<PAGE>
As filed with the Securities and Exchange Commission on December 19, 1997.
Registration No. 333-_____
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
FANIA ENTERTAINMENT GROUP, LTD.
(Exact name of Small Business Issuer as specified in its charter)
<TABLE>
<CAPTION>
Delaware 3652 13-3975933
<S> <C> <C>
(State or other jurisdiction of incorporation (Primary standard industrial (I.R.S. employer identification
or organization) classification number) number)
</TABLE>
112 West 31st Street
New York, NY 10001
(212) 967-3114
(Address and telephone number of principal executive offices)
---------------------
Gerald Masucci, Chairman
Fania Entertainment Group, Ltd.
112 West 31st Street
New York, NY 10001
(212) 967-3114
(Name, address and telephone number of agent for service)
---------------------
Copies to:
Robert J. Mittman, Esq. Lawrence B. Fisher, Esq.
Tenzer Greenblatt LLP Orrick, Herrington & Sutcliffe LLP
405 Lexington Avenue 666 Fifth Avenue
New York, New York 10174 New York, New York 10103
Telephone No. (212) 885-5000 Telephone No. (212) 506-5000
Telecopier No. (212) 885-5001 Telecopier No. (212) 506-5151
Approximate date of commencement of proposed sale to the public: As soon
as practicable 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, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration 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. / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Title of each Class of Amount to be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered Per Share(1) Price(1) Registration Fee
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share ........................ 1,840,000(2) $ 7.00 $12,880,000 $3,799.60
Representative's Warrants(3) ... 160,000 .0001 $ 16 (4)
Common Stock, par value $.01 per
share, issuable upon exercise of
the Representative's Warrants 160,000(4) $ 8.40 $ 1,344,000 $ 396.48
Total Registration Fee .................................................................. $4,196.08
</TABLE>
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes 240,000 additional shares of Common Stock pursuant to an
over-allotment option.
(3) Represents warrants to be issued by the Company to the Representative at
the time of delivery and acceptance of the securities to be sold by the
Company to the public hereunder.
(4) Based on Rule 457(g), no fee is required.
---------------------
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED DECEMBER 19, 1997
1,600,000 Shares
FANIA ENTERTAINMENT GROUP, LTD.
Common Stock
---------------------
Fania Entertainment Group, Ltd. (the "Company") is offering hereby
1,600,000 shares of common stock, par value $.01 per share (the "Common
Stock"). Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that any such market will develop. It is
anticipated that the Common Stock will be quoted on the Nasdaq National Market
("Nasdaq") under the symbol "FNIA." It is currently estimated that the initial
public offering price of the Common Stock will be between $6.00 and $7.00 per
share. For a discussion of the factors considered in determining the offering
price, see "Underwriting."
---------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING
ON PAGE 6 AND "DILUTION."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
Per Share ...... $ $ $
Total (3) ...... $ $ $
- --------------------------------------------------------------------------------
(1) Does not include additional compensation payable to Gilford Securities
Incorporated (the "Representative") in the form of a non-accountable
expense allowance. In addition, see "Underwriting" for information
concerning indemnification and contribution arrangements with the
Underwriters and other compensation payable to the Representative.
(2) Before deducting estimated expenses, including the non-accountable expense
allowance in the amount of $ ($ , if the Underwriters' over-allotment
option is exercised in full), estimated at $ , payable by the Company.
(3) The Company has granted to the Underwriters an option, exercisable within
45 days from the date of this Prospectus, to purchase up to 240,000
additional shares of Common Stock, on the same terms set forth above,
solely for the purpose of covering over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts
and Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
---------------------
The shares of Common Stock are being offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the several
Underwriters and subject to the approval of certain legal matters by their
counsel and subject to certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify the offering and to reject any order in
whole or in part. It is expected that delivery of certificates representing the
shares of Common Stock will be made against payment therefor at the offices of
Gilford Securities Incorporated, New York, New York on or about , 1998.
---------------------
Gilford Securities Incorporated
The date of this Prospectus is , 1998.
<PAGE>
[Inside front cover: the Company's logo consisting of the Fania name, an
artist's rendering of a Latin music
group and logos relating to the Company's record labels]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS,
ON NASDAQ, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE, WHICH STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION MAINTAINED BY THE
UNDERWRITERS IN THE COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor is
urged to read this Prospectus in its entirety. Unless the context indicates
otherwise (i) references in this Prospectus to the "Company" include Sonido
Inc. ("Sonido"), the Company's predecessor, and Jerry Masucci Music, Inc.
("JMM"), which will become a wholly-owned subsidiary of the Company on the date
of this Prospectus, (ii) this Prospectus gives effect to a reorganization (the
"Reorganization"), effective as of the date of this Prospectus, pursuant to
which Sonido will transfer certain assets to the Company, and (iii) this
Prospectus assumes no exercise of the Underwriters' overallotment option to
purchase 240,000 additional shares of Common Stock. See "The Company" and
"Underwriting."
The Company
Fania Entertainment Group, Ltd. (the "Company" or "Fania") is an
independent record company that produces, markets and sells Latin music on
compact discs ("CDs") and cassette tapes. Since its inception, the Company has
specialized in "classic" Latin music contained in its extensive library or
"catalog" of Salsa, Merengue, Latin jazz and Latin pop master recordings by
major Latin artists. Ruben Blades, Willie Colon, Hector Lavoe, Celia Cruz,
Johnny Pacheco, Tito Puente and the Fania All-Stars are among the performers
featured in the Company's catalog. Fania has recently begun to pursue the
acquisition, production and promotion of recorded music by promising new Latin
artists.
In 1964, Jerry Masucci, Chairman, President and Chief Executive Officer of
the Company, and Johnny Pacheco, a Latin bandleader, founded the original Fania
Records ("Fania Records"). The Fania label gained widespread recognition as one
of the most influential Salsa labels in Latin music history. In fifteen years,
Fania Records produced more than 650 Latin albums, including more than 50 gold
or platinum Latin records, five of which received Grammy Awards for Best Latin
Recording or Best Tropical Latin Performance. Fania Records also developed or
acquired ten Latin record labels and more than 1,300 master recordings,
representing a library of more than 10,000 individual songs. In 1979, Fania
Records sold the catalog to Valsyn, S.A. ("Valsyn"), a Uruguay corporation. In
1986, the Company licensed the exclusive right to exploit the catalog in the
United States and Puerto Rico from Valsyn (the "Valsyn License"). The Company
has acquired part of the catalog through payments made under the Valsyn License
since 1986, and intends to use a portion of the proceeds of this offering to
purchase the balance of the catalog (including all publishing and foreign
licensing rights).
Sales of Latin music have increased significantly in recent years.
According to the Recording Industry Association of America, retail sales of
Latin music in the United States were approximately $392 million in 1996 and
approximately $213 million during the first six months of 1997, an increase of
25% from the same period in 1996, despite an overall decline in the recording
industry. Sales of Latin music have also increased in certain countries in
Latin America, as well as in Europe and Asia.
The Company's products include new releases by artists under contract or
license, as well as compilations and re-releases of previously recorded music.
Since January 1997, the Company has entered into agreements with five Latin
recording artists. In June 1996, the Company entered into an agreement with
Pyrale Commercial S.A. ("Pyrale"), an independent production company organized
under the laws of Panama. Pyrale granted the Company the exclusive right
worldwide (except in Panama) to manufacture, advertise and sell Pyrale's master
recordings by Cuban artists, such as Paulito and Dan Den. The Company has
released nine recordings under this arrangement to date. The Company plans to
release at least ten new recordings, compilations and re-releases during the
twelve months following the consummation of this offering.
The Company recently entered into a three-year agreement with Sony Discos
Inc. ("Sony"), a leading distributor of Latin music. Sony has agreed to act as
the exclusive distributor for certain of the Company's products in the United
States and Puerto Rico. Sony is currently distributing twelve of the Company's
recordings, including a new recording by the Fania All-Stars entitled "Bravo"
and six new compilations of previously released Fania All-Star recordings.
3
<PAGE>
The Company's products are sold domestically primarily in small record
outlets in Latin neighborhoods and Latin record sections of Virgin Records,
HMV, Sam Goody's and other recorded music chains. The Company also sells
products in international markets, primarily in Colombia and Venezuela. For the
year ended December 31, 1996, sales of recordings in domestic and international
markets accounted for approximately 61.6% and 38.4%, respectively, of the
Company's revenues.
The Company intends to use a portion of the proceeds of this offering to
significantly expand its advertising, marketing and promotional activities,
primarily by purchasing advertising time on broadcast media designed to
maximize exposure of the Company's new releases and to promote the Fania name.
The Company's strategy is to (i) acquire a roster of talented new Latin
recording artists by capitalizing on management's expertise in identifying
artists with potential for commercial success, (ii) expand its operations by
increasing distribution of its recordings in new and existing geographic
markets, including foreign markets with significant growth potential and (iii)
pursue opportunities by making selective acquisitions of master recordings or
businesses which management believes will enhance Fania's growth prospects.
There can be no assurance that the Company will be able to successfully expand
its operations.
The Company's principal executive offices are located at 112 West 31st
Street, New York, New York 10001 and its telephone number is (212) 967-3114.
The Offering
Common Stock offered..... 1,600,000 shares
Common Stock to be outstanding
after the offering(1)... 4,575,000 shares
Use of Proceeds.......... The Company intends to use the net proceeds of
this offering for the acquisition of the catalog;
record production and manufacturing; advertising,
marketing and promotion; and the balance for working
capital and general corporate purposes. See "Use of
Proceeds."
Risk Factors............. The shares offered hereby involve a high degree of
risk and immediate substantial dilution. See "Risk
Factors" and "Dilution."
Proposed Nasdaq National Market
symbol.................. FNIA
- -------------
(1) Does not include (i) 160,000 shares of Common Stock reserved for issuance
upon exercise of the Representative's Warrants; (ii) 131,000 shares of
Common Stock reserved for issuance upon exercise of outstanding options
under the Company's Stock Option Plan (the "Plan") and (iii) 119,000
shares of Common Stock reserved for issuance upon exercise of options
available for future grant under the Plan. See "Management -- Stock Option
Plan" and "Underwriting."
4
<PAGE>
Summary Financial Information
(in thousands, except share and per share data)
The summary financial information set forth below is derived from the
financial statements appearing elsewhere in this Prospectus. Such information
should be read in conjunction with such financial statements, including the
notes thereto.
Statement of Income Data:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
--------------------------- --------------------------
1995 1996 1996 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Total revenues .................. $ 4,002 $ 5,104 $ 3,602 $ 3,731
Operating income ............... 1,364 1,771 1,337 1,335
Income before income
taxes ........................ 927 1,415 1,091 1,164
Net income(1) .................. 897 863 696 716
Net income per share ............ .30 .29 .23 .24
Weighted average number of shares
outstanding .................. 2,975,000 2,975,000 2,975,000 2,975,000
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------------------
Pro Forma
Actual Pro Forma(2) As Adjusted(3)
-------- -------------- ---------------
<S> <C> <C> <C>
Working capital (deficit) ............ $1,836 $ (1,102) $4,523
Total assets ........................ 8,371 4,769 9,547
Short-term debt ..................... 2,207 2,207 1,350
Total liabilities .................. 7,003 6,490 2,720
Stockholders' equity (deficit) ...... 1,368 (1,721) 6,827
</TABLE>
- -------------
(1) Reflects utilization of net operating loss carryforwards of approximately
$850,000 in 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(2) Gives pro forma effect to the Reorganization, including an aggregate of
$3,089,000 of net assets retained by Sonido. See "The Company" and Note 12
to Notes to Financial Statements.
(3) As adjusted to give effect to the sale of the Common Stock offered hereby
(based on an assumed public offering price of $6.50 per share) and the
application of the estimated net proceeds therefrom. See "Use of
Proceeds."
5
<PAGE>
RISK FACTORS
The shares offered hereby involve a high degree of risk. Prospective
investors should carefully consider the following risk factors before making an
investment decision.
Limited Relevant Operating History. Although the Company has been
successful in marketing, promoting and publishing its catalog and management
has significant experience in the recording industry, the Company has only
recently begun to pursue the acquisition, production and promotion of newly
recorded music. Accordingly, the Company has a limited relevant history of
record production operations upon which an evaluation of its growth prospects
can be made. The Company currently has a limited number of artists under
contract, and there can be no assurance that the Company will be successful in
implementing its business plans. The Company's growth prospects must be
considered in light of the numerous risks, uncertainties, delays, problems and
difficulties frequently encountered in the establishment of a new business in a
highly competitive industry characterized by a high rate of business failures
and short product life cycles. See "Business."
Risks of Record Production and Promotion; Possible Cost Overruns. Record
production and promotion activities are speculative and are subject to all of
the risks associated with the recording industry generally. Many commercial
recordings released in the United States do not earn sufficient gross receipts
to cover the costs of production and distribution and return initial
investments. Production costs, as well as promotion and marketing expenses, and
third-party participations payable to producers, recording artists and others,
which reduce potential revenues derived from record sales, have increased
significantly in recent years. The Company's future operating results will
depend on numerous factors beyond its control, such as the popularity and
timing of other recordings being released, retail prices, national, regional
and local economic conditions (particularly adverse conditions affecting
discretionary consumer spending), changes in consumer demographics, critical
reviews and public tastes and preferences, which change rapidly and cannot be
predicted. The Company's ability to plan for record production and promotional
activities will be significantly affected by its ability to anticipate and
respond to changes in consumer tastes and preferences, primarily those
consumers comprising the Company's target market. A decline in the popularity
of Latin music or in the recording industry generally (including the recent
downturn in such industry) or in particular market segments could adversely
affect the Company's business and prospects.
Record production activities are also subject to unforeseen events,
unanticipated production cost overruns and technical and operating
difficulties. Significant up-front expenses associated with record production
and promotion could adversely affect the Company's future operating results.
Although the Company seeks to reduce the financial risk of individual
recordings by limiting its initial production runs, actual production costs may
exceed production budgets and the occurrence of material cost overruns could
have a material adverse effect on the Company's operating results. See
"Business."
Dependence on Catalog Sales; Limited Artist Roster; Uncertainty of Market
Acceptance. To date, substantially all of the Company's revenues have been
derived from the sale of catalog CDs and tapes, a decline in the sale of which
would have a material adverse effect on the Company. A significant portion of
the Company's future revenues are expected to be derived from the exploitation
of a limited number of new and unknown recording artists in limited musical
genres. Accordingly, the Company's continued success will be dependent upon its
ability to sign and retain promising artists who will appeal to popular taste
over a significant period of time. As is typically the case in the record
industry, demand and market acceptance for newly introduced and unknown artists
and recordings is subject to a high level of uncertainty. Achieving market
acceptance for new artists and recordings will require significant efforts and
expenditures by the Company for advertising, marketing and promotional
activities, including obtaining access to television and radio "air time" to
create awareness of and demand for its recordings by consumers. The Company
currently has limited marketing capabilities, resources and personnel. The
Company intends to use a portion of the proceeds of this offering to
significantly expand its marketing and promotional activities and hire
additional personnel. There can be no assurance that the Company will be able,
for financial or other reasons, to successfully promote and market its newly
recorded music or that any of its efforts will result in initial or continued
market acceptance for the Company's products. See "Business -- Advertising,
Promotion and Marketing."
