including that
date.
6.6 This Agreement shall not be terminated by any:
(a) Transfer of all or substantially all of the
assets of Employer; or
(b) Merger by Employer with another company.
- 5 -
<PAGE>
In the event of any such merger or transfer of assets, the surviving corporation
or the transferee of Employer's assets shall be bound by and shall have the
benefit of the provisions of this Agreement; Employer agrees to take all actions
necessary to insure that such corporation or transferee is so bound.
7
GENERAL PROVISIONS
7.1 All notices required or permitted to be given pursuant to
this Agreement shall be in writing, and shall be delivered either personally, by
overnight delivery service or by U.S. certified mail, postage prepaid,
return-receipt requested and addressed to the parties at their respective
addresses as they appear in the first paragraph of this Agreement. The parties
may change their addresses for notice by giving notice of such change in
accordance with this paragraph. Notices sent by overnight delivery service shall
be deemed received on the business day following the date of deposit with the
delivery service. Mailed notices shall be deemed received upon the earlier of
the date of delivery shown on the return receipt, or the second business day
after the date of mailing.
7.2 This Agreement has been executed in and is to be performed
in the State of California, and this Agreement shall be interpreted in
accordance with the laws of the State of California.
7.3 This Agreement shall be binding upon and inure to the
benefit of the parties hereto, and their respective heirs, assigns,
successors-in-interest, and legal representatives, subject to any restrictions
on assignment set forth herein.
7.4 This Agreement may not be amended, modified or altered
except by a written instrument executed by all parties hereto.
7.5 None of the rights of any party hereunder (except the
right to receive money) may be assigned without the prior written consent of the
non-assigning party. None of the duties of
- 6 -
<PAGE>
any party hereunder may be delegated by either party without the prior written
consent of the non- delegating party.
7.6 No party has made any representations, warranties,
covenants or promises relating to the subject matter of this Agreement except as
set forth herein, and any prior agreements or understandings not specifically
set forth herein shall be of no force or effect. This Agreement constitutes the
entire agreement of the parties relative to the subject matter hereof.
7.7 If any provision of this Agreement is declared by a court
of competent jurisdiction to be invalid or unenforceable, the remaining
provisions hereof shall nevertheless be given full force and effect.
7.8 Captions are for convenience only and shall not be
considered in interpreting any of the provisions hereof.
7.9 As used herein, the masculine, feminine or neuter gender,
and the singular or plural number, shall each be deemed to include the others
whenever the context so indicates.
7.10 Should any party be required to bring legal action
(including arbitration) to enforce his rights under this Agreement, the
prevailing party in such action shall be entitled to recover from the losing
party his reasonable attorneys' fees and costs in addition to any other relief
to which he is entitled. Such recovery of attorneys' fees shall include any
attorneys' fees incurred in connection with any bankruptcy or reorganization
proceeding, including stay litigation. The parties further agree that any
attorneys' fees incurred in enforcing any judgment are recoverable as a separate
item, and that this provision is intended to be severable from the other
provisions of this Agreement, shall survive the judgment, and is not to be
deemed merged into the judgment.
7.11 Any controversy or claim arising out of or relating to
this Agreement, or breach thereof, shall be settled by binding arbitration in
Los Angeles, California, in accordance with
- 7 -
<PAGE>
the Commercial Arbitration Rules of the American Arbitration Association then in
effect, and judgment upon the award rendered by the arbitrator(s) may be entered
in any court of competent juris diction. The cost of arbitration shall be borne
by the losing party, or, if there is no losing party, as the arbitrator(s) shall
determine.
In any arbitration proceedings relative to this Agreement, or
breach thereof, all parties shall have the right to take depositions and to
obtain discovery regarding the subject matter of the arbitration pursuant to
California Code of Civil Procedure Section 1283.05, or any successor statute.
Service of any Petition to confirm or vacate the Arbitration
award and Notice of Hearing thereon may be made by certified or registered mail,
return-receipt requested, or by personal delivery.
The arbitrator'(s) award may be limited to a statement that
one party pay to the other a sum of money. The arbitrator(s) will not be deemed
to exceed their powers (per California Code of Civil Procedure Sections 1286.2
or 1286.6) by committing an error of law or legal reasoning, it being agreed
that the decision of the arbitrator(s) shall be final and unreviewable for error
of law or legal reasoning of any kind.
7.12 This Agreement may be executed in one (1) or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one (1) and the same instrument.
7.13 The failure of any party, at any time, to require timely
performance by any other party of any provision of this Agreement shall not
affect such party's rights thereafter to enforce the same, nor shall the waiver
by any party of any breach of any provision of this Agreement, whether or not
agreed to in writing, be taken or held to be a waiver of the breach of any other
provision or a waiver of any subsequent breach of the same provision of this
Agreement. No extension of time for
- 8 -
<PAGE>
the performance of any obligation or act hereunder shall be deemed to be an
extension of time for the performance of any other obligation or act hereunder.
7.14 The parties agree to perform such further acts and to
execute, acknowledge and deliver such documents as may be necessary to
effectuate the provisions of this Agreement.
Executed at Los Angeles, California, on the day and year first
above-written.
EMPLOYER: HIT ENTERTAINMENT, INC.
By /s/ Harry S. Shuster
----------------------------
Harry S. Shuster, its Chairman
EMPLOYEE:
/s/ Brian Shuster
-------------------------------
Brian Shuster
- 9 -
COMMERCIAL LEASE
(GENERAL FORM)
1. PARTIES.
This Lease is made and entered into this 1st day of July, 1995 by and
between 1990 Westwood Blvd., Inc. (hereinafter referred to as "Landlord") and
Hit Entertainment, Inc. (hereinafter referred to as "Tenant").
2. PREMISES.
Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord, on the terms and conditions hereinafter set forth that certain real
property and the building and other improvements located thereon situated in the
City of Los Angeles, County of Los Angeles, State of CA, commonly known as
Shanalee Plaza, 1990 Westwood Blvd., Penthouse (said real property is
hereinafter called the "Premises").
3. TERM.
The term of this Lease shall be for 3 years, commencing on July 1, 1995
and ending on June 30, 1998, unless sooner terminated as hereinafter provided.
4. RENT.
Tenant shall pay Landlord as rent for the Premises the following sums
per month, in advance on the first day of each month during the term of this
Lease:
During the first through third year of the term of this Lease, the sum
of Four Thousand Five Hundred and xx/100 ($4,500) dollars per month.
During the _________ through _________ year of the term of this Lease,
the sum of ($______________) dollars per month.
During the _________ through _________ year of the term of this Lease,
the sum of ($______________) dollars per month.
Tenant shall pay to Landlord upon the execution of this Lease the sum of N/A
($______________) dollars as rent for . Rent for any period during the term of
this Lease which is for less than one (1) month, shall be a pro rata portion of
the monthly installment. Rent shall be payable without notice or demand and
without any deduction, off-set, or abatement in lawful money of the United
States to the Landlord at the address stated herein for notices or to such other
persons or such other places as the Landlord may designate to Tenant in writing.
<PAGE>
5. SECURITY DEPOSIT.
Tenant shall deposit with Landlord upon the execution of this Lease the
sum of Nil ($______________) dollars as a security deposit for the Tenant's
faithful performance of the provisions of this Lease. If Tenant fails to pay
rent or other charges due hereunder, or otherwise defaults with respect to any
provision of this Lease, Landlord may use the security deposit, or any portion
of it, to cure the default or compensate Landlord for all damages sustained by
Landlord resulting from Tenant's default. Tenant shall immediately on demand pay
to Landlord the sum equal to that portion of the security deposit expended or
applied by Landlord which was provided for in this paragraph so as to maintain
the security deposit in the sum initially deposited with Landlord. Landlord
shall not be required to keep the security deposit separate from its general
account nor shall Landlord be required to pay Tenant any interest on the
security deposit. If Tenant performs all of Tenant's obligations under this
Lease, the security deposit or that portion thereof which has not previously
been applied by the Landlord, shall be returned to Tenant within fourteen (14)
days after the expiration of the term of this Lease, or after Tenant has vacated
the Premises, whichever is later.
6. USE.
Tenant shall use the Premises only for ________________________________
and for no other purpose without the Landlord's prior written consent.Tenant
shall not do, bring or keep anything in or about the Premises that will cause a
cancellation of any insurance covering the Premises or the building in which the
Premises are located. If the rate of any insurance carried by the Landlord is
increased as a result of Tenant's use, Tenant shall pay to Landlord within ten
(10) days after written demand from Landlord, the amount of any such increase.
Tenant shall comply with all laws concerning the Premises or Tenant's use of the
Premises, including without limitation, the obligation at Tenant's cost to
alter, maintain, or restore the Premises in compliance and conformity with all
laws relating to the condition, use, or occupancy of the Premises by Tenant
during the term of this Lease. Tenant shall not use or permit the use of the
Premises in any manner that will tend to create waste or a nuisance or, if there
shall be more than one tenant of the building containing the Premises, which
shall unreasonably disturb any other tenant.
Tenant hereby accepts the Premises in their condition existing as of
the date that Tenant possesses the Premises, subject to all applicable zoning,
municipal, county and state laws, ordinances, regulations governing or
regulating the use of the Premises and accepts this Lease subject thereto and to
all matters disclosed thereby. Tenant hereby acknowledges that neither the
Landlord nor the Landlord's agent has made any representation or warranty to
Tenant as to the suitability of the Premises for the conduct of Tenant's
business.
2
<PAGE>
7. TAXES.
(a) Real Property Taxes.
Landlord shall pay all real property taxes and general assessments
levied and assessed against the Premises during the term of this Lease.
If it shall be Tenant's obligation to pay such real property taxes and
assessments hereunder, Landlord shall use its best efforts to cause the Premises
to be separately assessed from other real property owned by the Landlord. If
Landlord is unable to obtain such a separate assessment, the assessor's
evaluation based on the building and other improvements that are a part of the
Premises shall be used to determine the real property taxes. If this evaluation
is not available, the parties shall equitably allocate the property taxes
between the building and other improvements that are a part of the Premises and
all buildings and other improvements included in the tax bill. In making the
allocation, the parties shall reasonably evaluate the factors to determine the
amount of the real property taxes so that the allocation of the building and
other improvements that are a part of the Premises will not be less than the
ratio of the total number of square feet of the building and other improvements
that are a part of the Premises bears to the total number of square feet in all
buildings and other improvements included in the tax bill.
Real property taxes attributable to land in the Premises shall be
determined by the ratio that the total number of square feet in the Premises
bears to the total number of square feet of land included in the tax bill.
(b) Personal Property Taxes.
Tenant shall pay prior to the delinquency all taxes assessed against
and levied upon the trade fixtures, furnishings, equipment and other personal
property of Tenant contained in the Premises. Tenant shall endeavor to cause
such trade fixtures, furnishings and equipment and all other personal property
to be assessed and billed separately from the property of the Landlord. If any
of Tenant's said personal property shall be assessed with Landlord's property,
Tenant shall pay to Landlord the taxes attributable to Tenant within ten (10)
days after the receipt of a written statement from Landlord setting forth the
taxes applicable to Tenant's property.
8. UTILITIES.
Tenant shall make all arrangements and pay for all water, gas, heat,
light, power, telephone and other utility services supplied to the Premises
together with any taxes thereon and for all connection charges. If any such
services are not separately metered to Tenant, the Tenant shall pay a reasonable
proportion, to be determined by Landlord, of all charges jointly metered with
other premises.
3
<PAGE>
9. MAINTENANCE AND REPAIRS.
(a) Landlord's Obligations.
Except as provided in Article 12, and except for damage caused by any
negligent or intentional act or omission of Tenant, Tenant's agents, employees,
or invitees, Landlord at its sole cost and expense shall keep in good condition
and repair the foundations, exterior walls, and exterior roof of the Premises.
Landlord shall also maintain the unexposed electrical, plumbing and sewage
systems including, without limitation, those portions of the systems lying
outside the Premises; window frames, gutters and down spouts on the building,
all sidewalks, landscaping and other improvements that are a part of the
Premises or of which the Premises are a part. The Landlord shall also maintain
the heating, ventilating and air-conditioning systems servicing the Premises.
Landlord shall resurface and restripe the parking area on or adjacent to the
Premises when necessary. Landlord shall have thirty 130) days after notice from
Tenant to commence to perform its obligations under this Article 9, except that
Landlord shall perform its obligations immediately if the nature of the problem
presents a hazard or emergency situation. 11 the Landlord does not perform its
obligations within the time limit set forth in this paragraph, Tenant can
perform said obligations and shall have the right to be reimbursed for the
amount that Tenant actually expends in the performance of Landlord's
obligations. If Landlord does not reimburse Tenant within thirty 130) days after
demand from Tenant, Tenant's sold remedy shall be to institute suit against the
Landlord, and Tenant shall not have the right to withhold from future rent the
sums Tenant has expended.
(b) Tenant's Obligations.
Subject to the provisions of Sub-paragraph la) above and Article 12,
Tenant at Tenant's sole cost and expense shall keep in good order, condition and
repair the Premises and every part thereof including, without limitation, all
Tenant's personal property, fixtures, signs, store fronts, plate glass, show
windows, doors, interior walls, interior ceiling, and lighting facilities.
If Tenant fails to perform Tenant's obligation as stated herein,
Landlord may at its option (but shall not be required to), enter the Premises,
after ten (10) days prior written notice to Tenant, put the same in good order,
condition and repair, and the costs thereof together with interest thereon at
the rate of ten (10%) percent per annum shall become due and payable as
additional rental to Landlord together with Tenant's next rental installment.
10. ALTERATIONS AND ADDITIONS.
(a) Tenant shall not, without the Landlord s prior written consent,
make any alterations, improvements or additions in or about the Premises except
for non-structural work which does not exceed $1,000.00 in cost. As a condition
to giving any such consent, the Landlord may require the Tenant to remove any
such alterations, improvements, or additions at the expiration of the term, and
to restore the Premises to their prior condition by giving Tenant thirty (30)
days written notice prior to the expiration of the term that
4
<PAGE>
Landlord requires Tenant to remove any such alterations, improvements, or
additions that Tenant has made to the Premises. If Landlord so elects, Tenant at
its sole cost shall restore the Premises to the condition designated by Landlord
in its election before the last day of the term of the Lease.
Before commencing any work relating to the alterations, additions, or
improvements affecting the Premises, Tenant shall notify Landlord in writing of
the expected date of the commencement of such work so that Landlord can post and
record the appropriate notices of non-responsibility to protect Landlord from
any mechanic's liens, materialman liens, or any other liens. In any event,
Tenant shall pay, when due, all claims for labor and materials furnished to or
for Tenant at or for use in the Premises. Tenant shall not permit any mechanic's
liens or materialman's liens to be levied against the Premises for any labor or
material furnished to Tenant or claimed to have been furnished to Tenant or
Tenant's agents or contractors in connection with work of any character
performed or claimed to have been performed on the Premises by or at the
direction of Tenant. Tenant shall have the right to assess the validity of any
such lien if, immediately on demand by Landlord, Tenant procures and records a
lien release bond meeting the requirements of California Civil Code Section 3143
and shall provide for the payment of any sum that the claimant may recover on
the claim (together with the costs of suit, if it is recovered in the action).
Unless the Landlord requires their removal as set forth above, all
alterations, improvements or additions which are made on the Premises by the
Tenant shall become the property of the Landlord and remain upon and be
surrendered with the Premises at the expiration of the term. Notwithstanding the
provisions of this paragraph, Tenant's trade fixtures, furniture, equipment and
other machinery, other than that which is affixed to the Premises so that it
cannot be removed without material or structural damage to the Premises, shall
remain the property of the Tenant and removed by Tenant at the expiration of the
term of this Lease.
11. INSURANCE; INDEMNITY.
(a) Fire Insurance.
Landlord at its cost shall maintain during the term of this Lease on
the Premises a policy or policies of standard fire and extended coverage
insurance to the extent of at least ninety (90%) percent of full replacement
value thereof. Said insurance policies shall be issued in the names of Landlord
and Tenant, as their interests may appear.
Tenant at its cost shall maintain the during the term is this Lease on
all its personal property, Tenant's improvements, and alterations in or about
the Premises, a policy of standard fire and extended coverage insurance, with
vandalism and malicious mischief endorsements, to the extent of their full
replacement value. The proceeds from any such policy shall be used by Tenant for
the replacement of personal property or the restoration of Tenant's improvements
or alterations.
5
<PAGE>
(b) Liability Insurance.
Tenant at its sole cost and expense shall maintain during the term of
this Lease public liability and property damage insurance with a single combined
liability limit of five hundred thousand ($500,000.00) dollars, and property
damage limits of not less that one hundred thousand ($100,000.00) dollars,
insuring against all liability of Tenant and its authorized representatives
arising out of and in connection with Tenant's use or occupancy of the Premises.
Both public liability insurance and property damage insurance shall insure
performance by Tenant of the indemnity provisions in Sub-paragraph (d) below,
but the limits of such insurance shall not, however, limit the liability of
Tenant hereunder. Both Landlord and Tenant shall be named as additional
insureds, and the policies shall contain cross-liability endorsements. If Tenant
shall fail to procure and maintain such insurance the Landlord may, but shall
not be required to, procure and maintain same at the expense of Tenant and the
cost thereof, together with interest thereon at the rate of ten (10%) percent
per annum, shall become due and payable as additional rental to Landlord
together with Tenant's next rental installment.
(c) Waiver of Subrogation.
Tenant and Landlord each waives any and all rights of recovery against
the other, or against the officers, employees, agents, and representatives of
the other, for loss of or damage to such waiving party or its property or the
property of others under its control, where such loss or damage is insured
against under any insurance policy in force at the time of such loss or damage.
Each party shall cause each insurance policy obtained by it hereunder to provide
that the insurance company waives all right of recovery by way of subrogation
against either party in connection with am/ damage covered by any such policy.
(d) Hold Harmless.
Tenant shall indemnify and hold Landlord harmless from and against any
and all claims arising from Tenant's use or occupancy of the Premises or from
the conduct of its business or from any activity, work, or things which may be
permitted or suffered by Tenant in or about the Premises including all damage,
costs, attorney's fees, expenses and liabilities incurred in the defense of any
claim or action or proceeding arising therefrom. Except for Landlord's willful
or grossly negligent conduct, Tenant hereby assumes all risk of damage to
property or injury to person in or about the Premises from any cause, and Tenant
hereby waives all claims in respect thereof against Landlord.
(e) Exemption of Landlord from Liability.
Except for Landlord's willful or grossly negligent conduct, Tenant
hereby agrees that Landlord shall not be liable for any injury to Tenant's
business or loss of income therefrom or for damage to the goods, wares,
merchandise, or other property of Tenant, Tenant's employees, invitees,
customers or any other person in or about the Premises; nor shall Landlord be
liable for injury to the person of Tenant. Tenant's employees, agents,
contractors, or invitees, whether such damage or injury is caused by or results
from fire,
6
<PAGE>
steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air-conditioning, or lighting fixtures, or from any other cause, whether such
damage results from conditions arising upon the Premises or upon other portions
of the building in which the Premises are a part, or from any other sources or
places. Landlord shall not be liable to Tenant for any damages arising from any
act or neglect of any other tenant, if any, of the building in which the
Premises are located.
12. DAMAGE OR DESTRUCTION.
(a) Damage - Insured.
If, during the term of this Lease, the Premises and/or the building and
other improvements in which the Premises are located are totally or partially
destroyed rendering the Premises totally or partially inaccessible or unusable,
and such damage or destruction was caused by a casualty covered under an
insurance policy required to be maintained hereunder, Landlord shall restore the
Premises and/or the building and other improvements in which the Premises are
located into substantially the same condition as they were in immediately before
such damage or destruction, provided that the restoration can be made under the
existing laws and can be completed within one hundred twenty 11201 working days
after the date of such destruction or damage. Such destruction or damage shall
not terminate this Lease.
If the restoration cannot be made in said 120 day period, then within
fifteen (15) days after the parties hereto determine that the restoration cannot
be made in the time stated in this paragraph, Tenant may terminate this Lease
immediately by giving notice to Landlord and the Lease will be deemed cancelled
as of the date of such damage or destruction. If Tenant fails to terminate this
Lease and the restoration is permitted under the existing laws, Landlord, at its
option, may terminate this Lease or restore the Premises and/or any other
improvements in which the Premises are located within a reasonable time and this
Lease shall continue in full force and effect. If the existing laws do not
permit the restoration, either party can terminate this Lease immediately by
giving notice to the other party.
Notwithstanding the above, if the Tenant is the insuring party and if
the insurance proceeds received by Landlord are not sufficient to effect such
repair, Landlord shall give notice to Tenant of the amount required in addition
to the insurance proceeds to effect such repair. Tenant may, at Tenant's option,
contribute the required amount, but upon failure to do so within thirty (30)
days following such notice, Landlord's sole remedy shall be, at Landlord's
option and with no liability to Tenant, to cancel and terminate this Lease. If
Tenant shall contribute such amount to Landlord within said thirty (30) day
period, Landlord shall make such repairs as soon as reasonably possible and this
Lease shall continue in full force and effect. Tenant shall in no event have any
right to reimbursement for any amount so contributed.
7
<PAGE>
(b) Damage - Uninsured.
In the event that the Premises are damaged or destroyed by a casualty
which is not covered by the fire and extended coverage insurance which is
required to be carried by the party designated in Article 11(a) above, then
Landlord shall restore the same; provided that if the damage or destruction is
to an extent greater than ten (10%) percent of the then replacement cost of the
improvements on the Premises (exclusive of Tenant's trade fixtures and equipment
and exclusive of foundations and footings), then Landlord may elect not to
restore and to terminate this Lease. Landlord must give to Tenant written notice
of its intention not to restore within thirty (30) days from the date of such
damage or destruction and, if not given, Landlord shall be deemed to have
elected to restore and in such event shall repair any damage as soon as
reasonably possible. In the event that Landlord elects to give such notice of
Landlord's intention to cancel and terminate this Lease, Tenant shall have the
right, within ten (10) days after receipt of such notice, to give written notice
to Landlord of Tenant's intention to repair such damage at Tenant's expense,
without reimbursement from Landlord, in which event the Lease shall continue in
full force and effect and Tenant shall proceed to make such repairs as soon as
reasonably possible. If the Tenant does not give such notice within such 10 day
period, this Lease shall be cancelled and be deemed terminated as of the date of
the occurrence of such damage or destruction.
(c) Damage Near the End of the Term.
If the Premises are totally or partially destroyed or damaged during
the last twelve (12) months of the term of this Lease, Landlord may, at
Landlord's option, cancel and terminate this Lease as of the date of the cause
of such damage by giving written notice to Tenant of Landlord's election to do
so within 30 days after the date of the occurrence of such damage; provided,
however, that, if the damage or destruction occurs within the last 12 months of
the term and if within fifteen (15) days after the date of such damage or
destruction Tenant exercises any option to extend the term provided herein,
Landlord shall restore the Premises if obligated to do so as provided in
subparagraph (a) or (b) above.
(d) Abatement of Rent.
If the Premises are partially or totally destroyed or damaged and
Landlord or Tenant repairs or restores them pursuant to the provisions of this
Article 12, the rent payable hereunder for the period during which such damage,
repair or restoration continues shall be abated in proportion to the degree to
which Tenant's reasonable use of the Premises is impaired. Except for the
abatement of rent, if any, Tenant shall have no claim against Landlord for any
damages suffered by reason of any such damage, destruction, repair or
restoration.
(e) Trade Fixtures and Equipment.
If Landlord is required or elects to restore the Premises as provided
in this Article, Landlord shall not be required to restore Tenant's
improvements, trade fixtures, equipment
8
<PAGE>
or alterations made by Tenant, such excluded items being the sole responsibility
of the Tenant to restore hereunder .
(f) Total Destruction - Multitenant Building.
If the Premises are a part of a multitenant building and there is
destruction to the Premises and/or the building of which the Premises are a part
that exceeds Fifty (50%) percent of the then replacement value of the Premises
and/or the building in which the Premises are a part from any cause whether or
not covered by the insurance described in Article ll above, Landlord may, at its
option, elect to terminate this Lease (whether or not the Premises are
destroyed) so long as Landlord terminates the leases of all other tenants in the
building of which the Premises are a part, effective as of the date of such
damage or destruction.
13. CONDEMNATION.
If the Premises or any portion thereof are taken by the power of
eminent domain, or sold by Landlord under the threat of exercise of said power
(all of which is herein referred to as "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever occurs first. If more than twenty (20%) percent
of the floor area of any buildings on the Premises, or more than twenty (20%)
percent of the land area of the Premises not covered with buildings, is taken by
condemnation, either Landlord or Tenant may terminate this Lease as of the date
the condemning authority takes possession by notice in writing of such election
within twenty (20) days after Landlord shall have notified Tenant of such taking
or, in the absence of such notice, then within twenty (20) days after the
condemning authority shall have taken possession.
If this Lease is not terminated by either Landlord or Tenant as
provided hereinabove, then it shall remain in full force and effect as to the
portion of the Premises remaining, provided that the rental shall be reduced in
proportion to the floor area of the buildings taken within the Premises as it
bears to the total floor area of all buildings located on the Premises. In the
event this Lease is not so terminated, then Landlord agrees at Landlord's sole
cost and expense, to as soon as reasonably possible restore the Premises to a
complete unit of like quality and character as existed prior to the
condemnation.
All awards for the taking of any part of the Premises or any payment
made under the threat of the exercise of the power of eminent domain shall be
the property of the Landlord, whether made as compensation for the diminution of
the value of the leasehold or for the taking of the fee or as severance damages;
provided, however, that Tenant shall be entitled to any award for loss or damage
to Tenant's trade fixtures and removable personal property.
Each party hereby waives the provisions of Code of Civil Procedure
1265.130 allowing either party to petition the Superior Court to terminate this
Lease in the event of a partial taking of the Premises.
9
<PAGE>
Rent shall be abated or reduced during the period from the date of
taking until the completion of restoration by Landlord, but all other
obligations of Tenant under this Lease shall remain in full force and effect.
The abatement or reduction of the rent shall be based on the extent to which the
restoration interferes with Tenant's use of the Premises.
14. ASSIGNMENT AND SUBLETTING.
Tenant shall not voluntarily or by operation of law assign, transfer,
sublet, mortgage, or otherwise transfer or encumber all or any part of Tenant's
interest in this Lease or in the Premises without Landlord's prior written
consent which consent shall not be unreasonably withheld. Any attempted
assignment, transfer, mortgage, encumbrance, or subletting without such consent
shall be void and shall constitute a breach of this Lease. If Tenant is a
corporation, any dissolution, merger, consolidation or other reorganization of
Tenant, or the sale or other transfer of a controlling percentage of the capital
stock of Tenant, or the sale of at least fifty-one (51%) percent of tile value
of the assets of Tenant, shall be deemed a voluntary assignment. The phrase
"controlling percentage" means the ownership of, and the right to vote, stock
possessing at least fifty-one (51%) percent of the total combined voting power
of all classes of Tenant's capital stock issued, outstanding, and entitled to
vote for the election of directors. This paragraph shall not apply to
corporations the stock of which is traded through an exchange or over the
counter.
Regardless of Landlord's consent, no subletting or assignment shall
release Tenant or Tenant's obligation to pay the rent and to perform all other
obligations to be performed by Tenant hereunder for the term of this Lease. The
acceptance of rent by Landlord from any other person shall not be deemed a
waiver by Landlord of any provision hereof. Consent to one assignment or
subletting shall not be deemed consent to any subsequent assignment or
subletting.
15. DEFAULT.
(a) Events of Default.
The occurrence of any one or more of the following events shall
constitute a default and breach of this Lease by Tenant:
(1) Failure to pay rent when due, if the failure continues for
five (5) days after written notice has been given to Tenant.
(2) Abandonment and vacation of the Premises (failure to occupy
the Premises for fourteen (14) consecutive days shall be deemed an
abandonment and vacation).
(3) Failure to perform any other provision of this Lease if the
failure to perform is not cured within thirty (30) days after written
notice thereof has been given to Tenant by Landlord. If the default
cannot reasonably be cured within said thirty (30) day period, Tenant
shall not be in default under this Lease if Tenant
10
<PAGE>
commences to cure the default within the thirty 1301 day period and
diligently prosecutes the same to completion.
(4) The making by Tenant of any general assignment, or general
arrangement for the benefit of creditors; the filing by or against
Tenant of a petition to have Tenant adjudged a bankrupt or a petition
for reorganization or arrangement under any law relating to bankruptcy
unless the same is dismissed within sixty (60) days; the appointment
of a trustee or receiver to take possession of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in the
Lease, where possession is not restored to Tenant within thirty (30)
days; or the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises or of
Tenant's interest in the Lease, where such seizure is not discharged
within thirty (30) days.
Notices given under this paragraph shall specify the alleged default
and the applicable lease provisions, and shall demand that Tenant perform the
provisions of this Lease or pay the rent that is in arrears as the case may be,
within the applicable period of time. No such notice shall be deemed a
forfeiture or a termination of this Lease unless Landlord so elects in the
notice.
(b) Landlord's Remedies.
The Landlord shall have the following remedies if Tenant commits a
default under this Lease. These remedies are not exclusive but are cumulative
and in addition to any remedies now or hereafter allowed by law.
Landlord can continue this Lease in full force and effect, and the
Lease will continue in effect so long as Landlord does not terminate Tenant's
right to possession, and the Landlord shall have the right to collect rent when
due. During the period that Tenant is in default, Landlord can enter the
Premises and relet them, or any part of them, to third parties for Tenant's
account. Tenant shall be liable immediately to the Landlord for all costs the
Landlord incurs in reletting the Premises, including, without limitation,
brokers' commissions, expenses of remodeling the Premises required by the
reletting, and like costs. Reletting can be for a period shorter or longer than
the remaining term of this Lease. Tenant shall pay to Landlord the rent due
under this Lease on the dates the rent is due, less the rent Landlord receives
from any reletting. No act by Landlord allowed by this paragraph shall terminate
this Lease unless Landlord notifies Tenant that Landlord elects to terminate
this Lease. After Tenant's default and for so long as Landlord has not
terminated Tenant's right to possession of the Premises, if Tenant obtains
Landlord's consent, Tenant shall have the right to assume or sublet its interest
in the Lease, but Tenant shall not be released from liability. Landlord's
consent to the proposed assignment or subletting shall not be unreasonably
withheld.
If Landlord elects to relet the Premises as provided in this paragraph,
any rent that Landlord receives from such reletting shall apply first to the
payment of any indebtedness from Tenant to Landlord other than the rent due from
Tenant to Landlord; secondly, to all
11
<PAGE>
costs, including maintenance, incurred by Landlord in such reletting; and third,
to any rent due and unpaid under this Lease. After deducting the payments
referred to in this paragraph, any sum remaining from the rent Landlord receives
from such reletting shall be held by Landlord and applied in payment of future
rent as rent becomes due under this Lease. In no event shall tenant be entitled
to any excess rent received by Landlord. If, on the date rent is due under this
Lease, the rent received from the reletting is less than the rent due on that
date, Tenant shall pay to Landlord, in addition to the remaining rent due, all
costs, including maintenance, that Landlord shall have incurred in reletting
that remain after applying the rent received from reletting as provided in this
paragraph.
Landlord can, at its option, terminate Tenant's right to possession of
the Premises at any time. No act by Landlord other than giving written notice to
Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the
Premises, or the appointment of a receiver on Landlord's initiative to protect
Landlord's interest in this Lease shall not constitute a termination of Tenant's
right to possession. In the event of such termination, Landlord has the right to
recover from Tenant:
(1) The worth, at the time of the award, of the unpaid rent that
had been earned at the time of the termination of this Lease;
(2) The worth, at the time of the award, of the amount by which
the unpaid rent that would have been earned after the date of the
termination of this Lease until the time of the award exceeds the
amount of the loss of rent that Tenant proves could have been
reasonably avoided;
(3) The worth, at the time of the award, of the amount by which
the unpaid rent for the balance of the term after the time of the
award exceeds the amount of the loss of rent that Tenant proves could
have been reasonably avoided; and
(4) Any other amount, including court costs, necessary to
compensate Landlord for all detriment proximately caused by Tenant's
default.
"The worth at the time of the award," as used in (1) and (2) of this
paragraph is to be computed by allowing interest at the maximum rate an
individual is permitted by law to charge. "The worth at the time of the award,"
as referred to in (3) of this paragraph is to be computed by discounting the
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of the award, plus one (1%) percent.
If Tenant is in default under the terms of this Lease, Landlord shall
have the additional right to have a receiver appointed to collect rent and
conduct Tenant's business. Neither the filing of a petition for the appointment
of a receiver nor the appointment itself shall constitute an election by
Landlord to terminate this Lease.
Landlord at any time after Tenant commits a default, can cure the
default at Tenant's cost and expense. If Landlord at any time, by reason of
Tenant's default, pays any sum or does any act that requires the payment of any
sum, the sum paid by Landlord shall be due
12
<PAGE>
immediately from Tenant to Landlord at the time the sum is paid, and if paid at
a later date shall bear interest at the maximum rate an individual is permitted
by law to charge from the date the sum is paid by Landlord until Landlord is
reimbursed by Tenant. The sum, together with interest thereon, shall be
considered additional rent.