Competition. The Company faces intense competition for a finite amount of
consumer discretionary spending from numerous other record companies and other
businesses in the entertainment industry, including
6
<PAGE>
from the major recording companies (Sony, Warner, Universal, BMG, Capitol-EMI
and PolyGram), all of which have substantially greater resources, history of
relationships in attracting talent, obtaining properties and hiring key
employees for the production of recordings. The Company also competes with
other significant independent record labels, such as FonoVisa, Platano Records,
Karen Records and RMM Records & Video Corp. The market for recorded music is
dominated by the major record companies, certain of which are a part of larger
entertainment conglomerates, and have Latin recording divisions with
significant financial resources and promotional budgets and large artist and
repertoire (A&R) staffs to compete for a limited number of promising Latin
recording artists, producers and writers. There is also intense competition
within the recording industry for access to playing time on Hispanic television
stations and other video outlets, and for "air time" by radio disc jockeys,
which is essential to gain attention and create demand for recordings. There
can be no assurance that any of the Company's artists, recordings or music
videos will gain the exposure required to generate significant market interest
or that the Company will be able to continue to compete successfully. See
"Business -- Competition."
Dependence on Third-Party Distributors. The Company sells its catalog of
CDs and tapes to wholesale distributors. Sales to a limited number of
distributors have and will continue to account for a substantial portion of the
Company's revenues. For the year ended December 31, 1996 and the nine months
ended September 30, 1997, sales of catalog CDs and tapes to five distributors
accounted for approximately 70.0% and 67.4%, respectively, of the Company's
revenues. For the nine months ended September 30, 1997 three of the Company's
largest distributors accounted for 47.0% of the Company's revenues, with Sony
accounting for approximately 15.0%. The Company has recently entered into a
three-year agreement with Sony pursuant to which Sony agreed to distribute the
Company's recorded music in the United States and Puerto Rico in consideration
of a distribution fee of approximately 16% of revenues. The Company's success
will be largely dependent upon the marketing efforts of Sony and its other
principal distributors and upon sales of the Company's products to their
principal accounts. Sony has and will continue to distribute other recordings,
including recordings in which Sony will have a large financial interest and,
accordingly, Sony may prefer its own recordings over the Company's in making
distribution decisions. Sony has the right to terminate the agreement if for
any reason Jerry Masucci, Chairman, President and Chief Executive Officer of
the Company, fails to be in the full-time, active management of the Company.
The loss of Sony or any other principal distributor, a significant reduction in
sales attributable to such distributors, or a decline in the economic prospects
of any such distributor would have material adverse effect on the Company. See
"Business -- Distribution."
Product Returns. The Company's CDs and tapes are subject to return if not
sold to consumers. At the time of product sales, the Company establishes a
reserve for future returns based primarily on historical return rates and
recognizes revenues net of estimated product returns. The Company has
historically experienced a return rate of less than 1% of gross revenue derived
from sales of catalog CDs and tapes, although the Company anticipates that
product returns will increase in connection with sales of new recordings. The
Company's agreement with Sony permits Sony to withhold up to 20% of revenues
for product returns. Product returns which significantly exceed the Company's
reserves would materially adversely affect the Company's operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Dependence on Third-Party Manufacturers. The Company relies on third-party
vendors for the manufacture of CD's and tapes. The Company does not maintain
agreements with any of its manufacturers and purchases CDs and tapes pursuant
to purchase orders placed from time to time in the ordinary course of business.
For the year ended December 31, 1996 and the nine months ended September 30,
1997, three manufacturers accounted for approximately 89.1% and 77.7%,
respectively, of product purchases. The Company will be dependent on the
ability of such manufacturers and other vendors to provide adequate supplies of
CDs and tapes on a timely basis and on favorable terms. Several of these
manufacturers require that the Company purchase certain minimum quantities of
CDs and tapes with each purchase order. Although the Company believes that
alternative manufacturing sources are currently available, there can be no
assurance that manufacturers will have sufficient production capacity or
incentive to satisfy the Company's product and scheduling requirements during
any period of sustained demand or that the Company will not be subject to price
fluctuations or periodic delays. Failure or delay by the Company's
manufacturers in supplying CDs and tapes to the Company on favorable terms
could result in material interruptions in its operations and adversely affect
the Company's ability to deliver its products on a timely and competitive
basis. See "Business -- Manufacturing."
7
<PAGE>
International Trade. A significant portion of the Company's sales of
catalog CDs and tapes are made in international markets, primarily in Colombia
and Venezuela. For the year ended December 31, 1996 and the nine months ended
September 30, 1997, sales in international markets accounted for approximately
38.4% and 31.9%, respectively, of the Company's revenues. The Company intends
to continue to exploit its catalog and artists' recordings outside of the
United States and Puerto Rico and will continue to seek access to foreign
markets principally through license arrangements with record companies and
direct sales. Consequently, the Company will be subject to increased credit
risks, customs duties and other trade restrictions, fluctuations in foreign
currency exchange rates, shipping delays and international political and
economic developments. A decline in the economic prospects of emerging foreign
markets could adversely affect the Company's ability to expand international
sales. Foreign sales also involve potential difficulties in enforcing foreign
license arrangements in the event of non-performance by the licensee. See
"Business -- Distribution."
Unauthorized Recordings; Enforceability of Property Rights. The Company's
business could be adversely affected the by the unauthorized reproduction of
recordings for commercial sale and by home taping. Unauthorized recordings of
the Company's products could result in the loss of substantial revenues,
particularly in foreign markets. The Company has in the past and may in the
future file lawsuits, either on its own behalf or in conjunction with other
music publishers, copyright owners and publishing organizations seeking
injunctive relief and/or monetary damages from persons and companies who
interfere with the Company's property rights. In December 1996, the Company
filed an action against third parties alleging infringement of the Company's
rights to certain catalog recordings. The Company obtained preliminary
injunctive relief and continues to seek unspecified damages and a permanent
injunction. Future actions could be costly and time consuming and may divert
management's attention from the Company's business affairs. Many of the
Company's master recordings were made prior to 1972 and are not subject to
statutory copyright protection. Due primarily to the vintage of many master
recordings in the Company's catalog, original documentation of the Company's
claim of title may be unavailable or difficult to locate, which could adversely
affect the Company's ability to sustain its rights in certain properties in the
event of disputes over ownership rights. There has been no challenge to any of
the Company's property rights from original recording artists or producers to
date. See "Business -- Intellectual Property."
Technological Change. New technologies, including digital audio tape and
recordable CD technology, may increase the opportunity for contraband
reproduction for distribution as well as the opportunity for consumers to make
high quality home copies of recordings. In the absence of adequate copyright or
other protections, new recording technologies could adversely affect the sale
of CDs and tapes. The Company's recordings are currently produced primarily for
CDs. A leveling off or a decline in sales of CDs, as a result of the
introduction of new technologies, such as digital video discs and enhanced CD
ROM, could also adversely affect the Company's future operating results. See
"Business Intellectual Property."
Significant Payment Obligation; Personal Guarantees. In connection with
the purchase of the catalog from Valsyn, the Company agreed to make a final
payment to Valsyn of $1,500,000 on the first anniversary of the consummation of
this offering. The Company has not allocated any portion of the proceeds of
this offering to satisfy such obligation, and there can be no assurance that
cash flow from operations will be sufficient to do so or that the Company will
not be required to use a portion of the proceeds of this offering to make such
payment to Valsyn. To the extent that the Company uses proceeds of this
offering to satisfy such obligation, the Company will have less resources
available to it for other purposes. The Company's $1,500,000 obligation to
Valsyn, as well as Sonido's obligation to pay Valsyn $450,000 on the tenth day
following the consummation of this offering, have been personally guaranteed by
Mr. Masucci. Neither Mr. Masucci nor any other person has any obligation to
provide any other personal guarantees if required by the Company, and there can
be no assurance that any such personal guarantees will be available in the
future. See "Business -- The Catalog."
Dependence on Pyrale; Cuban Artists. The Company has entered into an
agreement with Pyrale pursuant to which Pyrale granted the Company the
exclusive right worldwide (except in Panama) to manufacture, advertise and sell
copies of Pyrale's master recordings. The Company's agreement with Pyrale
obligates the Company to make advances currently aggregating $400,000 through
May 1999 and royalty payments (generally equal to 14% of retail prices of CDs
and tapes) during the term of the agreement. Failure to make payments or other
default by the Company may result in modification or termination of the
agreement, which could limit the Company's ability to exploit the music of
Cuban artists. In March 1995, the United States Department of the Treasury
granted to Mr. Masucci a license to travel to Cuba for the purpose of importing
into the United States infor-
8
<PAGE>
mational material (recordings) created by Cuban artists under an exemption from
applicable regulations. These regulations prohibit the Company from entering
into recording contracts with Cuban nationals for the creation of new
recordings. The Company's license expires on December 31, 1997. Although the
license has been renewed each year, nonrenewal of such license could also limit
the Company's ability to exploit the music of Cuban artists. The Company's
agreement with Sony provides that Sony is not obligated to distribute products
featuring the performances of artists who reside in or who are citizens of
Cuba. See "Business -- Artist Roster and New Releases" and "-- Distribution."
Dependence on Key Personnel; Limited Management. The success of the
Company is currently entirely dependent on the personal efforts of Jerry
Masucci, its Chairman, President and Chief Executive Officer, and Victor Gallo,
its Vice President. Although the Company has entered into employment agreements
with each of Messrs. Masucci and Gallo, the loss or interruption of the
services of such individuals could have a material adverse effect on the
Company's business and prospects. The Company intends to obtain "key-man"
insurance in the amount of $1 million on the life of Mr. Masucci prior to the
consummation of this offering. The success of the Company will also be
dependent upon its ability to hire and retain additional qualified management,
marketing and other personnel. The Company currently has limited management and
other personnel. None of such personnel has experience in managing the affairs
of a publicly-held company. Competition for qualified personnel in the
recording industry is intense, and there can be no assurance that the Company
will be able to hire or retain additional qualified personnel. Failure to hire
and retain additional qualified personnel could adversely affect the Company's
ability to expand its operations. See "Management."
Significant Capital Requirements; Possible Need for Additional
Financing. The music recording and distribution business is capital intensive.
The Company is dependent on the proceeds of this offering to purchase the
balance of the catalog, engage in record production and promotional activities
and finance its working capital requirements. Based on currently proposed plans
and assumptions relating to its operations, the Company believes that the
proceeds of this offering, together with projected cash flow from operations,
will be sufficient to satisfy its contemplated cash requirements for at least
twelve months following the consummation of this offering. In the event that
the Company's plans change, its assumptions change or prove to be inaccurate or
if the proceeds of this offering or cash flow prove to be insufficient to fund
operations, the Company may be required to obtain additional financing sooner
than anticipated. There can be no assurance that additional financing will be
available to the Company on commercially reasonable terms, or at all, or that
the proceeds of this offering will be adequate for all of the Company's
requirements, particularly the capital requirements associated with the
Company's anticipated increased record production and promotion activities. See
"Use of Proceeds."
Risks Associated with Expansion and Possible Acquisitions. The Company's
expansion plans could place a significant strain on its management,
administrative, operational, financial and other resources. The Company plans
to acquire a roster of talented new Latin recording artists, expand its
advertising, marketing and promotional activities, expand its work force and
expand its presence in international markets. To successfully manage growth,
the Company will be required to continue to implement and improve its operating
systems, train and manage its employees, monitor operations, control costs and
maintain effective quality controls. The Company has limited experience in
effectuating rapid expansion and in managing operations which are
geographically dispersed, and there can be no assurance that the Company will
be able to successfully expand its operations or manage growth. The Company may
seek to pursue opportunities by making selective acquisitions of master
recordings or businesses which the Company believes will enhance its prospects.
As of the date of this Prospectus, the Company has no plans, agreements,
commitments, understandings or arrangements with respect to any such
acquisition. There can be no assurance that the Company will ultimately effect
any acquisition or that it will be able to successfully integrate into its
operations any product or business which it may acquire. Any inability to do
so, particularly in instances in which the Company has made significant capital
investments, could have a material adverse effect on the Company.
The Company may determine, depending upon the opportunities available to
it, to seek additional debt or equity financing to fund the cost of continuing
expansion. To the extent that the Company finances an acquisition with equity
securities, any such issuance of equity securities would result in dilution to
the interests of the Company's stockholders. Additionally, to the extent that
the Company incurs indebtedness or issues debt securities in connection with
any acquisition, the Company will be subject to risks associated with incurring
substantial indebtedness, including the risks that interest rates may fluctuate
and cash flow may be insufficient to pay principal and interest on any such
indebtedness. See "Use of Proceeds" and "Business -- Expansion Strategy."
9
<PAGE>
Possible Fluctuations in Operating Results; Lengthy Production Cycle;
Seasonality. The Company's future operating results may be subject to
significant fluctuations as a result of the timing of new product releases, the
timing of significant operating expenses, product returns, pricing and the
length of the Company's production cycle. After an artist has been selected for
recording, it generally takes between three and six months to record a master
tape and two months to develop artwork and press, package and deliver CDs and
tapes to distributors. Accordingly, the period of time between the expenditure
of funds on production and release of a recording, at which time the Company
receives revenues, typically will range from six to nine months. In addition,
sales in the record industry typically increase toward the end of the calendar
year, principally due to sales associated with the holiday season.
Unanticipated events, including delays in planned releases past the time of
peak sales or significant decreases in sales during such period, could result
in material losses. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Concentration of Ownership. Upon the consummation of this offering, Sonido
will continue to own approximately 65% of the outstanding Common Stock of the
Company. As a result, Mr. Masucci, who owns all of the outstanding capital
stock of Sonido, will be able, through Sonido, to direct the election of all of
the Company's directors, increase the authorized capital, dissolve, merge or
sell the assets of the Company and generally direct the affairs of the Company.
By virtue of his ownership in Sonido, Mr. Masucci could also discourage,
prevent or delay a change in the control of the Company, which may otherwise be
in the best interests of the Company's stockholders. See "Management" and
"Principal Stockholders."
Potential Conflicts of Interest. The Company has in the past entered into
certain arrangements with "affiliates" of the Company which may result in
conflicts of interest. The Company intends to effect the Reorganization as of
the date of this Prospectus. The Company leases studio time from Key
Productions, Inc. ("Key"), a company controlled by Mr. Masucci, and occupies
office space rented by Key, at Key's cost. Key has agreed, as of the date of
this Prospectus, to contribute all of its recording equipment to the capital of
the Company and to assign its lease to the Company with respect to 3,500 square
feet of office and studio space. In addition, Mr. Masucci has from time to time
made advances to the Company. The Company believes that all transactions
between the Company and its affiliates were advantageous to the Company and
were on terms no less favorable than could be obtained from unaffiliated third
parties. Nevertheless, there can be no assurance that any such transactions or
arrangements will not result in conflicts of interest or that any such
conflicts will be resolved in a manner favorable to the Company. See "Certain
Transactions."