16. SIGNS.
Tenant shall not have the right to place, construct or maintain any
sign, advertisement, awning, banner, or other exterior decorations on the
building or other improvements that are a part of the Premises without
Landlord's prior, written consent, which consent shall not be unreasonably
withheld.
17. EARLY POSSESSION.
In the event that the Landlord shall permit Tenant to occupy the
Premises prior to the commencement date of the term of this Lease, such
occupancy shall be subject to all the provisions of this Lease. Said early
possession shall not advance the termination date of this Lease.
18. SUBORDINATION.
This Lease, at Landlord's option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the real property of which the Premises are a part and to
any and all advances made on the security thereof and to all renewal,
modifications, and extensions thereof. Notwithstanding any such subordination,
Tenant's right to quiet possession of the Premises shall not be disturbed if
Tenant is not in default and so long as Tenant shall pay the rent and observe
and perform all the other provisions of this Lease, unless this Lease is
otherwise terminated pursuant to its terms. If any mortgagee, trustee, or ground
lessor shall elect to have this Lease prior to the lien of its mortgage or deed
of trust or ground lease, and shall give written notice thereof to Tenant, this
Lease shall be deemed prior to such mortgage, deed of trust or ground lease,
whether this Lease is dated prior to or subsequent to the date of such mortgage,
deed of trust or ground lease, or the date of recording thereof. Tenant agrees
to execute any documents requiring to effect such subordination or to make this
Lease prior to the lien of any mortgage, deed of trust, or ground lease, as the
case may be, and failing to do so within ten (10) days after written demand from
Landlord does hereby make, constitute and irrevocably appoint Landlord as
Tenant's attorney in fact and in Tenant s name, place and stead to do so.
19. SURRENDER.
On the last day of the term hereof, or on any sooner termination,
Tenant shall surrender the Premises to Landlord In good condition, broom clean,
ordinary wear and tear accepted. Tenant shall repair any damage to the Premises
occasioned by its use thereof, or by the removal of Tenant's trade fixtures,
furnishings and equipment which repair shall include the patching and tilling of
holes and repair of structural damage. Tenant shall
13
<PAGE>
remove all of its personal property and fixtures on the Premises prior to the
expiration of the term of this Lease and if required by Landlord pursuant to
Article 10(a) above, any alterations, improvements or additions made by Tenant
to the Premises. If Tenant fails to surrender the Premises to Landlord on the
expiration of the Lease as required by this paragraph, Tenant shall hold
Landlord harmless from all damages resulting from Tenant's failure to vacate the
Premises, including, without limitation, claims made by any succeeding tenant
resulting from Tenant's failure to surrender the Premises.
20. HOLDING OVER.
If the Tenant, with the Landlord's consent, remains in possession of
the Premises after the expiration or termination of the term of this Lease, such
possession by Tenant shall be deemed to be a tenancy from month-to-month at a
rental in the amount of the last monthly rental plus all other charges payable
hereunder, upon all the provisions of this Lease applicable to month-to-month
tenancy.
21. BINDING ON SUCCESSORS AND ASSIGNS.
The terms, conditions and covenants of this Lease shall be binding upon
and shall inure to the benefit of each of the parties hereto, their heirs,
personal representatives, successors and assigns.
22. NOTICES.
Whenever under this Lease a provision is made for any demand, notice or
declaration of any kind, it shall be in writing and served either personally or
sent by registered or certified United States mail, postage prepaid, addressed
at the addresses set forth below:
to landlord at: 1990 Westwood Blvd., Inc.
1990 Westwood Blvd.
Penthouse
LA, CA 90025
to tenant at: Hit Entertainment, Inc.
1990 Westwood Blvd.
Penthouse
LA, CA 90025
Such notices shall be deemed to be received within forty-eight (48)
hours from the time of mailing, if mailed as provided for in this paragraph.
23. LANDLORD'S RIGHT TO INSPECTION.
Landlord and Landlord's agent shall have the right to enter the
Premises at reasonable times for the purpose of inspecting same, showing the
same to prospective purchasers or lenders, and making such alterations, repairs,
improvements or additions to
14
<PAGE>
the Premises or to the building of which the Premises are a part as Landlord may
deem necessary or desirable. Landlord may at any time place on or about the
Premises any ordinary "For Sale" signs and Landlord may at any time during the
last one hundred twenty 1120) days of the term of this Lease place on or about
the Premises any ordinary "For Sale or Lease" signs, all without rebate of rent
or liability to Tenant.
24. CHOICE OF LAW.
This Lease shall be governed by the laws of the state where the
Premises are located.
25. ATTORNEY'S FEES.
If either Landlord or Tenant becomes a party to any litigation or
arbitration concerning this Lease, the Premises, or the building or other
improvements in which the Premises are located, by reason of any act or omission
of the other party or its authorized representatives, and not by reason of any
act or omission of the party that becomes a party to that litigation or any act
or omission of its authorized representatives, the party that causes the other
party to become involved in the litigation shall be liable to that party for
reasonable attorney's fees and court costs incurred by it in the litigation.
If either party commences an action against the other party arising out
of or in connection with this Lease, the prevailing party shall be entitled to
have and recover from the losing party reasonable attorney's fees and costs of
suit.
26. LANDLORD'S LIABILITY.
The term "Landlord" as used in this Lease shall mean only the owner or
owners at the time in question of the fee title or a Lessee's interest in a
ground lease of the Premises, and in the event of any transfer of such title or
interest, Landlord herein named (and in case of any subsequent transfers to the
then successor) shall be relieved from and after the date of such transfer of
all liability in respect to Landlord's obligations thereafter to be performed.
The obligations contained in this Lease to be performed by Landlord shall be
binding upon the Landlord's successors and assigns, only during their respective
periods of ownership.
27. WAIVERS.
No waiver by Landlord of any provision hereof shall be deemed a waiver
of any other provision hereof or of any subsequent breach by Tenant of the same
or any other provision. Landlord's consent to or approval of any act shall not
be deemed to render unnecessary the obtaining of Landlord's consent to or
approval of any subsequent act by Tenant. The acceptance of rent hereunder by
Landlord shall not be a waiver of any preceding breach by Tenant of any
provision hereof, other than the failure of Tenant to pay the particular rent so
accepted, regardless of Landlord's knowledge of such preceding breach at the
time of its acceptance of such rent.
15
<PAGE>
28. INCORPORATION OF PRIOR AGREEMENTS.
This Lease contains all agreements of the parties with respect to any
matter mentioned herein. No prior agreement or understanding pertaining to any
such matter shall be effective. This Lease may be modified only in writing, and
signed by the parties in interest at the time of such modification.
29. TIME.
Time is of the essence of this Lease.
30. SEVERABILITY.
The unenforceability, invalidity, or illegality of any provision of
this Lease shall not render the other provisions hereof unenforceable, invalid
or illegal.
31. ESTOPPEL CERTIFICATES.
Each party, within ten (10) days after notice from the other party,
shall execute and deliver to the other party a certificate stating that this
Lease is unmodified and in full force and effect, or in full force and effect as
modified, and stating the modification. The certificate shall also state the
amount of minimum monthly rent, the dates to which rent has been paid in
advance, and the amount of any security deposit o prepaid rent, if any, as well
as acknowledging that there are not, to that party's knowledge, any uncured
defaults on the part of the other party, or specifying such defaults, if any,
which are claimed. Failure to deliver such a certificate within the ten (10) day
period shall be conclusive upon the party failing to deliver the certificate to
the benefit of the party requesting the certificate that this Lease is in full
force and effect, that there are no uncured defaults hereunder, and has not been
modified except as may be represented by the party requesting the certificate.
32. COVENANTS AND CONDITIONS.
Each provision of this Lease performable by Tenant shall be deemed both
a covenant and a condition.
33. SINGULAR AND PLURAL.
When required by the context of this Lease, the singular shall indicate
the plural.
34. JOINT AND SEVERAL OBLIGATIONS.
"Party" shall mean Landlord and Tenant; and if more than one person or
entity is the Landlord or Tenant, the obligations imposed on that party shall be
joint and several.
16
<PAGE>
35. OPTION TO EXTEND.
Provided that Tenant shall not then be in default hereunder, Tenant
shall have the option to extend the term of this Lease for ____________
additional ____________ year periods upon the same terms and conditions herein
contained, except for fixed minimum monthly rentals, upon delivery by Tenant to
Landlord of written notice of its election to exercise such option(s) at lease
ninety (90) days prior to the expiration of the original (or extended) term
hereof. The parties hereto shall have thirty (30) days after the Landlord
receives the option notice in which to agree on the minimum monthly rental
during the extended term(s). If the parties agree on the minimum monthly rent
for the extended term(s) during the period, they shall immediately execute an
amendment to this Lease stating the minimum monthly rent. In the event that
there is more than one option to extend the term of this Lease, the parties
hereto shall negotiate the minimum monthly rent as set forth herein for each
extended term of this Lease. If the parties hereto are unable to agree on the
minimum monthly rent for the extended term(s) within said thirty (30) day
period, the option notice shall be of no effect and this Lease shall expire at
the end of the term. Neither party to this Lease shall have the right to have a
court or other third party set the minimum monthly rent.
36. ADDENDUM.
Any addendum attached hereto and either signed or initialled by the
parties shall be deemed a part hereof and shall supersede any conflicting terms
or provisions contained in this Lease.
The parties hereto have executed this Lease on the date first above
written.
LANDLORD: TENANT:
By: /s/ 2/27/96 By: /s/
17
<PAGE>
RENT ADJUSTMENT
Addendum to Commercial Office Lease
Dated: November 1, 1996
By and between (Lessor) 1990 Westwood Blvd., Inc. and (Lessee) Hit
Entertainment, Inc.
The monthly rent for each month of the adjustment period(s) is as follows.
During the 1st year through the 3rd year of the term of the Lease, commencing on
November 1, 1996 and ending on June 30, 1998, the sum of Three Thousand Five
Hundred Thirty Seven Dollars ($3,537) per month.
During the _____ year through the __________ year of the term of the Lease,
commencing on _____________ and ending on ___________________ the sum of
_______________ ($_________) per month.
The description of Lessee's space is as follows:
1055 sq. ft of usable office space and 966.12 sq. ft. of common area which
equals to 58.2% of the Lessee's pro rate share for a total of 2,021.12 sq. ft.
(see Exhibit #__________).
This Addendum shall supersede any conflicting terms, conditions or provisions
contained in the original Lease dated July 1, 1995.
Lessor /s/ Lessee /s/
-------------------- --------------------
18
COMMERCIAL LEASE
(GENERAL FORM)
1. PARTIES.
This Lease is made and entered into this 1st day of July, 1996 by and
between 1990 Westwood Blvd., Inc. (hereinafter referred to as "Landlord") and
United Film Distributors, Inc. (hereinafter referred to as "Tenant").
2. PREMISES.
Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord, on the terms and conditions hereinafter set forth that certain real
property and the building and other improvements located thereon situated in the
City of Los Angeles, County of Los Angeles, State of CA, commonly known as
Shanalee Plaza, 1990 Westwood Blvd., Penthouse (said real property is
hereinafter called the "Premises").
3. TERM.
The term of this Lease shall be for 5 years, commencing on July 1, 1996
and ending on June 30, 2001, unless sooner terminated as hereinafter provided.
4. RENT.
Tenant shall pay Landlord as rent for the Premises the following sums
per month, in advance on the first day of each month during the term of this
Lease:
During the first through second year of the term of this Lease, the
sum of Three Thousand Five Hundred and xx/100 ($3,500) dollars per
month.
During the 3rd through fifth year of the term of this Lease, the sum
of Three Thousand Eight Hundred and Fifty xx/100 ($3,850) dollars per
month.
During the _________ through _________ year of the term of this Lease,
the sum of ($______________) dollars per month.
Tenant shall pay to Landlord upon the execution of this Lease the sum of Three
Thousand Five Hundred Dollars ($3,500) dollars as rent for July 1996.
Rent for any period during the term of this Lease which is for less than one (1)
month, shall be a pro rata portion of the monthly installment. Rent shall be
payable without notice or demand and without any deduction, off-set, or
abatement in lawful money of the United States to the Landlord at the address
stated herein for notices or to such other persons or such other places as the
Landlord may designate to Tenant in writing.
<PAGE>
5. SECURITY DEPOSIT.
Tenant shall deposit with Landlord upon the execution of this Lease the
sum of Nil ($0) dollars as a security deposit for the Tenant's faithful
performance of the provisions of this Lease. If Tenant fails to pay rent or
other charges due hereunder, or otherwise defaults with respect to any provision
of this Lease, Landlord may use the security deposit, or any portion of it, to
cure the default or compensate Landlord for all damages sustained by Landlord
resulting from Tenant's default. Tenant shall immediately on demand pay to
Landlord the sum equal to that portion of the security deposit expended or
applied by Landlord which was provided for in this paragraph so as to maintain
the security deposit in the sum initially deposited with Landlord. Landlord
shall not be required to keep the security deposit separate from its general
account nor shall Landlord be required to pay Tenant any interest on the
security deposit. If Tenant performs all of Tenant's obligations under this
Lease, the security deposit or that portion thereof which has not previously
been applied by the Landlord, shall be returned to Tenant within fourteen (14)
days after the expiration of the term of this Lease, or after Tenant has vacated
the Premises, whichever is later.
6. USE.
Tenant shall use the Premises only for General Office Purposes and for
no other purpose without the Landlord's prior written consent.Tenant shall not
do, bring or keep anything in or about the Premises that will cause a
cancellation of any insurance covering the Premises or the building in which the
Premises are located. If the rate of any insurance carried by the Landlord is
increased as a result of Tenant's use, Tenant shall pay to Landlord within ten
(10) days after written demand from Landlord, the amount of any such increase.
Tenant shall comply with all laws concerning the Premises or Tenant's use of the
Premises, including without limitation, the obligation at Tenant's cost to
alter, maintain, or restore the Premises in compliance and conformity with all
laws relating to the condition, use, or occupancy of the Premises by Tenant
during the term of this Lease. Tenant shall not use or permit the use of the
Premises in any manner that will tend to create waste or a nuisance or, if there
shall be more than one tenant of the building containing the Premises, which
shall unreasonably disturb any other tenant.
Tenant hereby accepts the Premises in their condition existing as of
the date that Tenant possesses the Premises, subject to all applicable zoning,
municipal, county and state laws, ordinances, regulations governing or
regulating the use of the Premises and accepts this Lease subject thereto and to
all matters disclosed thereby. Tenant hereby acknowledges that neither the
Landlord nor the Landlord's agent has made any representation or warranty to
Tenant as to the suitability of the Premises for the conduct of Tenant's
business.
2
<PAGE>
7. TAXES.
(a) Real Property Taxes.
Landlord shall pay all real property taxes and general assessments
levied and assessed against the Premises during the term of this Lease.
If it shall be Tenant's obligation to pay such real property taxes and
assessments hereunder, Landlord shall use its best efforts to cause the Premises
to be separately assessed from other real property owned by the Landlord. If
Landlord is unable to obtain such a separate assessment, the assessor's
evaluation based on the building and other improvements that are a part of the
Premises shall be used to determine the real property taxes. If this evaluation
is not available, the parties shall equitably allocate the property taxes
between the building and other improvements that are a part of the Premises and
all buildings and other improvements included in the tax bill. In making the
allocation, the parties shall reasonably evaluate the factors to determine the
amount of the real property taxes so that the allocation of the building and
other improvements that are a part of the Premises will not be less than the
ratio of the total number of square feet of the building and other improvements
that are a part of the Premises bears to the total number of square feet in all
buildings and other improvements included in the tax bill.
Real property taxes attributable to land in the Premises shall be
determined by the ratio that the total number of square feet in the Premises
bears to the total number of square feet of land included in the tax bill.
(b) Personal Property Taxes.
Tenant shall pay prior to the delinquency all taxes assessed against
and levied upon the trade fixtures, furnishings, equipment and other personal
property of Tenant contained in the Premises. Tenant shall endeavor to cause
such trade fixtures, furnishings and equipment and all other personal property
to be assessed and billed separately from the property of the Landlord. If any
of Tenant's said personal property shall be assessed with Landlord's property,
Tenant shall pay to Landlord the taxes attributable to Tenant within ten (10)
days after the receipt of a written statement from Landlord setting forth the
taxes applicable to Tenant's property.
8. UTILITIES.
Tenant shall make all arrangements and pay for all water, gas, heat,
light, power, telephone and other utility services supplied to the Premises
together with any taxes thereon and for all connection charges. If any such
services are not separately metered to Tenant, the Tenant shall pay a reasonable
proportion, to be determined by Landlord, of all charges jointly metered with
other premises.
3
<PAGE>
9. MAINTENANCE AND REPAIRS.
(a) Landlord's Obligations.
Except as provided in Article 12, and except for damage caused by any
negligent or intentional act or omission of Tenant, Tenant's agents, employees,
or invitees, Landlord at its sole cost and expense shall keep in good condition
and repair the foundations, exterior walls, and exterior roof of the Premises.
Landlord shall also maintain the unexposed electrical, plumbing and sewage
systems including, without limitation, those portions of the systems lying
outside the Premises; window frames, gutters and down spouts on the building,
all sidewalks, landscaping and other improvements that are a part of the
Premises or of which the Premises are a part. The Landlord shall also maintain
the heating, ventilating and air-conditioning systems servicing the Premises.
Landlord shall resurface and restripe the parking area on or adjacent to the
Premises when necessary. Landlord shall have thirty 130) days after notice from
Tenant to commence to perform its obligations under this Article 9, except that
Landlord shall perform its obligations immediately if the nature of the problem
presents a hazard or emergency situation. 11 the Landlord does not perform its
obligations within the time limit set forth in this paragraph, Tenant can
perform said obligations and shall have the right to be reimbursed for the
amount that Tenant actually expends in the performance of Landlord's
obligations. If Landlord does not reimburse Tenant within thirty 130) days after
demand from Tenant, Tenant's sold remedy shall be to institute suit against the
Landlord, and Tenant shall not have the right to withhold from future rent the
sums Tenant has expended.
(b) Tenant's Obligations.
Subject to the provisions of Sub-paragraph la) above and Article 12,
Tenant at Tenant's sole cost and expense shall keep in good order, condition and
repair the Premises and every part thereof including, without limitation, all
Tenant's personal property, fixtures, signs, store fronts, plate glass, show
windows, doors, interior walls, interior ceiling, and lighting facilities.
If Tenant fails to perform Tenant's obligation as stated herein,
Landlord may at its option (but shall not be required to), enter the Premises,
after ten (10) days prior written notice to Tenant, put the same in good order,
condition and repair, and the costs thereof together with interest thereon at
the rate of ten (10%) percent per annum shall become due and payable as
additional rental to Landlord together with Tenant's next rental installment.
10. ALTERATIONS AND ADDITIONS.
(a) Tenant shall not, without the Landlord s prior written consent,
make any alterations, improvements or additions in or about the Premises except
for non-structural work which does not exceed $1,000.00 in cost. As a condition
to giving any such consent, the Landlord may require the Tenant to remove any
such alterations, improvements, or additions at the expiration of the term, and
to restore the Premises to their prior condition by giving Tenant thirty (30)
days written notice prior to the expiration of the term that
4
<PAGE>
Landlord requires Tenant to remove any such alterations, improvements, or
additions that Tenant has made to the Premises. If Landlord so elects, Tenant at
its sole cost shall restore the Premises to the condition designated by Landlord
in its election before the last day of the term of the Lease.
Before commencing any work relating to the alterations, additions, or
improvements affecting the Premises, Tenant shall notify Landlord in writing of
the expected date of the commencement of such work so that Landlord can post and
record the appropriate notices of non-responsibility to protect Landlord from
any mechanic's liens, materialman liens, or any other liens. In any event,
Tenant shall pay, when due, all claims for labor and materials furnished to or
for Tenant at or for use in the Premises. Tenant shall not permit any mechanic's
liens or materialman's liens to be levied against the Premises for any labor or
material furnished to Tenant or claimed to have been furnished to Tenant or
Tenant's agents or contractors in connection with work of any character
performed or claimed to have been performed on the Premises by or at the
direction of Tenant. Tenant shall have the right to assess the validity of any
such lien if, immediately on demand by Landlord, Tenant procures and records a
lien release bond meeting the requirements of California Civil Code Section 3143
and shall provide for the payment of any sum that the claimant may recover on
the claim (together with the costs of suit, if it is recovered in the action).
Unless the Landlord requires their removal as set forth above, all
alterations, improvements or additions which are made on the Premises by the
Tenant shall become the property of the Landlord and remain upon and be
surrendered with the Premises at the expiration of the term. Notwithstanding the
provisions of this paragraph, Tenant's trade fixtures, furniture, equipment and
other machinery, other than that which is affixed to the Premises so that it
cannot be removed without material or structural damage to the Premises, shall
remain the property of the Tenant and removed by Tenant at the expiration of the
term of this Lease.
11. INSURANCE; INDEMNITY.
(a) Fire Insurance.
Tenant at its cost shall maintain during the term of this Lease on the
Premises a policy or policies of standard fire and extended coverage insurance
to the extent of at least ninety (90%) percent of full replacement value
thereof. Said insurance policies shall be issued in the names of Landlord and
Tenant, as their interests may appear.
Tenant at its cost shall maintain the during the term is this Lease on
all its personal property, Tenant's improvements, and alterations in or about
the Premises, a policy of standard fire and extended coverage insurance, with
vandalism and malicious mischief endorsements, to the extent of their full
replacement value. The proceeds from any such policy shall be used by Tenant for
the replacement of personal property or the restoration of Tenant's improvements
or alterations.
5
<PAGE>
(b) Liability Insurance.
Tenant at its sole cost and expense shall maintain during the term of
this Lease public liability and property damage insurance with a single combined
liability limit of five hundred thousand ($500,000.00) dollars, and property
damage limits of not less that one hundred thousand ($100,000.00) dollars,
insuring against all liability of Tenant and its authorized representatives
arising out of and in connection with Tenant's use or occupancy of the Premises.
Both public liability insurance and property damage insurance shall insure
performance by Tenant of the indemnity provisions in Sub-paragraph (d) below,
but the limits of such insurance shall not, however, limit the liability of
Tenant hereunder. Both Landlord and Tenant shall be named as additional
insureds, and the policies shall contain cross-liability endorsements. If Tenant
shall fail to procure and maintain such insurance the Landlord may, but shall
not be required to, procure and maintain same at the expense of Tenant and the
cost thereof, together with interest thereon at the rate of ten (10%) percent
per annum, shall become due and payable as additional rental to Landlord
together with Tenant's next rental installment.
(c) Waiver of Subrogation.
Tenant and Landlord each waives any and all rights of recovery against
the other, or against the officers, employees, agents, and representatives of
the other, for loss of or damage to such waiving party or its property or the
property of others under its control, where such loss or damage is insured
against under any insurance policy in force at the time of such loss or damage.
Each party shall cause each insurance policy obtained by it hereunder to provide
that the insurance company waives all right of recovery by way of subrogation
against either party in connection with am/ damage covered by any such policy.
(d) Hold Harmless.
Tenant shall indemnify and hold Landlord harmless from and against any
and all claims arising from Tenant's use or occupancy of the Premises or from
the conduct of its business or from any activity, work, or things which may be
permitted or suffered by Tenant in or about the Premises including all damage,
costs, attorney's fees, expenses and liabilities incurred in the defense of any
claim or action or proceeding arising therefrom. Except for Landlord's willful
or grossly negligent conduct, Tenant hereby assumes all risk of damage to
property or injury to person in or about the Premises from any cause, and Tenant
hereby waives all claims in respect thereof against Landlord.
(e) Exemption of Landlord from Liability.
Except for Landlord's willful or grossly negligent conduct, Tenant
hereby agrees that Landlord shall not be liable for any injury to Tenant's
business or loss of income therefrom or for damage to the goods, wares,
merchandise, or other property of Tenant, Tenant's employees, invitees,
customers or any other person in or about the Premises; nor shall Landlord be
liable for injury to the person of Tenant. Tenant's employees, agents,
contractors, or invitees, whether such damage or injury is caused by or results
from fire,
6
<PAGE>
steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air-conditioning, or lighting fixtures, or from any other cause, whether such
damage results from conditions arising upon the Premises or upon other portions
of the building in which the Premises are a part, or from any other sources or
places. Landlord shall not be liable to Tenant for any damages arising from any
act or neglect of any other tenant, if any, of the building in which the
Premises are located.
12. DAMAGE OR DESTRUCTION.
(a) Damage - Insured.
If, during the term of this Lease, the Premises and/or the building and
other improvements in which the Premises are located are totally or partially
destroyed rendering the Premises totally or partially inaccessible or unusable,
and such damage or destruction was caused by a casualty covered under an
insurance policy required to be maintained hereunder, Landlord shall restore the
Premises and/or the building and other improvements in which the Premises are
located into substantially the same condition as they were in immediately before
such damage or destruction, provided that the restoration can be made under the
existing laws and can be completed within one hundred twenty 11201 working days
after the date of such destruction or damage. Such destruction or damage shall
not terminate this Lease.
If the restoration cannot be made in said 120 day period, then within
fifteen (15) days after the parties hereto determine that the restoration cannot
be made in the time stated in this paragraph, Tenant may terminate this Lease
immediately by giving notice to Landlord and the Lease will be deemed cancelled
as of the date of such damage or destruction. If Tenant fails to terminate this
Lease and the restoration is permitted under the existing laws, Landlord, at its
option, may terminate this Lease or restore the Premises and/or any other
improvements in which the Premises are located within a reasonable time and this
Lease shall continue in full force and effect. If the existing laws do not
permit the restoration, either party can terminate this Lease immediately by
giving notice to the other party.
Notwithstanding the above, if the Tenant is the insuring party and if
the insurance proceeds received by Landlord are not sufficient to effect such
repair, Landlord shall give notice to Tenant of the amount required in addition
to the insurance proceeds to effect such repair. Tenant may, at Tenant's option,
contribute the required amount, but upon failure to do so within thirty (30)
days following such notice, Landlord's sole remedy shall be, at Landlord's
option and with no liability to Tenant, to cancel and terminate this Lease. If
Tenant shall contribute such amount to Landlord within said thirty (30) day
period, Landlord shall make such repairs as soon as reasonably possible and this
Lease shall continue in full force and effect. Tenant shall in no event have any
right to reimbursement for any amount so contributed.
7
<PAGE>
(b) Damage - Uninsured.
In the event that the Premises are damaged or destroyed by a casualty
which is not covered by the fire and extended coverage insurance which is
required to be carried by the party designated in Article 11(a) above, then
Landlord shall restore the same; provided that if the damage or destruction is
to an extent greater than ten (10%) percent of the then replacement cost of the
improvements on the Premises (exclusive of Tenant's trade fixtures and equipment
and exclusive of foundations and footings), then Landlord may elect not to
restore and to terminate this Lease. Landlord must give to Tenant written notice
of its intention not to restore within thirty (30) days from the date of such
damage or destruction and, if not given, Landlord shall be deemed to have
elected to restore and in such event shall repair any damage as soon as
reasonably possible. In the event that Landlord elects to give such notice of
Landlord's intention to cancel and terminate this Lease, Tenant shall have the
right, within ten (10) days after receipt of such notice, to give written notice
to Landlord of Tenant's intention to repair such damage at Tenant's expense,
without reimbursement from Landlord, in which event the Lease shall continue in
full force and effect and Tenant shall proceed to make such repairs as soon as
reasonably possible. If the Tenant does not give such notice within such 10 day
period, this Lease shall be cancelled and be deemed terminated as of the date of
the occurrence of such damage or destruction.
(c) Damage Near the End of the Term.
If the Premises are totally or partially destroyed or damaged during
the last twelve (12) months of the term of this Lease, Landlord may, at
Landlord's option, cancel and terminate this Lease as of the date of the cause
of such damage by giving written notice to Tenant of Landlord's election to do
so within 30 days after the date of the occurrence of such damage; provided,
however, that, if the damage or destruction occurs within the last 12 months of
the term and if within fifteen (15) days after the date of such damage or
destruction Tenant exercises any option to extend the term provided herein,
Landlord shall restore the Premises if obligated to do so as provided in
subparagraph (a) or (b) above.
(d) Abatement of Rent.
If the Premises are partially or totally destroyed or damaged and
Landlord or Tenant repairs or restores them pursuant to the provisions of this
Article 12, the rent payable hereunder for the period during which such damage,
repair or restoration continues shall be abated in proportion to the degree to
which Tenant's reasonable use of the Premises is impaired. Except for the
abatement of rent, if any, Tenant shall have no claim against Landlord for any
damages suffered by reason of any such damage, destruction, repair or
restoration.
(e) Trade Fixtures and Equipment.
If Landlord is required or elects to restore the Premises as provided
in this Article, Landlord shall not be required to restore Tenant's
improvements, trade fixtures, equipment
8
<PAGE>
or alterations made by Tenant, such excluded items being the sole responsibility
of the Tenant to restore hereunder .
(f) Total Destruction - Multitenant Building.
If the Premises are a part of a multitenant building and there is
destruction to the Premises and/or the building of which the Premises are a part
that exceeds Fifty (50%) percent of the then replacement value of the Premises
and/or the building in which the Premises are a part from any cause whether or
not covered by the insurance described in Article ll above, Landlord may, at its
option, elect to terminate this Lease (whether or not the Premises are
destroyed) so long as Landlord terminates the leases of all other tenants in the
building of which the Premises are a part, effective as of the date of such
damage or destruction.
13. CONDEMNATION.
If the Premises or any portion thereof are taken by the power of
eminent domain, or sold by Landlord under the threat of exercise of said power
(all of which is herein referred to as "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever occurs first. If more than twenty (20%) percent
of the floor area of any buildings on the Premises, or more than twenty (20%)
percent of the land area of the Premises not covered with buildings, is taken by
condemnation, either Landlord or Tenant may terminate this Lease as of the date
the condemning authority takes possession by notice in writing of such election
within twenty (20) days after Landlord shall have notified Tenant of such taking
or, in the absence of such notice, then within twenty (20) days after the
condemning authority shall have taken possession.
If this Lease is not terminated by either Landlord or Tenant as
provided hereinabove, then it shall remain in full force and effect as to the
portion of the Premises remaining, provided that the rental shall be reduced in
proportion to the floor area of the buildings taken within the Premises as it
bears to the total floor area of all buildings located on the Premises. In the
event this Lease is not so terminated, then Landlord agrees at Landlord's sole
cost and expense, to as soon as reasonably possible restore the Premises to a
complete unit of like quality and character as existed prior to the
condemnation.
All awards for the taking of any part of the Premises or any payment
made under the threat of the exercise of the power of eminent domain shall be
the property of the Landlord, whether made as compensation for the diminution of
the value of the leasehold or for the taking of the fee or as severance damages;
provided, however, that Tenant shall be entitled to any award for loss or damage
to Tenant's trade fixtures and removable personal property.
Each party hereby waives the provisions of Code of Civil Procedure
1265.130 allowing either party to petition the Superior Court to terminate this
Lease in the event of a partial taking of the Premises.
9
<PAGE>
Rent shall be abated or reduced during the period from the date of
taking until the completion of restoration by Landlord, but all other
obligations of Tenant under this Lease shall remain in full force and effect.
The abatement or reduction of the rent shall be based on the extent to which the
restoration interferes with Tenant's use of the Premises.
14. ASSIGNMENT AND SUBLETTING.
Tenant shall not voluntarily or by operation of law assign, transfer,
sublet, mortgage, or otherwise transfer or encumber all or any part of Tenant's
interest in this Lease or in the Premises without Landlord's prior written
consent which consent shall not be unreasonably withheld. Any attempted
assignment, transfer, mortgage, encumbrance, or subletting without such consent
shall be void and shall constitute a breach of this Lease. If Tenant is a
corporation, any dissolution, merger, consolidation or other reorganization of
Tenant, or the sale or other transfer of a controlling percentage of the capital
stock of Tenant, or the sale of at least fifty-one (51%) percent of tile value
of the assets of Tenant, shall be deemed a voluntary assignment. The phrase
"controlling percentage" means the ownership of, and the right to vote, stock
possessing at least fifty-one (51%) percent of the total combined voting power
of all classes of Tenant's capital stock issued, outstanding, and entitled to
vote for the election of directors. This paragraph shall not apply to
corporations the stock of which is traded through an exchange or over the
counter.
Regardless of Landlord's consent, no subletting or assignment shall
release Tenant or Tenant's obligation to pay the rent and to perform all other
obligations to be performed by Tenant hereunder for the term of this Lease. The
acceptance of rent by Landlord from any other person shall not be deemed a
waiver by Landlord of any provision hereof. Consent to one assignment or
subletting shall not be deemed consent to any subsequent assignment or
subletting.
15. DEFAULT.
(a) Events of Default.
The occurrence of any one or more of the following events shall
constitute a default and breach of this Lease by Tenant:
(1) Failure to pay rent when due, if the failure continues for
five (5) days after written notice has been given to Tenant.
(2) Abandonment and vacation of the Premises (failure to occupy
the Premises for fourteen (14) consecutive days shall be deemed an
abandonment and vacation).