Uncertainty of Trademark Protection. The Company intends to apply for
United States trademark registrations for the "Fania" and "Fania All-Stars"
names, as well as for the labels contained in the Company's catalog. Management
considers the rights in these names to be important to the Company's business.
There can be no assurance as to the breadth or degree of protection which
trademarks may afford the Company or that any of such trademark applications
will result in issued trademarks or that trademarks will not be invalidated if
challenged. The Company is not aware of any claims or infringement or other
challenges to the Company's rights to use these marks. See "Business --
Trademarks."
Authorization and Discretionary Issuance of Preferred Stock. The Company's
Certificate of Incorporation authorizes the issuance of up to 1,000,000 shares
of "blank check" preferred stock with such designations, rights and preferences
as may be determined from time to time by the Board of Directors. Accordingly,
the Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
the Company's Common Stock. In the event of issuance, the preferred stock could
be utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change in control of the Company. See "Management" and
"Description of Securities -- Preferred Stock."
No Cash Dividends. The Company has not paid any cash dividends on its
Common Stock and does not expect to declare or pay any cash dividends in the
foreseeable future. See "Dividend Policy."
Shares Eligible for Future Sale; Registration Rights. Upon completion of
this offering, the Company will have outstanding 4,575,000 shares of Common
Stock, of which the 1,600,000 shares of Common Stock being offered hereby will
be freely tradeable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"). All of the remaining 2,975,000 shares
outstanding are "restricted securities" (as that term is
10
<PAGE>
defined under Rule 144 promulgated under the Securities Act). Such restricted
shares will be eligible for sale under such rule commencing October 1998. All
of the Company officers, directors and securityholders have agreed not to sell
or otherwise dispose of any securities for a period of thirteen months
following the date of this Prospectus without the prior consent of the
Representative. In addition, the Company has granted certain demand and
"piggyback" registration rights to the Representative with respect to an
aggregate of 160,000 shares issuable upon exercise of warrants. No prediction
can be made as to the effect, if any, that sales of shares of Common Stock or
the availability of such shares for sale will have on the market prices
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
prevailing market prices for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities. See
"Management," "Principal Stockholders," "Shares Eligible for Future Sale" and
"Underwriting."
Immediate and Substantial Dilution. This offering involves an immediate
and substantial dilution of $5.64 (86.8%) per share between the net tangible
book value per share of Common Stock after the offering and the initial public
offering price (based on an assumed public offering price of $6.50 per share).
See "Dilution."
No Assurance of Public Market; Determination of Offering Price; Possible
Volatility of Market Price for the Common Stock. Prior to this offering there
has been no public trading market for the Common Stock. Consequently, the
initial offering price of the Common Stock has been determined by negotiations
between the Company and the Representative. In addition, there can be no
assurance that a regular trading market for the Common Stock will develop after
this offering or that, if developed, it will be sustained. The market price for
the Common Stock following this offering may be highly volatile. Factors such
as the Company's operating results and announcements by the Company or its
competitors may have an impact on the market price for the Common Stock.
Additionally, in recent years, the stock market has experienced a high level of
price and volume volatility and market prices for the stock of many companies
have experienced wide price fluctuations not necessarily related to the
operating performance of such companies. See "Underwriting."
Broad Discretion of Application of Proceeds. A substantial portion of the
estimated net proceeds of this offering has been allocated to record production
and manufacturing, advertising, marketing and promotion and working capital and
general corporate purposes. Accordingly, management will have broad discretion
as to the application of such proceeds. See "Use of Proceeds."
11
<PAGE>
THE COMPANY
The Reorganization
The Company was organized in Delaware in October 1997 as successor to the
business of Sonido, a corporation controlled by Mr. Masucci and organized under
the laws of the state of New York in February 1986. As of the date of this
Prospectus, the Company will effect the Reorganization, pursuant to which
Sonido will transfer to the Company certain assets, consisting primarily of all
of its rights to the catalog (including its master recordings, publishing
rights, intellectual property rights, contracts with artists, authors and
others and rights and obligations pursuant to the Valsyn License), all of its
accounts payable, trade accounts receivable (in excess of income taxes payable)
and inventory. Pursuant to the Reorganization, Sonido will retain all of its
other assets, including cash, and has agreed to discontinue the creation,
production, manufacture and/or sale of recordings following the Reorganization.
In connection with the Reorganization, Mr. Masucci agreed, as of the date of
this Prospectus, to transfer to the Company his ownership in JMM, which
includes rights to the Sony agreement and certain agreements with artists, and
Key Productions, Inc. agreed to contribute all of its recording equipment to
the capital of the Company and to assign its lease to the Company with respect
to 3,500 square feet of office and studio space. See "Certain Transactions" and
Note 12 to Notes to Financial Statements.
The Valsyn License
Pursuant to the Valsyn License, Valsyn granted the Company the exclusive
rights to manufacture and sell the master recordings contained in the catalog,
including the right to incorporate existing masters into new titles, in the
United States and Puerto Rico, in consideration of $950,000. Valsyn also
granted the Company an option to purchase the catalog, the publishing rights
and other properties owned by Valsyn, exercisable through scheduled payments of
an aggregate of $10,000,000, of which $4,500,000 has been paid to date.
Payments made under the agreement have been credited toward ownership of a pro
rata portion of master recordings.
The Valsyn License was amended in March 1996 to reschedule the payment of
$1,000,000. The Valsyn License was further amended in November 1997 to, among
other things, reschedule payments of an aggregate of $2,500,000 and to provide
for the Company to acquire all of Valsyn's remaining right, title and interest
in its masters, labels, publishing rights and recording contracts, including
the worldwide rights to reproduce, manufacture, distribute and publish all of
such works and all copyrights, trademarks and other property rights in such
works, upon the consummation of this offering. The Company intends to use
$4,000,000 of the proceeds of this offering to purchase the balance of the
catalog and has agreed to make a final payment to Valsyn of $1,500,000 on the
first anniversary of the consummation of this offering.
In addition, in consideration for the early transfer of foreign licensing
rights, Sonido agreed to pay Valsyn $500,000, of which $50,000 was paid and
$450,000 is to be paid on the tenth day following the consummation of this
offering. The Company has agreed to pay to Sonido $500,000 (together with
interest at the rate of 8% per annum) on the fifth anniversary of the
consummation of the offering as a reimbursement for amounts paid to Valsyn. Mr.
Masucci has personally guaranteed the Company's $1,500,000 obligation and
Sonido's $450,000 obligation to Valsyn. See "Use of Proceeds" and "Certain
Transactions."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares offered hereby
(based on an assumed public offering price of $6.50 per share) are estimated to
be approximately $8,548,000 ($9,905,200 if the Underwriters' over-allotment
option is exercised in full). The Company expects to use the net proceeds
during the twelve months following this offering approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage of
Application of Proceeds Dollar Amount Net Proceeds
- --------------------------------------------------------- --------------- --------------
<S> <C> <C>
Acquisition of catalog(1) .............................. $4,000,000 46.8%
Record production and manufacturing(2) .................. 2,700,000 31.5
Advertising, marketing and promotion(3) ............... 800,000 9.4
Working capital and general corporate purposes(4) ...... 1,048,000 12.3
---------- -----
$8,548,000 100.0%
========== =====
</TABLE>
- ------------
(1) Represents the cost to acquire the catalog. See "Business -- The Catalog."
(2) Represents anticipated costs associated with the production of at least ten
new recordings, compilations and re-releases during the twelve months
following this offering, including (i) approximately $500,000 for artist
advances; (ii) approximately $600,000 for record production; and (iii) an
aggregate of approximately $1,600,000 for CD manufacturing. See "Business
-- Record Company Operations."
(3) Includes costs associated with advertising, marketing and promotional
activities, including advertising in broadcast media and salaries for up
to three additional marketing and promotion personnel. See "Business --
Advertising, Promotion and Marketing."
(4) Working capital may be used, among other things, to pay rent, trade
payables and other expenses and the acquisition of master recordings or
businesses. See "Business -- Expansion Strategy."
If the Underwriters exercise the over-allotment option in full, the
Company will realize additional net proceeds of approximately $1,357,200 which
will be added to working capital.
The Company has not allocated any portion of the proceeds of this offering
to repay $1,500,000 owed to Valsyn on the first anniversary of the consummation
of this offering. To the extent the Company is required to use a portion of the
proceeds of this offering to satisfy such obligation, the Company will have
less resources available to it for other purposes.
Based on currently proposed plans and assumptions relating to its
operations, the Company believes that the proceeds of this offering, together
with projected cash flow from operations, will be sufficient to satisfy its
contemplated cash requirements for at least twelve months following the
consummation of this offering. In the event that the Company's plans change
(due to changes in market conditions, competitive factors or new or different
business opportunities that may become available in the future), its
assumptions change or prove to be inaccurate or if the proceeds of this
offering or cash flow prove to be insufficient to fund operations (due to
unanticipated expenses, operating difficulties or otherwise), the Company may
find it necessary or desirable to reallocate a portion of the proceeds within
the above described categories, seek additional financing or curtail its
operations. There can be no assurance that additional financing will be
available to the Company on commercially reasonable terms, or at all, or that
the proceeds of this offering will be adequate for all of the Company's
requirements, particularly the capital requirements associated with the
Company's anticipated increased record production and promotion activities.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term, interest-
bearing investments.
DIVIDEND POLICY
To date, the Company has not declared or paid any dividends on its Common
Stock and does not expect to declare or pay any cash dividends in the
foreseeable future. The payment of dividends, if any, in the future is within
the discretion of the Board of Directors and will depend upon the Company's
earnings, if any, its capital requirements and financial condition and other
relevant factors.
13
<PAGE>
DILUTION
The difference between the public offering price per share of Common Stock
and the net tangible book value per share after the offering constitutes the
dilution to investors in this offering. Net tangible book value is determined
by dividing the net tangible book value of the Company (total tangible assets
less total liabilities) by the number of outstanding shares of Common Stock.
At September 30, 1997, the Company had a negative net tangible book value
of $1,009,664 or approximately $.34 per share of Common Stock. After giving
effect to (i) the Reorganization and (ii) the sale of the shares of Common
Stock being offered hereby at an assumed public offering price of $6.50 per
share (less underwriting discounts and commissions and estimated expenses of
this offering) and the application of the estimated net proceeds therefrom, the
net tangible book value of the Company at September 30, 1997 would have been
$3,939,518 or approximately $.86 per share, representing an immediate increase
in net tangible book value of $1.20 per share to the existing stockholder and
an immediate dilution of $5.64 per share to new investors.
The following table illustrates the foregoing information with respect to
dilution to new investors on a per share basis:
Assumed public offering price .................. $ 6.50
Net tangible book value before offering ...... $(.34)
Increase attributable to new investors ...... 1.20
-----
Net tangible book value after offering. ...... .86
------
Dilution to new investors ..................... $ 5.64
======
The following table sets forth with respect to the existing stockholder
and new investors, a comparison of the number of shares of Common Stock
acquired from the Company, the percentage ownership of such shares, the total
consideration paid, the percentage of total consideration paid and the average
price per share:
<TABLE>
<CAPTION>
Average
Price
Shares Purchased Total Consideration
----------------------- ------------------------- per
Number Percent Amount Percent Share
----------- --------- ------------- --------- --------
<S> <C> <C> <C> <C> <C>
Existing stockholder ...... 2,975,000 65.0% $ 29,750 0.3% $ .01
New investors. ............ 1,600,000 35.0 10,400,000 99.7 6.50
--------- ----- ----------- -----
Total ..................... 4,575,000 100.0% $10,429,750 100.0%
========= ===== =========== =====
</TABLE>
The above table assumes no exercise of the Underwriters' over-allotment
option or outstanding options. If the over-allotment option is exercised in
full, the new investors will have paid $11,960,000 for 1,840,000 shares of
Common Stock, representing 100.0% of the total consideration for 38.2% of the
total number of shares of Common Stock outstanding. See "Underwriting."
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 and on a pro forma basis to give effect to the
Reorganization, and pro forma as adjusted to give effect to the sale of the
shares of Common Stock offered hereby (based on an assumed public offering
price of $6.50 per share) and the application of the estimated net proceeds
therefrom. See Note 12 to Notes to Financial Statements.
<TABLE>
<CAPTION>
September 30, 1997
---------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------ --------------- ------------
<S> <C> <C> <C>
Long-term debt ................................. $2,912,807 $ 3,412,807 $ 500,000
---------- ------------ ----------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued or outstanding. ...... -- -- --
Common Stock, $.01 par value; 15,000,000 shares
authorized; 2,975,000 issued and outstanding,
actual; 2,975,000 issued and outstanding, pro
forma; 4,575,000 shares issued and outstanding,
pro forma as adjusted(1) ..................... 29,750 29,750 45,750
Additional paid-in capital. ..................... -- (1,751,020) 6,780,980
Retained earnings .............................. 1,337,785 -- --
---------- ------------ ----------
Total stockholders' equity (deficit) ......... 1,367,535 (1,721,270) 6,826,730
---------- ------------ ----------
Total capitalization. ........................ $4,280,342 $ 1,691,537 $7,326,730
========== ============ ==========
</TABLE>
- ------------
(1) Does not include (i) 160,000 shares of Common stock reserved for issuance
upon exercise of the Representative's Warrants; (ii) an aggregate of
131,000 shares of Common Stock reserved for issuance upon exercise of
outstanding options under the Plan; and (iii) an aggregate of 119,000
shares of Common Stock reserved for issuance upon exercise of options
available for future grant under the Plan. See "Management -- Stock Option
Plan" and "Underwriting."
15
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except share and per share data)
The following selected financial data has been derived from the Company's
financial statements included elsewhere in this Prospectus and should be read
in conjunction with the financial statements and the notes thereto.
Statement of Income Data:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
--------------------------- --------------------------
1995 1996 1996 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Total revenues .................. $ 4,001 $ 5,104 $ 3,602 $ 3,731
Direct costs ..................... 2,047 2,908 1,976 1,776
---------- ---------- ---------- ---------
Gross profit ..................... 1,954 2,196 1,626 1,955
Selling, general and administrative
expenses. ........................ 590 425 289 619
---------- ---------- ---------- ---------
Operating income .................. 1,364 1,771 1,337 1,336
Interest expense, net ............ 437 356 246 172
---------- ---------- ---------- ---------
Income before income taxes. ...... 927 1,415 1,091 1,164
Net income(1) ..................... $ 897 $ 863 $ 696 $ 716
========== ========== ========== =========
Net income per share ............ $ .30 $ .29 $ .23 $ .24
========== ========== ========== =========
Weighted average number of common
shares outstanding ............... 2,975,000 2,975,000 2,975,000 2,975,000
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996 September 30, 1997
----------- -------- -------------------
<S> <C> <C> <C>
Working capital (deficit) ............ $ 1,036 $ 843 $1,836
Total assets ........................ 5,633 6,828 8,370
Short-term debt ..................... 1,123 2,207 2,207
Long-term debt ..................... 3,901 2,693 2,913
Total liabilities .................. 5,844 6,176 7,003
Stockholders' equity (deficit) ...... (211) 652 1,368
</TABLE>
- ------------
(1) Reflects utilization of net operating loss carryforwards of $850,000 in
1995. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in this Prospectus which are not historical facts are
forward looking statements which involve risks and uncertainties, including
those discussed under "Risk Factors" and elsewhere in this Prospectus.