(3) Failure to perform any other provision of this Lease if the
failure to perform is not cured within thirty (30) days after written
notice thereof has been given to Tenant by Landlord. If the default
cannot reasonably be cured within said thirty (30) day period, Tenant
shall not be in default under this Lease if Tenant
10
<PAGE>
commences to cure the default within the thirty 1301 day period and
diligently prosecutes the same to completion.
(4) The making by Tenant of any general assignment, or general
arrangement for the benefit of creditors; the filing by or against
Tenant of a petition to have Tenant adjudged a bankrupt or a petition
for reorganization or arrangement under any law relating to bankruptcy
unless the same is dismissed within sixty (60) days; the appointment
of a trustee or receiver to take possession of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in the
Lease, where possession is not restored to Tenant within thirty (30)
days; or the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises or of
Tenant's interest in the Lease, where such seizure is not discharged
within thirty (30) days.
Notices given under this paragraph shall specify the alleged default
and the applicable lease provisions, and shall demand that Tenant perform the
provisions of this Lease or pay the rent that is in arrears as the case may be,
within the applicable period of time. No such notice shall be deemed a
forfeiture or a termination of this Lease unless Landlord so elects in the
notice.
(b) Landlord's Remedies.
The Landlord shall have the following remedies if Tenant commits a
default under this Lease. These remedies are not exclusive but are cumulative
and in addition to any remedies now or hereafter allowed by law.
Landlord can continue this Lease in full force and effect, and the
Lease will continue in effect so long as Landlord does not terminate Tenant's
right to possession, and the Landlord shall have the right to collect rent when
due. During the period that Tenant is in default, Landlord can enter the
Premises and relet them, or any part of them, to third parties for Tenant's
account. Tenant shall be liable immediately to the Landlord for all costs the
Landlord incurs in reletting the Premises, including, without limitation,
brokers' commissions, expenses of remodeling the Premises required by the
reletting, and like costs. Reletting can be for a period shorter or longer than
the remaining term of this Lease. Tenant shall pay to Landlord the rent due
under this Lease on the dates the rent is due, less the rent Landlord receives
from any reletting. No act by Landlord allowed by this paragraph shall terminate
this Lease unless Landlord notifies Tenant that Landlord elects to terminate
this Lease. After Tenant's default and for so long as Landlord has not
terminated Tenant's right to possession of the Premises, if Tenant obtains
Landlord's consent, Tenant shall have the right to assume or sublet its interest
in the Lease, but Tenant shall not be released from liability. Landlord's
consent to the proposed assignment or subletting shall not be unreasonably
withheld.
If Landlord elects to relet the Premises as provided in this paragraph,
any rent that Landlord receives from such reletting shall apply first to the
payment of any indebtedness from Tenant to Landlord other than the rent due from
Tenant to Landlord; secondly, to all
11
<PAGE>
costs, including maintenance, incurred by Landlord in such reletting; and third,
to any rent due and unpaid under this Lease. After deducting the payments
referred to in this paragraph, any sum remaining from the rent Landlord receives
from such reletting shall be held by Landlord and applied in payment of future
rent as rent becomes due under this Lease. In no event shall tenant be entitled
to any excess rent received by Landlord. If, on the date rent is due under this
Lease, the rent received from the reletting is less than the rent due on that
date, Tenant shall pay to Landlord, in addition to the remaining rent due, all
costs, including maintenance, that Landlord shall have incurred in reletting
that remain after applying the rent received from reletting as provided in this
paragraph.
Landlord can, at its option, terminate Tenant's right to possession of
the Premises at any time. No act by Landlord other than giving written notice to
Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the
Premises, or the appointment of a receiver on Landlord's initiative to protect
Landlord's interest in this Lease shall not constitute a termination of Tenant's
right to possession. In the event of such termination, Landlord has the right to
recover from Tenant:
(1) The worth, at the time of the award, of the unpaid rent that
had been earned at the time of the termination of this Lease;
(2) The worth, at the time of the award, of the amount by which
the unpaid rent that would have been earned after the date of the
termination of this Lease until the time of the award exceeds the
amount of the loss of rent that Tenant proves could have been
reasonably avoided;
(3) The worth, at the time of the award, of the amount by which
the unpaid rent for the balance of the term after the time of the
award exceeds the amount of the loss of rent that Tenant proves could
have been reasonably avoided; and
(4) Any other amount, including court costs, necessary to
compensate Landlord for all detriment proximately caused by Tenant's
default.
"The worth at the time of the award," as used in (1) and (2) of this
paragraph is to be computed by allowing interest at the maximum rate an
individual is permitted by law to charge. "The worth at the time of the award,"
as referred to in (3) of this paragraph is to be computed by discounting the
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of the award, plus one (1%) percent.
If Tenant is in default under the terms of this Lease, Landlord shall
have the additional right to have a receiver appointed to collect rent and
conduct Tenant's business. Neither the filing of a petition for the appointment
of a receiver nor the appointment itself shall constitute an election by
Landlord to terminate this Lease.
Landlord at any time after Tenant commits a default, can cure the
default at Tenant's cost and expense. If Landlord at any time, by reason of
Tenant's default, pays any sum or does any act that requires the payment of any
sum, the sum paid by Landlord shall be due
12
<PAGE>
immediately from Tenant to Landlord at the time the sum is paid, and if paid at
a later date shall bear interest at the maximum rate an individual is permitted
by law to charge from the date the sum is paid by Landlord until Landlord is
reimbursed by Tenant. The sum, together with interest thereon, shall be
considered additional rent.
16. SIGNS.
Tenant shall not have the right to place, construct or maintain any
sign, advertisement, awning, banner, or other exterior decorations on the
building or other improvements that are a part of the Premises without
Landlord's prior, written consent, which consent shall not be unreasonably
withheld.
17. EARLY POSSESSION.
In the event that the Landlord shall permit Tenant to occupy the
Premises prior to the commencement date of the term of this Lease, such
occupancy shall be subject to all the provisions of this Lease. Said early
possession shall not advance the termination date of this Lease.
18. SUBORDINATION.
This Lease, at Landlord's option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the real property of which the Premises are a part and to
any and all advances made on the security thereof and to all renewal,
modifications, and extensions thereof. Notwithstanding any such subordination,
Tenant's right to quiet possession of the Premises shall not be disturbed if
Tenant is not in default and so long as Tenant shall pay the rent and observe
and perform all the other provisions of this Lease, unless this Lease is
otherwise terminated pursuant to its terms. If any mortgagee, trustee, or ground
lessor shall elect to have this Lease prior to the lien of its mortgage or deed
of trust or ground lease, and shall give written notice thereof to Tenant, this
Lease shall be deemed prior to such mortgage, deed of trust or ground lease,
whether this Lease is dated prior to or subsequent to the date of such mortgage,
deed of trust or ground lease, or the date of recording thereof. Tenant agrees
to execute any documents requiring to effect such subordination or to make this
Lease prior to the lien of any mortgage, deed of trust, or ground lease, as the
case may be, and failing to do so within ten (10) days after written demand from
Landlord does hereby make, constitute and irrevocably appoint Landlord as
Tenant's attorney in fact and in Tenant s name, place and stead to do so.
19. SURRENDER.
On the last day of the term hereof, or on any sooner termination,
Tenant shall surrender the Premises to Landlord In good condition, broom clean,
ordinary wear and tear accepted. Tenant shall repair any damage to the Premises
occasioned by its use thereof, or by the removal of Tenant's trade fixtures,
furnishings and equipment which repair shall include the patching and tilling of
holes and repair of structural damage. Tenant shall
13
<PAGE>
remove all of its personal property and fixtures on the Premises prior to the
expiration of the term of this Lease and if required by Landlord pursuant to
Article 10(a) above, any alterations, improvements or additions made by Tenant
to the Premises. If Tenant fails to surrender the Premises to Landlord on the
expiration of the Lease as required by this paragraph, Tenant shall hold
Landlord harmless from all damages resulting from Tenant's failure to vacate the
Premises, including, without limitation, claims made by any succeeding tenant
resulting from Tenant's failure to surrender the Premises.
20. HOLDING OVER.
If the Tenant, with the Landlord's consent, remains in possession of
the Premises after the expiration or termination of the term of this Lease, such
possession by Tenant shall be deemed to be a tenancy from month-to-month at a
rental in the amount of the last monthly rental plus all other charges payable
hereunder, upon all the provisions of this Lease applicable to month-to-month
tenancy.
21. BINDING ON SUCCESSORS AND ASSIGNS.
The terms, conditions and covenants of this Lease shall be binding upon
and shall inure to the benefit of each of the parties hereto, their heirs,
personal representatives, successors and assigns.
22. NOTICES.
Whenever under this Lease a provision is made for any demand, notice or
declaration of any kind, it shall be in writing and served either personally or
sent by registered or certified United States mail, postage prepaid, addressed
at the addresses set forth below:
to landlord at: 1990 Westwood Blvd., Inc.
1990 Westwood Blvd.
Penthouse
LA, CA 90025
to tenant at: United Film Distributors, Inc.
1990 Westwood Blvd.
Penthouse
LA, CA 90025
Such notices shall be deemed to be received within forty-eight (48)
hours from the time of mailing, if mailed as provided for in this paragraph.
23. LANDLORD'S RIGHT TO INSPECTION.
Landlord and Landlord's agent shall have the right to enter the
Premises at reasonable times for the purpose of inspecting same, showing the
same to prospective purchasers or lenders, and making such alterations, repairs,
improvements or additions to
14
<PAGE>
the Premises or to the building of which the Premises are a part as Landlord may
deem necessary or desirable. Landlord may at any time place on or about the
Premises any ordinary "For Sale" signs and Landlord may at any time during the
last one hundred twenty 1120) days of the term of this Lease place on or about
the Premises any ordinary "For Sale or Lease" signs, all without rebate of rent
or liability to Tenant.
24. CHOICE OF LAW.
This Lease shall be governed by the laws of the state where the
Premises are located.
25. ATTORNEY'S FEES.
If either Landlord or Tenant becomes a party to any litigation or
arbitration concerning this Lease, the Premises, or the building or other
improvements in which the Premises are located, by reason of any act or omission
of the other party or its authorized representatives, and not by reason of any
act or omission of the party that becomes a party to that litigation or any act
or omission of its authorized representatives, the party that causes the other
party to become involved in the litigation shall be liable to that party for
reasonable attorney's fees and court costs incurred by it in the litigation.
If either party commences an action against the other party arising out
of or in connection with this Lease, the prevailing party shall be entitled to
have and recover from the losing party reasonable attorney's fees and costs of
suit.
26. LANDLORD'S LIABILITY.
The term "Landlord" as used in this Lease shall mean only the owner or
owners at the time in question of the fee title or a Lessee's interest in a
ground lease of the Premises, and in the event of any transfer of such title or
interest, Landlord herein named (and in case of any subsequent transfers to the
then successor) shall be relieved from and after the date of such transfer of
all liability in respect to Landlord's obligations thereafter to be performed.
The obligations contained in this Lease to be performed by Landlord shall be
binding upon the Landlord's successors and assigns, only during their respective
periods of ownership.
27. WAIVERS.
No waiver by Landlord of any provision hereof shall be deemed a waiver
of any other provision hereof or of any subsequent breach by Tenant of the same
or any other provision. Landlord's consent to or approval of any act shall not
be deemed to render unnecessary the obtaining of Landlord's consent to or
approval of any subsequent act by Tenant. The acceptance of rent hereunder by
Landlord shall not be a waiver of any preceding breach by Tenant of any
provision hereof, other than the failure of Tenant to pay the particular rent so
accepted, regardless of Landlord's knowledge of such preceding breach at the
time of its acceptance of such rent.
15
<PAGE>
28. INCORPORATION OF PRIOR AGREEMENTS.
This Lease contains all agreements of the parties with respect to any
matter mentioned herein. No prior agreement or understanding pertaining to any
such matter shall be effective. This Lease may be modified only in writing, and
signed by the parties in interest at the time of such modification.
29. TIME.
Time is of the essence of this Lease.
30. SEVERABILITY.
The unenforceability, invalidity, or illegality of any provision of
this Lease shall not render the other provisions hereof unenforceable, invalid
or illegal.
31. ESTOPPEL CERTIFICATES.
Each party, within ten (10) days after notice from the other party,
shall execute and deliver to the other party a certificate stating that this
Lease is unmodified and in full force and effect, or in full force and effect as
modified, and stating the modification. The certificate shall also state the
amount of minimum monthly rent, the dates to which rent has been paid in
advance, and the amount of any security deposit o prepaid rent, if any, as well
as acknowledging that there are not, to that party's knowledge, any uncured
defaults on the part of the other party, or specifying such defaults, if any,
which are claimed. Failure to deliver such a certificate within the ten (10) day
period shall be conclusive upon the party failing to deliver the certificate to
the benefit of the party requesting the certificate that this Lease is in full
force and effect, that there are no uncured defaults hereunder, and has not been
modified except as may be represented by the party requesting the certificate.
32. COVENANTS AND CONDITIONS.
Each provision of this Lease performable by Tenant shall be deemed both
a covenant and a condition.
33. SINGULAR AND PLURAL.
When required by the context of this Lease, the singular shall indicate
the plural.
34. JOINT AND SEVERAL OBLIGATIONS.
"Party" shall mean Landlord and Tenant; and if more than one person or
entity is the Landlord or Tenant, the obligations imposed on that party shall be
joint and several.
16
<PAGE>
35. OPTION TO EXTEND.
Provided that Tenant shall not then be in default hereunder, Tenant
shall have the option to extend the term of this Lease for 5 additional 1 year
periods upon the same terms and conditions herein contained, except for fixed
minimum monthly rentals, upon delivery by Tenant to Landlord of written notice
of its election to exercise such option(s) at lease ninety (90) days prior to
the expiration of the original (or extended) term hereof. The parties hereto
shall have thirty (30) days after the Landlord receives the option notice in
which to agree on the minimum monthly rental during the extended term(s). If the
parties agree on the minimum monthly rent for the extended term(s) during the
period, they shall immediately execute an amendment to this Lease stating the
minimum monthly rent. In the event that there is more than one option to extend
the term of this Lease, the parties hereto shall negotiate the minimum monthly
rent as set forth herein for each extended term of this Lease. If the parties
hereto are unable to agree on the minimum monthly rent for the extended term(s)
within said thirty (30) day period, the option notice shall be of no effect and
this Lease shall expire at the end of the term. Neither party to this Lease
shall have the right to have a court or other third party set the minimum
monthly rent.
36. ADDENDUM.
Any addendum attached hereto and either signed or initialled by the
parties shall be deemed a part hereof and shall supersede any conflicting terms
or provisions contained in this Lease.
The parties hereto have executed this Lease on the date first above
written.
LANDLORD: TENANT:
By: /s/ 2/27/96 By: /s/
17
<PAGE>
RENT ADJUSTMENT
Addendum to Commercial Office Lease
Dated: November 1, 1996
By and between (Lessor) 1990 Westwood Blvd., Inc. and (Lessee) United Film
Distributors.
The monthly rent for each month of the adjustment period(s) is as follows.
During the 1st year through the 2nd year of the term of the Lease, commencing on
November 1, 1996 and ending on June 30, 1998, the sum of Two Thousand Four
Hundred and Ninety-Four Dollars ($2,494) per month.
During the 3rd year through the 5th year of the term of the Lease, commencing on
July 1, 1998 and ending on June 30, 2001 the sum of Two Thousand Seven Hundred
and Forth Three Dollars ($2,743) per month.
The description of Lessee's space is as follows:
731 sq. ft of usable office space and 693.9 sq. ft. of common area which equals
to 41.8% of the Lessee's pro rata share for a total of 1,424.9 sq. ft. (see
Exhibit #__________).
This Addendum shall supersede any conflicting terms, conditions or provisions
contained in the original Lease dated July 1, 1996.
Lessor /s/ Lessee /s/
18
1997 STOCK OPTION PLAN OF
HIT ENTERTAINMENT, INC.
Hit Entertainment, Inc., a corporation organized under the laws of the
State of Delaware (the "Company"), hereby adopts this 1997 Stock Option Plan
(the "Plan"). The purposes of this Plan are as follows:
(1) To further the growth, development and financial success of the
Company by providing additional incentives to its Non-Employee Directors,
Employees (as such terms are defined below) and consultants by assisting them to
become owners of capital stock of the Company and thus permitting them to
benefit directly from its growth, development and financial success.
(2) To enable the Company to obtain and retain the services of the type
of directors, employees and consultants considered essential to the long-range
success of the Company by providing and offering them an opportunity to become
owners of capital stock of the Company under options, including options that are
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended.
ARTICLE I
DEFINITIONS
1.1 General. Whenever the following terms are used in this Plan, they
shall have the meaning specified below unless the context clearly indicates to
the contrary. The masculine pronoun shall include the feminine and neuter, and
the singular shall include the plural, where the context so indicates.
1.2 Board. "Board" shall mean the Board of Directors of the Company.
1.3 Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.4 Committee. "Committee" shall mean the Compensation Committee of the
Board, appointed as provided in Section 6.1 or, if a Committee is not appointed,
the Board.
1.5 Company. "Company" shall mean Hit Entertainment, Inc. In addition,
"Company" shall mean any corporation assuming or issuing new employee stock
options in substitution for Options outstanding under the Plan, in a transaction
to which Section 424(a) of the Code applies.
1.6 Employee. "Employee" shall mean any employee (as defined in
accordance with the regulations and revenue rulings then applicable under
Section 3401(c) of the Code) of the Company or its subsidiaries, whether such
employee is so employed at the time this Plan is adopted or becomes so employed
subsequent to the adoption of this Plan, and includes employees who are
directors or officers of the Company.
<PAGE>
1.7 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
1.8 Incentive Stock Option. "Incentive Stock Option" shall mean an
Option which qualifies under Section 422 of the Code and which is designated as
an Incentive Stock Option by the Committee.
1.9 Non-Employee Director. "Non-Employee Director" shall have the same
meaning as such term has under Rule 16b-3 of the Securities Exchange Act of
1934, as amended.
1.10 Non-Qualified Option. "Non-Qualified Option" shall mean an Option
which is not an Incentive Stock Option and which is designated as a
Non-Qualified Option by the Committee.
1.11 Option. "Option" shall mean an option to purchase capital stock of
the Company granted under the Plan. "Options" include both Incentive Stock
Options and Non-Qualified Options.
1.12 Optionee. "Optionee" shall mean a Non-Employee Director, Employee
or consultant to whom an Option is granted under the Plan.
1.13 Plan. "Plan" shall mean this 1997 Stock Option Plan of the
Company.
1.14 Secretary. "Secretary" shall mean the Secretary of the Company.
1.15 Securities Act. "Securities Act" shall mean the Securities Act of
1933, as amended.
1.16 Termination of Consultancy. "Termination of Consultancy" shall
mean the time when the engagement of Optionee, as a consultant to the Company or
a subsidiary, is terminated for any reason, with or without cause, including
without limitation, resignation, discharge, death or retirement; but excluding
terminations where there is a simultaneous commencement of employment with the
Company. The Committee, in its absolute discretion, shall determine the effect
of all matters and questions relating to Termination of Consultancy, including,
but not by way of limitation, the question of whether a Termination of
Consultancy resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Consultancy.
Notwithstanding any other provision of this Plan, the Company has an absolute
and unrestricted right to terminate a consultant's service at any time for any
reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in writing.
1.17 Termination of Employment. "Termination of Employment" shall mean
the time when the employee-employer relationship or directorship between the
Optionee and the Company or its subsidiaries is terminated for any reason, with
or without cause, including, but not by way of limitation, a termination by
resignation, discharge, death or retirement, but excluding (i) terminations
where there is a simultaneous reemployment or continuing employment of an
Optionee by the Company, (ii) at the discretion of the Committee, terminations
which result in a temporary severance of the employee-employer relationship, and
(iii) at the discretion of the Committee, terminations which are followed by the
simultaneous establishment of a consulting relationship by the Company or a
subsidiary with the former employee. The Committee, in its absolute discretion,
shall determine
2
<PAGE>
the effect of all matters and questions relating to Termination of Employment,
including, but not by way of limitation, the question of whether a Termination
of Employment resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Employment;
provided, however, that, with respect to Incentive Stock Options, a leave of
absence, change in status from an employee to an independent contractor or other
change in the employee-employer relationship shall constitute a Termination of
Employment if, and to the extent that such leave of absence, change in status or
other change interrupts employment for the purposes of Section 422(a)(2) of the
Code and the then applicable regulations and revenue rulings under said Section.
Notwithstanding any other provision of this Plan, the Company has an absolute
and unrestricted right to terminate an Employee's employment at any time for any
reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in writing.
ARTICLE II
SHARES SUBJECT TO PLAN
2.1 Shares Subject to Plan. The shares of stock subject to Options
shall be shares of the Company's no par value Common Stock. The aggregate number
of such shares which may be issued upon exercise of Options shall not exceed
360,000.
2.2 Annual Dollar Limits on Grants of Incentive Stock Options. The
aggregate fair market value (determined as of the time the option is granted) of
stock with respect to which "Incentive Stock Options" (within the meaning of
Section 422 of the Code) are exercisable for the first time by any Employee in
any calendar year (under the Plan and all other incentive stock option plans of
the Company) shall not exceed $100,000.
2.3 Unexercised Options. If any Option expires or is canceled without
having been fully exercised, the number of shares subject to such Option but as
to which such Option was not exercised prior to its expiration or cancellation
may again be optioned or granted hereunder, subject to the limitations of
Sections 2.1 and 2.2.
2.4 Changes in Company's Shares. In case the Company shall (i) pay a
dividend in shares of common stock or make a distribution in shares of common
stock, (ii) subdivide its outstanding shares of common stock, (iii) combine its
outstanding shares of common stock into a smaller number of shares of common
stock, or (iv) issue by reclassification of its shares of common stock, other
securities of the Company (including any such reclassification in connection
with a consolidation or merger in which the Company is the surviving
corporation), the number of shares of common stock purchasable upon exercise of
the Option immediately prior thereto shall be adjusted so that the Optionee
shall be entitled to receive the kind and number of shares of common stock or
other securities of the Company which Optionee would have owned or have been
entitled to receive after the happening of any of the events described above,
had such Option been exercised immediately prior to the happening of such event
or any record date with respect thereto. Such adjustment in the Option shall be
made without change in the total exercise price applicable to the Option or the
unexercised portion of the Option (except for any change in the aggregate price
resulting from rounding-off of share quantities or prices) but with any
necessary corresponding adjustment in Option exercise price per share; provided,
however, in the case of Incentive Stock Options, each such
3
<PAGE>
adjustment shall be made in such manner as not to constitute a "modification"
within the meaning of Section 424(h)(3) of the Code. By way of example, if an
Option to purchase 100 shares at an exercise price of $2.00 per share had been
granted and a 2 for 1 stock split occurred, the number of shares purchasable
upon exercise of such Option would be adjusted to 200 shares and the exercise
price for each share subject to the Option would be reduced to $1.00 per share.
An adjustment made pursuant to this Section 2.4 shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event. Any such adjustment made by the Committee shall be
final and binding on the Optionee, the Company and all interested parties.
ARTICLE III
GRANTING OF OPTIONS
3.1 Eligibility. Any Non-Employee Director, Employee or consultant of
the Company shall be eligible to be granted Options, except as provided in
Sections 3.3 and 6.1. Each Non- Employee Director of the Company shall be
eligible to be granted Options at the times and in the manner set forth in
Section 3.4(d).
3.2 Disqualification for Stock Ownership. No person may be granted an
Incentive Stock Option under this Plan if such person, at the time the Incentive
Stock Option is granted, owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
then existing subsidiary unless such Incentive Stock Option conforms to the
applicable provisions of Section 422 of the Code.
3.3 Qualification of Incentive Stock Options. No Incentive Stock Option
shall be granted unless such Option, when granted, qualifies as an "incentive
stock option" under Section 422 of the Code. No Incentive Stock Option shall be
granted to any person who is not an Employee.
3.4 Granting of Options.
(a) The Committee shall from time to time, in its absolute
discretion:
(i) Determine which individuals are Non-Employee
Directors, Employees or consultants, and select from among
those persons (including those to whom Options have been
previously granted under the Plan) such of them as in its
opinion should be granted Options;
(ii) Determine the number of shares to be subject to
such Options granted to such selected persons, and determine
whether such Options are to be Incentive Stock Options or
Non-Qualified Options; and
(iii) Determine the terms and conditions of such
Options, consistent with the Plan.
(b) Upon the selection of a Non-Employee Director,
Employee or consultant to be granted an Option, the Committee
shall instruct the Secretary to issue such Option and may
4
<PAGE>
impose such conditions on the grant of such Option as it deems appropriate.
Without limiting the generality of the preceding sentence, the Committee may, in
its discretion and on such terms as it deems appropriate, require as a condition
on the grant of an Option to an Employee or consultant that the Employee or
consultant surrender for cancellation some or all of the unexercised Options
which have been previously granted to him under this Plan or otherwise. An
Option, the grant of which is conditioned upon such surrender, may have an
option price lower (or higher) than the exercise price of such surrendered
Option or other award, may cover the same (or a lesser or greater) number of
shares as such surrendered Option or other award, may contain such other terms
as the Committee deems appropriate, and shall be exercisable in accordance with
its terms, without regard to the number of shares, price, exercise period or any
other term or condition of such surrendered Option or other award.
(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as an
"incentive stock option" under Section 422 of the Code.
(d) When a person is initially elected to the Board and is
then a Non-Employee Director, each such new Non-Employee Director automatically
shall be granted an Option to purchase ten thousand (10,000) shares of Common
Stock (subject to adjustment as provided in Section 2.4) on the date of his or
her election to the Board at an exercise price of 100% of the Fair Market Value
(as defined in Section 4.2(b) herein). Members of the Board who are Employees
who subsequently retire from the Company and remain on the Board will not
receive an Option grant pursuant to this Section 3.4(d). All the foregoing
Option grants authorized by this Section 3.4(d) are subject to stockholder
approval of the Plan.
ARTICLE IV
TERMS OF OPTIONS
4.1 Option Agreement. Each Option shall be evidenced by a written Stock
Option Agreement, which shall be executed by the Optionee and an authorized
Officer of the Company and which shall contain such terms and conditions as the
Committee shall determine, consistent with the Plan. Stock Option Agreements
evidencing Incentive Stock Options shall contain such terms and conditions as
may be necessary to qualify such Options as "Incentive Stock Options" under
Section 422 of the Code.
4.2 Option Price.
--- -------------
(a) The price of the shares subject to each Option shall be
set by the Committee; provided, however, that the price per share for an
Incentive Stock Option shall not be less than 100% of the fair market value of
such shares on the date such Option is granted, or 110% of the fair market value
of such shares on the date such Option is granted in the case of an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or any
subsidiary, and that the price per share subject to a Non-Qualified Option shall
not be less than 85% of the fair market value of such shares on the date such
Option is granted.
5
<PAGE>
(b) For purposes of the Plan, the fair market value of a share
of the Company's stock as of a given date ("Fair Market Value") shall be: (i)
the closing price of a share of the Company's stock on the principal exchange on
which shares of the Company's stock are then trading, if any, on such date, or,
if shares were not traded on such date, then on the next preceding trading day
during which a sale occurred; or (ii) if such stock is not traded on an exchange
but is quoted on NASDAQ or a successor quotation system, (1) the last sales
price (if the stock is then listed as a National Market Issue under the NASD
National Market System) or (2) the mean between the closing representative bid
and asked price (in all other cases) for the stock on such date as reported by
NASDAQ or such successor quotation system; or (iii) if such stock is not
publicly traded on an exchange and not quoted on NASDAQ or a successor quotation
system, the mean between the closing bid and asked prices for the stock on such
date as determined in good faith by the Committee; or (iv) if the Company's
stock is not publicly traded, the fair market value established by the Committee
acting in good faith.
4.3 Option Vesting.
--------------
(a) The period during which the right to exercise an Option in
whole or in part vests in the Optionee shall be set by the Committee and the
Committee may determine that an Option may not be exercised in whole or in part
for a specified period after it is granted; provided, however, that no Option
granted to a person subject to Section 16 of the Exchange Act shall be
exercisable until at least six (6) months have elapsed from (but excluding) the
date on which the Option was granted. At any time after grant of an Option, the
Committee (or the Board) may, in its sole discretion and subject to whatever
terms and conditions it selects, accelerate the period during which an Option
vests. Notwithstanding the foregoing, all Options granted to Non-Employee
Directors shall become exercisable in cumulative annual installments of 25% on
each of the first, second, third and fourth anniversaries of the date of Option
grant, and the term of each such Option shall be ten (10) years without
variation or acceleration, except as provided in Section 4.5 and except that the
Board may authorize the acceleration of Options granted to a Non-Employee
Director upon the retirement of a Non-Employee Director.
(b) No portion of an Option which is unexercisable at
Termination of Employment or Termination of Consultancy, as applicable, shall
thereafter become exercisable, except as may be otherwise provided by the
Committee with respect to Options granted to Employees or consultants, in the
Stock Option Agreement or in a resolution adopted following the grant of the
Option.
(c) To the extent that the aggregate Fair Market Value of
stock with respect to which "incentive stock options" (within the meaning of
Section 422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year (under
the Plan and all other incentive stock option plans of the Company) exceeds
$100,000, such Options shall be treated as Non-Qualified Options to the extent
required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking Options into account in the order in which
they were granted. For purposes of this Section 4.3(c), the Fair Market Value of
stock shall be determined as of the time the Option with respect to such stock
is granted.
6
<PAGE>
4.4 Expiration of Options.
---------------------
(a) No Incentive Stock Option may be exercised to any extent
by anyone after the first to occur of the following events:
(i) the later of the expiration of ten (10) years
from the date the Option was granted (five (5) years in case
of an individual then owning (within the meaning of Section
424(d) of the Code) more than 10% of the total combined voting
power of all classes of stock of the Company or any
subsidiary) or the expiration of one year from the date of the
Optionee's death; or
(ii) except in the case of any Optionee who is
disabled (within the meaning of Section 22(e)(3) of the Code),
the expiration of one month from the date of the Optionee's
Termination of Employment for any reason other than such
Optionee's death unless the Optionee dies within said
one-month period; or
(iii) in the case of an Optionee who is disabled
(within the meaning of Section 22(e)(3) of the Code), the
expiration of three months from the date of the Optionee's
Termination of Employment for any reason other than such
Optionee's death unless the Optionee dies within said
three-month period.
(b) Subject to the provisions of Section 4.4(a), the Committee
shall provide, in the terms of each individual Option, when such Option expires
and becomes unexercisable.
4.5 Merger, Consolidation, Acquisition or Change in Control. In the
event of the merger or consolidation of the Company with or into another
corporation in which the Company is not the surviving corporation, or the
acquisition by another corporation or person of all or substantially all of the
Company's assets (collectively, a "Change Transaction"), Optionees shall
thereafter be entitled, upon exercise of the Options, to receive the kind and
amount of shares, other securities, cash or property receivable upon such Change
Transaction by a holder of the number of shares of Common Stock which might have
been purchased upon exercise of the Option immediately prior to such Change
Transaction and shall have no other conversion rights. In any such event,
effective provision shall be made in the certificate or articles of
incorporation of the surviving corporation, in any contract of sale or
conveyance, or otherwise, so that so far as appropriate and as nearly as
reasonably may be, the provisions set forth herein for the protection of the
rights of Optionees shall thereafter be made applicable. Anything provided in
this Section 4.5 to the contrary notwithstanding, if upon the consummation of
any such Change Transaction, or within a period of twelve (12) months
thereafter, the Optionee's employment with the Company is terminated, or the
Optionee fails to be re-elected as a director, as the case may be, then, upon
such termination of employment or failure to re-elect Optionee as a director, as
the case may be, the Option shall immediately fully vest and become exercisable
as to all shares of Common Stock covered thereby, notwithstanding Section 4.3(a)
or 4.3(b), and/or any installment provisions of such Option, and such Option
shall be and remain exercisable for a period of sixty (60) days following such
termination of employment or failure to be re-elected as a director, as the case
may be.
7
<PAGE>
ARTICLE V
EXERCISE OF OPTIONS
5.1 Person Eligible to Exercise. During the lifetime of the Optionee,
only he or she or a legal representative thereof may exercise an Option granted
to him or her, or any portion thereof. After the death of the Optionee, any
exercisable portion of an Option may, prior to the time when such portion
becomes unexercisable under Section 4.4, be exercised by his or her personal
representative or by any person empowered to do so under the deceased Optionee's
will or under the then applicable laws of descent and distribution.
5.2 Partial Exercise. At any time from time to time prior to the time
when any exercisable Option or exercisable portion thereof becomes unexercisable
under Section 4.4, such Option or portion thereof may be exercised in whole or
in part; provided, however that the Company shall not be required to issue
fractional shares and the Committee may, by the terms of the Option, require any
partial exercise to be with respect to a specified minimum number of shares.
5.3 Manner of Exercise. An exercisable Option, or any exercisable
porion thereof, may be exercised solely by delivery to the Secretary or his or
her office of all of the following prior to the time when such Option or such
portion becomes unexercisable under Section 4.4:
(a) Notice in writing signed by the Optionee or other person
then entitled to exercise such Option or portion, stating that such Option or
portion is exercised, such notice complying with all applicable rules
established by the Committee;
(b) Full payment (in cash or by check) for the shares with
respect to which such Option or portion is thereby exercised. However, at the
discretion of the Committee (or the Board, in the case of Options granted to
Non-Employee Directors), the terms of the Option may (i) allow a delay in
payment up to thirty (30) days from the date the Option, or portion thereof, is
exercised; (ii) allow payment, in whole or in part, through the delivery of
shares of common stock owned by the Optionee, duly endorsed for transfer to the
Company with a Fair Market Value on the date of delivery equal to the aggregate
exercise price of the Option or exercised portion thereof; (iii) subject to the
timing requirements of Section 5.4, allow payment, in whole or in part, through
the surrender of shares of Common Stock then issuable upon exercise of the
Option having a Fair Market Value on the date of Option exercise equal to the
aggregate exercise price of the Option or exercised portion thereof; (iv) allow
payment, in whole or in part, through the delivery of property of any kind which
constitutes good and valuable consideration; (v) allow payment, in whole or in
part, through the delivery of a full recourse promissory note bearing interest
(at no less than such rate as shall then preclude the imputation of interest
under the Code) and payable upon such terms as may be prescribed by the
Committee or the Board, or (vi) allow payment through any combination of the
consideration provided in the foregoing subparagraphs (ii), (iii), (iv) and (v).
In the case of a promissory note, the Committee or the Board may also prescribe
the form of such note and the security to be given for such note. The Option may
not be exercised, however, by delivery of a promissory note or by a loan from
the Company when or where such loan or other extension of credit is prohibited
by law.
8
<PAGE>
(c) Such representations and documents as the Committee, in
its absolute discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act and any other federal or state
securities laws or regulations. The Committee may, in its absolute discretion,
also take whatever additional actions it deems appropriate to effect such
compliance, including, without limitation, placing legends on share certificates
and issuing stop-transfer orders to transfer agents and registrars; and
(d) In the event that the Option or portion thereof shall be
exercised pursuant to Section 5.1 by any person or persons other than the
Optionee, appropriate proof of the right of such person or persons to exercise
the Option or portion thereof.
5.4 Certain Timing Requirements. At the discretion of the Committee (or
Board, as the case may be), shares of common stock issuable to the Optionee upon
exercise of the Option may be used to satisfy the Option exercise price or the
tax withholding consequences of such exercise, in the case of persons subject to
Section 16 of the Exchange Act, only (i) during the period beginning on the
third business day following the date of release of the quarterly or annual
summary statement of sales and earnings of the Company and ending on the twelfth
business day following such date or (ii) pursuant to an irrevocable written
election by the Optionee to use shares of common stock issuable to the Optionee
upon exercise of the Option to pay all or part of the Option price or the
withholding taxes made at least six (6) months prior to the payment of such
Option price or withholding taxes.
5.5 Conditions to Issuance of Stock Certificates. The shares of stock
issuable and deliverable upon the exercise of an Option, or any portion thereof,
may be either previously authorized but unissued shares or issued shares which
have then been reacquired by the Company. The Company shall not be required to
issue or deliver any certificate or certificates for shares of stock purchased
upon the exercise of any Option or portion thereof prior to fulfillment of all
of the following conditions:
(a) There is available an exemption from registration or other
qualification of such shares under any state or federal securities laws, or
there has been completed a registration or other qualification of such shares
under any state or federal securities laws or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental regulatory
body, which the Committee shall, in its absolute discretion, deem necessary or
advisable;
(b) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable;
(c) The payment to the Company of all amounts which it is
required to withhold under federal, state, or local law in connection with the
exercise of the Option; and
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may establish from time to time for
reasons of administrative convenience.
9
<PAGE>
5.6 Transfer Restrictions. The Committee, in its absolute discretion,
may impose such restrictions on the transferability of the shares purchasable
upon the exercise of an Option as it deems appropriate. Any such restriction
shall be set forth in the respective Stock Option Agreement and may be referred
to on the certificates evidencing such shares. The Committee may require the
Employee to give the Company prompt notice of any disposition of shares of stock
acquired by exercise of an Incentive Stock Option, within two years from the
date of granting such Option or one year after the transfer of such shares to
such Employee. The Committee may direct that the certificates evidencing shares
acquired by exercise of an Option refer to such requirements to give prompt
notice of disposition.
5.7 Rights as Stockholders. The holders of Options shall not be, nor
have any of the rights or privileges of, stockholders of the Company in respect
of any shares purchasable upon the exercise of any part of an Option unless and
until certificates representing such shares have been issued by the Company to
such holders. The Company shall provide to each Optionee a copy of the Company's
annual report when released to the Company's stockholders.
ARTICLE VI
ADMINISTRATION
6.1 Compensation Committee. The Compensation Committee shall consist of
at least two Non-Employee Directors, appointed by and holding office at the
pleasure of the Board. Appointment of Committee members shall be effective upon
acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board and may be replaced at any time by the
Board. Vacancies in the Committee shall be filled by the Board.
No person shall be eligible to serve on the Compensation Committee
unless he is then a "Non- Employee Director" within the meaning of Rule 16b-3
which has been adopted by the Securities and Exchange Commission under the
Exchange Act, if and as such Rule is then in effect and an "outside director"
for purposes of Section 162(m) of the Code. This paragraph may be waived for
successive six (6) month periods by the Board of Directors.
6.2 Duties and Powers of Committee. It shall be the duty of the
Committee to conduct the general administration of the Plan in accordance with
its provisions. The Committee shall have the power to interpret the Plan and the
Options and to adopt or amend such rules for the administration, interpretation
and application of the Plan as are consistent therewith and to interpret, amend
or revoke any such rules. The Committee may accelerate the exercise date of any
Option and determine the right of any person to exercise the rights on behalf of
any Optionee. Notwithstanding the foregoing, the full Board, acting by a
majority of its members in office, shall conduct the general administration of
the Plan with respect to Options granted to Non-Employee Directors. Any such
interpretations and rules in regard to Incentive Stock Options shall be
consistent with the basic purpose of the Plan to grant "Incentive Stock Options"
within the meaning of Section 422 of the Code. In its absolute discretion, the
Board may at any time and from time to time exercise any and all rights and
duties of the Committee under this Plan except with respect to matters which
under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules
issued thereunder, are required to be determined in the sole discretion of the
Committee.
10
<PAGE>
6.3 Majority Rule. The Committee shall act by a majority of its members
in office. The Committee may act either by vote at a meeting or by a memorandum
or other written instrument signed by a majority of the Committee.
6.4 Compensation; Professional Assistance; Good Faith Actions. Members
of the Committee shall receive such compensation for their services as members
as may be determined by the Board. All expenses and liabilities incurred by
members of the Committee in connection with the administration of the Plan shall
be borne by the Company. The Committee may, with the approval of the Board,
employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and its officers and directors shall be
entitled to rely upon the advice, opinions, or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Committee in good faith shall be final and binding upon all Optionees, the
Company, and all other interested persons. No member of the Committee shall be
personally liable for any action, determination, or interpretation made in good
faith with respect to the Plan or the Options, and all members of the Committee
shall be fully protected by the Company in respect to any such action,
determination, or interpretation.
ARTICLE VII
OTHER PROVISIONS
7.1 Options Not Transferable. Options shall not be transferable except
by testamentary will or the laws of descent and distribution, and shall be
exercisable during an Optionee's lifetime only by the Optionee. Except as
permitted by the preceding sentence, no Option granted under the Plan or any of
the rights and privileges thereby conferred shall be transferred, assigned,
pledged or hypothecated in any way (whether by operation of law or otherwise),
and no such Option, right or privilege shall be subject to execution,
attachment, or similar process. Upon any attempt to so transfer, assign, pledge,
hypothecate or otherwise dispose of the Option, or of any right or privilege
conferred thereby, contrary to the provisions hereof, or upon the levy of any
attachment or similar process upon such Option, right or privilege, the Option
and such rights and privileges shall immediately become null and void.
7.2 Amendment, Suspension or Termination of the Plan. The Plan may be
wholly or partially amended or otherwise modified, suspended or terminated at
any time or from time to time by the Board or the Committee. However, without
approval of the Company's stockholders given within twelve (12) months before or
after the action by the Committee, no action of the Committee may, except as
provided in Section 4.5, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan, and no action of
the Committee may be taken that would otherwise require stockholder approval as
a matter of applicable law, regulation or rule. Notwithstanding the foregoing,
the provisions of this Plan relating to Option grants to Non-Employee Directors,
including the amount, price and timing thereof, shall not be amended more than
once in any six-month period other than to comport with changes, in the Code,
the Employee Retirement Income Security Act, or the respective rules thereunder.
Neither the amendment, suspension, nor termination of the Plan shall, without
the consent of the holder of the Option, alter or impair any rights or
obligations under any Option theretofore granted. No Option may be granted
during any
11
<PAGE>
period of suspension nor after termination of the Plan, and in no event may any
Incentive Stock Option be granted under this Plan after the first to occur of
the following events:
(a) The expiration of ten (10) years from the date the Plan is
adopted by the Board; or
(b) The expiration of ten (10) years from the date the Plan is
approved by the Company's stockholders under Section 7.3.
7.3 Approval of Plan by Shareholders. This Plan will be submitted for
the approval of the Company's shareholders within twelve (12) months after the
date of the Board's initial adoption of the Plan. Incentive Stock Options may be
granted prior to such shareholder approval; provided, however, that such
Incentive Stock Options shall not be exercisable prior to the time when the Plan
is approved by the shareholders; provided, further, that if such approval has
not been obtained at the end of said twelve (12)-month period, all Incentive
Stock Options previously granted under the Plan shall thereupon be canceled and
become null and void.
7.4 Tax Withholding. The Company shall be entitled to require payment
in cash or deduction from other compensation payable to each Optionee of any
sums required by federal, state or local tax law to be withheld with respect to
the issuance, vesting or exercise of any Option. Subject to the timing
requirements of Section 5.4, the Committee (or the Board, in the case of Options
granted to Non-Employee Directors) may in its discretion and in satisfaction of
the foregoing requirement allow such Optionee to elect to have the Company
withhold shares of common stock (or allow the return of shares of common stock)
having a Fair Market Value equal to the sums required to be withheld.
7.5 Loans. The Committee may, in its discretion, extend one or more
loans to key Employees in connection with the exercise or receipt of an Option
granted under this Plan. The terms and conditions of any such loan shall be set
by the Committee.
7.6 Limitations Applicable to Section 16 Persons and Performance-Based
Compensation. Notwithstanding any other provision of this Plan, any Option
awarded to an Employee or Non- Employee Director who is then subject to Section
16 of the Exchange Act, shall be subject to any additional limitations set forth
in any applicable exemptive rule under Section 16 of the Exchange Act that are
requirements for the application of such exemptive rule, and this Plan shall be
deemed amended to the extent necessary to conform to such limitations.
Furthermore, notwithstanding any other provision of this Plan, any Option
intended to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code shall be subject to any additional limitations set
forth in Section 162(m) of the Code (including any amendment to Section 162(m)
of the Code) or any regulations or rulings issued thereunder that are
requirements for qualification as performance-based compensation as described in
Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the
extent necessary to conform to such requirements.
12
<PAGE>
7.7 Effect of Plan Upon Other Option and Compensation Plans. The
adoption of this Plan shall not affect any other compensation or incentive plans
in effect for the Company. Nothing in this Plan shall be construed to limit the
right of the Company (a) to establish any other forms of incentives or
compensation for employees of the Company or (b) to grant or assume options
otherwise than under this Plan in connection with any proper corporate purpose,
including, but not by way of limitation, the grant or assumption of options in
connection with the acquisition by purchase, lease, merger, consolidation, or
otherwise of the business, stock, or assets of any corporation, firm or
association.
7.8 Compliance with Laws. This Plan, the granting and vesting of
Options under this Plan and the issuance and delivery of shares of common stock
or Options granted or hereunder are subject to compliance with all applicable
federal and state laws, rules and regulations (including but not limited to
state and federal securities law and federal margin requirements) and to such
approvals by any listing, regulatory or governmental authority as may, in the
opinion of counsel for the Company, be necessary or advisable in connection
therewith. Any securities delivered under this Plan shall be subject to such
restrictions, and the person acquiring such securities shall, if requested by
the Company, provide such assurances and representations to the Company as the
Company may deem necessary or desirable to assure compliance with all applicable
legal requirements. To the extent permitted by applicable law, the Plan or
Options granted hereunder shall be deemed amended to the extent necessary to
conform to such laws, rules and regulations.
7.9 Titles. Titles are provided herein for convenience only
and are not to serve as a basis for interpretation or construction of this Plan.
7.10 Governing Law. This Plan and any agreements hereunder
shall be administered, interpreted and enforced under the internal laws of the
State of Delaware without regard to conflicts of laws thereof.
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors and the stockholders of Hit Entertainment, Inc. as of May 16, 1997.
/s/ David M. Kane
---------------------------
David M. Kane, Secretary
13
Exhibit 10.7
DISTRIBUTOR/SALES AGENT
Dated as of July 17, 1995
HEP I PARTNERS
Re: THE SECRET AGENT CLUB, starring HULK HOGAN
Gentlemen:
1. PARTIES. This letter will confirm the agreement ("Agreement")
reached between United Film Distributors, Inc. ("Distributor/Sales Agent") and
HEP I PARTNERS ("Owner/Grantor") with respect to the feature film THE SECRET
AGENT CLUB (the "Picture") whereby Owner has engaged the services of Distributor
as the exclusive authorized international sales, collections and servicing agent
of Owner for the Picture in the Territory (as defined below), upon the following
terms and conditions.
2. PICTURE. (a) Owner confirms that the Picture will be or is shot in
color, in the English language, with a running time of no less than 92 minutes
including main and end titles, and shall qualify for an MPAA rating not more
restrictive than "R".
3. TERM. The term of this Agreement ("Term") shall commence as the date
of this Agreement and shall continue in perpetuity.
4. TERRITORY. Distributor shall have the right to sublicense the
Picture during the Term throughout the entire universe.
5. LICENSED RIGHTS. The Licensed Rights in the Picture which
Distributor may sublicense ("Rights") are the exclusive rights in the Territory
to exhibit the Picture, substantially as produced or represented by Owner other
than customary dubbing, subtitling and limited editing for censorship purposes
as is customary in each local country) in any and all media, now known or
hereafter devised or improved including, but not limited to: theatrical
exhibition (35mm), non-theatrical exhibition (as customarily defined in the
motion picture industry), television exhibition (including pay, cable, free,
satellite and pay-per-view), exhibition by means of video device (videocassette,
disc or other format), for private home use (including the right to manufacture,
distribute, rent and sell such video devices for such purposes) and any and all
other means of exploitation of the Picture and any Rights therein, whatsoever,
including merchandising, publication and soundtrack album rights. All other
rights are excluded, including, the rights to exploit, license, or represent any
and all "derivative works", such as sequels and remakes.
6. DIVISION OF GROSS RECEIPTS. As used in this Agreement, the term
"Gross Receipts" shall mean all non-refundable monies or credits payable by
foreign distributors once actually received by Distributor in United States
Dollars including, without limitation, advances, minimum
<PAGE>
guarantees, "overages", and other license fees or receipts, net of any
withholding or other foreign remittance taxes. Gross Receipts shall be divided
between Owner and Distributor as follows:
(a) Distributor shall first deduct and retain its fee of
Twenty percent (20%) out of total Gross Receipts;
(b) Distributor shall next deduct and retain the portion
attributable to cover Distributor's general out-of-pocket expenses
(e.g., travel, hotels, temporary personnel, sales offices,
entertainment, equipment rentals, sales trips, public relations fees
and overhead expenses, etc.) incurred in connection with the sale of
the Picture and attending various sales markets where the Picture will
be offered to foreign distributors. Said amount shall be fairly
apportioned in the event the expenses apply to matters other than the
Picture.
(c) Distributor shall also deduct and retain an amount equal
to all direct out-of-pocket distribution expenses applicable to the
Picture incurred by Distributor including, without limitation, creative
fees, printing, shipping, postage, courier, screening rooms and
cassettes, laboratory, legal and accounting fees directly related to
agreements with foreign distributors, telephone, telecopier and the
like. Distributor shall also be entitled to deduct its expenses
incurred including, without limitation, the creation of "additional"
technical materials such as, but not limited to, negatives,
internegatives, magnetic and optical soundtracks, trailers, television
spots, one-sheets, stills and any and all other advertising, publicity
and marketing expenses, of any kind, as advanced by Distributor.
(d) Provided Owner has complied with all terms and conditions
of this Agreement including, without limitation, timely Delivery, the
balance shall be Owner's share of Gross Receipts and shall be paid to
Owner in accordance with Paragraph 10 of this Agreement.
7. DEPOSIT ACCOUNT. All Agreements shall provide that any and all Gross
Receipts under the Agreements shall be paid by each licensee directly to a bank
account (the "Deposit Account") established by and under the control of
Distributor or its designee.
8. DELIVERY. On or before April 1, 1996, Owner shall deliver to
Distributor, at Owner's expense, all those items ("Items") relating to the
Picture referred to in Exhibit "A" ("Delivery"). All Items delivered to
Distributor by Owner shall be of first class, professional quality, suitable for
theatrical exhibition and acceptable to foreign television broadcasters quality
control requirements.
9. DISTRIBUTOR'S RIGHTS. Distributor shall have the right to advertise,
promote, sell, assign and sublicense, without limitation, the theatrical, video,
television and all other rights, and otherwise exploit and deal with the Picture
and its title, in Distributor's sole good faith discretion, in connection with
Distributor's sublicense of the Picture in the Territory. Distributor shall also
have the right to change or edit the Picture and its title, but only to the
extent reasonably necessary for the foreign exploitation of the Picture
including, without limitation, re-editing, re-mixing, adding to and deleting
from, and adding appropriate credits to the Picture as Distributor shall deem
reasonably necessary or appropriate provided same does not conflict with
subparagraph (a) below. Any and all expenses incurred by Distributor in
connection with changes in the Picture shall be deemed
2
<PAGE>
distribution expenses recoupable by Distributor pursuant to Paragraph 6 of this
Agreement. Distributor shall further have the right to sell the Picture along
with other pictures, i.e. in groups or "packages", in which case proceeds from
the exploitation of the group or package shall be allocated by Distributor among
the various motion pictures in an equitable manner to be determined in good
faith by Distributor.
(a) Owner will notify Distributor, in writing, of its
contractual obligations with respect to credits or advertising of
persons, names and/or likenesses in connection with the Picture.
Failure by Owner to give written notice, as indicated herein, shall
release Distributor from any liability or responsibility in connection
therewith and Owner hereby agrees to indemnify and hold Distributor
harmless from the consequences of any action with respect thereto.
(b) Distributor shall have the right, but not the obligation,
to include in the main and end titles of the Picture and in all
advertising and publicity materials for the Picture, its corporate logo
and the words "Distributed by", "Released by", or a similar indication
of Distributor's function. Owner hereby acknowledges its obligation to
provide Distributor with a listing of the main and end titles so that
Distributor may make a determination as to the placement of its logo
and credit in accordance with the provisions of this Paragraph 9. Owner
further agrees to consult with Distributor at the time the credits are
prepared to determine if Distributor wishes to have its credit and logo
included therewith.
10. ACCOUNTING. Distributor shall report to and make appropriate
payments to Owner on a calendar quarterly basis, commencing upon collection of
first monies, for the first eighteen (18) months of the Term and semi-annually
thereafter. Accounting statements shall be sent to Owner within thirty (30) days
following the close of the applicable accounting period. Owner shall have
customary audit rights with respect to Distributor's records pertaining to the
Picture, exercisable at Distributor's offices not more frequently than once
every twelve (12) months. Accounting statements shall be incontestible
twenty-four (24) months after they are mailed by Distributor to Owner at the
above address or such other address as Owner may designate in writing.
11. INDEMNIFICATIONS/REPRESENTATIONS & WARRANTIES.
(a) Owner represents and warrants that it has the full right, power and
authority to enter into this Agreement and to perform all of its obligations and
undertakings herein; that Owner has not entered into any agreement with any
third party that is inconsistent with or in derogation of the rights, privileges
and benefits being granted to Distributor; that the rights granted are free and
clear of any claims, liens or encumbrances whatsoever; and, that it will not, by
action or inaction, cause Distributor to be deprived of any of the benefits
granted hereunder.
(b) Owner represents and warrants that, with respect to any of its
obligations hereunder (including, without limitation, any materials supplied
hereunder or actions undertaken or omitted herefrom), that neither the Picture,
nor any part thereof, nor the title thereof, nor the exercise by Distributor or
its licensees or assigns of any right, license or privilege herein granted,
violates or infringes or will violate or infringe any trademark, trade name,
contract, agreement, copyright (common law or statutory), patent, literary,
artistic, dramatic, personal, private, civil or property right
3
<PAGE>
or right of privacy or any other right or defames any person, firm, corporation,
or association whatsoever.
(c) Owner warrants and agrees that it will indemnify and hold
Distributor and its successors, licensees and assigns, directors, shareholders,
officers, employees, agents, attorneys and other representatives harmless from
and against any and all liability, loss, judgments, damages, costs and expenses,
including reasonable attorneys' fees, arising solely out of or relating to any
breach or alleged breach by Owner hereunder in connection with any suits
relating to the Picture.
(d) Distributor warrants and agrees that it will indemnify and hold
Owner and its successors, licensees and assigns, directors, shareholders,
officers, employees, agents, attorneys and other representatives harmless from
and against any and all liability, loss, judgments, damages, costs and expenses,
including reasonable attorneys' fees, arising solely out of or relating to any
breach or alleged breach by Distributor hereunder in connection with any suits
relating to the Picture.
12. REMEDIES. In the event of any breach or alleged breach of this
Agreement by Distributor, Owner's sole remedy shall be an action at law for
damages, if any; Owner shall not have the right to terminate or rescind this
Agreement or any sublicenses for the Picture entered into by Distributor.
Because of the costs and expenses which will be incurred by Distributor in the
marketing and promotion of the Picture, the agency relationship created hereby
shall be deemed coupled with an interest.
13. ARBITRATION. Any dispute, controversy or claim arising out of or
relating to the enforcement, interpretation or alleged breach of this Agreement
shall be submitted to and resolved by binding arbitration in Los Angeles,
California before one neutral arbitrator appointed in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment on the award rendered by the arbitrator may be entered in and
enforceable by any court having jurisdiction thereof.
14. THIRD PARTY PAYMENTS. Owner is responsible for all third party
payments including, but not limited to, any and all residuals, refuse fees, and
any other union or guild payments which may become payable as a result of
Distributor's exercise of the Rights granted hereunder.
15. ADDITIONAL DOCUMENTS. Each of the parties hereto agrees to execute
any additional documents which may be required or be desirable to fully
effectuate the purposes and intents of this Agreement or to carry out the
obligations with the parties hereunder, provided that they are not inconsistent
with the provisions of this Agreement. Owner hereby appoints Distributor its
sole and exclusive attorney-in-fact with full and irrevocable power and
authority in Owner's name to execute, acknowledge, deliver, file, register,
renew, extend, enforce and defend all copyrights in the Picture in the
Territory. Before Distributor may exercise its power of attorney hereunder, it
must first submit the documents at issue to Owner with ten (10) business days to
return the same.
16. MISCELLANEOUS. This Agreement contains the entire understanding and
supersedes all prior understandings of the parties hereto relating to the
subject matter hereof, and this agreement may not be modified, nor may any
provision be waived, except by an instrument in writing signed by both parties.
No payment under this Agreement shall operate as a waiver of any provision
hereof.
4
<PAGE>
No waiver of any breach or default under this Agreement shall operate as a
waiver of any preceding or subsequent breach or default. Neither party shall be
deemed a fiduciary, partner, joint venturer, employee, or agent of the other
party. Neither party shall hold itself out contrary to the provision of this
Agreement or shall become liable by reason of any representation, act or
omission of the other party contrary to the provisions hereof. Notwithstanding
anything herein or elsewhere contained, this Agreement is solely for the mutual
benefit of Owner and Distributor, and no third party (whether or not referred to
herein) is intended or shall be deemed to be a third party beneficiary hereof.
Paragraph headings used herein are for convenience only and shall not be used in
any way to interpret the provisions of this Agreement. All items which have not
been addressed shall be negotiated in good faith pursuant to the prevailing
customs and standards in the entertainment industry. Any and all estimates or
projections as to sales of the Picture by either party shall be deemed
statements of opinion only and shall not be binding upon the parties.
17. NOTICES. All notices given may be given by facsimile with
conformational receipt, by personal delivery or by certified mail, return
receipt requested. The date of any personal delivery or facsimile shall be
deemed the date of the giving of notice. Notice shall be addressed to the
parties at their respective addresses as follows, subject to change by written
notice:
TO OWNER: HEP I PARTNERS
c/o Hit Entertainment, Inc.
1990 Westwood Boulevard
The Penthouse
Los Angeles, California 90025
TO DISTRIBUTOR: HIT ENTERTAINMENT
1990 Westwood Boulevard
The Penthouse
Los Angeles, California 90025
18. APPLICABLE LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of California.
If the foregoing accurately sets forth your understanding, please
indicate your agreement to this Agreement by signing in the space provided
below.
Very truly yours,
United Film Distributors, Inc.
By: /s/
ACCEPTED AND AGREED TO
HEP I PARTNERS
By: Hit Entertainment, Inc., its
general partner
By: /s/
5
Exhibit 10.8
DISTRIBUTOR/SALES AGENT
Dated as of March 4, 1996
HEP II PARTNERS
Re: SANTA WITH MUSCLES, starring HULK HOGAN
SKELETONS, starring RON SILVER, JAMES COBURN
Gentlemen:
1. PARTIES. This letter will confirm the agreement ("Agreement")
reached between United Film Distributors, Inc. ("Distributor/Sales Agent") and
HEP II PARTNERS ("Owner/Grantor") with respect to the feature films SANTA WITH
MUSCLES and SKELETONS (the "Picture") whereby Owner has engaged the services of
Distributor as the exclusive authorized international sales, collections and
servicing agent of Owner for the Picture in the Territory (as defined below),
upon the following terms and conditions.
2. PICTURE. (a) Owner confirms that the Picture will be or is shot in
color, in the English language, with a running time of no less than 92 minutes
including main and end titles, and shall qualify for an MPAA rating not more
restrictive than "R".
3. TERM. The term of this Agreement ("Term") shall commence as the date
of this Agreement and shall continue in perpetuity.
4. TERRITORY. Distributor shall have the right to sublicense the
Picture during the Term throughout the entire universe.
5. LICENSED RIGHTS. The Licensed Rights in the Picture which
Distributor may sublicense ("Rights") are the exclusive rights in the Territory
to exhibit the Picture, substantially as produced or represented by Owner other
than customary dubbing, subtitling and limited editing for censorship purposes
as is customary in each local country) in any and all media, now known or
hereafter devised or improved including, but not limited to: theatrical
exhibition (35mm), non-theatrical exhibition (as customarily defined in the
motion picture industry), television exhibition (including pay, cable, free,
satellite and pay-per-view), exhibition by means of video device (videocassette,
disc or other format), for private home use (including the right to manufacture,
distribute, rent and sell such video devices for such purposes) and any and all
other means of exploitation of the Picture and any Rights therein, whatsoever,
including merchandising, publication and soundtrack album rights. All other
rights are excluded, including, the rights to exploit, license, or represent any
and all "derivative works", such as sequels and remakes.
6. DIVISION OF GROSS RECEIPTS. As used in this Agreement, the term
"Gross Receipts" shall mean all non-refundable monies or credits payable by
foreign distributors once actually received by Distributor in United States
Dollars including, without limitation, advances, minimum
<PAGE>
guarantees, "overages", and other license fees or receipts, net of any
withholding or other foreign remittance taxes. Gross Receipts shall be divided
between Owner and Distributor as follows:
(a) Distributor shall first deduct and retain its fee of
Twenty percent (20%) out of total Gross Receipts;
(b) Distributor shall next deduct and retain the portion
attributable to cover Distributor's general out-of-pocket expenses
(e.g., travel, hotels, temporary personnel, sales offices,
entertainment, equipment rentals, sales trips, public relations fees
and overhead expenses, etc.) incurred in connection with the sale of
the Picture and attending various sales markets where the Picture will
be offered to foreign distributors. Said amount shall be fairly
apportioned in the event the expenses apply to matters other than the
Picture.
(c) Distributor shall also deduct and retain an amount equal
to all direct out-of-pocket distribution expenses applicable to the
Picture incurred by Distributor including, without limitation, creative
fees, printing, shipping, postage, courier, screening rooms and
cassettes, laboratory, legal and accounting fees directly related to
agreements with foreign distributors, telephone, telecopier and the
like. Distributor shall also be entitled to deduct its expenses
incurred including, without limitation, the creation of "additional"
technical materials such as, but not limited to, negatives,
internegatives, magnetic and optical soundtracks, trailers, television
spots, one-sheets, stills and any and all other advertising, publicity
and marketing expenses, of any kind, as advanced by Distributor.
(d) Provided Owner has complied with all terms and conditions
of this Agreement including, without limitation, timely Delivery, the
balance shall be Owner's share of Gross Receipts and shall be paid to
Owner in accordance with Paragraph 10 of this Agreement.
7. DEPOSIT ACCOUNT. All Agreements shall provide that any and all Gross
Receipts under the Agreements shall be paid by each licensee directly to a bank
account (the "Deposit Account") established by and under the control of
Distributor or its designee.
8. DELIVERY. On or before April 1, 1996, Owner shall deliver to
Distributor, at Owner's expense, all those items ("Items") relating to the
Picture referred to in Exhibit "A" ("Delivery"). All Items delivered to
Distributor by Owner shall be of first class, professional quality, suitable for
theatrical exhibition and acceptable to foreign television broadcasters quality
control requirements.
9. DISTRIBUTOR'S RIGHTS. Distributor shall have the right to advertise,
promote, sell, assign and sublicense, without limitation, the theatrical, video,
television and all other rights, and otherwise exploit and deal with the Picture
and its title, in Distributor's sole good faith discretion, in connection with
Distributor's sublicense of the Picture in the Territory. Distributor shall also
have the right to change or edit the Picture and its title, but only to the
extent reasonably necessary for the foreign exploitation of the Picture
including, without limitation, re-editing, re-mixing, adding to and deleting
from, and adding appropriate credits to the Picture as Distributor shall deem
reasonably necessary or appropriate provided same does not conflict with
subparagraph (a) below. Any and all expenses incurred by Distributor in
connection with changes in the Picture shall be deemed
2
<PAGE>
distribution expenses recoupable by Distributor pursuant to Paragraph 6 of this
Agreement. Distributor shall further have the right to sell the Picture along
with other pictures, i.e. in groups or "packages", in which case proceeds from
the exploitation of the group or package shall be allocated by Distributor among
the various motion pictures in an equitable manner to be determined in good
faith by Distributor.
(a) Owner will notify Distributor, in writing, of its
contractual obligations with respect to credits or advertising of
persons, names and/or likenesses in connection with the Picture.
Failure by Owner to give written notice, as indicated herein, shall
release Distributor from any liability or responsibility in connection
therewith and Owner hereby agrees to indemnify and hold Distributor
harmless from the consequences of any action with respect thereto.
(b) Distributor shall have the right, but not the obligation,
to include in the main and end titles of the Picture and in all
advertising and publicity materials for the Picture, its corporate logo
and the words "Distributed by", "Released by", or a similar indication
of Distributor's function. Owner hereby acknowledges its obligation to
provide Distributor with a listing of the main and end titles so that
Distributor may make a determination as to the placement of its logo
and credit in accordance with the provisions of this Paragraph 9. Owner
further agrees to consult with Distributor at the time the credits are
prepared to determine if Distributor wishes to have its credit and logo
included therewith.
10. ACCOUNTING. Distributor shall report to and make appropriate
payments to Owner on a calendar quarterly basis, commencing upon collection of
first monies, for the first eighteen (18) months of the Term and semi-annually
thereafter. Accounting statements shall be sent to Owner within thirty (30) days
following the close of the applicable accounting period. Owner shall have
customary audit rights with respect to Distributor's records pertaining to the
Picture, exercisable at Distributor's offices not more frequently than once
every twelve (12) months. Accounting statements shall be incontestible
twenty-four (24) months after they are mailed by Distributor to Owner at the
above address or such other address as Owner may designate in writing.
11. INDEMNIFICATIONS/REPRESENTATIONS & WARRANTIES.
(a) Owner represents and warrants that it has the full right, power and
authority to enter into this Agreement and to perform all of its obligations and
undertakings herein; that Owner has not entered into any agreement with any
third party that is inconsistent with or in derogation of the rights, privileges
and benefits being granted to Distributor; that the rights granted are free and
clear of any claims, liens or encumbrances whatsoever; and, that it will not, by
action or inaction, cause Distributor to be deprived of any of the benefits
granted hereunder.
(b) Owner represents and warrants that, with respect to any of its
obligations hereunder (including, without limitation, any materials supplied
hereunder or actions undertaken or omitted herefrom), that neither the Picture,
nor any part thereof, nor the title thereof, nor the exercise by Distributor or
its licensees or assigns of any right, license or privilege herein granted,
violates or infringes or will violate or infringe any trademark, trade name,
contract, agreement, copyright (common law or statutory), patent, literary,
artistic, dramatic, personal, private, civil or property right
3
<PAGE>
or right of privacy or any other right or defames any person, firm, corporation,
or association whatsoever.