Overview
Since its inception, the Company has engaged in marketing, promoting and
publishing its catalog pursuant to the Valsyn License. The Company has recently
begun to pursue the acquisition, production and promotion of recorded music by
promising new Latin artists. Record production activities are subject to
unforeseen events, unanticipated production cost overruns and operating
difficulties. Significant up-front expenses associated with record production
and promotion could adversely affect the Company's future operating results.
The Company generates revenue from sales of CDs and tapes. Revenue from
the sale of products pursuant to domestic distribution arrangements is
recognized when products are shipped. In the case of Sony, revenue is
recognized net of an allowance for returns. Royalty revenue is derived
primarily under licensing arrangements with foreign record companies and is
recognized when earned. See Note 2 to Notes to Financial Statements.
The Company's products are subject to return if not sold to consumers. At
the time of product sales, the Company establishes a reserve for future returns
based primarily on its historical return rates and recognizes revenues net of
estimated product returns. The Company has historically experienced a product
return rate of less than 1% of gross revenue derived from sales of catalog CDs
and tapes, although the Company anticipates that product returns will increase
in connection with sales of new recordings. Product returns which significantly
exceed the Company's reserves would materially adversely affect the Company's
operating results.
The Company capitalizes its music catalog and publishing rights. Such
assets are amortized based on the ratio that aggregate sales to date bears to
aggregate estimated sales over the life of the catalog. At September 30, 1997,
the Company had capitalized approximately $2,157,000 of net assets relating to
the catalog. Advances to artists are expensed. Advances to producers are
capitalized as an asset when the Company estimates the probability of future
recoupment from earnings otherwise payable to the artist or producer. The
Company periodically reevaluates the recoverability of capitalized assets which
may be reduced in future periods. See Note 2 to Notes to Financial Statements.
In connection with the Valsyn License, the Company has recorded a
liability relating to a series of non-interest bearing payments required to
purchase the balance of the catalog. Interest has been imputed at the rate of
7.5%. See Note 6 to Notes to Financial Statements.
Results of Operations
The following table sets forth for the periods indicated the percentage of
revenues represented by certain items reflected in the Company's statement of
operations.
<TABLE>
<CAPTION>
Percentages of Revenues
----------------------------------------
Year Ended December Nine Months Ended
31, September 30,
------------------- ------------------
1995 1996 1996 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues ........................ 100.0% 100.0% 100.0% 100.0%
Direct costs ..................... 51.2 57.0 54.9 47.6
Gross profit ..................... 48.8 43.0 45.1 52.4
Selling, general and administrative
expenses ........................ 14.7 8.3 8.0 16.6
Operating income .................. 34.1 34.7 37.1 35.8
Net income ........................ 22.4 16.9 19.3 19.2
</TABLE>
17
<PAGE>
Nine Months Ended September 30, 1997 and 1996
Revenues increased by approximately $129,000, or 3.6%, from the nine
months ended September 30, 1996 to the nine months ended September 30, 1997.
Sales of recorded music through Sony commenced during the three months ended
September 30, 1997 and accounted for approximately $560,000 of the Company's
revenues for that period (or 30.7% and 15.1%, respectively, for the three and
nine months ended September 30, 1997). Based on preliminary unaudited financial
data, the Company estimates that it generated revenues of approximately
$686,000 and achieved net income of approximately $114,000 for the month ended
October 31, 1997. Sales made through Sony accounted for approximately $310,000
or 45.2% of these revenues. The Company believes, although there can be no
assurance, that sales of recordings through Sony will account for an increasing
portion of the Company's revenues in future periods. Domestic and foreign sales
were approximately $2,542,000 and $1,189,000, respectively, or 68.1% and 31.9%,
respectively, of the Company's revenues for the nine months ended September 30,
1997.
Gross profit increased by approximately $329,000, or 20.2%, from the nine
months ended September 30, 1996 to the nine months ended September 30, 1997.
Gross profit as a percentage of revenues increased from approximately 45.1% to
approximately 52.4% during these periods. The increase in gross profit was due
to an increased sales of compilation albums (without increasing production
costs) in the Company's product mix during the nine months ended September 30,
1997. In future periods, gross profit may be adversely affected by price
competition and by changes in the mix of products offered by the Company.
Selling, general and administrative expenses increased by approximately
$329,000, or 114.0%, from the nine months ended September 30, 1996 to the nine
months ended September 30, 1997. Such expenses also increased as a percentage
of revenues from 7.9% to 16.5% during these periods. The increases in such
expenses in absolute dollars and as a percentage of revenues were attributable
to increased media advertising and promotion expenses for recordings and
distribution fees paid to Sony. The Company expects that for the foreseeable
future these expenses will continue to increase in absolute dollars and as a
percentage of revenues as the Company seeks to expand its operations.
Operating income was approximately $1,335,000 for the nine months ended
September 30, 1997, as compared to approximately $1,337,000 for the nine months
ended September 30, 1996, and remained relatively constant as a percentage of
revenues.
Net income increased from approximately $696,000 for the nine months ended
September 30, 1996 to approximately $716,000 for the nine months ended
September 30, 1997, and remained relatively constant as a percentage of
revenues.
Year Ended December 31, 1996 and 1995
Revenues increased by approximately $1,103,000, or 27.6%, from 1995 to
1996. The Company believes that the increase is primarily attributable to
increased ownership of CD players and demand in the Company's target market for
older titles released on CDs. Domestic and foreign sales were approximately
$3,146,000 and $1,958,000, respectively, or 61.6% and 38.4%, respectively, of
the Company's revenues for the year ended December 31, 1996.
Gross profit increased by approximately $242,000, or 12.4%, from 1995 to
1996. Gross profit as a percentage of revenues decreased from 48.8% to 43.0%
during these periods. The decrease in gross profit as a percentage of revenues
was attributable to record production costs relating to new masters.
Selling, general and administrative expenses decreased by approximately
$165,000, or 28.0%, from 1995 to 1996, and decreased as a percentage of
revenues during these periods from 14.7% to 8.3%. The decreases were
attributable to reduction of promotional expenses.
Operating income was approximately $1,771,000 for 1996, as compared to
approximately $1,364,000 for 1995, an increase of approximately $407,000, or
29.8%. This increase was primarily attributable to an increase in gross profit.
Operating income as a percentage of revenues remained relatively constant
during these periods.
Net income decreased from approximately $897,000 in 1995 to approximately
$863,000 in 1996. Net income as a percentage of revenues also decreased during
this period from approximately 22.4% to 16.9%. The
18
<PAGE>
decreases were primarily attributable to an income tax provision of $552,000 in
1996, as compared to an income tax provision of 30,000 in 1995. The increased
tax provision in 1996 resulted from the full utilization of available net
operating loss carryforwards to offset taxable income in 1995.
Liquidity and Capital Resources
The Company's primary cash requirements have been to fund payments to
Valsyn under the Valsyn License to purchase the catalog and for working
capital. The Company has historically satisfied its working capital
requirements principally through cash flow from operations. At September 30,
1997, the Company had working capital of approximately $2,059,000, compared to
working capital of approximately $1,107,000 at December 31, 1996.
Net cash provided by operating activities was approximately $1,183,000 for
the nine months ended September 30, 1997, as compared to approximately
$1,726,000 for the nine months ended September 30, 1996. The decrease in cash
was primarily attributable to increased levels of accounts receivable. Net cash
used in investing activities was approximately $252,000 for the nine months
ended September 30, 1997, as compared to net cash used in investing activities
of $131,594 for the nine months ended September 30, 1996. The increase in cash
used in investing activities was attributable to expenditures for master
recordings under the Company's agreement with Pyrale. The Company did not use
cash in financing activities for the nine months ended September 30, 1997, as
compared to approximately $500,000 of cash used in financing activities for the
nine months ended September 30, 1996. The decrease was attributable to an
amendment to the Valsyn License in November 1997 pursuant to which payments
aggregating $2,500,000 were rescheduled until the consummation of this
offering. At September 30, 1997, the Company had cash of approximately
$2,740,000.
Net cash provided by operating activities was approximately $2,764,000 for
1996, as compared to approximately $1,668,000 for 1995. The increase in cash
was primarily attributable to a decrease in accounts receivable. Net cash used
in investing activities was approximately $480,000 for 1996, as compared to net
cash used in investing activities of $246,000 for 1995. The increase in cash
used in investing activities was attributable to expenditures for master
recordings under the Company's agreement with Pyrale. Net cash used in
financing activities was approximately $500,000 for 1996, as compared to
approximately $1,500,000 for 1995. The decrease was attributable to an
amendment of the Valsyn License in 1996 pursuant to which a $1,000,000 payment
was rescheduled.
The Company's accounts receivable, less allowance for doubtful accounts,
at September 30, 1997 were approximately $2,132,000 as compared to
approximately $1,533,000, at December 31, 1996. Trade accounts receivable
averaged 206 days of sales in fiscal 1995, as compared to an average 123 days
in 1996 and 291 days through September 30, 1997. As of September 30, 1997,
accounts 90 or more days past due were approximately 43.8% of aggregate trade
accounts receivable. Bad debt expense accounted for less than 1% of the
Company's revenues for the years ended December 31, 1995 and 1996.
At September 30, 1997, the Company's allowance for doubtful accounts was
$74,200, which the Company believes is currently adequate for the size and
nature of its receivables. Nevertheless, delays in collection or the
uncollectibility of accounts receivable could have an adverse effect on the
Company's liquidity and working capital position. The Company is subject to
credit risks, inasmuch as its receivables represent sales to a limited number
of distributors or are concentrated in foreign markets. Sales of the Company's
products in foreign markets are made in United States dollars. Failure to
properly assess such risks could require the Company to continually increase
its allowance for doubtful accounts.
As of the date of this Prospectus, the Company has no material commitments
for capital expenditures.
The Company intends to use $4,000,000 of the proceeds of this offering to
purchase the balance of the catalog and has agreed to make a final payment to
Valsyn of $1,500,000 on the first anniversary of the consummation of this
offering. The Company also agreed to pay Sonido $500,000 (together with accrued
interest at the rate of 8% per annum) on the fifth anniversary of the
consummation of this offering as a reimbursement for amounts paid to Valsyn
pursuant to the amendment to the Valsyn License in November 1997. The payment
of an aggregate of $6,000,000 to Valsyn will be accounted for as a prepayment
of amounts owed and the early acquisition of foreign licensing rights. See
"Certain Transactions" and Notes 6 and 12 to Notes to Financial Statements.
19
<PAGE>
The music recording and distribution business is capital intensive. The
Company is dependent on the proceeds of this offering to purchase the balance
of the catalog, engage in record production and promotion activities and
finance its working capital requirements. Based on currently proposed plans and
assumptions relating to its operations, the Company believes that the proceeds
of this offering, together with projected cash flow from operations, will be
sufficient to satisfy its contemplated cash requirements for at least twelve
months following the consummation of this offering. In the event that the
Company's plans change, its assumptions change or prove to be inaccurate or if
the proceeds of this offering or cash flow prove to be insufficient to fund
operations, the Company may be required to obtain additional financing sooner
than anticipated or curtail its operations. There can be no assurance that
additional financing will be available to the Company on commercially
reasonable terms, or at all.
Seasonality
Sales in the record industry typically increase toward the end of the
calendar year, principally due to sales associated with the holiday season.
Unanticipated events, including delays in planned releases past the time of
peak sales or significant decreases in sales during such period, could result
in material losses which would not be easily reversed before the following
year. The Company does not believe that sales of catalog CDs and tapes have
been subject to seasonal fluctuations in the past. New recordings, however, may
be subject to seasonal fluctuations.
Inflation
Inflation has historically not had a material effect on the Company's
operations.
20
<PAGE>
BUSINESS
The Company is an independent record company that produces, markets and
sells Latin music on CDs and tapes. Since its inception, the Company has
specialized in "classic" Latin music contained in its extensive library or
"catalog" of Salsa, Merengue, Latin jazz and Latin pop master recordings by
major Latin artists. Ruben Blades, Willie Colon, Hector Lavoe, Celia Cruz,
Johnny Pacheco, Tito Puente and the Fania All-Stars are among the performers
featured in the Company's catalog. Fania has recently begun to pursue the
acquisition, production and promotion of recorded music by promising new Latin
artists.
Background
In 1964, Jerry Masucci, Chairman, President and Chief Executive Officer of
the Company, and Johnny Pacheco, a Latin bandleader, formed the original Fania
Records. The Fania label gained widespread recognition as one of the most
influential Salsa labels in Latin music history. In fifteen years, Fania
Records produced more than 650 albums, including more than 50 gold or platinum
Latin records (record sales in excess of 50,000 and 75,000 copies,
respectively), five of which received Grammy Awards for Best Latin Recording or
Best Tropical Latin Performance. Fania Records also developed or acquired ten
Latin record labels and more than 1,300 master recordings, representing a
library of more than 10,000 individual songs. In 1979, Fania Records sold the
catalog to Valsyn. In 1986, the Company licensed the exclusive rights to
exploit the catalog in the United States and Puerto Rico from Valsyn. The
Company acquired part of the catalog through payments made under the Valsyn
License since 1986 and intends to use a portion of the proceeds of this
offering to purchase the balance of the catalog (including all publishing and
foreign licensing rights). See "The Catalog."
Target Market and Industry Trends
According to the United States Census Bureau, there are 29 million people
of Hispanic origin in the United States today, representing 11% of the
population and one of the nation's fastest-growing ethnic groups, a target
market with attractive demographic characteristics, increasing household income
and significant spending power. The current purchasing power of Hispanic
households in the United States is estimated to be more than $228 billion, with
households in Los Angeles, New York and Miami accounting for a substantial
portion of these dollars. Hispanic Americans are younger than the population as
a whole (66% of Hispanics living in the United States today are below the age
of 35), at an age where they purchase records and go dancing. Broadcasters,
including radio and television networks, advertisers and marketers have
increasingly targeted young Hispanic consumers with formative consumption
habits and brand loyalty.
Sales of Latin music have increased significantly in recent years.