(c) Owner warrants and agrees that it will indemnify and hold
Distributor and its successors, licensees and assigns, directors, shareholders,
officers, employees, agents, attorneys and other representatives harmless from
and against any and all liability, loss, judgments, damages, costs and expenses,
including reasonable attorneys' fees, arising solely out of or relating to any
breach or alleged breach by Owner hereunder in connection with any suits
relating to the Picture.
(d) Distributor warrants and agrees that it will indemnify and hold
Owner and its successors, licensees and assigns, directors, shareholders,
officers, employees, agents, attorneys and other representatives harmless from
and against any and all liability, loss, judgments, damages, costs and expenses,
including reasonable attorneys' fees, arising solely out of or relating to any
breach or alleged breach by Distributor hereunder in connection with any suits
relating to the Picture.
12. REMEDIES. In the event of any breach or alleged breach of this
Agreement by Distributor, Owner's sole remedy shall be an action at law for
damages, if any; Owner shall not have the right to terminate or rescind this
Agreement or any sublicenses for the Picture entered into by Distributor.
Because of the costs and expenses which will be incurred by Distributor in the
marketing and promotion of the Picture, the agency relationship created hereby
shall be deemed coupled with an interest.
13. ARBITRATION. Any dispute, controversy or claim arising out of or
relating to the enforcement, interpretation or alleged breach of this Agreement
shall be submitted to and resolved by binding arbitration in Los Angeles,
California before one neutral arbitrator appointed in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment on the award rendered by the arbitrator may be entered in and
enforceable by any court having jurisdiction thereof.
14. THIRD PARTY PAYMENTS. Owner is responsible for all third party
payments including, but not limited to, any and all residuals, refuse fees, and
any other union or guild payments which may become payable as a result of
Distributor's exercise of the Rights granted hereunder.
15. ADDITIONAL DOCUMENTS. Each of the parties hereto agrees to execute
any additional documents which may be required or be desirable to fully
effectuate the purposes and intents of this Agreement or to carry out the
obligations with the parties hereunder, provided that they are not inconsistent
with the provisions of this Agreement. Owner hereby appoints Distributor its
sole and exclusive attorney-in-fact with full and irrevocable power and
authority in Owner's name to execute, acknowledge, deliver, file, register,
renew, extend, enforce and defend all copyrights in the Picture in the
Territory. Before Distributor may exercise its power of attorney hereunder, it
must first submit the documents at issue to Owner with ten (10) business days to
return the same.
16. MISCELLANEOUS. This Agreement contains the entire understanding and
supersedes all prior understandings of the parties hereto relating to the
subject matter hereof, and this agreement may not be modified, nor may any
provision be waived, except by an instrument in writing signed by both parties.
No payment under this Agreement shall operate as a waiver of any provision
hereof.
4
<PAGE>
No waiver of any breach or default under this Agreement shall operate as a
waiver of any preceding or subsequent breach or default. Neither party shall be
deemed a fiduciary, partner, joint venturer, employee, or agent of the other
party. Neither party shall hold itself out contrary to the provision of this
Agreement or shall become liable by reason of any representation, act or
omission of the other party contrary to the provisions hereof. Notwithstanding
anything herein or elsewhere contained, this Agreement is solely for the mutual
benefit of Owner and Distributor, and no third party (whether or not referred to
herein) is intended or shall be deemed to be a third party beneficiary hereof.
Paragraph headings used herein are for convenience only and shall not be used in
any way to interpret the provisions of this Agreement. All items which have not
been addressed shall be negotiated in good faith pursuant to the prevailing
customs and standards in the entertainment industry. Any and all estimates or
projections as to sales of the Picture by either party shall be deemed
statements of opinion only and shall not be binding upon the parties.
17. NOTICES. All notices given may be given by facsimile with
conformational receipt, by personal delivery or by certified mail, return
receipt requested. The date of any personal delivery or facsimile shall be
deemed the date of the giving of notice. Notice shall be addressed to the
parties at their respective addresses as follows, subject to change by written
notice:
TO OWNER: HEP II PARTNERS
c/o Hit Entertainment, Inc.
1990 Westwood Blvd.
The Penthouse
Los Angeles, California 90025
TO DISTRIBUTOR: United Film Distributors, Inc.
1990 Westwood Boulevard
The Penthouse
Los Angeles, California 90025
18. APPLICABLE LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of California.
If the foregoing accurately sets forth your understanding, please
indicate your agreement to this Agreement by signing in the space provided
below.
Very truly yours,
United Film Distributors, Inc.
By: /s/
ACCEPTED AND AGREED TO
HEP II Partners
By: Hit Entertainment, Inc., its general
partner
By: /s/
5
Exhibit 10.9
THE PARTNERSHIP INTERESTS ISSUED UNDER THIS AGREEMENT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES ACT AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF ABSENT SUCH REGISTRATION UNLESS, IN THE OPINION OF
COUNSEL TO THE GENERAL PARTNER, SUCH REGISTRATION IS NOT
REQUIRED.
AGREEMENT OF LIMITED PARTNERSHIP
OF
HEP I, L.P.
This AGREEMENT OF LIMITED PARTNERSHIP is made and entered into as of
July 17, 1995, by and between Hit Entertainment, Inc., a Delaware corporation
(the "General Partner"), and J. Brooke Johnston, Jr., a resident of the State of
Alabama, as the organizational limited partner (the "Organizational Limited
Partner), and those other parties who from time to time may become limited
partners pursuant to the provisions of this Agreement by execution and delivery
of this Agreement or counterparts hereof (hereinafter referred to collectively
as the "Limited Partners" and referred to individually as a "Limited Partner").
W I T N E S S E T H:
WHEREAS, the General Partner and the Original Limited Partner have
created the Partnership, and the parties hereto desire to set forth their
respective interests in and all rights, duties and obligations in and to the
Partnership, all upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises, and the mutual
covenants and promises hereinafter set forth, the parties to this Agreement of
Limited Partnership do hereby agree as follows:
<PAGE>
ARTICLE I
DEFINED TERMS
The following defined terms used in this Agreement shall have the
meanings specified below:
1.1. "ACCOUNTANTS" means any firm of certified public accountants that
may be engaged by the General Partner on behalf of the Partnership for any task.
1.2. "ACT" means the Delaware Revised Uniform Limited Partnership Act
(6 DEL. C. 6, 17-101, ET SEQ.), and now in effect and as the same may be amended
from time to time hereafter.
1.3. "AFFILIATE" means (a) any Person directly or indirectly
controlling, controlled by or under common control with, another Person, (b) any
Person owning or controlling 10% or more of the outstanding voting securities of
such other Person, (c) any officer, director or partner of such Person, or (d)
if such other Person is an officer, director or partner, any company for which
such Person acts in any such capacity.
1.4. "AGREEMENT" means this Agreement of Limited Partnership, as
amended, modified or supplemented from time to time.
1.5. "AVAILABLE CASH FLOW" means all cash and cash equivalent funds of
the Partnership on hand at the end of each Year, less (a) provision for payment
of all outstanding and unpaid current cash obligations of the Partnership at the
end of such year (including those which are in dispute), including, but not
limited to, deferred contingent payments due to principal artists and other
talent contributing to the Project, and (b) provisions for reserves for
reasonably anticipated cash expenses and contingencies (which include debt
service on indebtedness of the Partnership, if any, and amounts payable to the
General Partner and Affiliates of the General Partner), not including, but not
limited to, provisions for depreciation, amortization and other non-cash
expenses; provided, however, that Sale Proceeds shall not be included in
Available Cash Flow.
1.6. "CAPITAL ACCOUNT" means, with respect to any Partner, the Capital
Account maintained for such Person in accordance with the following provisions:
(i) To each Person's Capital Account there shall be credited
such Person's Capital Contributions, such Person's distributive share
of Net Income and any items in the nature of income or gain that are
specially allocated hereunder to such Person, and the amount of any
Partnership liabilities assumed by such Person or which are secured by
any Partnership property distributed to such Person.
(ii) To each Person' s Capital Account there shall be debited
the amount of cash and the Gross Asset Value of any Partnership
property distributed to such Person pursuant.to any provision of this
Agreement, such Person's distributive share of Net Loss and any items
in the nature of expenses or losses that are specially
2
<PAGE>
allocated hereunder to such Person, and the amount of any liabilities
of such Person assumed by the Partnership or which are secured by any
property contributed by such Person to the Partnership.
(iii) In the event any interest in the Partnership is
transferred in accordance with the terms of this Agreement, the
transferee shall succeed to the Capital Account of the transferor to
the extent it relates to the transferred interest.
(iv) In determining the amount of any liability for purposes
of Sections 1.6(i) and (ii) hereof, there shall be taken into account
Code Section 752(c) and any other applicable provisions of the Code and
Regulations.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner
consistent with such Regulations. In the event the General Partner shall
determine that it is prudent to modify the manner in which the Capital Accounts,
or any debits or credits thereto (including, without limitation, debits or
credits relating to liabilities that are secured by contributed or distributed
property or that are assumed by the Partnership or the General Partner), are
computed in order to comply with such Regulations, the General Partner may make
such modification, provided that it is not likely to have a material effect on
the amounts distributable to any Partner pursuant to Article XIII hereof upon
the dissolution of the Partnership. The General Partner also shall (i) make any
adjustments that are necessary or appropriate to maintain equality between the
Capital Accounts of the Partners and the amount of Partnership capital reflected
on the Partnership's balance sheet, as computed for book purposes, in accordance
with Regulations Section 1.704-l(b)(2)(iv)(q), and (ii) make any appropriate
modifications in the event unanticipated events (for example, the acquisition by
the Partnership of oil or gas properties) might otherwise cause this Agreement
not to comply with Regulations Section 1.704-1(b).
1.7. "CAPITAL CONTRIBUTION" in respect of any Partner or transferee of
such Partner means the amount of money and the initial Gross Asset Value of any
property (other than money), tangible or intangible, contributed by such Partner
to the capital of the Partnership.
1.8. "CERTIFICATE" means the Certificate of Limited Partnership of the
Partnership filed pursuant to the Act, as amended from time to time.
1.9. "CODE" means the Internal Revenue Code of 1986, as amended from
time to time.
1.10. "DEPRECIATION" means, for each Year, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable with
respect to an asset for such Year, except that if the Gross Asset Value of an
asset differs from its adjusted basis for federal income tax purposes at the
beginning of such Year, Depreciation shall be an amount which bears the same
ratio to such beginning Gross Asset Value as the federal income tax
depreciation, amortization, or other cost recovery deduction for such Year bears
to such
3
<PAGE>
beginning adjusted tax basis; provided, however, that if the federal income tax
depreciation, amortization, or other cost recovery deduction for such Year is
zero, Depreciation shall be determined with reference to such beginning Gross
Asset Value using any reasonable method selected by the General Partner.
1.11. "FINAL PERCENTAGE" Interest Change Date means the day following
the earlier to occur of (i) seven years following the date of this Agreement, or
(ii) the date as of which the cumulative amount of Available Cash Flow
distributed to the Limited Partners by the Partnership equals 200% of the total
Capital Contributions of the Limited Partners.
1.12. "GAIN FROM SALE" means gain or loss, as the case may be,
determined m accordance with the rules of determining Federal taxable income,
gain or loss, arising from a transaction giving rise to Sale Proceeds.
1.13. "GENERAL PARTNER" means the parties designated as the "General
Partner" in the first paragraph of this Agreement, including any successor
general partner or general partners substituted pursuant to the provisions of
this Agreement.
1.14. "GENERAL PARTNER'S PERCENTAGE INTEREST" means (i) 1% until the
Percentage Interest Change Date, (ii) 50% upon and after the Percentage Interest
Change Date and (iii) 100% upon and after the Final Percentage Interest Change
Date.
1.15. "GENERAL PARTNERSHIP INTEREST" means the entire interest of the
General Partner in the Partnership, including the General Partner's Percentage
Interest in capital, income, gains, losses, deductions, credits and
distributions of the Partnership, the General Partner's right to participate in
the management of the Partnership and all other rights and obligations accorded
under this Agreement or under the Act.
1.16. "GROSS ASSET VALUE" means, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset contributed
by a Partner to the Partnership shall be the gross fair market value of
such asset, as determined by the contributing Partner and the
Partnership;
(ii) The Gross Asset Values of all Partnership assets shall
be adjusted to equal their respective gross fair market values, as
determined by the General Partner, as of the following times: (a) the
acquisition of an additional interest in the Partnership (other than
pursuant to Section 6.3 hereof) by any new or existing Partner in
exchange for more than a de minimis Capital Contribution; (b) the
distribution by the Partnership to a Partner of more than a de minimis
amount of Partnership property as consideration for an interest in the
Partnership; and (c) the liquidation of the Partnership within the
meaning of Regulations Section 1.704- 1(b)(2)(ii)(g); provided,
however, that adjustments pursuant to clauses (a) and (b) above shall
be made only if the General Partner reasonably determines that such
4
<PAGE>
adjustments are necessary or appropriate to reflect the relative
economic interests of the Partners in the Partnership;
(iii) The Gross Asset Value of any Partnership asset
distributed to any Partner shall be the gross fair market value of such
asset on the date of distribution; and
(iv) The Gross Asset Values of Partnership assets shall be
increased (or decreased) to reflect any adjustments to the adjusted
basis of such assets pursuant to Code Section 734(b) or Code Section
743(b), but only to the extent that such adjustments are taken into
account in determining Capital Accounts pursuant to Regulations Section
1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall
not be adjusted pursuant to this Section 1.15(iv) to the extent the
General Partner determines that an adjustment pursuant to Section
1.15(ii) hereof is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment pursuant to
this Section 1.15(iv).
If the Gross Asset Value of an asset has been determined or adjusted
pursuant to Section 1.15(i), Section 1.15(ii), or Section 1.15(iv) hereof, such
Gross Asset Value shall thereafter be adjusted by the Depreciation taken into
account with respect to such asset for purposes of computing Net Income and Net
Loss.
1.17. "LIMITED PARTNERS" means the Persons who are, from time to time,
admitted to the Partnership as Limited Partners, and whose names, mailing
addresses, Limited Partnership Percentage or Capital Contribution, number of
Units held by, and social security or taxpayer identification numbers appear in
Appendix A to this Agreement, as amended from time to time, including, unless
the context otherwise specifically states, the Organizational Limited Partner.
Such Persons shall become Limited Partners when a duly executed Subscription
Agreement, or such other instrument or document as the General Partner may
require, has been accepted by the General Partner, except as otherwise required
by law.
1.18. "LIMITED PARTNERS' PERCENTAGE INTEREST" means (i) 99% until the
Percentage Interest Change Date, (ii) 50% upon and after the Percentage Interest
Change Date and (iii) 0% upon and after the Final Percentage Interest Change
Date.
1.19. "LIMITED PARTNERSHIP INTEREST" means the entire interest of a
Limited Partner in the Partnership expressed in Units, including such Limited
Partner' s interest in the Limited Partners' Percentage Interest in capital,
income, gains, losses, deductions, credits and distributions of the Partnership.
1.20. "NET INCOME" and "NET LOSS" means, for each Year, an amount equal
to the Partnership' s taxable income or loss for such Year, determined in
accordance with Code Section 703(a) (for this purpose, all items of income,
gain, loss, or deduction required to be stated separately pursuant to Code
Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
5
<PAGE>
(i) Any income of the Partnership that is exempt from
federal income tax and not otherwise taken into account in computing
Net Income and Net Loss pursuant to this Section 1.19 shall be added to
such taxable income or loss;
(ii) Any expenditures of the Partnership described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B)
expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and
not otherwise taken into account in computing Net Income or Net Loss
pursuant to this Section 1.19, shall be subtracted from such taxable
income or loss;
(iii) In the event the Gross Asset Value of any Partnership
asset is adjusted pursuant to Section 1.15(ii) or Section 1.15(iv)
hereof, the amount of such adjustment shall be taken into account as
gain or loss from the disposition of such asset for purposes of
computing Net Income or Net Loss;
(iv) Gain or loss resulting from any disposition of
Partnership property with respect to which gain or loss is recognized
for federal income tax purposes shall be computed by reference to the
Gross Asset Value of the property disposed of, notwithstanding that the
adjusted tax basis of such property differs from its Gross Asset Value;
(v) In lieu of the depreciation, amortization, and other
cost recovery deductions taken into account in computing such taxable
income or loss, there shall be taken into account Depreciation for such
fiscal year or other period, computed in accordance with Section 1.10
hereof; and
(vi) Notwithstanding any other provision of this Section
1.19, any items which are specially allocated hereunder to any Person
shall not be taken into account in computing Net Income or Net Loss.
1.21. "ORGANIZATIONAL LIMITED PARTNER" means any party designated as an
"Organizational Limited Partner" in the first paragraph of this Agreement.
1.22. "PARTNERS" means, collectively, the General Partner and the
Limited Partners.
1.23. "PARTNERSHIP" means the limited partnership formed pursuant to
this Agreement by the filing of the Certificate pursuant to the Act.
1.24. "PARTNERSHIP RETURN" means the United States Partnership
Information Return of Income of the Partnership.
1.25. "PERCENTAGE INTEREST CHANGE DATE" means the day following the
date as of which the cumulative amount of Net Losses allocated to and Available
Cash Flow distributed to the Partners equals 110% of the total Capital
Contributions of the Partners.
6
<PAGE>
1.26. "PERSON" means (i) a person as that term is defined in Section
7701(a)(1) of the Code, namely, an individual, trust, estate, partnership,
association, company or corporation, and (ii) those persons who are related by
blood or marriage to a person defined in (i), above.
1.27. "PROJECT" means the development, production, distribution and
otherwise effectuating the economic exploitation of artistic properties in the
form of one or more motion pictures, including, but not limited to, no fewer
than two full length motion pictures, and incorporating themes related to
physical fitness, self-defense, action and children.
1.28. "REGULATIONS" means the Income Tax Regulations promulgated under
the Code, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
1.29. "SALE PROCEEDS" means all proceeds from any sale, exchange,
foreclosure or abandonment of all, or substantially all, of the assets of the
Partnership, or any portion of such proceeds, or proceeds from condemnation
awards or casualty insurance claims, less applicable expenses and any debt paid
or prepaid with the proceeds of, or in connection with, such transaction, which
proceeds are not used to acquire Partnership assets or in the operation of the
business of the Partnership, exclusive of proceeds accruing in the normal course
of business.
1.30. "SECTION" means the designated section of this Agreement if no
reference is specified; otherwise the designated section of the specified
agreement, statute or regulation or the comparable provision of any successor
agreement, statute or regulation.
1.31. "SUBSCRIPTION AGREEMENT" means the agreement between the
Partnership and each Limited Partner pursuant to which the Limited Partner
agrees to subscribe for one or more Units and the Partnership accepts the
subscription.
1.32. "UNIT" means an interest in the capital of the Partnership
contributed by the Limited Partners. The authorized number of Units of the
Partnership is 160.
1.33. "YEAR" means the calendar year, except for the initial and final
Year of the Partnership which may begin or end on a date other than January 1
and December 31, respectively.
ARTICLE II
ORGANIZATION
2.1. FORMATION. The parties hereto hereby form a limited partnership
under and pursuant to the Act. As required by the Act, the General Partner and
the Original Limited Partner shall promptly cause the Certificate to be filed on
behalf of the Partnership as required under the Act.
7
<PAGE>
2.2. QUALIFICATION. Promptly after the filing of the Certificate
pursuant to the Act as set forth in Section 2.1, the General Partner shall take
such action as shall be required by law to qualify the Partnership to transact
business as a foreign limited partnership in such other places as shall be
necessary to protect the status of the Partnership as a limited partnership, and
as otherwise required by law.
2.3. NAME. The name of the Partnership is "HEP I, L.P." The business of
the Partnership may be conducted under any name chosen by the General Partner,
and the General Partner may, in its sole discretion from time to time, change
the name of the Partnership.
2.4. PRINCIPAL PLACE OF BUSINESS. The principal place of business of
the Partnership shall be located at 1990 Westwood Boulevard, Third Floor, Los
Angeles, California 90025, or at such other place as the General Partner may
from time to time designate by written notice to the Limited Partners. The
General Partner may establish such other places of business of the Partnership
in addition to the Partnership's principal place of business when and where
required by the Partnership's business and shall give prompt written notice
thereof to the Limited Partners.
2.5. REGISTERED AGENT FOR SERVICE OF PROCESS AND REGISTERED OFFICE;
PARTNERSHIP RECORDS. The agent for service of process on the Partnership in the
State of Delaware shall be CT Corporation System. The address of the registered
agent and the address of the registered office of the Partnership in the State
of Delaware is 1209 Orange Street, Wilmington, Delaware 19801.
ARTICLE III
BUSINESS
The business to be conducted by the Partnership shall be the Project
and to license ancillary rights to such motion pictures and to carry on any and
all activities necessary, proper, convenient or advisable in connection
therewith.
ARTICLE IV
TERM
The term of the Partnership shall be from the date on which the
Certificate was originally filed in accordance with the Act, and shall continue
until the Final Percentage Interest Change Date, unless sooner terminated by law
or as hereafter provided in this Agreement.
8
<PAGE>
ARTICLE V
NAMES AND ADDRESSES OF PARTNERS
5.1. GENERAL PARTNER. Hit Entertainment, Inc., a Delaware corporation,
is the General Partner, and its principal places of business is 1200
AmSouth/Harbert Plaza, Birmingham, Alabama 35203.
5.2. ORGANIZATIONAL LIMITED PARTNER. J. Brooke Johnston, Jr., a
resident of the State of Alabama, is the Organizational Limited Partner and his
mailing address is 1200 AmSouth/Harbert Plaza, 1901 Sixth Avenue North,
Birmingham, Alabama 35203.
5.3. LIMITED PARTNERS. The name, mailing address, the Limited
Partnership Percentage or Capital Contribution of, the number of Units held by,
and the social security or taxpayer identification number of, each Limited
Partner of the Partnership is set forth in Appendix A attached to this
Agreement, as amended from time to time, which is incorporated herein by
reference and made a part hereof as though set out in full herein. Such
information shall always be kept available to any Partner at the principal place
of business of the Partnership.
ARTICLE VI
CAPITAL CONTRIBUTIONS AND
ADDITIONAL WORKING CAPITAL
6.1. CAPITAL CONTRIBUTION OF THE GENERAL PARTNER. The General Partner
has contributed to the capital of the Partnership the sum of $60,000, which has
an Initial Gross Asset Value of and the General Partner's capital account will
be credited in the amount of $50,000. The General Partner may make additional
Capital Contributions from time to time.
6.2. CAPITAL CONTRIBUTION OF THE ORGANIZATIONAL LIMITED PARTNER. The
Organizational Limited Partner has contributed $100 in cash to the capital ofthe
Partnership upon the formation of the Partnership and shall be a Limited Partner
solely to facilitate the formation of the Partnership. Such contribution shall
be returned to him in cash on the day of the admission of any other Person or
Persons as a Limited Partner or Limited Partners or upon the dissolution of the
Partnership, whichever first occurs, at which time the Organizational Limited
Partner shall cease to be a Limited Partner.
6.3. CAPITAL CONTRIBUTIONS OF THE LIMITED PARTNERS. It is contemplated
by the parties to this Agreement that at some indeterminate time in the future,
it will be in the best interest of the Partnership and its Partners to admit to
the Partnership certain parties as Limited Partners. In such event, all Capital
Contributions made by such Limited Partners shall be paid to and received by the
Partnership and each Limited Partner, other than the Organizational Limited
Partner, shall contribute money to the capital of the Partnership in the amount
of $100 per Unit subscribed for under a Subscription Agreement.
9
<PAGE>
6.4. WITHDRAWAL OF CAPITAL CONTRIBUTIONS.
(a) Limited Partners. Subject to the provisions of Section 11.5, no
Limited Partner (other than the Organizational Limited Partner) shall have the
right to withdraw or reduce his Capital Contribution without the consent of the
General Partner. No Limited Partner shall have the right to demand or receive
property other than cash in return for his Capital Contribution, and, except as
provided in Section 6.2, no Limited Partner (other than the Organizational
Limited Partner) shall have priority over any other Limited Partner, either as
to the return of his Capital Contribution or as to the allocation of income,
gains, losses, deductions, credits or as to distributions.
(b) General Partner. The General Partner will not withdraw its Capital
Contribution prior to the dissolution and liquidation of the Partnership or
sooner than the time the Limited Partners have withdrawn their Capital
Contributions hereunder, whichever first occurs.
6.5. ASSESSMENTS. Limited Partners will not be subject to assessments
for contributions to the capital of the Partnership in excess of the Capital
Contribution required by Sections 6.2 and 6.3.
ARTICLE VII
EXPENSES OF THE PARTNERSHIP
7.1. NO COMPENSATION TO GENERAL PARTNER AS GENERAL PARTNER. The General
Partner shall receive no direct compensation or fees for acting as the general
partner of the Partnership.
7.2. REIMBURSEMENT OF EXPENSES INCURRED BY THE GENERAL PARTNER. The
General Partner may charge the Partnership for all direct costs and expenses
incurred by it in connection with the Partnership's business, including legal
and accounting expenses.
7.3. ORGANIZATIONAL AND OFFERING EXPENSES. All expenses incurred in
connection with the formation of the Partnership and obtaining the Partnership's
capital shall be paid by the Partnership.
ARTICLE VIII
CAPITAL ACCOUNTS; ALLOCATION OF
INCOME AND LOSS; CASH DISTRIBUTIONS
8.1. CAPITAL ACCOUNTS. A Capital Account shall be determined and
maintained for each Partner. No interest shall be payable on the Capital
Accounts of the Partners. The General Partner shall maintain a minimum balance
in its Capital Account equal to one percent of the total positive balance of all
Capital Accounts maintained for the Partners.
10
<PAGE>
8.2. ALLOCATION OF NET INCOME OR NET LOSS. With respect to each Year,
the General Partner shall be allocated the percentage of Net Income or Net Loss
for such Year equal to the applicable General Partner's Percentage Interest, and
the Limited Partners shall be allocated the percentage of Net Income or Net Loss
for such Year equal to the applicable Limited Partners' Percentage Interest.
8.3. DISTRIBUTION OF AVAILABLE CASH FLOW AND PROPERTY OTHER THAN CASH.
(a) The General Partner shall make distributions of Available Cash Flow
in cash or assets of the Partnership in kind at such times as the General
Partner, in its sole discretion, deems such distributions to be advisable and in
the best interest of the Partnership to do so. Notwithstanding any contrary
provision contained in this Agreement, to the extent any amount of a
distribution of Available Cash Flow would create or increase a deficit in the
capital account of any Partner, such amount shall not be distributed to such
Partner, but shall be distributed to the other Partners in proportion to the
amount of the distributions to such other Partners without regard to this
proviso. The General Partner shall have the light to withhold any distribution
of Available Cash Flow if it deems it to be in the best interest of the
Partnership to do so.
(b) With respect to each Year, distributions of Available Cash Flow for
such Year shall be made to the General Partner in an amount equal to the General
Partner's Percentage Interest of such distribution of Available Cash Flow and to
the Limited Partners in an amount equal to the Limited Partners' Percentage
Interest of such distribution of Available Cash Flow; provided, however, that
such distributions of Available Cash Flow shall be made to the General Partner
and Limited Partners taking into account their respective varying percentage
interests which occur with respect to each such Year.
(c) If assets other than cash are distributed by the Partnership, the
capital accounts of the Partners shall be adjusted to reflect how much gain or
loss would have been allocated to the respective Partners if the property had
been sold at the value or values assigned thereto for purposes of making the
distribution.
8.4. ALLOCATION OF GAIN FROM SALE AND DISTRIBUTION OF SALE PROCEEDS.
The General Partner shall be allocated an amount of the Gain from Sale equal to
the applicable General Partner's Percentage Interest, and the Limited Partners
shall be allocated an amount of the Gain from Sale equal to the applicable
Limited Partners' Percentage Interest. The General Partner shall make
distributions of Sale Proceeds as soon after the receipt thereof by the
Partnership as the General Partner deems practicable, such distributions to be
made to the Partners in proportion to their respective capital accounts, taking
into account the allocations of Gain from Sale set forth in this Section 8.4;
provided, however, that to the extent that any amount of a cash distribution to
any Partner would create or increase a deficit in the capital account of such
Partner, such amount shall not be distributed to such Partner, but shall be
distributed to the other Partners in proportion to the amounts distributed to
such other Partners without regard to this provision.
11
<PAGE>
8.5. CONSEQUENCES OF DISTRIBUTIONS. Upon the determination to
distribute cash or property other than cash in any manner expressly provided in
this Article VIII, made in good faith, the General Partner shall incur no
liability on account of such distribution, even though such distribution may
have resulted in the Partnership retaining insufficient funds for the operation
of its business, which insufficiency resulted in loss to the Partnership or
necessitated the borrowing of funds by the Partnership.
8.6. ALLOCATION OF NET INCOME, NET LOSS AND DISTRIBUTIONS IN RESPECT OF
UNITS TRANSFERRED OR SOLD BY THE PARTNERSHIP. If one or more Units are
transferred during any Year of the Partnership, the Net Income or Net Loss
attributable to such Unit or Units for such Year shall be divided and allocated
between the transferor and the transferee based on the time each such party was,
according to the books and records of the Partnership, the owner of record of
the Unit or Units transferred during the Year in which the transfer occurs.
Distributions of Partnership assets in respect of Units shall be made only to
persons who, according to the books and records of the Partnership, are the
owners of such Units on a date selected by the General Partner. The General
Partner and the Partnership shall incur no liability for making distributions in
accordance with the provisions of the preceding sentence whether or not the
General Partner or the Partnership has knowledge or notice of any transfer of
ownership of any Unit or Units. For purposes of the foregoing, in the case of a
transfer of a Unit, and also in the case of a sale of a Unit by the Partnership
(except for the first time any Person or Persons other than the Organizational
Limited Partner is admitted to the Partnership as a Limited Partner or Limited
Partners), a Limited Partner who becomes a Limited Partner or who acquires a
Unit according to the books and records of the Partnership after the 15th day of
a month will be treated as becoming a Limited Partner or acquiring such Unit on
the first day of the following month, and a Limited Partner who becomes a
Limited Partner or who acquires a Unit according to the books and records of the
Partnership during the first 15 days of a month shall be treated as becoming a
Limited Partner or acquiring such Units on the first day of such month. In the
case of a sale of a Unit by the Partnership (except for the first time any
Person or Persons other than the Organizational Limited Partner is admitted to
the Partnership as a Limited Partner or Limited Partners), the General Partner
shall have the right to allocate Net Income and Net Loss to the purchaser of
such Unit as of the date such purchaser fully executes and delivers a
Subscription Agreement.
8.7. TAX ALLOCATIONS: CODE SECTION 704(C). In accordance with Code
Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction
with respect to any property contributed to the capital of the Partnership
shall, solely for tax purposes, be allocated among the Partners so as to take
account of any variation between the adjusted basis of such property to the
Partnership for federal income tax purposes and its initial Gross Asset Value
(computed in accordance with Section 1.15).
In the event the Gross Asset Value of any Partnership asset is adjusted
pursuant to Section 1.15(ii), subsequent allocations of income, gain, loss, and
deduction with respect to such asset shall take account of any variation between
the adjusted basis of such asset for federal income tax purposes and its Gross
Asset Value in the same manner as under Code Section 704(c) and the Regulations
thereunder.
12
<PAGE>
Any elections or other decisions relating to such allocations shall be
made by the General Partner in any manner that reasonably reflects the purpose
and intention of this Agreement. Allocations pursuant to this Section 8.7 are
solely for purposes of federal, state, and local taxes and shall not affect or
in any way be taken into account in computing, any Person's Capital Account or
share of Net Income or Net Loss, other items or distributions pursuant to any
provisions of this Agreement.
ARTICLE IX
RIGHTS, POWERS AND OBLIGATIONS
OF THE GENERAL PARTNER
9.1. POWERS. The management and control of the Partnership and its
business and affairs shall rest exclusively with the General Partner, which
shall have all the rights and powers which may be possessed by a general partner
pursuant to the Act, and such additional rights and powers as are otherwise
conferred by law or are necessary, advisable or convenient to the discharge of
its duties under this Agreement. The General Partner shall be the "tax matters
partner" within the meaning of the Code. Without limiting the generality of the
foregoing, the General Partner may, at the cost, expense and risk of the
Partnership:
(a) spend the capital and net income of the Partnership in
the exercise of any rights or powers possessed by the General Partner
hereunder pursuant to a production budget for the Project;
(b) purchase, hold, manage, distribute and license the
Partnership's property, and enter into agreements containing such
terms, provisions and conditions as the General Partner in its
discretion shall approve;
(c) purchase from or through others contracts of liability,
casualty and other insurance and a completion bond, which the General
Partner deems advisable for the protection of the Partnership or for
any purpose convenient or beneficial to the Partnership;
(d) incur indebtedness in the ordinary course of business;
(e) pledge, grant security interests in, hypothecate or
otherwise encumber, under such terms and conditions as the General
Partner deems admissible, the assets of the Partnership;
(f) sell, distribute, license or otherwise dispose of, under
such terms and conditions as the General Partner deems advisable for
the Partnership, or for any purpose convenient or beneficial to the
Partnership, any of the assets of the Partnership, including, without
limitation, the Project;
13
<PAGE>
(g) invest such funds as are temporarily not required for the
purposes of the Partnership's operations in such investments as the
General Partner, in its sole discretion, shall deem prudent;
(h) negotiate employment contracts with principal artists and
other talent which may contribute to the Project, including negotiating
employment contracts providing for profits participation in the Project
for such principal artists and other talent, provided, however, such
profits participation shall be subordinated to the Limited Partners'
right to the return of their total Capital Contribution pursuant to
Section 1.24;
(i) delegate all and any of its duties hereunder and, in
furtherance of any delegation, appoint, employ, or contract with any
person (including Affiliates of the General Partner) for the
transaction of the business of the Partnership, which persons may,
under the supervision of the General Partner, act as distributors,
licensees, consultants, accountants, attorneys, brokers or in any other
capacity deemed by the General Partner necessary or desirable, and pay
appropriate fees to any of such persons.
9.2. INDEPENDENT ACTIVITIES. The General Partner may engage in whatever
activities it chooses, whether or not the same be competitive with the
Partnership, without having or incurring any obligation to offer any interest in
such activities to the Partnership or any party hereto, and, as a material part
of the consideration for the General Partner's execution hereof, for the
admission of such Limited Partner, each Limited Partner hereby waives,
relinquishes and renounces any such right or claim of participation. The
Partnership shall be considered to be an entity and business wholly separate,
for all purposes, from the business and affairs of the General Partner, it being
understood that the only obligations undertaken by the General Partner are those
expressly provided in this Agreement and those which are inherent to the role of
a general partner.
9.3. DUTIES. The General Partner shall manage and control the
Partnership, its business and affairs, including, without limitation, the
Project, to the best of its ability and shall use its best efforts to carry out
the business of the Partnership. The General Partner shall devote itself to the
business of the Partnership to the extent that it, in its discretion, deems
necessary for the efficient carrying on thereof The General Partner shall act as
a fiduciary with respect to the safekeeping and use of the funds and assets of
the Partnership.
9.4. CERTAIN LIMITATIONS. Without obtaining the consent of Limited
Partners holding greater than 50% of the issued and outstanding Units, or such
greater percentage of the issued and outstanding Units as is required under the
Act, the General Partner shall not:
(i) act in contravention of this Agreement;
(ii) except as provided in Article XIII of this Agreement, do
any act which would make it impossible to carry on the ordinary
business of the Partnership;
14
<PAGE>
(iii) confess a judgment against the Partnership;
(iv) possess Partnership property, or assign any rights in
specific Partnership property, including any assignment for the benefit
of Partnership creditors, for other than a Partnership purpose;
(v) admit a person as a Limited Partner other than as
provided in this Agreement;
(vi) amend this Agreement;
(vii) dissolve the Partnership;
(viii) sell, pledge or exchange all, or substantially all, of
the assets of the Partnership; or
(ix) remove a general partner of the Partnership.
9.5. NET WORTH OF THE GENERAL PARTNER. The General Partner shall have
and maintain at all times during which it is the general partner of the
Partnership a net worth which is sufficient to conduct the business of the
Partnership in a prudent manner and to comply with any requirements of the Code
or the regulations thereunder or interpretations of the Internal Revenue Service
thereof necessary to avoid the taxation of the Partnership as an association
taxable as a corporation.
9.6. INDEMNIFICATION. Neither the General Partner nor any of its
Affiliates, officers, directors, employees or agents shall be liable to the
Partnership or any Limited Partners for any action or inaction of the General
Partner in connection with the business or affairs of the Partnership, so long
as the person against whom liability is asserted acted in good faith on behalf
of the Partnership and in a manner reasonably believed by such person to be in
the best interests of the Partnership, but only if such course of conduct does
not constitute gross negligence or willful misconduct. The General Partner and
its Affiliates, officers, directors, employees and agents shall be indemnified
and held harmless by the Partnership for any claim, liability, damage, loss, or
other expense (including, without limitation, investigating and defending any
claims and lawsuits and settlement thereof, and legal and accounting costs in
connection therewith) incurred by them solely by virtue of the performance by
any of them of the duties of the General Partner acting as general partner in
connection with the Partnership's business, so long as such indemnified person
acted in good faith on behalf of the Partnership and in a manner reasonably
believed by such person to be in the best interests of the Partnership, but only
if such course of conduct does not constitute gross negligence or willful
misconduct; provided that such indemnification or agreement to hold harmless
shall be recoverable only out of assets of the Partnership and not from the
Limited Partners.
9.7. GENERAL PARTNER AS LIMITED PARTNER. The General Partner may be a
Limited Partner to the extent that it (a) contributes capital under Section 6.3,
or (b) purchases or
15
<PAGE>
otherwise acquires or becomes the transferee of all or any part of a Limited
Partnership Interest. The General Partner's Capital Contribution pursuant to
Section 6.1 shall be made solely in its capacity as general partner and shall
not entitle the General Partner to any rights as a Limited Partner.
9.8. SUCCESSION AS GENERAL PARTNER. The General Partner may at any time
assign its General Partnership Interest to any subsidiary or other Affiliate of
the General Partner without the consent of the Limited Partners. Any corporation
into which the General Partner may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which the General Partner shall be a party, shall be the successor of the
General Partner hereunder, without the execution or filing of any paper or any
further act on the part of any of the parties hereto. In any such event, the
General Partner shall amend the Certificate within 90 days thereafter.
ARTICLE X
STATUS OF LIMITED PARTNERS
10.1. NO PARTICIPATION IN MANAGEMENT. No Limited Partner shall take
part in the management of the business of the Partnership, transact any business
for the Partnership, have the power to sign for or to bind the Partnership to
any agreement or document, or otherwise act as an agent for the Partnership for
any purpose. Such powers to manage and transact Partnership business, to bind
the Partnership or otherwise to act as the agent of the Partnership are vested
solely and exclusively in the General Partner.
10.2. LIMITED LIABILITY. No Limited Partner shall have any personal
liability whatsoever, whether to the Partnership, to the Partners or to the
creditors of the Partnership, for the debts of the Partnership or any of its
losses beyond the amount committed by him to the capital of the Partnership, as
set forth in Section 6.2 and 6.3, and his undistributed balance in his Capital
Account. Each Unit shall be fully paid and nonassessable, and no Limited Partner
shall have any personal liability whatsoever to another Limited Partner on
account of his Capital Contribution.
ARTICLE XI
TRANSFER OF INTERESTS IN THE PARTNERSHIP
11.1. IN GENERAL. Subject to the rights of first refusal granted to the
General Partner, the Partnership and the Limited Partners below, a Limited
Partner may sell, assign or otherwise transfer any or all of the Units owned by
him; provided, however, that:
(a) such Limited Partner and his purchaser, assignee or
transferee execute, acknowledge and deliver to the General Partner such
instruments of transfer and assignment with respect to such transaction
as are in form and substance satisfactory to the General Partner; and
16
<PAGE>
(b) such Limited Partner pays the Partnership a transfer fee
which is sufficient to pay all reasonable expenses of the Partnership
in connection with such transaction;
provided, further, that such purchaser, assignee, or transferee shall not become
a substituted Limited Partner within the meaning of the Act unless the General
Partner consents in writing to such person's becoming a substituted Limited
Partner, which consent may be given or withheld in the sole discretion of the
General Partner. Neither the Partnership nor the General Partner shall recognize
or be bound by any sale, assignment or transfer of any Unit unless the General
Partner consents to such sale, assignment or transfer in writing. The General
Partner will not consent to any sale, assignment or transfer of any Unit or to
the admission of any person as a substituted Limited Partner if, in its opinion,
such consent and substitution would result in the Partnership being treated for
Federal income tax purposes as an association taxable as a corporation, would
result in a termination of the Partnership within the meaning of the Code, or
would constitute a violation of any applicable Federal or state law pertaining
to securities regulation.
Notwithstanding the foregoing, each Limited Partner agrees that at
least 60 days prior to any sale, assignment or transfer (by operation of law or
otherwise) of any Unit by it, such Limited Partner will give written notice
thereof to the General Partner and all Limited Partners, including the name of
the proposed purchaser, assignee or transferee and all of the terms, conditions
and other material details of such proposed sale, assignment or transfer. The
General Partner shall have a right of first refusal for its own account for 30
days after receipt by the General Partner of such written notice in which to
elect to consummate such sale, transfer or assignment itself pursuant to the
same terms, conditions and material details set forth in such notice. If the
General Partner does so purchase the Unit, it may resell such Unit, at any time,
on whatever terms and conditions it deems appropriate, to any Person without
regard to the rights of first refusal set forth herein. If the General Partner
fails to consummate the transaction during such 30-day period, the Partnership
shall then have 10 days in which to consummate such sale, transfer or assignment
pursuant to such terms, conditions and material details. The right of first
refusal in the General Partner provided in this Section 11.1 shall be a right in
each party designated as the "General Partner" in the first paragraph of this
Agreement, or either of them if the other party designated the "General Partner"
fails to exercise its rights thereunder, provided, however, that such
disjunctive right in each party designated as the "General Partner" shall not
expand the time periods provided for herein with respect to such right of first
refusal, and further provided that such right, if jointly exercised by the
parties designated the "General Partner", shall be proportionate to the
interests in the Partnership of each party designated the "General Partner". If
the Partnership does so purchase the Unit, it may resell such Unit, at any time,
on whatever terms and conditions it deems appropriate, to any Person without
regard to the rights of refusal set forth herein. If the Partnership fails to
consummate the transaction during such 10-day period, the General Partner shall
give written notice of such failure within two days of the expiration of the
above 40-day period to all the Limited Partners. The Limited Partners shall then
have 20 days from the end of the above 40-day period in which to consummate such
sale, transfer or assignment pursuant to such terms, conditions and material
details in proportion to the pro rata Limited
17
<PAGE>
Partnership Interests of the Limited Partners participating in such purchase. If
any Limited Partner does so purchase a Unit or Units, such Limited Partner may
resell such Unit or Units only in accordance with the provisions of this Section
11.1. If none of the General Partner, the Partnership or the other Limited
Partners consummate the transaction during such 60-day period, the selling
Limited Partner shall then have 30 days from the end of such 60-day period in
which to consummate such sale, transfer or assignment pursuant to such terms,
conditions and material details and to such named purchaser. If the Limited
Partner shall not consummate the sale, transfer or assignment during such 30-day
period, such Unit shall again be subject to the rights of first refusal
contained herein.
11.2. SUBSTITUTED LIMITED PARTNERS. If none of the General Partner, the
Partnership or the Limited Partners exercise their rights of first refusal
provided in Section 11.1 and the General Partner consents to the admission of a
Person as a substituted Limited Partner within the meaning of the Act, and such
Person:
(a) elects to become a substituted Limited Partner by deliver-
ing a written notice of such election to the General Partner;
(b) executes and acknowledges such other instruments as the
General Partner may deem necessary or admissible to effect the
admission of such Person as a substituted Limited Partner, including,
without limitation, the written acceptance and adoption by such Person
of the provisions of this Agreement; and
(c) pays the Partnership a transfer fee which is sufficient to
pay all reasonable expenses of the Partnership in connection with the
admission of such Person as a substituted Limited Partner within the
meaning of the Act, including, without limitation, the cost of
preparing, printing and filing for record an amendment to the
Certificate in accordance with the Act;
then the General Partner shall take all steps which, in the opinion of the
General Partner, are reasonably necessary to admit such Person as a substituted
Limited Partner under the Act. Such Person shall thereupon become a substituted
Limited Partner within the meaning of the Act.
11.3. PURCHASE OF UNITS BY THE GENERAL PARTNER. The General Partner may
acquire one or more Units owned by, or reserved for, Limited Partners, and, if
with respect to such additional Unit or Units the General Partner becomes a
Limited Partner within the meaning of the Act, the General Partner shall, with
respect to such Unit or Units, enjoy all the rights and be subject to all the
obligations and duties of a Limited Partner. Any Limited Partnership Interest
owned by the General Partner may be sold, in whole or in part, by the General
Partner, on whatever terms and conditions it deems appropriate, to any Person
without regard to the rights of first refusal set forth in Section 11.1.
18
<PAGE>
11.4. INVOLUNTARY TRANSFER OF PARTNER'S INTEREST.
(a) If any Limited Partner, or more than 50% of the members, partners
or shareholders of a Limited Partner which is not an individual, shall be
adjudicated a bankrupt or make a general assignment for the benefit of creditors
or take the benefit of any insolvency act, or if a permanent receiver or trustee
in bankruptcy be appointed for any such Limited Partner's property, or if a
temporary receiver be appointed for any Limited Partner and such appointment is
not vacated or set aside within 60 days from the date of such appointment, or in
the case of a Limited Partner which is not an individual, such Limited Partner
shall be adjudicated a bankrupt or make a general assignment for the benefit of
creditors or take the benefit of any insolvency act, or if a permanent receiver
or trustee in bankruptcy be appointed for any such Limited Partner's property,
or if a temporary receiver be appointed for any such Limited Partner and such
appointment is not vacated or set aside within 60 days from the date of such
appointment, or in the event of any attempted transfer or other devolution of
the interest of any Limited Partner in the Partnership except as specifically
provided herein, then such Limited Partner shall become a "defaulting Partner"
(which term as used herein shall include any successor to or assignee of the
defaulting Partner).
(b) If any Limited Partner, or more than 50% of the members, partners
or shareholders of a Limited Partner which is not an individual, shall die, or
in the case of a Limited Partner which is not an individual, such Limited
Partner shall dissolve, then such Limited Partner shall become an "involuntary
defaulting Partner" (which term as used herein shall include any successor to or
assignee of the involuntary defaulting Partner).
(c) The General Partner, at its election, may cause the Partnership to
purchase and, if so elected, the defaulting Partner or the involuntary
defaulting Partner, as the case may be, shall sell the Limited Partnership
Interest of the defaulting Partner or the involuntary defaulting Partner, as the
case may be, in the Partnership at the prices and upon the terms specified in
Section 11.5 at a closing which shall be held at the principal office of the
Partnership within 120 days following the giving of written notice to the
defaulting Partner or involuntary defaulting Partner of the election to purchase
such Partner's Limited Partnership Interest after receiving appropriate releases
and satisfactions.
11.5. PURCHASE PRICE OF DEFAULTING PARTNER'S INTEREST. If the General
Partner shall elect to cause the Partnership to purchase the Limited Partnership
Interest of a defaulting Partner or an involuntary defaulting Partner pursuant
to Section 11.4, the purchase price shall equal the balance of the Capital
Account related to said Limited Partnership Interest reduced by the amount of
any obligation then due the Partnership by the defaulting Partner or involuntary
defaulting Partner (all obligations of the defaulting Partner or involuntary
defaulting Partner shall become immediately due and payable immediately
preceding liquidation of the defaulting Partner's or the involuntary defaulting
Partner's interest), and the excess (if any) of such obligations over the value
of such Partner's interest shall be immediately due and payable to the
Partnership by such Partner.
19
<PAGE>
(a) At the closing ofthe transfer ofthe Limited Partnership
Interest, the Partnership shall pay in cash to the defaulting Partner
or the involuntary defaulting Partner 20% of the purchase price (net
after reduction for any obligations owed by the Partner to the
Partnership as above provided), and the balance of the purchase price
shall be evidenced by the Partnership's nonnegotiable promissory note
payable in eight approximately equal quarterly installments of
principal, the first of which installments shall be due and payable
three months after the closing, with the remainder being due and
payable serially each three months thereafter. The unpaid balance shall
bear interest at a rate equal to the lower of (x) the prime rate of
Citibank, N.A., New York, New York on the date of closing, or (y) 9%
per annum, payable quarterly with each installment of principal. The
note shall contain provisions for (i) the acceleration of the entire
unpaid balance of principal and accrued interest at the option of the
holder in the event of default in payment of any principal or interest
when due, (ii) the payment of reasonable attorneys' fees in the event
of default, (iii) the prepayment of all or part of the unpaid principal
(any prepayment being first applied to then accrued interest), and (iv)
no prepayment during the taxable year in which the liquidation of the
Limited Partnership Interest occurs.
(b) All determinations and allocations required under this
Section 11.5 shall be made by the Partnership's Accountants, and any
such determination or allocation so made shall be binding on all
parties. For the purpose of the computations required in determining
the defaulting or involuntary defaulting Partner's Limited Partnership
Interest, the books of the Partnership and its Affiliates shall be
accepted as correct.
(c) No payment other than those specifically provided for
herein shall be due or payable with respect to the interest of the
defaulting or involuntary defaulting Partner. Any debt due by the
Partnership to the defaulting Partner or involuntary defaulting
Partner, as the case may be, shall be payable according to its terms.
ARTICLE XII
RESIGNATION OF THE GENERAL PARTNER
12.1. NO RESIGNATION OF THE GENERAL PARTNER. The General Partner may
not resign as general partner of the Partnership.
12.2. LIABILITY OF THE GENERAL PARTNER AFTER RESIGNATION. If,
notwithstanding the provisions of Section 12.1, the General Partner resigns as
such, its liability as a general partner shall cease upon the appointment of a
successor General Partner pursuant to Section 12.3, and the Partnership shall
promptly take all steps reasonably necessary under the Act to cause such
cessation of liability, provided, however, that, if no successor General Partner
is appointed pursuant to Section 12.3, the General Partner shall remain the
General Partner of the Partnership for purposes of the winding up of the
Partnership pursuant to Section 13.2. Upon its resignation, the General Partner
shall not receive its Capital
20
<PAGE>
Contribution, nor the repayment of any indebtedness of the Partnership owed it,
nor any undistributed balance in its capital account nor its share of any Sale
Proceeds as otherwise provided for in Article VIII hereof.
12.3. APPOINTMENT OF SUCCESSOR GENERAL PARTNER. Subject to Section
13.1(i), at any time during the 90-day period after any notice of resignation
given by the General Partner, the Limited Partners may, by the affirmative vote
of Limited Partners holding 51% of the issued and outstanding Units, voting at a
meeting called in accordance with Article XVI hereof, elect a successor General
Partner to serve beginning immediately upon the effectiveness of the resignation
of the General Partner.
ARTICLE XIII
DISSOLUTION AND WINDING UP
OF THE PARTNERSHIP
13.1. DISSOLUTION OF THE PARTNERSHIP. The resignation of either party
designated as the General Partner in the first paragraph of this Agreement shall
cause a dissolution of the Partnership unless (i) the other party designated as
the General Partner in the first paragraph of this Agreement elects to serve as
the sole General Partner and continue the Partnership, or (ii) a successor
General Partner is appointed pursuant to Section 12.3. The Partnership shall
also be dissolved upon (a) the final judgment by a court having jurisdiction
over the General Partner adjudicating either party designated as the General
Partner in the first paragraph of this Agreement to be bankrupt, or (b) the
expiration of the term of the Partnership. In no event shall the death of any
Limited Partner result in dissolution of the Partnership.
13.2. WINDING UP OF THE PARTNERSHIP. Upon the dissolution of the
Partnership, the General Partner shall take full account of the Partnership's
assets and liabilities and the assets shall be liquidated as promptly as is
consistent with obtaining the fair value thereof The proceeds therefrom, to the
extent sufficient therefor, shall be applied and distributed as provided in the
Act; provided, however, that after payment of all Partnership debts, obligations
and liabilities, there shall be distributed to each Partner the balance in his
capital account, and the remaining assets of the Partnership, if any, shall be
distributed according to the Partners' percentage interest in the Partnership.
13.3. COMPLIANCE WITH CERTAIN REQUIREMENTS OF REGULATIONS. In the event
the Partnership is "liquidated" within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g), (a) distributions shall be made pursuant to this Article
XIII to the Partners who have positive Capital Accounts in compliance with
Regulations Section 1.704-1(b)(2)(ii)(b)(2), and (b) if any Partner's Capital
Account has a deficit balance (after giving effect to all contributions,
distributions, and allocations for all taxable years, including the year during
which such liquidation occurs), such Partner shall contribute to the capital of
the Partnership the amount necessary to restore such deficit balance to zero in
compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(3). In the discretion
of the General Partner, a pro
21
<PAGE>
rata portion of the distributions that would otherwise be made to the Partners
pursuant to Section 13.2 may be:
(a) distributed to a trust established for the benefit of the
Partners for the purposes of liquidating Partnership assets, collecting
amounts owed to the Partnership, and paying any contingent or
unforeseen liabilities or obligations of the Partnership or of the
Partners arising out of or in connection with the Partnership. The
assets of any such trust shall be distributed to the Partners from time
to time, in the reasonable discretion of the General Partner, in the
same proportions as the amount distributed to such trust by the
Partnership would otherwise have been distributed to the Partners
pursuant to this Agreement; or
(b) withheld to provide a reasonable reserve of Partnership
liabilities (contingent or otherwise) and to reflect the unreaLized
portion of any installment obligations owed to the Partnership,
provided that such withheld amounts shall be distributed to the
Partners as soon as practicable.
ARTICLE XIV
BOOKS OF ACCOUNT, ACCOUNTING, REPORTS,
FISCAL YEAR, BANKING AND TAX ELECTION
14.1. BOOKS OF ACCOUNT. The Partnership's books and records (including
a current list of the names and addresses of all Limited Partners) and an
executed copy of this Agreement, as currently in effect, shall be maintained at
the principal office of the Partnership at 1990 Westwood Boulevard, Third Floor,
Los Angeles, California 90025, and each Partner shall have access thereto at all
reasonable times. The books and records of the Partnership shall be kept by the
General Partner using the income tax basis method of accounting consistently
applied, which shall be the cash method of accounting, if allowed under the
Code, and shall reflect all Partnership transactions and be appropriate and
adequate for the Partnership's business. The General Partner shall also keep
adequate Federal income tax records using an appropriate method of tax
accounting, which shall be the cash method of accounting, if allowed under the
Code, on a basis consistently applied. Each Limited Partner hereby agrees to
submit to the General Partner the name, address and social security or taxpayer
identification number of a transferee of the Limited Partner and the date of
transfer of the Unit or Units so transferred.
14.2. FINANCIAL REPORTS. The Partnership will send the following
reports to each Person who was a Partner during the period covered by such
report:
(a) A report within 90 days after the end of each Year of the
Partnership containing all information necessary for the preparation of
the Partner's Federal and state income tax returns;
(b) An annual report within 120 days after the end of each
Year of the Partnership containing (i) a balance sheet as of the end of
the fiscal year, a statement
22
<PAGE>
of income and a cash flow statement for the year then ended, all of
which, except for the cash flow statement, shall be prepared in
accordance with federal income tax principles, and (ii) a report of the
activities of the Partnership during the period covered by the report.
Such report will set forth distributions to the Limited Partners for
the period covered thereby, and shall separately identify distributions
of Available Cash Flow, whether such be in cash or non-cash assets
during the period, amounts which had been held as reserves, and
proceeds from disposition or sublease of assets, if any. The report
shall also include a detailed statement of any transaction with the
General Partner of the Partnership or its Affiliates and of
commissions, compensation and other benefits paid, or accrued to such
General Partner or its Affiliates for the fiscal year completed,
showing the amount paid or accrued to each recipient and the services
performed; and
(c) Semi-annual progress reports on the operations of the Partnership.
14.3. FISCAL YEAR. The fiscal year of the Partnership shall be the
Year, as defined in Section 1.32.
14.4. BANKING. All funds of the partnership shall be initially
deposited in a separate bank account or accounts or in an account or accounts of
a savings and loan association as shall be determined by the General Partner,
but such funds may be invested as provided in Section 9.1(g).
14.5. TAX ELECTION. Upon the transfer of an interest in the Partnership
or in the event of a distribution of the Partnership's property, the Partnership
may elect, but is not required to elect, pursuant to Section 754 of the Code to
adjust the basis of the Partnership's property as allowed by Sections 734(b) and
743(b) thereof The General Partner shall have the sole authority and discretion
to make such an election. There shall be no requirement that the General Partner
make such an election.
14.6. TAX RETURNS. The General Partner shall, for each fiscal year,
file on behalf of the Partnership with the Internal Revenue Service a
Partnership Return within the time prescribed by law (including any extensions)
for such filing. The General Partner shall also file on behalf of the
Partnership such state and/or local tax returns as may be required by law.
ARTICLE XV
POWER OF ATTORNEY
15.1. APPOINTMENT OF ATTORNEY-IN-FACT. Each Limited Partner hereby
makes, constitutes and appoints the General Partner and any officer thereof,
with full power of substitution and resubstitution, his agent and
attorney-in-fact to file for record the Certificate as required by the Act, and
to sign, execute, certify, acknowledge, and file for record any other
instruments which may be required of the Partnership or of the Limited Partners
by law, including, but not limited to, amendments to or cancellations of the
23
<PAGE>
Certificate and specifically including the amendments to the Agreement admitting
Limited Partners to the Partnership as Limited Partners. Each Limited Partner
authorizes such attorney-in-fact to take any further action which such
attorney-in-fact shall consider necessary or advisable in connection with the
foregoing, hereby giving such attorney-in-fact full power and authority to act
to the same extent as if such Limited Partner were himself personally present
and hereby ratifying and confirming all that such attorney-in-fact shall
lawfully do or cause to be done by virtue hereof.
15.2. EFFECT OF POWER. The power of attorney pursuant to Section 15.1:
(a) is a special power of attorney, coupled with an interest,
is irrevocable, and shall survive the death, insanity, or incapacity of
the granting Limited Partner;
(b) may be exercised by such attorney-in-fact for each Limited
Partner by listing all of the Limited Partners executing any agreement,
certificate, instrument or document with the single signature of such
attorney-in-fact as attorney-in-fact for all of them; and
(c) shall survive the delivery of an assignment by a Limited
Partner of the whole or a portion of his interest in the Partnership,
except that where the purchaser, transferee or assignee thereof is to
be admitted as a substituted Limited Partner, the power of attorney
shall survive the delivery of such assignment for the sole purpose of
enabling such attorney-in-fact to sign, execute, certify, acknowledge,
and file any such agreement, certificate, instrument, or document
necessary to effect such substitution.
ARTICLE XVI
MEETINGS AND MEANS OF VOTING
Meetings of the Partners may be called by the General Partner, or by
Limited Partners holding at least 50% of the issued and outstanding Units for
any matter specified in Section 9.4. The General Partner shall call a meeting of
the Partners to be held not later than 60 days following the receipt by the
General Partner of any notice of adjustments of Partnership income or expenses
issued by the Internal Revenue Service in connection with an audit of any
Partnership Return, such meeting to determine the appropriate action to be
taken, including, without limitation, the forum of any litigation contesting the
notice. The notice of any meeting called under this Article XVI shall state the
nature of the business to be transacted. Notice of any such meeting shall be
delivered by the General Partner within ten days of its calling to all Partners
in the manner prescribed in Section 17.1, and such meeting shall be held not
less than 15 days nor more than 60 days after the date of such notice. Partners
may vote in person or by proxy at any such meeting. Any matters presented to the
Limited Partners for their vote shall be determined by Limited Partners holding
50% of the issued and outstanding Units or such greater percentage of the issued
and outstanding Units as is required under the Act or this Agreement. Each Unit
shall be entitled to one vote on all such matters. Whenever the vote or consent
of Partners
24
<PAGE>
is permitted or required under this Agreement, such vote or consent may be given
at a meeting of Partners or may be given in writing in accordance with the
procedure for obtaining written votes prescribed in Section 17.1.
ARTICLE XVII
MISCELLANEOUS
17.1. NOTICE. Except as otherwise specifically provided in this
Agreement, any notice, payment, demand or communication required or permitted to
be given by any provision of this Agreement shall be duly given if delivered in
writing personally to the person to whom it is directed, or if sent by mail or
telegraph, as follows: if to the General Partner, at its address set forth in
Section 5.1 or to such other address as the General Partner may from time to
time specify by written notice to the Limited Partners pursuant to this Section
17.1, and if to a Limited Partner, at such Limited Partner's address set forth
in Appendix A hereto, or to such other address as such Limited Partner may from
time to time specify by written notice to the General Partner and all other
Limited Partners pursuant to this Section 17.1. Any such notice shall be deemed
to be given as of the date so delivered, if delivered personally, or as of the
date on which the same was deposited in the United States mail, postage prepaid,
addressed and sent as aforesaid.
17.2. ADDITIONAL BUSINESSES. The General Partner shall be permitted to
manage or OWD additional businesses even though such businesses may compete with
the business of the Partnership, including, without limitation, the Project.
17.3. SECTION CAPTIONS. Section and other captions contained in this
Agreement are for reference purposes only and are in no way intended to
describe, interpret, define or limit the scope, extent, or intent of this
Agreement or any provision hereof
17.4. SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision of this Agreement is illegal or invalid for
any reason whatsoever, such illegality or invalidity shall not affect the
validity of the remainder of this Agreement.
17.5. AMENDMENTS. Amendments to this Agreement may be proposed by the
General Partner. Following such proposal, the General Partner shall submit to
the Limited Partners a verbatim statement of any proposed amendment and may
include in any such submission its recommendation as to the proposed amendment.
The General Partner shall seek the written vote of the Limited Partners on the
proposed amendment or shall call a meeting of the Partners pursuant to Article
XVI of this Agreement to vote thereon and to transact any other business
permitted by the Act to be transacted by the Limited Partners that they may deem
appropriate. For purposes of obtaining a written vote, the General Partner may
require response within a specified time, but not less than 30 days, and failure
to respond in such time shall constitute a vote which is consistent with the
General Partner's recommendation with respect to the proposal. A proposed
amendment shall be adopted and effective as an amendment to this Agreement if it
receives the affirmative vote of
25
<PAGE>
Limited Partners holding 50% of the issued and outstanding Units or such greater
percentage of the issued and outstanding Units as is required under the Act.
17.6. RIGHT TO RELY UPON THE AUTHORITY OF THE GENERAL PARTNER. No
person dealing with the General Partner shall be required to determine its
authority to make any commitment or undertaking on behalf of the Partnership,
nor to determine any fact or circumstance bearing upon the existence of its
authority. In addition, no purchaser of any property of the Partnership shall be
required to determine the sole and exclusive authority of the General Partner to
sign and deliver on behalf of the Partnership any such installment of transfer,
or to see to the application or distribution of revenues or proceeds paid or
credited in connection therewith, unless such purchaser shall have received
written notice from the Partnership affecting the same.
17.7. GOVERNING LAW. The laws of the State of Delaware shall govern the
validity of this Agreement, the construction of its terms and the interpretation
of the rights and duties of the parties hereto.
17.8. WAIVER OF ACTION FOR PARTITION. Each Partner irrevocably waives
during the term of the Partnership, and during the period of its liquidation
following any dissolution, any right to maintain any action for partition with
respect to any of the assets of the Partnership.
17.9. COUNTERPART EXECUTION. This Agreement may be executed in one or
more counterparts all of which together shall constitute one and the same
Agreement.
17.10. PARTIES IN INTEREST. Except as provided in Article XI of this
Agreement, this Agreement shall be binding upon the parties hereto and their
successors, heirs, designees, assigns, legal representatives, executors and
administrators.
17.11. CONSTRUCTION OF PRONOUNS. The feminine or neuter of the words
"he", "his" and "him" used herein shall be automatically deemed to have been
substituted for such words where appropriate to the particular Limited Partner
or Organizational Limited Partner executing this Agreement.
17.12. INTEGRATED AGREEMENT. This Agreement constitutes the entire
understanding and agreement among the parties hereto with respect to the subject
matter hereof, and there are no agreements, understandings, restrictions,
representations or warranties among the parties other than those set forth
herein or herein provided for.
26
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have hereto set their hands
as of the day and year first above written.
GENERAL PARTNER
HIT ENTERTAINMENT, INC.
By /s/ Brian Shuster
------------------------------
Brian Shuster
Its President
/s/ J. Brooke Johnston, Jr.
---------------------------------
J. Brooke Johnston, Jr.
Organizational Limited Partner
27
Exhibit 10.10
THE PARTNERSHIP INTERESTS ISSUED UNDER THIS AGREEMENT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES ACT AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF ABSENT SUCH REGISTRATION UNLESS, IN THE OPINION OF
COUNSEL TO THE GENERAL PARTNER, SUCH REGISTRATION IS NOT
REQUIRED.
AGREEMENT OF LIMITED PARTNERSHIP
OF
HEP II, L.P.
This AGREEMENT OF LIMITED PARTNERSHIP is made and entered into as of
March 4, 1996, by and between Hit Entertainment, Inc., a Delaware corporation
(the "General Partner"), and Master Glazier's Karate International, Inc., a
Delaware corporation, as the original limited partner (the "Original Limited
Partner"), and those other parties who from time to time may become limited
partners pursuant to the provisions of this Agreement by execution and delivery
of this Agreement or counterparts hereof (hereinafter referred to collectively
as the "Limited Partners" and referred to individually as a "Limited Partner").