According to the Recording Industry Association of America, sales of Latin
music in the United States were approximately $392 million in 1996 and
approximately $213 million during the first six months of 1997, an increase of
25% from the same period in 1996, despite an overall decline in the recording
industry. Sales of Latin music have also increased in certain countries in
Latin America, as well as in Europe and Asia. The Company believes that the
growth in Latin music sales is largely attributable to the demographic factors
described above, as well as the popular appeal of Latin crossover artists such
as Gloria Estefan, Jon Secada and Julio Iglesias. The proliferation of Spanish
language television networks, magazines and radio programming, coupled with the
growing trend of popular nightclubs to promote Latin dancing, have also
expanded the potential market for Latin music.
Expansion Strategy
Key elements of the Company's expansion strategy include:
o Acquiring New Artists: The Company plans to acquire a roster of talented new
Latin recording artists by capitalizing on management's expertise in
identifying artists with potential for commercial success. The Company has
entered into agreements with five Latin recording artists. The Company has
also entered into an agreement with Pyrale to manufacture, advertise and
sell Pyrale's master recordings by Cuban artists.
o Expanding Advertising and Promotion: The Company intends to use a portion of
the proceeds of this offering to significantly expand its advertising,
marketing and promotional activities, primarily by purchasing advertising
time on broadcast media designed to maximize exposure of the Company's new
releases and the Fania name. The Company advertises its recordings on
Hispanic radio stations and cable networks.
21
<PAGE>
o Increasing Record Distribution: The Company plans to expand it operations by
increasing distribution of its recordings in new and existing geographic
markets, including foreign markets with significant growth potential. The
Company has entered into a three-year agreement with Sony, a leading
distributor of Latin music. Sony has agreed to act as exclusive distributor
for certain of the Company's products in the United States and Puerto Rico.
o Pursuing Strategic Acquisitions: Consistent with its strategy, the Company
may also seek to expand its operations through acquisitions. The Company may
seek to expand its library of recorded music by acquiring master recordings
from other record companies. The Company will also consider acquisitions of
Latin record labels, studio, concert, management and record companies which
management believes would enhance Fania's growth prospects.
The Company's expansion and future marketing plans are subject to change
as a result of progress or delays in the Company's efforts to acquire
additional artists, changes in market conditions, the nature of possible
arrangements that may become available in the future and competitive factors.
There can be no assurance that the Company will be able to successfully expand
its operations.
The Catalog
The catalog consists of ten Latin music labels: "Fania," "Vaya," "Tico,"
"Alegre," "Cotique," "Inca," "Mardi Gras," "Barbaro," "International" and
"Musica Latina" and a library of more than 1,300 master recordings,
approximately 900 of which are currently available on CDs and tapes. Management
believes that the popularity of CDs has enhanced the value of the catalog
because older titles previously released on vinyl records and cassettes can be
re-released on CDs. In addition, by combining selected recordings from its
catalog, the Company continually produces new compilation albums.
The following are certain of the major Latin artists included in catalog
recordings (none of whom is currently under contract or is obligated to make
new recordings for the Company):
Celia Cruz Eddie Palmieri Adalberto Santiago
Johnny Pacheco Willie Colon Ismael Quintana
Ray Barretto Ruben Blades Bobby Valentin
Tito Puente Bobby Cruz Roberto Roena
The Valsyn License. In October 1986, the Company entered into the Valsyn
License, which was amended in March 1996 and November 1997. Pursuant to the
Valsyn License, Valsyn granted the Company the exclusive rights to manufacture
and sell the master recordings contained in the catalog, including the right to
incorporate existing masters into new titles, in the United States and Puerto
Rico, in consideration of $950,000. Valsyn also granted the Company an option
to purchase the catalog, the publishing rights and other properties owned by
Valsyn, exercisable through the scheduled payment of an aggregate of
$10,000,000, of which $4,500,000 has been paid to date. Payments made under the
agreement have been credited toward the ownership of a pro rata portion of
master recordings.
The Valsyn License provides that the Company will acquire all of Valsyn's
remaining right, title and interest in its masters, labels, publishing rights
and recording contracts, including the worldwide rights to reproduce,
manufacture, distribute and publish all of such works and all copyrights,
trademarks and other property rights in such works, upon the consummation of
this offering. The Company intends to use $4,000,000 of the proceeds of this
offering to purchase the balance of the catalog and has agreed to make a final
payment to Valsyn of $1,500,000 on the first anniversary of the consummation of
this offering.
Since its inception in 1986, sales of catalog CDs and tapes, including
compilations and re-releases, have accounted for substantially all of the
Company's revenues.
22
<PAGE>
Record Company Operations
Acquiring Artists
The Company's continued success will depend upon its ability to sign and
retain promising artists who will appeal to popular taste over a significant
period of time. The Company's executive officers are responsible for locating
new talent with potential commercial appeal. Management relies on industry
contacts, such as personal managers, agents and music attorneys, who often
refer their clients, and on word of mouth about local bands. The Company has
only recently begun to emphasize the development of new talent.
Record Contracts
A typical recording agreement gives the Company the exclusive worldwide
right to market and sell recordings of the artist (both audio and audio-visual)
as well as the exclusive ownership of all recordings created under the
agreement. The Company's standard recording agreement provides for the artist
to deliver an initial album and up to four additional albums, at the option of
the Company. Recording contracts generally provide for the Company to pay all
of the costs of recording an album, including artists' and producers' advances.
The Company anticipates that royalties payable to recording artists and
producers will generally range from 5% to 12% of the suggested retail list
price of tapes and CDs, less packaging costs (which range from 10% to 25% of
retail prices). Advances paid to artists and producers and certain other costs
incurred in connection with the production of recordings are recoupable from
the royalties payable by the Company.
The Company has entered into agreements with the following Latin recording
artists:
Yannet Sol. In August 1997, the Company entered into an exclusive
recording agreement with Yannet Sol. Ms. Sol agreed to record at least 40
minutes of performances satisfactory to the Company during each year of the
agreement. The agreement has an initial term of one year and is renewable at
the option of the Company for three successive one-year periods. The Company
paid Ms. Sol a non-refundable advance of $8,000 pursuant to the agreement, and
will make recoupable advances of $10,000, $12,500 and $15,000, respectively, in
the second, third and fourth years of the agreement, for each album completed
and delivered. The Company agreed to pay Ms. Sol royalties, subject to certain
minimum retail prices and limitations, equal to 10% of suggested retail prices
during the first and second years of the agreement, increasing to 11% in the
third year and 12% in the fourth year, for sales made in the United States and
Puerto Rico, and royalties at one-half of those rates for sales made in other
markets.
Lino Iglesias. In July 1997, the Company entered into an agreement with
Lino Iglesias, pursuant to which it acquired the exclusive worldwide rights to
manufacture, advertise, sell, license and publish master recordings embodying
performances by the group known as "Rikoson All Stars 'Salsa en Movimiento,'"
in consideration of $8,000. These masters were included in an album released in
December 1997 as "Yannet Sol with Lino Iglesias and Friends." The Company
agreed to pay Mr. Iglesias royalties equal to 12% of suggested retail prices
for recordings sold in the United States and Puerto Rico and royalties at
one-half of that rate for sales made in other markets.
Lebron Brothers. In June 1997, the Company entered into an exclusive
recording agreement with a group known as the Lebron Brothers. The group agreed
to record at least 40 minutes of performances satisfactory to the Company
during each year of the agreement. The agreement has an initial term of one
year and is renewable at the option of the Company for four successive one-year
periods. The Company paid the Lebron Brothers an advance of $10,000 and agreed
to pay royalties equal to 10% of its net receipts attributable to sales in the
United States and one-half of such royalties for sales made outside the United
States, after recoupment of advances. Lebron Brothers is currently recording an
album which the Company expects to release in March 1998.
Larry Harlow. In January 1997, the Company entered into an exclusive
recording agreement with Larry Harlow of Larry Harlow's Latin Legends Band
pursuant to which Mr. Harlow agreed to record an album containing no fewer than
eight commercially satisfactory recordings. The agreement provides for the
Company to pay Mr. Harlow a $40,000 recoupable advance upon delivery of the
record and for Mr. Harlow to pay all musicians, singers, arrangers, producers
and studio costs. The Company agreed to pay Mr. Harlow royalties, subject
23
<PAGE>
to certain minimum retail prices and limitations, generally equal to 10% of
suggested retail prices for 90% of all recordings sold in the United States and
Puerto Rico (and not subject to return) and royalties at one-half of that rate
for sales made in other markets. The Company expects to release an album by Mr.
Harlow in January 1998.
Ismael Miranda. In October 1996, the Company entered into an arrangement
with Ismael Miranda, pursuant to which the Company provided advances of $30,000
to Mr. Miranda in consideration of Mr. Miranda's services in producing an
album. The Company agreed to pay Mr. Miranda royalties of $1.00 per CD and $.50
per cassette on sales of an album to be released (following recoupment of the
$30,000 advance). The Company released an album featuring Mr. Miranda entitled
"Con Buena Nota" in November 1997.
Record Production and Promotion
The Company produces master recordings at its recording studio in New York
City and at other independent studios. A finished master is a completed
recording project generally contained on a digital audio tape, on which all of
the recording elements have been mixed, equalized and balanced. Mr. Masucci is
personally responsible for overseeing all aspects of production of the
Company's recordings, including the selection of producers, musical directors,
studio musicians, recording engineers and arrangers.
Certain costs (such as artists' and producers' royalties) are contingent
upon subsequent sales while other costs (such as salaries, overhead,
manufacturing, recording costs, including studio time, artists' and producers'
advances and certain other expenses) are payable regardless of sales.
Production costs (inclusive of artists' and producers' advances and advertising
and promotional expenses) for a master recording of an album generally range
from $110,000 to $245,000. Such costs (other than advertising and promotion)
are generally recoupable by the Company from royalties payable to the artist.
The estimated cost range involved in producing, manufacturing and
promoting a recording is as follows:
<TABLE>
<CAPTION>
Category Low High
- ---------------------------------------------------------------- ---------- ---------
<S> <C> <C> <C>
Master cost (including artists' and producers' advances) ...... $ 40,000 -- $100,000
Artwork/liner notes .......................................... 5,000 -- 10,000
Video ......................................................... 10,000 -- 25,000
Initial manufacturing cost (5,000 units) ..................... 10,000 -- 10,000
Advertising for the first single .............................. 25,000 -- 60,000
Independent promotion (radio) for the first single ............ 20,000 -- 40,000
-------- --------
Total ...................................................... $110,000 $245,000
======== ========
</TABLE>
The Company currently anticipates that the cost to produce a new recording
will average approximately $150,000. If management determines that a recording
will achieve commercial acceptance, the Company may increase advertising and
promotional activities in order to capitalize on its potential popularity.
After an artist has been selected for recording, it generally requires
between three and six months to record a master tape and two months to develop
artwork and press, package and deliver CDs and tapes to retail outlets.
Accordingly, the period of time between the expenditure of funds on production
and release of a recording, at which time the Company receives revenues,
typically will range from six to nine months.
24
<PAGE>
Artist Roster and New Releases
The Company's products include new releases by artists under contract or
license, as well as compilations and re-releases of previously recorded music.
The Company plans to release at least ten new recordings, compilations and
re-releases during the twelve months following the consummation of this
offering. The Company has recently released or plans to release the following
recordings:
<TABLE>
<CAPTION>
Artist Album Title Release Date
- ----------------------------------- --------------------------------------------- --------------
<S> <C> <C>
Latin Music Sobredosis (1) "Latin Music Sobredosis" October 1996
Marcos (1) "Marcos" October 1996
Paulito (1) "Paulito FG y Su Elite" October 1996
Juan Carlos Alfonso y Dan Den (1) "Mi Cuerpo" November 1996
Pedro Jesus (1) "Pedro Jesus" December 1996
Pedro Dikan (1) "Cuestion Seria" December 1996
Sexteto Tipica (1) "Sexteto Tipica de Cuba" March 1997
Shira (1) "Shira" July 1997
Fania All-Stars (2) "Bravo" July 1997
Hector Lavoe (2)(3) "Hector Lavoe - Live" October 1997
Ismael Miranda (2)(4) "Con Buena Nota" November 1997
Yannet Sol (2)(4) "Yannet Sol with Lino Iglesias and Friends" December 1997
Paulito (1) "Con La Concienca Tranquila" December 1997
Larry Harlow (5) "Larry Harlow's Latin Legends" January 1998
Lebron Brothers (4)(5) Untitled March 1998
</TABLE>
- ------------
(1) These recordings were released or are proposed to be released pursuant to
an agreement with Pyrale described below. Generally, sales of these
recordings to date have not been significant, except that the Company has
sold more than 10,000 copies of "Mi Cuerpo" by the popular Cuban group Dan
Den.
(2) Released through Sony. "Bravo" has sold more than 45,000 copies to date.
The Company has also released through Sony eight additional new
compilation albums, including six by the Fania All-Stars, under the Jerry
Masucci Music label.
(3) This is a new release of a 1987 live performance.
(4) Currently under contract with the Company.
(5) Proposed release.
Pyrale Agreement. In June 1996, the Company entered into an agreement with
Pyrale Commercial S.A. ("Pyrale"), an independent production company organized
under the laws of Panama. Independent record production companies are primarily
engaged in the production of master recordings and do not have manufacturing,
distribution, promotion or marketing capabilities. Pursuant to the agreement,
Pyrale granted the Company the exclusive right to manufacture, advertise and
sell, other than by means of record clubs, copies of master recordings released
on the Pyrale label in the form of records, compact discs and audio tapes
worldwide, except in Panama.
The agreement obligates the Company to pay Pyrale (i) quarterly royalties
equal to 14% of the suggested retail or list prices for all records, compact
discs and tapes manufactured and sold by the Company, (ii) 50% of all
performance and broadcasting fees received in connection with the licensed
recordings and (iii) all royalties owed to artists and third parties for
copyrighted music or other material. The agreement provides for Pyrale to
receive an aggregate of $900,000 in nine installments over the three year term
of the agreement as non-refundable advance payments on royalties for each year,
$500,000 of which has been paid to date, and obligates Pyrale to record at
least six new masters which are acceptable to the Company during each year. To
date, Pyrale has delivered nine completed master recordings to the Company.
The agreement expires on May 31, 1999, subject to earlier termination by
Pyrale upon the liquidation or bankruptcy of the Company or in the event of the
Company's uncured failure to perform any of its obligations
25
<PAGE>
under the agreement. Following expiration, but not the early termination of the
agreement, the Company is entitled to continue to manufacture and sell all
masters released during the contract period for an additional two-year period
and to sell all remaining inventory in the ordinary course of business for a
period of three months thereafter. The agreement is governed by the laws of
Panama.
Distribution
The Company sells its catalog of CDs and tapes to wholesale distributors.
The Company has developed a network of approximately 20 distributors who sell
CDs and tapes primarily in New York and Puerto Rico and, to a lesser extent,
Miami, Chicago, Los Angeles and San Francisco. The Company does not maintain
agreements with any of these distributors. Sales to a limited number of
distributors have and will continue to account for a substantial portion of the
Company's revenues. For the year ended December 31, 1996 and the nine months
ended September 30, 1997, sales of catalog CDs and tapes to five distributors
accounted for approximately 70.0% and 67.4%, respectively, of the Company's
revenues. For the nine months ended September 30, 1997, three of the Company's
largest distributors accounted for approximately 47.0% of the Company's
revenues, with Sony accounting for approximately 15.0%. The Company's success
will be largely dependent upon the marketing efforts of Sony and its other
principal distributors and upon sales of the Company's products to their
principal accounts. The Company's products are sold domestically primarily in
small record outlets in Latin neighborhoods and Latin record sections of Virgin
Records, HMV, Sam Goody's and other recorded music chains.