W I T N E S S E T H:
WHEREAS, the General Partner and the Original Limited Partner have
created the Partnership, and the parties hereto desire to set forth their
respective interests in and all rights, duties and obligations in and to the
Partnership, all upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises, and the mutual
covenants and promises hereinafter set forth, the parties to this Agreement of
Limited Partnership do hereby agree as follows:
<PAGE>
ARTICLE I
DEFINED TERMS
The following defined terms used in this Agreement shall have the
meanings specified below:
1.1. "ACCOUNTANTS" means any firm of certified public accountants that
may be engaged by the General Partner on behalf of the Partnership for any task.
1.2. "ACT" means the Delaware Revised Uniform Limited Partnership Act
(6 Del. C. 6, 17-101, et seq.), and now in effect and as the same may be amended
from time to time hereafter.
1.3. "AFFILIATE" means (a) any Person directly or indirectly
controlling, controlled by or under common control with, another Person, (b) any
Person owning or controlling 10% or more of the outstanding voting securities of
such other Person, (c) any officer, director or partner of such Person, or (d)
if such other Person is an officer, director or partner, any company for which
such Person acts in any such capacity.
1.4. "AGREEMENT" means this Agreement of Limited Partnership, as
amended, modified or supplemented from time to time.
1.5. "AVAILABLE CASH FLOW" means all cash and cash equivalent funds of
the Partnership on hand at the end of each Year, less (a) provision for payment
of all outstanding and unpaid current cash obligations of the Partnership at the
end of such year (including those which are in dispute), including, but not
limited to, deferred contingent payments due to principal artists and other
talent contributing to the Project, and (b) provisions for reserves for
reasonably anticipated cash expenses and contingencies (which include debt
service on indebtedness of the Partnership, if any, and amounts payable to the
General Partner and Affiliates of the General Partner), not including, but not
limited to, provisions for depreciation, amortization and other non-cash
expenses; provided, however, that Sale Proceeds shall not be included in
Available Cash Flow.
1.6. "CAPITAL ACCOUNT" means, with respect to any Partner, the Capital
Account maintained for such Person in accordance with the following provisions:
(i) To each Person's Capital Account there shall be credited
such Person's Capital Contributions, such Person's distributive share
of Net Income and any items in the nature of income or gain that are
specially allocated hereunder to such Person, and the amount of any
Partnership liabilities assumed by such Person or which are secured by
any Partnership property distributed to such Person.
(ii) To each Person' s Capital Account there shall be debited
the amount of cash and the Gross Asset Value of any Partnership
property distributed to such Person pursuant.to any provision of this
Agreement, such Person's distributive share of Net Loss and any items
in the nature of expenses or losses that are specially
2
<PAGE>
allocated hereunder to such Person, and the amount of any liabilities
of such Person assumed by the Partnership or which are secured by any
property contributed by such Person to the Partnership.
(iii) In the event any interest in the Partnership is
transferred in accordance with the terms of this Agreement, the
transferee shall succeed to the Capital Account of the transferor to
the extent it relates to the transferred interest.
(iv) In determining the amount of any liability for purposes
of Sections 1.6(i) and (ii) hereof, there shall be taken into account
Code Section 752(c) and any other applicable provisions of the Code and
Regulations.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner
consistent with such Regulations. In the event the General Partner shall
determine that it is prudent to modify the manner in which the Capital Accounts,
or any debits or credits thereto (including, without limitation, debits or
credits relating to liabilities that are secured by contributed or distributed
property or that are assumed by the Partnership or the General Partner), are
computed in order to comply with such Regulations, the General Partner may make
such modification, provided that it is not likely to have a material effect on
the amounts distributable to any Partner pursuant to Article XIII hereof upon
the dissolution of the Partnership. The General Partner also shall (i) make any
adjustments that are necessary or appropriate to maintain equality between the
Capital Accounts of the Partners and the amount of Partnership capital reflected
on the Partnership's balance sheet, as computed for book purposes, in accordance
with Regulations Section 1.704-l(b)(2)(iv)(q), and (ii) make any appropriate
modifications in the event unanticipated events (for example, the acquisition by
the Partnership of oil or gas properties) might otherwise cause this Agreement
not to comply with Regulations Section 1.704-1(b).
1.7. "CAPITAL CONTRIBUTION" in respect of any Partner or transferee of
such Partner means the amount of money and the initial Gross Asset Value of any
property (other than money), tangible or intangible, contributed by such Partner
to the capital of the Partnership.
1.8. "CERTIFICATE" means the Certificate of Limited Partnership of the
Partnership filed pursuant to the Act, as amended from time to time.
1.9. "CODE" means the Internal Revenue Code of 1986, as amended from
time to time.
1.10. "DEPRECIATION" means, for each Year, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable with
respect to an asset for such Year, except that if the Gross Asset Value of an
asset differs from its adjusted basis for federal income tax purposes at the
beginning of such Year, Depreciation shall be an amount which bears the same
ratio to such beginning Gross Asset Value as the federal income tax
depreciation, amortization, or other cost recovery deduction for such Year bears
to such
3
<PAGE>
beginning adjusted tax basis; provided, however, that if the federal income tax
depreciation, amortization, or other cost recovery deduction for such Year is
zero, Depreciation shall be determined with reference to such beginning Gross
Asset Value using any reasonable method selected by the General Partner.
1.11. "FINAL PERCENTAGE" Interest Change Date means the day following
the earlier to occur of (i) seven years following the date of this Agreement, or
(ii) the date as of which the cumulative amount of Available Cash Flow
distributed to the Limited Partners by the Partnership equals 200% of the total
Capital Contributions of the Limited Partners.
1.12. "GAIN FROM SALE" means gain or loss, as the case may be,
determined m accordance with the rules of determining Federal taxable income,
gain or loss, arising from a transaction giving rise to Sale Proceeds.
1.13. "GENERAL PARTNER" means the parties designated as the "General
Partner" in the first paragraph of this Agreement, including any successor
general partner or general partners substituted pursuant to the provisions of
this Agreement.
1.14. "GENERAL PARTNER'S PERCENTAGE INTEREST" means (i) 1% until the
Percentage Interest Change Date, (ii) 50% upon and after the Percentage Interest
Change Date and (iii) 100% upon and after the Final Percentage Interest Change
Date.
1.15. "GENERAL PARTNERSHIP INTEREST" means the entire interest of the
General Partner in the Partnership, including the General Partner's Percentage
Interest in capital, income, gains, losses, deductions, credits and
distributions of the Partnership, the General Partner's right to participate in
the management of the Partnership and all other rights and obligations accorded
under this Agreement or under the Act.
1.16. "GROSS ASSET VALUE" means, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset contributed
by a Partner to the Partnership shall be the gross fair market value of
such asset, as determined by the contributing Partner and the
Partnership;
(ii) The Gross Asset Values of all Partnership assets shall
be adjusted to equal their respective gross fair market values, as
determined by the General Partner, as of the following times: (a) the
acquisition of an additional interest in the Partnership (other than
pursuant to Section 6.3 hereof) by any new or existing Partner in
exchange for more than a de minimis Capital Contribution; (b) the
distribution by the Partnership to a Partner of more than a de minimis
amount of Partnership property as consideration for an interest in the
Partnership; and (c) the liquidation of the Partnership within the
meaning of Regulations Section 1.704- 1(b)(2)(ii)(g); provided,
however, that adjustments pursuant to clauses (a) and (b) above shall
be made only if the General Partner reasonably determines that such
4
<PAGE>
adjustments are necessary or appropriate to reflect the relative
economic interests of the Partners in the Partnership;
(iii) The Gross Asset Value of any Partnership asset
distributed to any Partner shall be the gross fair market value of such
asset on the date of distribution; and
(iv) The Gross Asset Values of Partnership assets shall be
increased (or decreased) to reflect any adjustments to the adjusted
basis of such assets pursuant to Code Section 734(b) or Code Section
743(b), but only to the extent that such adjustments are taken into
account in determining Capital Accounts pursuant to Regulations Section
1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall
not be adjusted pursuant to this Section 1.15(iv) to the extent the
General Partner determines that an adjustment pursuant to Section
1.15(ii) hereof is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment pursuant to
this Section 1.15(iv).
If the Gross Asset Value of an asset has been determined or adjusted
pursuant to Section 1.15(i), Section 1.15(ii), or Section 1.15(iv) hereof, such
Gross Asset Value shall thereafter be adjusted by the Depreciation taken into
account with respect to such asset for purposes of computing Net Income and Net
Loss.
1.17. "LIMITED PARTNERS" means the Persons who are, from time to time,
admitted to the Partnership as Limited Partners, and whose names, mailing
addresses, Limited Partnership Percentage or Capital Contribution, number of
Units held by, and social security or taxpayer identification numbers appear in
Appendix A to this Agreement, as amended from time to time, including, unless
the context otherwise specifically states, the Organizational Limited Partner.
Such Persons shall become Limited Partners when a duly executed Subscription
Agreement, or such other instrument or document as the General Partner may
require, has been accepted by the General Partner, except as otherwise required
by law.
1.18. "LIMITED PARTNERS' PERCENTAGE INTEREST" means (i) 99% until the
Percentage Interest Change Date, (ii) 50% upon and after the Percentage Interest
Change Date and (iii) 0% upon and after the Final Percentage Interest Change
Date.
1.19. "LIMITED PARTNERSHIP INTEREST" means the entire interest of a
Limited Partner in the Partnership expressed in Units, including such Limited
Partner' s interest in the Limited Partners' Percentage Interest in capital,
income, gains, losses, deductions, credits and distributions of the Partnership.
1.20. "NET INCOME" and "NET LOSS" means, for each Year, an amount equal
to the Partnership' s taxable income or loss for such Year, determined in
accordance with Code Section 703(a) (for this purpose, all items of income,
gain, loss, or deduction required to be stated separately pursuant to Code
Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
5
<PAGE>
(i) Any income of the Partnership that is exempt from
federal income tax and not otherwise taken into account in computing
Net Income and Net Loss pursuant to this Section 1.19 shall be added to
such taxable income or loss;
(ii) Any expenditures of the Partnership described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B)
expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and
not otherwise taken into account in computing Net Income or Net Loss
pursuant to this Section 1.19, shall be subtracted from such taxable
income or loss;
(iii) In the event the Gross Asset Value of any Partnership
asset is adjusted pursuant to Section 1.15(ii) or Section 1.15(iv)
hereof, the amount of such adjustment shall be taken into account as
gain or loss from the disposition of such asset for purposes of
computing Net Income or Net Loss;
(iv) Gain or loss resulting from any disposition of
Partnership property with respect to which gain or loss is recognized
for federal income tax purposes shall be computed by reference to the
Gross Asset Value of the property disposed of, notwithstanding that the
adjusted tax basis of such property differs from its Gross Asset Value;
(v) In lieu of the depreciation, amortization, and other
cost recovery deductions taken into account in computing such taxable
income or loss, there shall be taken into account Depreciation for such
fiscal year or other period, computed in accordance with Section 1.10
hereof; and
(vi) Notwithstanding any other provision of this Section
1.19, any items which are specially allocated hereunder to any Person
shall not be taken into account in computing Net Income or Net Loss.
1.21. "ORIGINAL LIMITED PARTNER" means any party designated as an
"Original Limited Partner" in the first paragraph of this Agreement.
1.22. "PARTNERS" means, collectively, the General Partner and the
Limited Partners.
1.23. "PARTNERSHIP" means the limited partnership formed pursuant to
this Agreement by the filing of the Certificate pursuant to the Act.
1.24. "PARTNERSHIP RETURN" means the United States Partnership
Information Return of Income of the Partnership.
1.25. "PERCENTAGE INTEREST CHANGE DATE" means the day following the
date as of which the cumulative amount of Net Losses allocated to and Available
Cash Flow distributed to the Partners equals 110% of the total Capital
Contributions of the Partners.
6
<PAGE>
1.26. "PERSON" means (i) a person as that term is defined in Section
7701(a)(1) of the Code, namely, an individual, trust, estate, partnership,
association, company or corporation, and (ii) those persons who are related by
blood or marriage to a person defined in (i), above.
1.27. "PROJECT" means the development, production, distribution and
otherwise effectuating the economic exploitation of artistic properties in the
form of one or more motion pictures, including, but not limited to, no fewer
than two full length motion pictures, and incorporating themes related to
physical fitness, self-defense, action and children.
1.28. "REGULATIONS" means the Income Tax Regulations promulgated under
the Code, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
1.29. "SALE PROCEEDS" means all proceeds from any sale, exchange,
foreclosure or abandonment of all, or substantially all, of the assets of the
Partnership, or any portion of such proceeds, or proceeds from condemnation
awards or casualty insurance claims, less applicable expenses and any debt paid
or prepaid with the proceeds of, or in connection with, such transaction, which
proceeds are not used to acquire Partnership assets or in the operation of the
business of the Partnership, exclusive of proceeds accruing in the normal course
of business.
1.30. "SECTION" means the designated section of this Agreement if no
reference is specified; otherwise the designated section of the specified
agreement, statute or regulation or the comparable provision of any successor
agreement, statute or regulation.
1.31. "SUBSCRIPTION AGREEMENT" means the agreement between the
Partnership and each Limited Partner pursuant to which the Limited Partner
agrees to subscribe for one or more Units and the Partnership accepts the
subscription.
1.32. "UNIT" means an interest in the capital of the Partnership
contributed by the Limited Partners. The authorized number of Units of the
Partnership is 160.
1.33. "YEAR" means the calendar year, except for the initial and final
Year of the Partnership which may begin or end on a date other than January 1
and December 31, respectively.
ARTICLE II
ORGANIZATION
2.1. FORMATION. The parties hereto hereby form a limited partnership
under and pursuant to the Act. As required by the Act, the General Partner and
the Original Limited Partner shall promptly cause the Certificate to be filed on
behalf of the Partnership as required under the Act.
7
<PAGE>
2.2. QUALIFICATION. Promptly after the filing of the Certificate
pursuant to the Act as set forth in Section 2.1, the General Partner shall take
such action as shall be required by law to qualify the Partnership to transact
business as a foreign limited partnership in such other places as shall be
necessary to protect the status of the Partnership as a limited partnership, and
as otherwise required by law.
2.3. NAME. The name of the Partnership is "HEP II, L.P." The business
of the Partnership may be conducted under any name chosen by the General
Partner, and the General Partner may, in its sole discretion from time to time,
change the name of the Partnership.
2.4. PRINCIPAL PLACE OF BUSINESS. The principal place of business of
the Partnership shall be located at 1990 Westwood Boulevard, Third Floor, Los
Angeles, California 90025, or at such other place as the General Partner may
from time to time designate by written notice to the Limited Partners. The
General Partner may establish such other places of business of the Partnership
in addition to the Partnership's principal place of business when and where
required by the Partnership's business and shall give prompt written notice
thereof to the Limited Partners.
2.5. REGISTERED AGENT FOR SERVICE OF PROCESS AND REGISTERED OFFICE;
PARTNERSHIP RECORDS. The agent for service of process on the Partnership in the
State of Delaware shall be CT Corporation System. The address of the registered
agent and the address of the registered office of the Partnership in the State
of Delaware is 1209 Orange Street, Wilmington, Delaware 19801.
ARTICLE III
BUSINESS
The business to be conducted by the Partnership shall be the Project
and to license ancillary rights to such motion pictures and to carry on any and
all activities necessary, proper, convenient or advisable in connection
therewith. In conducting its business, the Partnership shall use personnel of
the Original Limited Partner in both on-screen and technical advisory roles.
In addition, when feasible, the Partnership will incorporate the name,
logo, and personnel and/or students of the Original Limited Partner in the
Project.
ARTICLE IV
TERM
The term of the Partnership shall be from the date on which the
Certificate was originally filed in accordance with the Act, and shall continue
until the Final Percentage Interest Change Date, unless sooner terminated by law
or as hereafter provided in this Agreement.
8
<PAGE>
ARTICLE V
NAMES AND ADDRESSES OF PARTNERS
5.1. GENERAL PARTNER. Hit Entertainment, Inc., a Delaware corporation,
is the General Partner, and its principal places of business is 1200
AmSouth/Harbert Plaza, Birmingham, Alabama 35203.
5.2. ORIGINAL LIMITED PARTNER AND LIMITED PARTNERS. The name, mailing
address, the Limited Partnership Percentage or Capital Contribution of, the
number of Units held by, and the social security or taxpayer identification
number of, each Original Limited Partner and Limited Partner of the Partnership
is set forth in Appendix A attached to this Agreement, as amended from time to
time, which is incorporated herein by reference and made a part hereof as though
set out in full herein. Such information shall always be kept available to any
Partner at the principal place of business of the Partnership.
ARTICLE VI
CAPITAL CONTRIBUTIONS AND
ADDITIONAL WORKING CAPITAL
6.1. CAPITAL CONTRIBUTION OF THE GENERAL PARTNER. The General Partner
has contributed to the capital of the Partnership the sum of $1,000, which has
an Initial Gross Asset Value of and the General Partner' s capital account will
be credited in the amount of $1,000. The General Partner may make additional
Capital Contributions from time to time.
6.2. CAPITAL CONTRIBUTION OF THE ORIGINAL LIMITED PARTNER. The Original
Limited Partner has contributed $1,500,000 in cash to the capital of the
Partnership upon the formation of the Partnership. Such contribution shall be
returned to the Original Limited Partner in the event that an additional
$1,500,000 in capital is not contributed by additional Limited Partners within
SiXtY (60) days after the effective date of this Agreement.
6.3. CAPITAL CONTRIBUTIONS OF THE LIMITED PARTNERS. It is contemplated
by the parties to this Agreement that at some indeterminate time in the future,
it will be in the best interest of the Partnership and its Partners to admit to
the Partnership certain parties as Limited Partners. In such event, all Capital
Contributions made by such Limited Partners shall be paid to and received by the
Partnership and each Limited Partner, other than the Organizational Limited
Partner, shall contribute money to the capital of the Partnership in the amount
of $25,000 per Unit subscribed for under a Subscription Agreement.
6.4. WITHDRAWAL OF CAPITAL CONTRIBUTIONS.
(a) Limited Partners. Subject to the provisions of Section 11.5, no
Limited Partner shall have the right to withdraw or reduce his Capital
Contribution without the consent of the General Partner. No Limited Partner
shall have the right to demand or
9
<PAGE>
receive property other than cash in return for his Capital Contribution, and,
except as provided in Section 6.2, no Limited Partner (other than the Original
Limited Partner) shall have priority over any other Limited Partner, either as
to the return of his Capital Contribution or as to the allocation of income,
gains, losses, deductions, credits or as to distributions.
(b) General Partner. The General Partner will not withdraw its Capital
Contribution prior to the dissolution and liquidation of the Partnership or
sooner than the time the Limited Partners have withdrawn their Capital
Contributions hereunder, whichever first occurs.
6.5. ASSESSMENTS. Limited Partners will not be subject to assessments
for contributions to the capital of the Partnership in excess of the Capital
Contribution required by Sections 6.2 and 6.3.
6.6. INTEREST ON CAPITAL. Interest equal to seven percent (7%) shall be
paid quarterly on Capital Contributions to the Partnership.
6.7. NO VOLUNTARY CAPITAL CONTRIBUTIONS. No Limited Partner shall have
the right to make voluntary Capital Contributions to the Partnership.
6.8. WORKING CAPITAL LOANS. The General Partner shall make or arrange
for such loans as are necessary or desirable, in the sole discretion of the
General Partner, to meet the working capital needs of the Partnership. Such
loans shall be on such terms as the General Partner, in its sole discretion,
shall deem reasonable; provided, however, that any loans made by the General
Partner shall be on terms no less favorable than those that the Partnership
could obtain from an unaffiliated lender.
ARTICLE VII
EXPENSES OF THE PARTNERSHIP
7.1. NO COMPENSATION TO GENERAL PARTNER AS GENERAL PARTNER. The General
Partner shall receive no direct compensation or fees for acting as the general
partner of the Partnership.
7.2. REIMBURSEMENT OF EXPENSES INCURRED BY THE GENERAL PARTNER. The
General Partner may charge the Partnership for all direct costs and expenses
incurred by it in connection with the Partnership's business, including legal
and accounting expenses.
7.3. ORGANIZATIONAL AND OFFERING EXPENSES. All expenses incurred in
connection with the formation of the Partnership and obtaining the Partnership's
capital shall be paid by the Partnership.
10
<PAGE>
ARTICLE VIII
CAPITAL ACCOUNTS; ALLOCATION OF
INCOME AND LOSS; CASH DISTRIBUTIONS
8.1. CAPITAL ACCOUNTS. A Capital Account shall be determined and
maintained for each Partner. No interest shall be payable on the Capital
Accounts of the Partners. The General Partner shall maintain a minimum balance
in its Capital Account equal to one percent of the total positive balance of all
Capital Accounts maintained for the Partners.
8.2. ALLOCATION OF NET INCOME OR NET LOSS. With respect to each Year,
the General Partner shall be allocated the percentage of Net Income or Net Loss
for such Year equal to the applicable General Partner's Percentage Interest, and
the Limited Partners shall be allocated the percentage of Net Income or Net Loss
for such Year equal to the applicable Limited Partners' Percentage Interest.
8.3. DISTRIBUTION OF AVAILABLE CASH FLOW AND PROPERTY OTHER THAN CASH.
(a) The General Partner shall make distributions of Available Cash Flow
in cash or assets of the Partnership in kind at such times as the General
Partner, in its sole discretion, deems such distributions to be advisable and in
the best interest of the Partnership to do so. Notwithstanding any contrary
provision contained in this Agreement, to the extent any amount of a
distribution of Available Cash Flow would create or increase a deficit in the
capital account of any Partner, such amount shall not be distributed to such
Partner, but shall be distributed to the other Partners in proportion to the
amount of the distributions to such other Partners without regard to this
proviso. The General Partner shall have the right to withhold any distribution
of Available Cash Flow if it deems it to be in the best interest of the
Partnership to do so.
(b) With respect to each Year, distributions of Available Cash Flow for
such Year shall be made to the General Partner in an amount equal to the General
Partner's Percentage Interest of such distribution of Available Cash Flow and to
the Limited Partners in an amount equal to the Limited Partners' Percentage
Interest of such distribution of Available Cash Flow; provided, however, that
such distributions of Available Cash Flow shall be made to the General Partner
and Limited Partners taking into account their respective varying percentage
interests which occur with respect to each such Year.
(c) If assets other than cash are distributed by the Partnership, the
capital accounts of the Partners shall be adjusted to reflect how much gain or
loss would have been allocated to the respective Partners if the property had
been sold at the value or values assigned thereto for purposes of making the
distribution.
8.4. ALLOCATION OF GAIN FROM SALE AND DISTRIBUTION OF SALE PROCEEDS.
The General Partner shall be allocated an amount of the Gain from Sale equal to
the applicable General Partner's Percentage Interest, and the Limited Partners
shall be allocated an amount of the Gain from Sale equal to the applicable
Limited Partners' Percentage Interest. The General Partner shall make
distributions of Sale Proceeds as soon after the receipt thereof by the
11
<PAGE>
Partnership as the General Partner deems practicable, such distributions to be
made to the Partners in proportion to their respective capital accounts, taking
into account the allocations of Gain from Sale set forth in this Section 8.4;
provided, however, that to the extent that any amount of a cash distribution to
any Partner would create or increase a deficit in the capital account of such
Partner, such amount shall not be distributed to such Partner, but shall be
distributed to the other Partners in proportion to the amounts distributed to
such other Partners without regard to this proviso.
8.5. CONSEQUENCES OF DISTRIBUTIONS. Upon the determination to
distribute cash or property other than cash in any manner expressly provided in
this Article VIII, made in good faith, the General Partner shall incur no
liability on account of such distribution, even though such distribution may
have resulted in the Partnership retaining insufficient funds for the operation
of its business, which insufficiency resulted in loss to the Partnership or
necessitated the borrowing of funds by the Partnership.
8.6. ALLOCATION OF NET INCOME, NET LOSS AND DISTRIBUTIONS IN RESPECT OF
UNITS TRANSFERRED OR SOLD BY THE PARTNERSHIP. If one or more Units are
transferred during any Year of the Partnership, the Net Income or Net Loss
attributable to such Unit or Units for such Year shall be divided and allocated
between the transferor and the transferee based on the time each such party was,
according to the books and records of the Partnership, the owner of record of
the Unit or Units transferred during the Year in which the transfer occurs.
Distributions of Partnership assets in respect of Units shall be made only to
persons who, according to the books and records of the Partnership, are the
owners of such Units on a date selected by the General Partner. The General
Partner and the Partnership shall incur no liability for making distributions in
accordance with the provisions of the preceding sentence whether or not the
General Partner or the Partnership has knowledge or notice of any transfer of
ownership of any Unit or Units. For purposes of the foregoing, in the case of a
transfer of a Unit, and also in the case of a sale of a Unit by the Partnership
(except for the first time any Person or Persons other than the Original Limited
Partner is admitted to the Partnership as a Limited Partner or Limited
Partners), a Limited Partner who becomes a Limited Partner or who acquires a
Unit according to the books and records of the Partnership after the 15th day of
a month will be treated as becoming a Limited Partner or acquiring such Unit on
the first day of the following month, and a Limited Partner who becomes a
Limited Partner or who acquires a Unit according to the books and records of the
Partnership during the first 15 days of a month shall be treated as becoming a
Limited Partner or acquiring such Units on the first day of such month. In the
case of a sale of a Unit by the Partnership (except for the first time any
Person or Persons other than the Original Limited Partner is admitted to the
Partnership as a Limited Partner or Limited Partners), the General Partner shall
have the right to allocate Net Income and Net Loss to the purchaser of such Unit
as of the date such purchaser fully executes and delivers a Subscription
Agreement.
8.7. TAX ALLOCATIONS: CODE SECTION 704(C). In accordance with Code
Section 7W(c) and the Regulations thereunder, income, gain, loss, and deduction
with respect to any property contributed to the capital of the Partnership
shall, solely for tax purposes, be allocated among the Partners so as to take
account of any variation between the adjusted
12
<PAGE>
basis of such property to the Partnership for federal income tax purposes and
its initial Gross Asset Value (computed in accordance with Section 1.15).
In the event the Gross Asset Value of any Partnership asset is adjusted
pursuant to Section 1.15(ii), subsequent allocations of income, gain, loss, and
deduction with respect to such asset shall take account of any variation between
the adjusted basis of such asset for federal income tax purposes and its Gross
Asset Value in the same manner as under Code Section 704(c) and the Regulations
thereunder.
Any elections or other decisions relating to such allocations shall be
made by the General Partner in any manner that reasonably reflects the purpose
and intention of this Agreement. Allocations pursuant to this Section 8.7 are
solely for purposes of federal, state, and local taxes and shall not affect or
in any way be taken into account in computing, any Person's Capital Account or
share of Net Income or Net Loss, other items, or distributions pursuant to any
provisions of this Agreement.
ARTICLE IX
RIGHTS, POWERS AND OBLIGATIONS
OF THE GENERAL PARTNER
9.1. POWERS. The management and control of the Partnership and its
business and affairs shall rest exclusively with the General Partner, which
shall have all the rights and powers which may be possessed by a general partner
pursuant to the Act, and such additional rights and powers as are otherwise
conferred by law or are necessary, advisable or convenient to the discharge of
its duties under this Agreement. The General Partner shall be the "tax matters
partner" within the meaning of the Code. Without limiting the generality of the
foregoing, the General Partner may, at the cost, expense and risk of the
Partnership:
(a) spend the capital and net income of the Partnership in the
exercise of any rights or powers possessed by the General Partner
hereunder pursuant to a production budget for the Project;
(b) purchase, hold, manage, distribute and license the
Partnership's property, and enter into agreements containing such
terms, provisions and conditions as the General Partner in its
discretion shall approve;
(c) purchase from or through others contracts of liability,
casualty and other insurance and a completion bond, which the General
Partner deems advisable for the protection of the Partnership or for
any purpose convenient or beneficial to the Partnership;
(d) incur indebtedness in the ordinary course of business;
13
<PAGE>
(e) pledge, grant security interests in, hypothecate or
otherwise encumber, under such terms and conditions as the General
Partner deems advisable, the assets of the Partnership;
(f) sell, distribute, license or otherwise dispose of, under
such terms and conditions as the General Partner deems advisable for
the Partnership, or for any purpose convenient or beneficial to the
Partnership, any of the assets of the Partnership, including, without
limitation, the Project;
(g) invest such funds as are temporarily not required for the
purposes of the Partnership's operations in such investments as the
General Partner, in its sole discretion, shall deem prudent;
(h) negotiate employment contracts with principal artists and
other talent which may contribute to the Project, including negotiating
employment contracts providing for profits participation in the Project
for such principal artists and other talent, provided, however, such
profits participation shall be subordinated to the Limited Partners'
right to the return of their total Capital Contribution pursuant to
Section 1.24;
(i) delegate all and any of its duties hereunder and, in
furtherance of any delegation, appoint, employ, or contract with any
person (including Affiliates of the General Partner) for the
transaction of the business of the Partnership, which persons may,
under the supervision of the General Partner, act as distributors,
licensees, consultants, accountants, attorneys, brokers or in any other
capacity deemed by the General Partner necessary or desirable, and pay
appropriate fees to any of such persons.
9.2. INDEPENDENT ACTIVITIES. The General Partner may engage in whatever
activities it chooses, whether or not the same be competitive with the
Partnership, without having or incurring any obligation to offer any interest in
such activities to the Partnership or any party hereto, and, as a material part
of the consideration for the General Partner' s execution hereof, for the
admission of such Limited Partner, each Limited Partner hereby waives,
relinquishes and renounces any such right or claim of participation. The
Partnership shall be considered to be an entity and business wholly separate,
for all purposes, from the business and affairs of the General Partner, it being
understood that the only obligations undertaken by the General Partner are those
expressly provided in this Agreement and those which are inherent to the role of
a general partner.
9.3. DUTIES. The General Partner shall manage and control the
Partnership, its business and affairs, including, without limitation, the
Project, to the best of its ability and shall use its best efforts to carry out
the business of the Partnership. The General Partner shall devote itself to the
business of the Partnership to the extent that it, in its discretion, deems
necessary for the efficient carrying on thereof. The General Partner shall act
as a fiduciary with respect to the safekeeping and use of the funds and assets
of the Partnership.
14
<PAGE>
9.4. CERTAIN LIMITATIONS. Without obtaining the consent of Limited
Partners holding greater than 50% of the issued and outstanding Units, or such
greater percentage of the issued and outstanding Units as is required under the
Act, the General Partner shall not:
(i) act in contravention of this Agreement;
(ii) except as provided in Article XIII of this Agreement, do
any act which would make it impossible to carry on the ordinary
business of the Partnership;
(iii) confess a judgment against the Partnership;
(iv) possess Partnership property, or assign any rights in
specific Partnership property, including any assignment for the benefit
of Partnership creditors, for other than a Partnership purpose;
(v) admit a person as a Limited Partner other than as
provided in this Agreement;
(vi) amend this Agreement;
(vii) dissolve the Partnership;
(viii) sell, pledge or exchange all, or substantially all,
of the assets of the Partnership; or
(ix) remove a general partner of the Partnership.
9.5. NET WORTH OF THE GENERAL PARTNER. The General Partner shall have
and maintain at all times during which it is the general partner of the
Partnership a net worth which is sufficient to conduct the business of the
Partnership in a prudent manner and to comply with any requirements of the Code
or the regulations thereunder or interpretations of the Internal Revenue Service
thereof necessary to avoid the taxation of the Partnership as an association
taxable as a corporation.
9.6. INDEMNIFICATION. Neither the General Partner nor any of its
Affiliates, officers, directors, employees or agents shall be liable to the
Partnership or any Limited Partners for any action or inaction of the General
Partner in connection with the business or affairs of the Partnership, so long
as the person against whom liability is asserted acted in good faith on behalf
of the Partnership and in a manner reasonably believed by such person to be in
the best interests of the Partnership, but only if such course of conduct does
not constitute gross negligence or willful misconduct. The General Partner and
its Affiliates, officers, directors, employees and agents shall be indemnified
and held harmless by the Partnership for any claim, liability, damage, loss, or
other expense (including, without limitation, investigating and defending any
claims and lawsuits and settlement thereof, and legal and accounting costs in
connection therewith) incurred by them solely by virtue of the
15
<PAGE>
performance by any of them of the duties of the General Partner acting as
general partner in connection with the Partnership's business, so long as such
indemnified person acted in good faith on behalf of the Partnership and in a
manner reasonably believed by such person to be in the best interests of the
Partnership, but only if such course of conduct does not constitute gross
negligence or willful misconduct; provided that such indemnification or
agreement to hold harmless shall be recoverable only out of assets of the
Partnership and not from the Limited Partners.
9.7. GENERAL PARTNER AS LIMITED PARTNER. The General Partner may be a
Limited Partner to the extent that it (a) contributes capital under Section 6.3,
or (b) purchases or otherwise acquires or becomes the transferee of all or any
part of a Limited Partnership Interest. The General Partner's Capital
Contribution pursuant to Section 6.1 shall be made solely in its capacity as
general partner and shall not entitle the General Partner to any rights as a
Limited Partner.
9.8. SUCCESSION AS GENERAL PARTNER. The General Partner may at any time
assign its General Partnership Interest to any subsidiary or other Affiliate of
the General Partner without the consent of the Limited Partners. Any corporation
into which the General Partner may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which the General Partner shall be a party, shall be the successor of the
General Partner hereunder, without the execution or filing of any paper or any
further act on the part of any of the parties hereto. In any such event, the
General Partner shall amend the Certificate within 90 days thereafter.
ARTICLE X
STATUS OF LIMITED PARTNERS
10.1. NO PARTICIPATION IN MANAGEMENT. No Limited Partner shall take
part in the management of the business of the Partnership, transact any business
for the Partnership, have the power to sign for or to bind the Partnership to
any agreement or document, or otherwise act as an agent for the Partnership for
any purpose. Such powers to manage and transact Partnership business, to bind
the Partnership or otherwise to act as the agent of the Partnership are vested
solely and exclusively in the General Partner.
10.2. LIMITED LIABILITY. No Limited Partner shall have any personal
liability whatsoever, whether to the Partnership, to the Partners or to the
creditors of the Partnership, for the debts of the Partnership or any of its
losses beyond the amount committed by him to the capital of the Partnership, as
set forth in Section 6.2 and 6.3, and his undistributed balance in his Capital
Account. Each Unit shall be fully paid and nonassessable, and no Limited Partner
shall have any personal liability whatsoever to another Limited Partner on
account of his Capital Contribution.
16
<PAGE>
ARTICLE XI
TRANSFER OF INTERESTS IN THE PARTNERSHIP
11.1. IN GENERAL. Subject to the rights of first refusal granted to the
General Partner, the Partnership and the Limited Partners below, a Limited
Partner may sell, assign or otherwise transfer any or all of the Units owned by
him; provided, however, that:
(a) such Limited Partner and his purchaser, assignee or
transferee execute, acknowledge and deliver to the General Partner such
instruments of transfer and assignment with respect to such transaction
as are in form and substance satisfactory to the General Partner; and
(b) such Limited Partner pays the Partnership a transfer fee
which is sufficient to pay all reasonable expenses of the Partnership
in connection with such transaction;
provided, further, that such purchaser, assignee, or transferee shall not become
a substituted Limited Partner within the meaning of the Act unless the General
Partner consents in writing to such person's becoming a substituted Limited
Partner, which consent may be given or withheld in the sole discretion of the
General Partner. Neither the Partnership nor the General Partner shall recognize
or be bound by any sale, assignment or transfer of any Unit unless the General
Partner consents to such sale, assignment or transfer in writing. The General
Partner will not consent to any sale, assignment or transfer of any Unit or to
the admission of any person as a substituted Limited Partner if, in its opinion,
such consent and substitution would result in the Partnership being treated for
Federal income tax purposes as an association taxable as a corporation, would
result in a termination of the Partnership within the meaning of the Code, or
would constitute a violation of any applicable Federal or state law pertaining
to securities regulation.
Notwithstanding the foregoing, each Limited Partner agrees that at
least 60 days prior to any sale, assignment or transfer (by operation of law or
otherwise) of any Unit by it, such Limited Partner will give written notice
thereof to the General Partner and all Limited Partners, including the name of
the proposed purchaser, assignee or transferee and all of the terms, conditions
and other material details of such proposed sale, assignment or transfer. The
General Partner shall have a right of first refusal for its own account for 30
days after receipt by the General Partner of such written notice in which to
elect to consummate such sale, transfer or assignment itself pursuant to the
same terms, conditions and material details set forth in such notice. If the
General Partner does so purchase the Unit, it may resell such Unit, at any time,
on whatever terms and conditions it deems appropriate, to any Person without
regard to the rights of first refusal set forth herein. If the General Partner
fails to consummate the transaction during such 30-day period, the Partnership
shall then have 10 days in which to consummate such sale, transfer or assignment
pursuant to such terrns, conditions and material details. The right of first
refusal in the General Partner provided in this Section 11.1 shall be a right in
each party designated as the "General Partner" in the first paragraph of this
Agreement, or either of them if the other party designated the "General Partner"
fails to exercise its rights thereunder, provided, however, that such
disjunctive right in each party designated as the "General Partner" shall not
expand the time periods provided for herein with respect to such right of first
refusal, and further provided that such right, if jointly exercised by the
parties
17
<PAGE>
designated the "General Partner", shall be proportionate to the interests in the
Partnership of each party designated the "General Partner". If the Partnership
does so purchase the Unit, it may resell such Unit, at any time, on whatever
terms and conditions it deems appropriate, to any Person without regard to the
rights of refusal set forth herein. If the Partnership fails to consummate the
transaction during such 10-day period, the General Partner shall give written
notice of such failure within two days of the expiration of the above 4-day
period to all the Limited Partners. The Limited Partners shall then have 20 days
from the end of the above 40-day period in which to consummate such sale,
transfer or assignment pursuant to such terms, conditions and material details
in proportion to the pro rata Limited Partnership Interests of the Limited
Partners participating in such purchase. If any Limited Partner does so purchase
a Unit or Units, such Limited Partner may resell such Unit or Units only in
accordance with the provisions of this Section 11.1. If none of the General
Partner, the Partnership or the other Limited Partners consummate the
transaction during such 60-day period, the selling Limited Partner shall then
have 30 days from the end of such 60 day period in which to consummate such
sale, transfer or assignment pursuant to such terms, conditions and material
details and to such named purchaser. If the Limited Partner shall not consummate
the sale, transfer or assignment during such 30-day period, such Unit shall
again be subject to the rights of first refusal contained herein.
11.2. SUBSTITUTED LIMITED PARTNERS. If none of the General Partner, the
Partnership or the Limited Partners exercise their rights of first refusal
provided in Section 11.1 and the General Partner consents to the admission of a
Person as a substituted Limited Partner within the meaning of the Act, and such
Person:
(a) elects to become a substituted Limited Partner by
delivering a written notice of such election to the General Partner;
(b) executes and acknowledges such other instruments as the
General Partner may deem necessary or advisable to effect the admission
of such Person as a substituted Limited Partner, including, without
limitation, the written acceptance and adoption by such Person of the
provisions of this Agreement; and
(c) pays the Partnership a transfer fee which is sufficient to
pay all reasonable expenses of the Partnership in connection with the
admission of such Person as a substituted Limited Partner within the
meaning of the Act, including, without limitation, the cost of
preparing, printing and filing for record an amendment to the
Certificate in accordance with the Act;
then the General Partner shall take all steps which, in the opinion of the
General Partner, are reasonably necessary to admit such Person as a substituted
Limited Partner under the Act. Such Person shall thereupon become a substituted
Limited Partner within the meaning of the Act.
11.3. PURCHASE OF UNITS BY THE GENERAL PARTNER. The General Partner may
acquire one or more Units owned by, or reserved for, Limited Partners, and, if
with respect to such
18
<PAGE>
additional Unit or Units the General Partner becomes a Limited Partner within
the meaning of the Act, the General Partner shall, with respect to such Unit or
Units, enjoy all the rights and be subject to all the obligations and duties of
a Limited Partner. Any Limited Partnership Interest owned by the General Partner
may be sold, in whole or in part, by the General Partner, on whatever terms and
conditions it deems appropriate, to any Person without regard to the rights of
first refusal set forth in Section 11.1.
11.4. INVOLUNTARY TRANSFER OF PARTNER'S INTEREST.
(a) If any Limited Partner, or more than 50% of the members, partners
or shareholders of a Limited Partner which is not an individual, shall be
adjudicated a bankrupt or make a general assignment for the benefit of creditors
or take the benefit of any insolvency act, or if a permanent receiver or trustee
in bankruptcy be appointed for any such Limited Partner's property, or if a
temporary receiver be appointed for any Limited Partner and such appointment is
not vacated or set aside within 60 days from the date of such appointment, or in
the case of a Limited Partner which is not an individual, such Limited Partner
shall be adjudicated a bankrupt or make a general assignment for the benefit of
creditors or take the benefit of any insolvency act, or if a permanent receiver
or trustee in bankruptcy be appointed for any such Limited Partner' s property,
or if a temporary receiver be appointed for any such Limited Partner and such
appointment is not vacated or set aside within 60 days from the date of such
appointment, or in the event of any attempted transfer or other devolution of
the interest of any Limited Partner in the Partnership except as specifically
provided herein, then such Limited Partner shall become a "defaulting Partner"
(which term as used herein shall include any successor to or assignee of the
defaulting Partner).
(b) If any Limited Partner, or more than 50% of the members, partners
or shareholders of a Limited Partner which is not an individual, shall die, or
in the case of a Limited Partner which is not an individual, such Limited
Partner shall dissolve, then such Limited Partner shall become an "involuntary
defaulting Partner" (which term as used herein shall include any successor to or
assignee of the involuntary defaulting Partner).
(c) The General Partner, at its election, may cause the Partnership to
purchase and, if so elected, the defaulting Partner or the involuntary
defaulting Partner, as the case may be, shall sell the Limited Partnership
Interest of the defaulting Partner or the involuntary defaulting Partner, as the
case may be, in the Partnership at the prices and upon the terrns specified in
Section 11.5 at a closing which shall be held at the principal office of the
Partnership within 120 days following the giving of written notice to the
defaulting Partner or involuntary defaulting Partner of the election to purchase
such Partner's Limited Partnership Interest after receiving appropriate releases
and satisfactions.
11.5. PURCHASE PRICE OF DEFAULTING PARTNER'S INTEREST. If the General
Partner shall elect to cause the Partnership to purchase the Limited Partnership
Interest of a defaulting Partner or an involuntary defaulting Partner pursuant
to Section 11.4, the purchase price shall equal the balance of the Capital
Account related to said Limited Partnership Interest reduced by the amount of
any obligation then due the Partnership by the defaulting Partner
19
<PAGE>
or involuntary defaulting Partner (all obligations of the defaulting Partner or
involuntary defaulting Partner shall become immediately due and payable
immediately preceding liquidation of the defaulting Partner' s or the
involuntary defaulting Partner's interest), and the excess (if any) of such
obligations over the value of such Partner' s interest shall be immediately due
and payable to the Partnership by such Partner.
(a) At the closing of the transfer of the Limited Partnership
Interest, the Partnership shall pay in cash to the defaulting Partner
or the involuntary defaulting Partner 20% of the purchase price (net
after reduction for any obligations owed by the Partner to the
Partnership as above provided), and the balance of the purchase price
shall be evidenced by the Partnership's nonnegotiable promissory note
payable in eight approximately equal quarterly installments of
principal, the first of which installments shall be due and payable
three months after the closing, with the remainder being due and
payable serially each three months thereafter. The unpaid balance shall
bear interest at a rate equal to the lower of (x) the prime rate of
Citibank, N.A., New York, New York on the date of closing, or (y) 9%
per annum, payable quarterly with each installment of principal. The
note shall contain provisions for (i) the acceleration of the entire
unpaid balance of principal and accrued interest at the option of the
holder in the event of default in payment of any principal or interest
when due, (ii) the payment of reasonable attorneys' fees in the event
of default, (iii) the prepayment of all or part of the unpaid principal
(any prepayment being first applied to then accrued interest), and (iv)
no prepayment during the taxable year in which the liquidation of the
Limited Partnership Interest occurs.
(b) All determinations and allocations required under this
Section 11.5 shall be made by the Partnership's Accountants, and any
such determination or allocation so made shall be binding on all
parties. For the purpose of the computations required in determining
the defaulting or involuntary defaulting Partner's Limited Partnership
Interest, the books of the Partnership and its Affiliates shall be
accepted as correct.
(c) No payment other than those specifically provided for
herein shall be due or payable with respect to the interest of the
defaulting or involuntary defaulting Partner. Any debt due by the
Partnership to the defaulting Partner or involuntary defaulting
Partner, as the case may be, shall be payable according to it.c terms
ARTICLE XII
RESIGNATION OF THE GENERAL PARTNER
12.1. NO RESIGNATION OF THE GENERAL PARTNER. The General Partner may
not resign as general partner of the Partnership.
12.2. LIABILITY OF THE GENERAL PARTNER AFTER RESIGNATION. If,
notwithstanding the provisions of Section 12.1, the General Partner resigns as
such, its liability as a general
20
<PAGE>
partner shall cease upon the appointment of a successor General Partner pursuant
to Section 12.3, and the Partnership shall promptly take all steps reasonably
necessary under the Act to cause such cessation of liability; provided, however,
that, if no successor General Partner is appointed pursuant to Section 12.3, the
General Partner shall remain the General Partner of the Partnership for purposes
of the winding up of the Partnership pursuant to Section 13.2. Upon its
resignation, the General Partner shall not receive its Capital Contribution, nor
the repayment of any indebtedness of the Partnership owed it, nor any
undistributed balance in its capital account nor its share of any Sale Proceeds
as otherwise provided for in Article VIII hereof.
12.3. APPOINTMENT OF SUCCESSOR GENERAL PARTNER. Subject to Section
13.1(i), at any time during the 90 day period after any notice of resignation
given by the General Partner, the Limited Partners may, by the affirmative vote
of Limited Partners holding 51% of the issued and outstanding Units, voting at a
meeting called in accordance with Article XVI hereof, elect a successor General
Partner to serve beginning immediately upon the effectiveness of the resignation
of the General Partner.
ARTICLE XIII
DISSOLUTION AND WINDING UP
OF THE PARTNERSHIP
13.1. DISSOLUTION OF THE PARTNERSHIP. The resignation of either party
designated as the General Partner in the first paragraph of this Agreement shall
cause a dissolution of the Partnership unless (i) the other party designated as
the General Partner in the first paragraph of this Agreement elects to serve as
the sole General Partner and continue the Partnership, or (ii) a successor
General Partner is appointed pursuant to Section 12.3. The Partnership shall
also be dissolved upon (a) the final judgment by a court having jurisdiction
over the General Partner adjudicating either party designated as the General
Partner in the first paragraph of this Agreement to be bankrupt, or (b) the
expiration of the term of the Partnership. In no event shall the death of any
Limited Partner result in dissolution of the Partnership.
13.2. WINDING UP OF THE PARTNERSHIP. Upon the dissolution of the
Partnership, the General Partner shall take full account of the Partnership's
assets and liabilities and the assets shall be liquidated as promptly as is
consistent with obtaining the fair value thereof. The proceeds therefrom, to the
extent sufficient therefor, shall be applied and distributed as provided in the
Act; provided, however, that after payment of all Partnership debts, obligations
and liabilities, there shall be distributed to each Partner the balance in his
capital account, and the remaining assets of the Partnership, if any, shall be
distributed according to the Partners' percentage interest in the Partnership.
13.3. COMPLIANCE WITH CERTAIN REQUIREMENTS OF REGULATIONS. In the event
the Partnership is "liquidated" within the meaning of Regulations Section
1.704-l(b)(2)(ii)(g), (a) distributions shall be made pursuant to this Article
XIII to the Partners who have positive Capital Accounts in compliance with
Regulations Section 1.704 1(b)(2)(ii)(b)(2),
21
<PAGE>
and (b) if any Partner' s Capital Account has a deficit balance (after giving
effect to all contributions, distributions, and allocations for all taxable
years, including the year during which such liquidation occurs), such Partner
shall contribute to the capital of the Partnership the amount necessary to
restore such deficit balance to zero in compliance with Regulations Section
1.704-l(b)(2)(ii)(b)(3). In the discretion of the General Partner, a pro rata
portion of the distributions that would otherwise be made to the Partners
pursuant to Section 13.2 may be:
(a) distributed to a trust established for the benefit of the
Partners for the purposes of liquidating Partnership assets, collecting
amounts owed to the Partnership, and paying any contingent or
unforeseen liabilities or obligations of the Partnership or of the
Partners arising out of or in connection with the Partnership. The
assets of any such trust shall be distributed to the Partners from time
to time, in the reasonable discretion of the General Partner, in the
same proportions as the amount distributed to such trust by the
Partnership would otherwise have been distributed to the Partners
pursuant to this Agreement; or
(b) withheld to provide a reasonable reserve of Partnership
liabilities (contingent or otherwise) and to reflect the unrealized
portion of any installment obligations owed to the Partnership,
provided that such withheld amounts shall be distributed to the
Partners as soon as practicable.
ARTICLE XIV
BOOKS OF ACCOUNT, ACCOUNTING, REPORTS,
FISCAL YEAR, BANKING AND TAX ELECTION
14.1. BOOKS OF ACCOUNT. The Partnership's books and records (including
a current list of the names and addresses of all Limited Partners) and an
executed COW of this Agreement, as currently in effect, shall be maintained at
the principal office of the Partnership at 1990 Westwood Boulevard, Third Floor,
Los Angeles, California 90025, and each Partner shall have access thereto at all
reasonable times. The books and records of the Partnership shall be kept by the
General Partner using the income tax basis method of accounting consistently
applied, which shall be the cash method of accounting, if allowed under the
Code, and shall reflect all Partnership transactions and be appropriate and
adequate for the Partnership's business. The General Partner shall also keep
adequate federal income tax records using an appropriate method of tax
accounting, which shall be the cash method of accounting, if allowed under the
Code, on a basis consistently applied. Each Limited Partner hereby agrees to
submit to the General Partner the name, address and social security or taxpayer
identification number of a transferee of the Limited Partner and the date of
transfer of the Unit or Units so transferred.
14.2. FINANCIAL REPORTS. The Partnership will send the following
reports to each Person who was a Partner during the period covered by such
report:
22
<PAGE>
(a) A report within 90 days after the end of each Year of the
Partnership containing all information necessary for the preparation of
the Partner's Federal and state income tax returns;
(b) An annual report within 120 days after the end of each
Year of the Partnership containing: (i) a balance sheet as of the end
of the fiscal year, a statement of income and a cash flow statement for
the year then ended, all of which, except for the cash flow statement,
shall be prepared in accordance with federal income tax principles, and
(ii) a report of the activities of the Partnership during the period
covered by the report. Such report will set forth distributions to the
Limited Partners for the period covered thereby, and shall separately
identify distributions of Available Cash Flow, whether such be in cash
or non-cash assets during the period, amounts which had been held as
reserves, and proceeds from disposition or sublease of assets, if any.
The report shall also include a detailed statement of any transaction
with the General Partner of the Partnership or its Affiliates and of
commissions, compensation and other benefits paid, or accrued to such
General Partner or its Affiliates for the fiscal year completed,
showing the amount paid or accrued to each recipient and the services
performed; and
(c) Semi-annual progress reports on the operations of the
Partnership.
14.3. FISCAL YEAR. The fiscal year of the Partnership shall be the
Year, as defined in Section 1.32.
14.4. BANKING. All funds of the partnership shall be initially
deposited in a separate bank account or accounts or in an account or accounts of
a savings and loan association as shall be determined by the General Partner,
but such funds may be invested as provided in Section 9.1(g).
14.5. TAX ELECTION. Upon the transfer of an interest in the Partnership
or in the event of a distribution of the Partnership's property, the Partnership
may elect, but is not required to elect, pursuant to Section 754 of the Code to
adjust the basis of the Partnership's property as allowed by Sections 734(b) and
743(b) thereof. The General Partner shall have the sole authority and discretion
to make such an election. There shall be no requirement that the General Partner
make such an election.
14.6. TAX RETURNS. The General Partner shall, for each fiscal year,
file on behalf of the Partnership with the Internal Revenue Service a
Partnership Return within the time prescribed by law (including any extensions)
for such filing. The General Partner shall also file on behalf of the
Partnership such state and/or local tax returns as may be required by law.
23
<PAGE>
ARTICLE XV
POWER OF ATTORNEY
15.1. APPOINTMENT OF ATTORNEY-IN-FACT. Each Limited Partner hereby
makes, constitutes and appoints the General Partner and any officer thereof,
with full power of substitution and resubstitution, his agent and
attorney-in-fact to file for record the Certificate as required by the Act, and
to sign, execute, certify, acknowledge, and file for record any other
instruments which may be required of the Partnership or of the Limited Partners
by law, including, but not limited to, amendments to or cancellations of the
Certificate and specifically including the amendments to the Agreement admitting
Limited Partners to the Partnership as Limited Partners. Each Limited Partner
authorizes such attorney-in-fact to take any further action which such
attorney-in-fact shall consider necessary or advisable in connection with the
foregoing, hereby giving such attorney-in-fact full power and authority to act
to the same extent as if such Limited Partner were himself personally present
and hereby ratifying and confirming all that such attorney-in-fact shall
lawfully do or cause to be done by virtue hereof.
15.2. EFFECT OF POWER. The power of attorney pursuant to Section 15.1:
(a) is a special power of attorney, coupled with an interest,
is irrevocable, and shall survive the death, insanity, or incapacity of
the granting Limited Partner:
(b) may be exercised by such attorney-in-fact for each Limited
Partner by listing all of the Limited Partners executing any agreement,
certificate, instrument or document with the single signature of such
attorney-in-fact as attorney-in-fact for all of them; and
(c) shall survive the delivery of an assignment by a Limited
Partner of the whole or a portion of his interest in the Partnership,
except that where the purchaser, transferee or assignee thereof is to
be admitted as a substituted Limited Partner, the power of attorney
shall survive the delivery of such assignment for the sole purpose of
enabling such attorney-in-fact to sign, execute, certify, acknowledge,
and file any such agreement, certificate, instrument, or document
necessary to effect such substitution.
ARTICLE XVI
MEETINGS AND MEANS OF VOTING
Meetings of the Partners may be called by the General Partner, or by
Limited Partners holding at least 50% of the issued and outstanding Units for
any matter specified in Section 9.4. The General Partner shall call a meeting of
the Partners to be held not later than 60 days following the receipt by the
General Partner of any notice of adjustments of Partnership income or expenses
issued by the Internal Revenue Service in connection with an audit of any
Partnership Return, such meeting to determine the appropriate action to be
taken, including, without limitation, the forum of any litigation contesting the
notice.
24
<PAGE>
The notice of any meeting called under this Article XVI shall state the nature
of the business to be transacted. Notice of any such meeting shall be delivered
by the General Partner within ten days of its calling to all Partners in the
manner prescribed in Section 17.1, and such meeting shall be held not less than
15 days nor more than 60 days after the date of such notice. Partners may vote
in person or by proxy at any such meeting. Any matters presented to the Limited
Partners for their vote shall be determined by Limited Partners holding 50% of
the issued and outstanding Units or such greater percentage of the issued and
outstanding Units as is required under the Act or this Agreement. Each Unit
shall be entitled to one vote on all such matters. Whenever the vote or consent
of Partners is permitted or required under this Agreement, such vote or consent
may be given at a meeting of Partners or may be given in writing in accordance
with the procedure for obtaining written votes prescribed in Section 17.1.
ARTICLE XVII
MISCELLANEOUS
17.1. NOTICE. Except as otherwise specifically provided in this
Agreement, any notice, payment, demand or communication required or permitted to
be given by any provision of this Agreement shall be duly given if delivered in
writing personally to the person to whom it is directed, or if sent by mail or
telegraph, as follows: if to the General Partner, at its address set forth in
Section 5.1 or to such other address as the General Partner may from time to
time specify by written notice to the Limited Partners pursuant to this Section
17.1, and if to a Limited Partner, at such Limited Partner' s address set forth
in Appendix A hereto, or to such other address as such Limited Partner may from
time to time specify by written notice to the General Partner and all other
Limited Partners pursuant to this Section 17.1. Any such notice shall be deemed
to be given as of the date so delivered, if delivered personally, or as of the
date on which the same was deposited in the United States mail, postage prepaid,
addressed and sent as aforesaid.
17.2. ADDITIONAL BUSINESSES. The General Partner shall be permitted to
manage or own additional businesses even though such businesses may compete with
the business of the Partnership, including, without limitation, the Project.
17.3. SECTION CAPTIONS. Section and other captions contained in this
Agreement are for reference purposes only and are in no way intended to
describe, interpret, define or limit the scope, extent, or intent of this
Agreement or any provision hereof.
17.4. SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision of this Agreement is illegal or invalid for
any reason whatsoever, such illegality or invalidity shall not affect the
validity of the remainder of this Agreement.
17.5. AMENDMENTS. Amendments to this Agreement may be proposed by the
General Partner. Following such proposal, the General Partner shall submit to
the Limited Partners a verbatim statement of any proposed amendment and may
include in any such submission its recommendation as to the proposed amendment.
The General Partner shall
25
<PAGE>
seek the written vote of the Limited Partners on the proposed amendment or shall
call a meeting of the Partners pursuant to Article XVI of this Agreement to vote
thereon and to transact any other business permitted by the Act to be transacted
by the Limited Partners that they may deem appropriate. For purposes of
obtaining a written vote, the General Partner may require response within a
specified time, but not less than 30 days, and failure to respond in such time
shall constitute a vote which is consistent with the General Partner' s
recommendation with respect to the proposal. A proposed amendment shall be
adopted and effective as an amendment to this Agreement if it receives the
affirmative vote of Limited Partners holding 50% of the issued and outstanding
Units or such greater percentage of the issued and outstanding Units as is
required under the Act.
17.6. RIGHT TO RELY UPON THE AUTHORITY OF THE GENERAL PARTNER. No
person dealing with the General Partner shall be required to determine its
authority to make any commitment or undertaking on behalf of the Partnership,
nor to determine any fact or circumstance bearing upon the existence of its
authority. In addition, no purchaser of any property of the Partnership shall be
required to determine the sole and exclusive authority of the General Partner to
sign and deliver on behalf of the Partnership any such instrument of transfer,
or to see to the application or distribution of revenues or proceeds paid or
credited in connection therewith, unless such purchaser shall have received
written notice from the Partnership affecting the same.
17.7. GOVERNING LAW. The laws of the State of Delaware shall govern the
validity of this Agreement, the construction of its terms and the interpretation
of the rights and duties of the parties hereto.
17.8. WAIVER OF ACTION FOR PARTITION. Each Partner irrevocably waives
during the term of the Partnership, and during the period of its liquidation
following any dissolution, any right to maintain any action for partition with
respect to any of the assets of the Partnership.
17.9. COUNTERPART EXECUTION. This Agreement may be executed in one or
more counterparts all of which together shall constitute one and the same
Agreement.
17.10. PARTIES IN INTEREST. Except as provided in Article XI of this
Agreement, this Agreement shall be binding upon the parties hereto and their
successors, heirs, devisees, assigns, legal representatives, executors and
administrators.
17.11. CONSTRUCTION OF PRONOUNS. The feminine or neuter of the words
"he", "his" and "him" used herein shall be automatically deemed to have been
substituted for such words where appropriate to the particular Limited Partner
executing this Agreement.
17.12. INTEGRATED AGREEMENT. This Agreement constitutes the entire
understanding and agreement among the parties hereto with respect to the subject
matter hereof, and there are no agreements, understandings, restrictions,
representations or warranties among the parties other than those set forth
herein or herein provided for.
26
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have hereunto set their
hands as of the day and year first above written.
GENERAL PARTNER
HIT ENTERTAINMENT, INC.
By /s/ Brian Shuster
-------------------------------
Brian Shuster
Its President
ORIGINAL LIMITED PARTNER
MASTER GLAZIER'S KARATE
INTERNATIONAL, INC.
By /s/ Mark Glazier
-------------------------------
Mark Glazier
Its President
27
<PAGE>
APPENDIX A
TO THE
AGREEMENT OF LIMITED PARTNERSHIP
OF
HEP II, L.P.
GENERAL PARTNER
Name Mailing Address
------------------------- ----------------------------
Hit Entertainment, Inc. 1200 AmSouth/Harbert Plaza
Birmingham, Alabama 35203
LIMITED PARTNERS
<TABLE>
<CAPTION>
Social Security
or
Number Taxpayer
Mailing Capital of Identification
Name Addresss Contribution Units Number
- ------------------------ ---------------------------- --------------- -------- ----------------
<S> <C> <C> <C> <C>
Master Glazier's Karate 570 Broad Street $1,500,000 60 22-3234110
International, Inc. Suite 12
Elizabeth, New Jersey 07202
</TABLE>
A-1
Exhibit 10.11
THE PARTNERSHIP INTERESTS ISSUED UNDER THIS AGREEMENT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES ACT AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF ABSENT SUCH REGISTRATION UNLESS, IN THE OPINION OF
COUNSEL TO THE GENERAL PARTNER, SUCH REGISTRATION IS NOT
REQUIRED.
AMENDMENT NO. 1
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
HEP II, L.P.
This AMENDMENT NO 1 TO AGREEMENT OF LIMITED PARTNERSHIP is made and
entered into as of April 23, 1996, by and among Hit Entertainment, Inc., a
Delaware corporation (the "General Partner"), Master Glazier's Karate
International, Inc., a Delaware corporation, as the original limited partner
(the "Original Limited Partner") and United Leisure Corporation, a Delaware
corporation ("ULC"), and those other parties who from time to time may become
limited partners pursuant to the provisions of this Agreement by execution and
delivery of this Agreement or counterparts hereof (hereinafter referred to
collectively as the "Limited Partners" and referred to individually as a
"Limited Partner")
W I T N E S S E T H:
WHEREAS, the General Partner and the Original Limited Partner have
created the Partnership, and the parties hereto desire to set forth their
respective interests in and all rights, duties and obligations in and to the
Partnership, all upon the terms and conditions hereinafter set forth; and
WHEREAS, ULC desires to become a limited partner of the Partnership by
the execution and delivery hereof.
NOW, THEREFORE, in consideration of the premises, and the mutual
covenants and promises hereinafter set forth, the parties to this Agreement of
Limited Partnership do hereby agree as follows:
1. Admission of ULC as Limited Partner; Capital Contribution. By its
execution and delivery of this Agreement, ULC shall become a Limited Partner of
the Partnership and
<PAGE>
hereby makes a capital contribution to the Partnership in the total amount of
$1,500,000, thereby becoming the owner of 60 Units
2. Section 8.1 of the Agreement of Limited Partnership of the
Partnership is hereby amended to read in its entirety as follows
"8.1 CAPITAL ACCOUNTS. A Capital Account shall be determined
and maintained for each Partner. Interest equal to seven percent (7%)
per annum shall be payable on a quarterly basis on the Capital Accounts
of the Partners The General Partner shall maintain a minimum balance in
its Capital Account equal to one percent of the total positive balance
of all Capital Accounts maintained for the Partners."
2
<PAGE>
IN WITNESS WHEREOF, the undersigned parties have hereunto set their
hands as of the day and year first above written.
GENERAL PARTNER
HIT ENTERTAINMENT, INC.
By /s/ Brian Shuster
-----------------------------
Brian Shuster
Its President
LIMITED PARTNERS
UNITED LEISURE CORPORATION
By /s/ Harry Shuster
---------------------------------
Harry Shuster
Chairman of the Board,
President and Chief
Executive Officer
ORIGINAL LIMITED PARTNER
MASTER GLAZIER'S KARATE
INTERNATIONAL, INC.
By /s/ Mark Glazier
--------------------------------
Mark Glazier
Its President
3
<PAGE>
APPENDIX A
TO THE
AMENDMENT NO. 1
OF
AGREEMENT OF LIMITED PARTNERSHIP
OF
HEP II, L.P.
GENERAL PARTNER
Name Mailing Address
- ----------------------------- -------------------------------
Hit Entertainment, Inc. 1200 AmSouth/Harbert Plaza
Birmingham, Alabama 35203
LIMITED PARTNERS
<TABLE>
<CAPTION>
Social Security
or
Number Taxpayer
Mailing Capital of Identification
Name Addresss Contribution Units Number
- ------------------------ ---------------------------- --------------- -------- ----------------
<S> <C> <C> <C> <C>
Master Glazier's Karate 570 Broad Street $1,500,000 60 22-3234110
International, Inc. Suite 12
Elizabeth, New Jersey 07202
United Leisure 8800 Irvine Center Drive $1,500,000 60 13-2652243
Corporation Irvine, California 92718
</TABLE>
A-1
Exhibit 21.1
LIST OF SUBSIDIARIES
The Company has the following wholly owns subsidiaries:
Name of Corporation Jurisdiction of Incorporation
Hit Productions, Inc. California
United Film Distributors-- California, Inc. California
Skeleton Productions, Inc. California
Retribution Productions, Inc. California
Production of the Night, Inc. California
Markus 4, Inc. California
J.F.W. Productions, Inc. California
Bad Blood Productions, Inc. California
Secret Agent Productions, Inc. California
Santa Productions, Inc. California
Elevator Productions, Inc. California
Dead End Productions, Inc. California
Avatar Filmworks, Inc. California
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
United Film Distributors, Inc.
Los Angeles, California
We hereby consent to the use in the Prospectus constituting a
part of this Registration Statement on Form SB-2 of our report dated November
15, 1996, relating to the consolidated financial statements of United Film
Distributors, Inc. which is contained in the Prospectus.
We also consent to the reference to us under the caption
"Experts" in the Prospectus.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
June 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS ENCLOSED AS ITEM 22 IN THIS REGISTRATION STATEMENT.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JAN-31-1997
<EXCHANGE-RATE> 1
<CASH> 295,774
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,373,634
<PP&E> 79,179
<DEPRECIATION> 18,981
<TOTAL-ASSETS> 7,433,832
<CURRENT-LIABILITIES> 2,265,707
<BONDS> 0
30,000
0
<COMMON> 0
<OTHER-SE> 2,005,932
<TOTAL-LIABILITY-AND-EQUITY> 7,433,832
<SALES> 4,029,908
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 3,621,637
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,629
<INCOME-PRETAX> (97,756)
<INCOME-TAX> 26,658
<INCOME-CONTINUING> (71,098)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (71,098)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