Sony Agreement. In May 1997, the Company entered into a letter agreement
with Sony, a leading distributor of Latin music. Sony has agreed to act as the
exclusive distributor for certain of the Company's products in the United
States and Puerto Rico. The agreement provides for Sony to bear bad credit
risks for all sales approved by Sony and to include Company products in Sony
advertising programs at the Company's expense, provided that advertising
expenses do not exceed 3% of the gross value of products sold. The agreement
also provides that the Company and Sony may enter into a separate agreement
providing for the manufacture by Sony of cassette tapes and CDs.
The agreement obligates the Company to deliver to Sony (i) during each
contract year of the agreement (a) not less than four newly recorded,
commercially satisfactory, previously unreleased single disc albums by
different artists and (b) not less than four commercially satisfactory,
previously unreleased single disc television-advertised compilation albums
comprising repertoire from the catalog mutually agreed upon by Sony and the
Company, including one studio album entitled "Fania All-Stars" in the first
year of the agreement, and (ii) three compilation catalog albums, each
comprising "Best of Fania All-Stars" tracks. Sony has no obligation to
distribute any products featuring the performances of artists who reside in or
are citizens of Cuba. Sony is currently distributing twelve of the Company's
recordings, including a new recording by the Fania All-Stars entitled "Bravo"
and six compilations of previously released Fania All-Star recordings.
The Company is entitled to receive aggregate advances from Sony,
recoupable by Sony from proceeds accruing to the Company, of $250,000. Pursuant
to the agreement, Sony is obligated to restore the advance to $250,000 whenever
total advances charged to the Company's account are recouped and the Company is
current in its delivery obligations to Sony, except during the final six months
of the third contract year of the agreement.
The agreement provides for Sony to retain distribution fees of 16% of the
gross value of shipments of studio albums (18.5% if distributed through Sony
Music Distribution) and 14.5% of the gross value of shipments of television
advertised compilation albums (17% if distributed through Sony Music
Distribution), as well as processing fees of $.25 per unit returned in excess
of 12.5% of sales in any month. The agreement permits Sony to reserve 20% from
each monthly statement for future product returns, distribution fees and any
other agreed deductions, such reserve to be liquidated in the sixth monthly
statement after the monthly statement in which the reserve was established, and
to pay net proceeds to the Company on the 60th day following the end of each
month.
The agreement terminates May 15, 2000, provided that (i) if the Company
does not fulfill its delivery commitment in any contract year, such contract
year shall be automatically extended until such time as the Company fulfills
its delivery commitment for that contract year; (ii) if any advances remain
unrecouped as of the end of the term of the agreement, then the term will be
extended until all advances have been recouped; and (iii) if Mr.
26
<PAGE>
Masucci fails to be engaged in the full-time, active management of the Company,
then Sony shall have the option to terminate the agreement and any remaining
unrecouped advances shall become immediately due and payable to Sony. The
agreement provides that Sony shall have the non-exclusive right to distribute
and sell products previously delivered to it for a period of six months
following its termination.
A significant portion of the Company's catalog sales are made in
international markets, primarily in Colombia and Venezuela, through
distributors. For the year ended December 31, 1996 and the nine months ended
September 30, 1997, sales in international markets accounted for approximately
38.4% and 31.9%, respectively, of the Company's revenues. The Company intends
to continue to exploit its catalog and artists' recordings outside of the
United States and will seek access to foreign markets principally through
license arrangements with record companies and through direct sales.
Advertising, Promotion and Marketing
The Company is releasing and plans to release records in popular Latin
music formats. Accordingly, the Company's principal marketing efforts are
focused on broadcast media aimed at Hispanic markets. Following the
consummation of this offering, the Company plans to target domestic Hispanic
markets in New York and Puerto Rico and, to a lesser extent, Miami, Chicago,
Los Angeles and San Francisco. The Company's executive officers and one person
employed in promotion are currently responsible for marketing activities. The
Company also engages independent promotion companies to generate radio air
play. Following the consummation of this offering, the Company intends to hire
up to three additional marketing and promotion personnel.
The Company's marketing and promotion activities include the use of print
ads and radio and television spots designed to achieve a high level of consumer
awareness and appeal. The Company intends to use approximately $800,000 of the
proceeds of this offering to purchase advertising time in increased quantities
and at preferred listening and viewing hours on broadcast media, including
spots on Hispanic radio stations and Hispanic cable networks such as Telemundo
Network, Inc. ("Telemundo"). The Company anticipates that television
advertising will consist of 30 second commercials designed to promote the
Company's recordings.
In September 1997, the Company entered into an agreement with Telemundo,
pursuant to which the Company agreed to provide Telemundo a minimum of four
advertising campaigns to be broadcast to Telemundo's United States Hispanic
television audience during the period from September 1997 through August 1998.
The agreement provides for each campaign to consist of a series of thirty
second commercials to be written and produced by an independent agency and
broadcast at a rate of eighteen commercials per week for a four-week period in
the United States, United States territories and possessions, excluding Puerto
Rico, and Canadian markets within 50 miles of the United States border (the
"Advertising Territory"). The Company is obligated to pay Telemundo $50,400 per
campaign as a nonrefundable, minimum advance against royalties of $1.00 per CD
and $.75 per cassette sold in the Advertising Territory during the three-month
period following the commencement date of each campaign, subject to a minimum
annual amount of $200,000.
The Company promotes sales of its recordings by organizing live
performances and special events by music groups. The Company has obtained a
visa permitting Paulito and Dan Den, two popular Cuban groups, to tour and
perform in the United States. In addition, the Fania All-Stars are currently
scheduled to tour outside of the United States, including appearances at the
Midem music business showcase and other performances in Europe in January 1998,
and in March 1998 as featured guests at celebrations for National Salsa Day in
Puerto Rico. Yannet Sol appeared in concert in Colombia in December 1997 with
the Fania All-Stars.
The Company also promotes sales of its new albums by producing video clips
of single songs. The Company has produced ten video clips to date which are
played on cable television stations broadcasting Spanish-language music videos
in the United States, Puerto Rico and several countries in Latin America. The
Company generally does not pay or receive money in connection with the
broadcast of its video clips. Other marketing methods employed by the Company
include newspaper, trade publications and music oriented magazine advertising.
27
<PAGE>
Manufacturing
The manufacture of CDs and tapes involves pressing, printing of product
packaging and shipping of finished goods, which is performed by third-party
vendors in accordance with the Company's requirements. The Company does not
maintain agreements with any manufacturer and purchases CDs and tapes pursuant
to purchase orders placed from time to time in the ordinary course of business.
For the year ended December 31, 1996 and the nine months ended September 30,
1997, three manufacturers accounted for approximately 89.1% and 77.7%,
respectively, of product purchases. The Company will be dependent on the
ability of such manufacturers and other vendors to provide adequate supplies of
CDs and tapes on a timely basis and on favorable terms. To date, the Company
has not experienced any material difficulties or delays in the manufacture of
its products or delays due to product defects. Several of these manufacturers
require that the Company purchase certain minimum quantities of CDs and tapes
with each purchase order.
Competition
The Company faces intense competition for a finite amount of consumer
discretionary spending from numerous other record companies and other
businesses in the entertainment industry, including from the major recording
companies (Sony, Warner, Universal, BMG, Capitol-EMI and PolyGram), all of
which have substantially greater resources, history of relationships in
attracting talent, obtaining properties and hiring key employees for the
production of recordings. The Company also competes with other significant
independent record labels, such as FonoVisa, Platano Records, Karen Records and
RMM Records & Video Corp.
The market for recorded music is dominated by the major record companies,
certain of which are a part of larger entertainment conglomerates, and have
Latin recording divisions with significant financial resources and promotional
budgets and large artist and repertoire (A&R) staffs to compete for a limited
number of promising Latin recording artists, producers and writers. There is
also intense competition within the recording industry for access to playing
time on Hispanic television stations and other video outlets, and for "air
time" by radio disc jockeys, which is essential to gain attention and create
demand for the Company's recordings. There is currently only one radio station
in the New York metropolitan area that plays Latin music. There can be no
assurance that any of the Company's artists, recordings or music videos will
gain the exposure required to generate significant market interest or that the
Company will be able to continue to compete successfully.
Intellectual Property
Recordings
The Company's business, like that of other companies in the record
industry, is dependent on ownership or control of sound recordings and, in
certain cases, audio visual works. Typically, when a recording is made,
copyright in that recording (as opposed to the composition upon which the
recording is based) vests either in the artist, in a production company (and is
licensed or sold to a record company) or in the record company itself,
depending on the terms of the relevant agreement. The manufacture and sale of a
record results in royalties being payable by the record company to the
publishing company at statutory rates or lower agreed upon rates for the use of
the composition and generally by the record company to the recording artist,
producer and/or production company for the use of the recording. In addition to
directly marketing recordings in its home country, record companies export to
various foreign countries and license rights to companies to manufacture and
sell recordings in various territories. Licenses are granted to use individual
recordings for use in compilation records, motion pictures and television and
in advertising.
The Company's business could be adversely affected by the unauthorized
reproduction of recordings for commercial sale and by home taping. Unauthorized
recordings of the Company's products could result in the loss of substantial
revenues. The Company has in the past and may in the future file lawsuits,
either on its own behalf or in conjunction with other music publishers,
copyright owners and publishing organizations seeking injunctive relief and/or
monetary damages from persons and companies who interfere with the Company's
property rights. In December 1996, the Company filed an action against third
parties alleging infringement of the Company's rights to certain catalog
recordings. The Company obtained preliminary injunctive relief and continues to
seek unspecified damages and a permanent injunction. Future actions could be
costly and time consuming and may divert management's attention from the
Company's business affairs.
28
<PAGE>
In addition, new technologies, including digital audio tape and recordable
CD technology, may increase the opportunity for contraband reproduction for
distribution as well as the opportunity for consumers to make high quality home
copies of recordings. In the absence of adequate copyright or other
protections, new recording technologies could adversely affect the sale of CDs
and tapes.
Music Publishing
Music publishing involves the acquisition of rights to and exploitation of
musical compositions (as compared to recordings of those compositions). When a
musical composition is written, copyright in the composition vests either in
the writer (and is licensed to a music publishing company) or in the publishing
company. Principal sources of music publishing revenues are royalties from (i)
"mechanical license fees," i.e., the fees for the reproduction of compositions
on records; (ii) "synchronization rights," i.e., fees for the reproduction of
music works in motion pictures, television and radio commercials and original
cable programming; (iii) "performance rights," i.e., fees for the radio,
television or cable broadcast of a musical work or the live public performance
of the lyrics and/or music of a composition; and (iv) sheet music.
Performance rights are usually regulated and administered by either the
American Society of Composers, Authors and Publishers ("ASCAP") or Broadcast
Music, Inc. ("BMI"), two nonprofit organizations responsible for the collection
and payment of performance-related royalties. As a result, a songwriter will
join either ASCAP or BMI, while a publisher will join both through separate
corporations or "doing business as" entities in order to coordinate with its
various writers. The Company "does business as" FAF Publishing (BMI publishing
entity) and VEV Publishing (ASCAP publishing entity). ASCAP and BMI distribute
royalties to writers and publishers.
All other publishing rights are administered by the music publisher, who
then pays the writers an agreed upon portion of such royalties. Royalties
related to mechanical rights are paid to the music publisher by the record
company utilizing the composition on a per unit basis. Synchronization rights
are usually directly negotiated and administered by the publisher. Collection
mechanisms are used to collect royalties in most foreign countries.
Copyright
The term of U.S. copyright for musical compositions and recordings made
after 1978 is the life of the author plus fifty years. Pre-1978 copyrights have
a duration of twenty-eight years with renewal terms of twenty-eight years and
nineteen years, which are exercisable by or on behalf of the author, the
author's assigns or heirs, or by the owner of works made for hire. A given work
may have different components exercisable by more than one rights holder.
The U.S. copyright law was amended in 1972 to provide statutory copyright
protection for sound recordings. Previously, recordings were (and pre-1972
recordings are still) protected as common law copyrights and under rules
governing unfair competition and various federal and state statutes such as the
federal Lanham Act and the New York and California anti-bootlegging statutes.
Copyright statutes outside of the United States generally provide comparable
protection.
Many of the Company's master recordings were made prior to 1972 and are
not subject to U.S. statutory protection, although they may be protectable
under other legal theories. Due principally to the vintage of many recordings
in the Company's catalog, original documentation of the Company's claims of
title may be unavailable or difficult to locate, which could adversely affect
the Company's ability to sustain its rights in certain properties in the event
of disputes over ownership rights. There has been no challenge to any of the
Company's property rights from the original performing artists or producers to
date.
Trademarks
The Company intends to apply for United States trademark registrations for
the "Fania" and "Fania All-Stars" names, as well as for the labels contained in
the Company's catalog. Management considers the rights in
29
<PAGE>
these names to be important to the Company's business. There can be no
assurance as to the breadth or degree of protection which trademarks may offer
the Company or that any such trademark applications will result in issued
trademarks. The Company is not aware of any claims or infringement or other
challenges to the Company's rights to use these marks.
Employees
As of November 30, 1997 the Company had seven employees, including two
executive officers, one employee in promotion, one employee in studio
production, one employee in publishing and two employees in administration and
accounting. The Company's employees are not represented by a collective
bargaining unit. The Company believes its employee relations are good.
Properties
The Company's principal offices and recording studio are located in
approximately 3,500 square feet of space in New York, New York. The premises
are leased by Key, a company controlled by Mr. Masucci, pursuant to a five-year
agreement (which expires in February 2001) with an unaffiliated third-party
landlord at a rental of approximately $4,442 per month, which is equal to Key's
cost. Key has agreed to assign its lease to these premises to the Company as of
the date of this Prospectus. See "Certain Transactions."
30
<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Position
- --------------------------- ----- -------------------------------------
Gerald Masucci ............ 63 Chairman of the Board, President and
Chief Executive Officer
Victor Gallo ............ 60 Vice President and Director
John Anthony Rubino ...... 54 Chief Financial Officer
John S. McBride ......... 63 Director
Myron S. Mayer ............ 63 Director
Joseph Hunter ............ 57 Director
Gerald Masucci, founder of the Company, has been Chairman, President and
Chief Executive Officer of the Company since its inception in 1986. Mr. Masucci
co-founded Fania Records in 1964 and served as its President until 1979. From
1979 to 1983, Mr. Masucci served as President of Musica Latina, Inc. ("Musica
Latina"), a company engaged in the production and marketing of Latin music. Mr.
Masucci received a Juris Doctor from New York Law School in 1960 and is a
member of the Bar of the State of New York.
Victor Gallo has been Vice President of the Company since its inception in
1986 and a director since October 1997. Mr. Gallo is responsible for the
overall business operations of the Company. Mr. Gallo served as Vice President
of Fania Records from 1971 to 1979 and Vice President of Musica Latina from
1979 to 1983.
John Anthony Rubino has agreed to become Chief Financial Officer of the
Company upon the consummation of this offering. Mr. Rubino has been a certified
public accountant since 1977 and has been a principal of John Anthony Rubino &
Company, CPA PC since 1988. Mr. Rubino received a Bachelor of Business
Administration from Pace University in 1966. John Anthony Rubino, CPA has been
the Company's independent accountant since inception.
John S. McBride has been a director of the Company since October 1997. Mr.
McBride has been an attorney in private practice and member of the Bar of the
State of New York for more than the past thirty years. Mr. McBride received a
Juris Doctor from New York Law School in 1960.
Myron S. Mayer has been a director of the Company since November 1997. Mr.
Mayer has been a practicing attorney and member of the Bar of the State of New
York since 1959, most recently with the firm of Rubin, Bailin, Ortoli, Mayer,
Baker & Fry, LLP, specializing in all aspects of the entertainment, recording
and music businesses. Mr. Mayer received a LLB degree from Columbia Law School
in 1959.
Joseph Hunter has been a director of the Company since December 1997. Mr.
Hunter has been President of Karin Model LLC, a model management company, since
1995. From 1970 to 1995, Mr. Hunter was President of Ford Modeling Agency.
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.
The Company has agreed, for a period of five years from the date of this
Prospectus, if so requested by the Representative, to nominate and use its best
efforts to elect a designee of the Representative as a director of the Company
or, at the Representative's option, as a non-voting advisor to the Company's
Board of Directors. The Representative has not yet exercised its right to
designate such a person.
31
<PAGE>
Executive Compensation
The following table sets forth the compensation for the Company's Chief
Executive Officer during the fiscal year ended December 31, 1996 and the only
other officer of the Company who received compensation in excess of $100,000
during the fiscal year ended December 31, 1996.
Summary Compensation Table
Name Principal Position Salary
- --------------------- ------------------------- ----------------
Jerry Masucci ...... Chief Executive Officer $ 77,500(1)
Victor Gallo ...... Vice President $ 106,000
- ------------
(1) Represents producer's fees paid to Mr. Masucci. See "Certain Transactions."
The Company did not have any long-term incentive or option plans during
the fiscal year ended December 31, 1996.
Employment Agreements
The Company has entered into three-year employment agreements with each of
Messrs. Masucci and Gallo, effective as of the date of this Prospectus. The
agreement with Mr. Masucci provides for an annual base compensation of $100,000
in the first year, increasing to $200,000 in the event the Company achieves
pre-tax income of $1,800,000, and is subject to increases as determined by the
Board of Directors in the second and third years of the agreement. Mr. Masucci
is also entitled to standard producer's fees in the event that he produces
Company recordings and a bonus equal to 10% of pre-tax income in excess of
certain incremental earnings targets. The agreement with Mr. Gallo provides for
annual base compensation of $100,000 in the first year, increasing to $150,000
and $175,000 in the second and third years of the agreement, respectively, and
such bonuses as may be determined by the Company's board of directors. The
employment agreements provide for employment on a full-time basis (and in the
case of Mr. Masucci, increased responsibilities with respect to the Company's
business affairs) and contain a provision that the employee will not compete or
engage in a business competitive with the current or anticipated business of
the Company during the term of the employment agreement and for a period of one
year thereafter. The agreements provide that if the employee is terminated
without cause (including as a result of a change in control), he will be
entitled to receive severance pay equal to the base compensation through the
term of the agreement, provided that if the employee is terminated during the
third year or the last year of any renewal term, the employee will be entitled
to receive additional compensation equal to the base compensation received from
the Company during the one-year period prior to the date of termination.
Director Compensation and Committees
Non-employee directors currently receive no cash compensation for serving
on the Board of Directors other than reimbursement of reasonable expenses in
attending Board meetings. The Company has agreed, as of the date of this
Prospectus, to issue options to purchase 16,000 shares of Common Stock to
non-employee directors. See "Stock Option Plan."
The Company intends to establish an Audit Committee and a Compensation
Committee of the Board of Directors prior to the consummation of the offering.
Stock Option Plan
The Company has adopted the Plan, pursuant to which 250,000 shares of
Common Stock are currently reserved for issuance upon the exercise of options
designated as either (i) options intended to constitute incentive stock options
("ISOs") under the Internal Revenue Code of 1986, as amended (the "Code") or
(ii) nonqualified options. ISOs may be granted under the Plan to employees and
officers of the Company. Non-qualified options may be granted to consultants,
directors (whether or not they are employees), employees or officers of the
Company.
32
<PAGE>
The Plan is intended to qualify under Rule 16b-3 under the Securities
Exchange Act of 1934, and is administered by the Board of Directors. The Board,
within the limitations of the Plan, determines the persons to whom options will
be granted, the number of shares to be covered by each option, whether the
options granted are intended to be ISOs, the duration and rate of exercise of
each option, the option purchase price per share and the manner of exercise,
and the time, manner and form of payment upon exercise of an option. Unless
sooner terminated the Plan will expire in October 2007.
ISOs granted under the Plan may not be granted at a price less than the
fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). The purchase price of non-qualified options granted under the
Plan is determined by the Board. The aggregate fair market value of shares for
which ISOs granted to any employee are exercisable for the first time by such
employee during any calendar year (under all stock option plans of the Company)
may not exceed $100,000. Options granted under the Plan will expire not more
than ten years from the date of grant (five years in the case of ISOs granted
to persons holding 10% or more of the voting stock of the Company). ISOs
granted under the Plan are not transferable during an optionee's lifetime but
are transferable at death by will or by the laws of descent and distribution.
Non-qualified options granted under the Plan may be transferred if such right
is granted by the Board. In general, upon termination of employment of an
optionee, all options granted to such person which are not exercisable on the
date of such termination immediately terminate, and any options that are
exercisable terminate three months following termination of employment. Any
options granted to a person whose employment is terminated for cause or
voluntarily without the consent of the Company terminate automatically as of
the date of such termination of employment.
The Plan contains anti-dilution provisions authorizing appropriate
adjustments in certain circumstances. Shares of Common Stock subject to options
which expire without being exercised or which are cancelled as a result of the
cessation of employment are available for further grants. No shares of Common
Stock of the Company may be issued to any optionee until the full option price
has been paid. The Board may grant individual options under the Plan with more
stringent provisions than those specified in the Plan.
As of the date of this Prospectus, options to purchase an aggregate of
131,000 shares have been granted under the Plan, of which options to purchase
40,000, 15,000, 8,000, 4,000 and 4,000 shares, respectively, have been granted
to Messrs. Gallo, Rubino, McBride, Mayer and Hunter at an exercise price equal
to the public offering price per share. Such options vest as to one-third of
the shares covered thereby on the first, second and third anniversary of the
date of grant.
Indemnification and Exculpation Provisions
The Company's Certificate of Incorporation provides for indemnification of
officers and directors to the fullest extent permitted by Delaware law. In
addition, under the Company's Certificate of Incorporation, no director shall
be liable personally to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director; provided that the Certificate of
Incorporation does not eliminate the liability of a director for (i) any breach
of the director's duty of loyalty to the Company or its stockholders; (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) acts or omissions in respect of certain
unlawful dividend payments or stock redemptions or repurchases; or (iv) any
transaction from which such director derives improper personal benefit.
33
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the date of this
Prospectus and as adjusted to reflect the sale of the 1,600,000 shares of
Common Stock offered hereby, based on information obtained from the persons
named below, with respect to the beneficial ownership of shares of Common Stock
by (i) each person known by the Company to be the beneficial owner of more than
five percent of the outstanding shares of Common Stock, (ii) each of the
Company's directors and (iii) all executive officers and directors as a group:
<TABLE>
<CAPTION>
Percentage of
Outstanding Shares
Owned
----------------------
Name and Address of Amount and Nature of Before After
Beneficial Owner (1) Beneficial Ownership Offering Offering
- -------------------------------------------------------- ---------------------- ---------- ---------
<S> <C> <C> <C>
Sonido, Inc.(2) ....................................... 2,975,000 100.0% 65.0%
Jerry Masucci(2) ....................................... 2,975,000 100.0 65.0
Victor Gallo .......................................... -- -- --
John S. McBride ....................................... -- -- --
Myron S. Mayer ....................................... -- -- --
Joseph Hunter .......................................... -- -- --
All officers and directors as a group (five persons) . 2,975,000 100.0% 65.0%
</TABLE>
- ------------
(1) The address for each of such persons is in care of the Company, 112 West
31st Street, New York, New York 10001.
(2) Mr. Masucci owns all of the issued and outstanding capital stock of Sonido.
34
<PAGE>
CERTAIN TRANSACTIONS
The Company was organized in October 1997 as successor to the business of
Sonido, a corporation controlled by Mr. Masucci and organized under the laws of
the state of New York in February 1986. As of the date of this Prospectus, the
Company will effect the Reorganization, pursuant to which Sonido will transfer
to the Company certain assets, consisting primarily of all of its rights to the
catalog (including its master recordings, publishing rights, intellectual
property rights, contracts with artists, authors and others and rights and
obligations pursuant to the Valsyn License), all of its accounts payable, trade
accounts receivable (in excess of income taxes payable) and inventory. Pursuant
to the Reorganization, Sonido will retain all of its other assets, including
cash, and has agreed to discontinue the creation, production, manufacture
and/or sale of recordings following the Reorganization. In connection with the
Reorganization, Mr. Masucci agreed, as of the date of this Prospectus, to
transfer his ownership in JMM to the Company, which includes rights to the Sony
agreement and agreements with certain recording artists.
In connection with the purchase of the catalog, the Company agreed to pay
Sonido $500,000 (together with accrued interest at the rate of 8% per annum) on
the fifth anniversary of the consummation of this offering to reimburse Sonido
for amounts paid to Valsyn pursuant to an amendment to the Valsyn License in
November 1997.
Mr. Masucci has personally guaranteed the payment by the Company of
$1,500,000 to Valsyn on the first anniversary of the consummation of this
offering. Mr. Masucci has also guaranteed an obligation of Sonido to pay Valsyn
$450,000 on the tenth day following the consummation of this offering.
The Company leases studio time from Key, a company controlled by Mr.
Masucci, and occupies office space rented by Key. For the years ended December
31, 1995 and 1996 and the nine months ended September 30, 1997, the Company
paid Key $413,000, $497,000 and $340,000, respectively, in connection with such
arrangement, which represents Key's cost. Key has agreed, as of the date of
this Prospectus, to contribute all of its recording equipment to the capital of
the Company and to assign its lease to the Company with respect to 3,500 square
feet of office and recording studio space.
Mr. Masucci made aggregate non-interest bearing advances of $151,222 to
the Company in connection with the purchase of a condominium in Miami, Florida.
As of September 30, 1997, $13,504 of such advances remain outstanding. The
condominium is being retained by Sonido pursuant to the Reorganization.
The Company has made non-interest bearing advances aggregating $151,000 at
September 30, 1997 to certain entities controlled by Mr. Masucci. Such amounts
are payable to Sonido pursuant to the Reorganization.
John Anthony Rubino, who has agreed to become Chief Financial Officer of
the Company upon the consummation of this offering, is President of John
Anthony Rubino & Company, CPA PC, an accounting firm which audited the
Company's financial statements for the year ended December 31, 1995. The
Company paid such firm $3,450, $94,100 and $64,000, respectively, during the
years ended December 31, 1995 and 1996 and the nine months ended September 30,
1997.
Myron S. Mayer, a director of the Company, is a member of the law firm of
Rubin, Bailin, Ortoli, Mayer, Baker & Fry, LLP. The Company paid such firm
$30,800 and $32,300, respectively, during the year ended December 31, 1996 and
the nine months ended September 30, 1997.
Future transactions between the Company and its officers and directors and
their respective affiliates will be on terms and conditions no less favorable
to the Company than could be obtained from unaffiliated third parties based on
similar transactions and will be approved by a majority of the independent and
disinterested members of the Board of Directors of the Company.
35
<PAGE>
DESCRIPTION OF SECURITIES
General
The Company is authorized to issue 15,000,000 shares of Common Stock, par
value $.01 per share and 1,000,000 shares of preferred stock, par value $.01
per share. As of the date of this Prospectus, there are 2,975,000 shares of
Common Stock issued and outstanding and held of record by one holder, and no
shares of preferred stock are outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each share held
of record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors in its discretion
out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably the assets of the Company, if any, legally available
for distribution to them after payment of debts and liabilities of the Company
and after provision has been made for each class of stock, if any, having
preference over the Common Stock. Holders of shares of Common Stock have no
conversion, preemptive or other subscription rights, and there are no
redemption or sinking fund provisions applicable to the Common Stock. All of
the outstanding shares of Common Stock are, and the shares of Common Stock
offered hereby will be, when issued upon payment of the consideration set forth
in this Prospectus, fully paid and non-assessable.
Preferred Stock
The Company is authorized to issue preferred stock with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting
power or other rights of the holders of the Company's Common Stock. In the
event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company.
Delaware Anti-Takeover Law
The Company is subject to certain anti-takeover provisions under Section
203 of the Delaware General Corporation Law. In general, under Section 203, a
Delaware corporation may not engage in any business combination with any
"interested stockholder" (a person that owns, directly or indirectly, 15% or
more of the outstanding voting stock of a corporation or is an affiliate of a
corporation and was the owner of 15% or more of the outstanding voting stock),
for a period of three years following the date such stockholder became an
interested stockholder, unless (i) prior to such date the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder, or (ii)
upon consummation of the transaction which resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, or (iii) on or subsequent to such date, the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders by at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder. The restrictions imposed by
Section 203 will not apply to a corporation if the corporation's initial
certificate of incorporation contains a provision expressly electing not to be
governed by this section or the corporation by action of its stockholders
holding a majority of outstanding stock adopts an amendment to its certificate
of incorporation or by-laws expressly electing not to be governed by Section
203.
The Company has not elected out of Section 203, and upon consummation of
this offering and the listing of Common Stock on Nasdaq, the restrictions
imposed by Section 203 will apply to the Company. Such provision could have the
effect of discouraging, delaying or preventing a takeover of the Company, which
could otherwise be in the best interest of the Company's stockholders, and have
an adverse effect on the market price for the Company's Common Stock.
36
<PAGE>
Transfer Agent and Warrant Agent
The transfer and registrar agent for the Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 4,575,000
shares of Common Stock outstanding, assuming no exercise of outstanding options
and warrants. All 1,600,000 of the shares being offered hereby will be freely
tradeable without restriction or further registration under the Securities Act,
except for any shares purchased by an "affiliate" of the Company (in general, a
person who has a control relationship with the Company), which shares will be
subject to the resale limitations, described below, of Rule 144 promulgated
under the Securities Act. The remaining 2,975,000 shares are deemed to be
"restricted securities," as that term is defined under Rule 144, in that such
shares were issued and sold by the Company in private transactions not
involving a public offering and, as such, may only be sold pursuant to an
effective registration under the Securities Act, in compliance with the
exemption provisions of Rule 144 or pursuant to another exemption under the
Securities Act. Such "restricted" shares will become eligible for sale under
Rule 144 commencing October 1998 (subject to the contractual restrictions
described below).
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated with an affiliate), who has
owned restricted shares of Common Stock beneficially for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class or, if the common stock is quoted on NASDAQ, the average weekly
trading volume during the four calendar weeks preceding the sale and who has
beneficially owned shares of Common Stock for at least two years is entitled to
sell such shares under Rule 144 without regard to any of the limitations
described above.
All of the Company's officers, directors and securityholders have agreed
not to sell or otherwise dispose of any securities for a period of thirteen
months following the date of this Prospectus without the prior written consent
of the Representative. In addition, the Company has granted certain demand and
"piggy-back" registration rights to the Representative with respect to the
securities issuable upon exercise of warrants.
Prior to this offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that public sales of shares
of Common Stock or the availability of such shares for sale will have on the
market prices of the Common Stock prevailing from time to time. Nevertheless,
the possibility that substantial amounts of Common Stock may be sold in the
public market may adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability in the future to raise additional
capital through the sale of its equity securities.
37
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Gilford
Securities Incorporated is acting as Representative, have agreed, subject to
the terms and conditions contained in the Underwriting Agreement, to purchase
from the Company on a "firm commitment" basis the shares set forth opposite
their respective names:
Underwriters Number of Shares
- --------------------------------------- -----------------
Gilford Securities Incorporated ......
Total. ........................... 1,600,000
=========
The Underwriters are committed to purchase and pay for all of the shares
of Common Stock offered hereby if any shares of Common Stock 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.
The Representative has advised the Company that it initially proposes to
offer the shares of Common Stock to the public at the public offering price set
forth on the cover page of this Prospectus. The Representative may allow to
certain dealers who are members of the National Association of Securities
Dealers, Inc. (the "NASD") concessions, not in excess of $ per share of
Common Stock, of which amount a sum not in excess of $ per share of Common
Stock may be reallowed by such dealers to other dealers which are members of
the NASD. The Representative has informed the Company that it does not expect
sales to discretionary accounts by Underwriters to exceed 5% of the shares
offered hereby.
The Company has granted to the Underwriters an option, exercisable within
45 days from the date of this Prospectus, to purchase from the Company at the
public offering price, less underwriting discounts and the non-accountable
expense allowance, all or part of an additional 240,000 shares of Comon Stock
on the same terms and conditions of the offering for the sole purpose of
covering over-allotments, if any.
In connection with this offering, the Company has agreed to issue and sell
to the Representative and/or its designees, at the closing of the proposed
underwriting, for nominal consideration, five year Representative's Warrants
(the "Representative's Warrants") to purchase 160,000 shares of Common Stock.
The Representative's Warrants are exercisable at a price of $ per share
of Common Stock at any time during a period of four years commencing one year
from the date of this Prospectus and are restricted from sale, transfer,
assignment or hypothecation for a period of twelve months from the date hereof,
except to officers of the Representative. The Representative's Warrants contain
anti-dilution provisions providing for adjustment of the number of shares of
Common Stock and exercise price under certain circumstances. The
Representative's Warrants grant to the holders thereof and to the holders of
the underlying securities certain rights of registration of the securities
underlying the Representative's Warrants.
The Company has also agreed, for a period of five years from the date of
this Prospectus, if so requested by the Representative, to nominate and use its
best efforts to elect a designee of the Representative as a director of the
Company or, at the Representative's option, as a non-voting advisor the
Company's Board of Directors. The Representative has not yet exercised its
right to designate such a person.
All of the Company's officers, directors and securityholders have agreed
not to sell or otherwise dispose of any securities of the Company for a period
of thirteen months following the date of this Prospectus without the prior
written consent of the Representative.
The Company has agreed to pay to the Representative a nonaccountable
expense allowance of three percent (3%) of the gross proceeds of this offering,
of which $50,000 has been paid to date. The Company has agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Securities Act.
Prior to this offering, there has been no public market for the Common
Stock. Accordingly, the initial public offering price of the Common Stock was
determined by negotiations between the Company and the Representative. The
factors considered in determining the price, in addition to the prevailing
market conditions,
38
<PAGE>
included the history of and the prospects for the industry in which the Company
competes, an assessment of the Company's management, the prospects of the
Company, its capital structure and such other factors that were deemed
relevant. The offering price does not necessarily bear any relationship to the
assets, results of operations or net worth of the Company.
In order to facilitate the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot in connection with
the offering, creating a short position in the Common Stock for their own
accounts. In addition, to cover over-allotments or to stabilize the price of
the Common Stock, the Underwriters may bid for, and purchase, shares of Common
Stock in the open market. The Underwriters may also reclaim selling concessions
allowed to a dealer for distributing the Common Stock in the offering, if the
Underwriters repurchase previously distributed Common Stock in transactions to
cover short position, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for
the Company by Tenzer Greenblatt LLP, New York, New York. Orrick, Herrington &
Sutcliffe LLP, New York, New York, has acted as counsel for the Underwriters in
connection with the offering.
EXPERTS
The financial statements for the year ended December 31, 1996, in this
Prospectus have been included herein in reliance upon the report of BDO
Seidman, LLP, independent auditors, given upon the authority of that firm as
experts in accounting and auditing.
The financial statements for the year ended December 31, 1995 in this
Prospectus have been included herein in reliance upon the report of John
Anthony Rubino & Company, CPA PC, independent auditor, given upon the authority
of that firm as experts in accounting and auditing. See "Certain Transactions."
In October 1997, the Board of Directors of the Company consented to retain
BDO Seidman, LLP to serve as the Company's independent auditors following the
resignation of John Anthony Rubino & Company, CPA PC. There were no
disagreements with John Anthony Rubino & Company, CPA PC on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, and such firm's reports on the Company's financial
statements did not contain an adverse opinion or disclaimer or qualification as
to uncertainty, audit scope or accounting principles.
ADDITIONAL INFORMATION
Upon consummation of this offering, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934 and in accordance
therewith will file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Company intends to
furnish to its stockholders with annual reports containing audited financial
statements and such other reports as the Company deems appropriate or as may be
required by law.
The Company has filed with the Commission a registration statement on Form
SB-2 under the Act (together with all amendments and exhibits thereto, the
"Registration Statement") with respect to the securities offered hereby. This
Prospectus, filed as part of such Registration Statement, does not contain all
of the information set forth in the Registration Statement, certain portions of
which have been omitted in accordance with the rules and regulations of the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete
and are qualified in their entirety by reference to each such contract,
agreement or other document which is filed as an exhibit to the Registration
Statement. The Registration Statement may be inspected without charge at the
Commission's principal office, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, at the Chicago Regional Office, 500 West Madison
Street, Chicago, Illinois, 60601-2511, and at the New York Regional Office, 7
World Trade Center, New York, New York 10048, and copies of such materials can
be obtained from the Commission's Public Reference Section at prescribed rates.
The Registration Statement, Exhibits and such reports and other information may
also be accessed electronically by means of the Commission's site on the
worldwide web at http://www.sec.gov.
39
<PAGE>
Fania Entertainment Group, Ltd.
<TABLE>
<CAPTION>
Index
-----------
<S> <C>
Reports of Independent Certified Public Accountants .................................... F-2 - F-3
Financial statements:
Balance sheets as of December 31, 1995 and 1996; September 30, 1997 (unaudited) ......... F-4
Statements of income for the years ended December 31, 1995 and 1996; for the nine months
ended September 30, 1996 and 1997 (unaudited) ....................................... F-5
Statements of stockholder's equity (deficit) for the years ended December 31, 1995 and
1996;
for the nine months ended September 30, 1997 (unaudited) .............................. F-6
Statements of cash flows for the years ended December 31, 1995 and 1996; for the nine
months
ended September 30, 1996 and 1997 (unaudited) ....................................... F-7
Notes to financial statements ......................................................... F-8 - F-15
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholder
of Fania Entertainment Group, Ltd.
New York, New York
We have audited the accompanying balance sheet of Fania Entertainment Group,
Ltd. (formerly Sonido, Inc.) as of December 31, 1996, and the related
statements of income, stockholder's equity (deficit), and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fania Entertainment Group,
Ltd. as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
New York, New York
November 17, 1997, except for
Note 1(b) which is as of ______.
F-2
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholder
of Fania Entertainment Group, Ltd.
New York, New York
We have audited the accompanying balance sheet of Fania Entertainment Group,
Ltd. (formerly Sonido, Inc.) as of December 31, 1995, and the related
statements of income, stockholder's equity (deficit), and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fania Entertainment Group,
Ltd. as of December 31, 1995, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
John Anthony Rubino & Company, CPA, PC
Smithtown, New York
April 21, 1997, except for
Note 1(b) which is as of ______.
F-3
<PAGE>
Fania Entertainment Group, Ltd.
Balance Sheets
<TABLE>
<CAPTION>
December 31 Pro Forma
----------------------------- As Adjusted
1995 1996 September 30, 1997 September 30, 1997
-------------- ------------ -------------------- -------------------
(unaudited) (unaudited)
(Note 12)
<S> <C> <C> <C> <C>
Assets
Current:
Cash ....................................... $ 246,973 $1,930,355 $2,740,471 $ 4,768,000
Accounts receivable (Note 3) ............... 2,045,538 1,533,921 2,132,884 1,182,334
Inventory .................................... 445,439 521,015 627,694 627,694
Other receivables (Note 7) .................. 66,324 193,000 276,572 17,500
---------- ---------- ---------- -----------
Total current assets ..................... 2,804,274 4,178,291 5,777,621 6,595,528
Property and equipment, net (Note 4) ......... 84,891 199,974 215,463 64,463
Music catalogs and publishing rights, net
(Note 5) .................................... 2,743,956 2,349,792 2,157,199 2,886,991
Deferred offering costs ..................... -- 100,000 220,000 --
---------- ---------- ---------- -----------
$5,633,121 $6,828,057 $8,370,283 $ 9,546,982
========== ========== ========== ===========
Liabilities and Stockholder's Equity
(Deficit)
Current:
Current portion of long-term debt
(Note 6) ................................. $1,123,201 $2,207,401 $2,207,401 $ 1,350,000
Accounts payable and accrued expenses . 644,021 550,472 616,560 554,822
Deferred royalty income ..................... -- -- 167,430 167,430
Income taxes payable ........................ 1,280 576,922 950,550 --
---------- ---------- ---------- -----------
Total current liabilities .................. 1,768,502 3,334,795 3,941,941 2,072,252
Long-term debt, less current portion
(Note 6) .................................... 3,900,788 2,693,388 2,912,807 500,000
Deferred income taxes (Note 9) ............... 175,000 148,000 148,000 148,000
---------- ---------- ---------- -----------
Total liabilities ........................ 5,844,290 6,176,183 7,002,748 2,720,252
---------- ---------- ---------- -----------
Stockholder's equity (deficit):
Capital stock, par value $.01 per share --
shares issued and outstanding
2,975,000 and 4,575,000 pro forma as
adjusted ................................. 29,750 29,750 29,750 45,750
Additional paid-in capital .................. -- -- -- 6,780,980
Retained earnings (deficit) .................. (240,919) 622,124 1,337,785 --
---------- ---------- ---------- -----------
Total stockholder's equity (deficit) ...... (211,169) 651,874 1,367,535 6,826,730
---------- ---------- ---------- -----------
$5,633,121 $6,828,057 $8,370,283 $ 9,546,982
========== ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
Fania Entertainment Group, Ltd.
Statements of Income
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
--------------------------- --------------------------
1995 1996 1996 1997
------------ ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
Sales (Note 8) .................................... $3,628,926 $4,559,164 $3,357,334 $3,561,398
Royalties .......................................... 372,895 545,067 245,066 169,172
---------- ---------- ---------- ----------
Total revenues .................................... 4,001,821 5,104,231 3,602,400 3,730,570
Direct costs (Note 7) .............................. 2,046,982 2,908,173 1,975,904 1,776,338
---------- ---------- ---------- ----------
Gross profit .................................... 1,954,839 2,196,058 1,626,496 1,954,232
Selling, general and administrative expenses
(Note 7) .......................................... 590,479 424,933 289,578 618,953
---------- ---------- ---------- ----------
Operating income ................................. 1,364,360 1,771,125 1,336,918 1,335,279
Interest expense -- net ........................... 437,001 356,082 246,221 171,618
---------- ---------- ---------- ----------
Income before income taxes ........................ 927,359 1,415,043 1,090,697 1,163,661
Income taxes (Note 9) .............................. 30,302 552,000 394,200 448,000
---------- ---------- ---------- ----------
Net income ....................................... $ 897,057 $ 863,043 $ 696,497 $ 715,661
========== ========== ========== ==========
Net income per share .............................. $ .30 $ .29 $ .23 $ .24
========== ========== ========== ==========
Weighted average number of shares outstanding . 2,975,000 2,975,000 2,975,000 2,975,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Fania Entertainment Group, Ltd.
Statements of Stockholder's Equity (deficit)
Years ended December 31, 1995 and 1996 and nine months ended September 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Capital stock Retained Total
----------------------- earnings stockholder's
Shares Amount (deficit) equity (deficit)
----------- --------- ---------------- -----------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 ..................... 2,975,000 $29,750 $ (1,137,976) $ (1,108,226)
Net income .................................... -- -- 897,057 897,057
--------- ------- ------------ ------------
Balance, December 31, 1995 .................. 2,975,000 29,750 (240,919) (211,169)
Net income .................................... -- -- 863,043 863,043
--------- ------- ------------ ------------
Balance, December 31, 1996 .................. 2,975,000 29,750 622,124 651,874
Net income (unaudited) ........................ -- -- 715,661 715,661
--------- ------- ------------ ------------
Balance, September 30, 1997 (unaudited) ...... 2,975,000 $29,750 $ 1,337,785 $ 1,367,535
========= ======= ============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Fania Entertainment Group, Ltd.
Statements of Cash Flows
(Note 10)
<TABLE>
<CAPTION>
Year Ended Nine months ended
December 31, September 30,
------------------------------- -----------------------------
1995 1996 1996 1997
--------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ....................................... $ 897,057 $ 863,043 $ 696,497 $ 715,661
------------ ---------- ---------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................... 3,144 13,978 10,485 6,630
Amortization of master costs .................. 534,437 711,663 475,645 423,094
Imputed interest .............................. 455,162 376,799 258,599 219,419
Deferred income taxes ........................... 29,821 (27,000) (27,000) --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable ........................ (439,624) 511,617 157,561 (598,963)
Inventory .................................... (113,337) (75,576) (54,561) (106,679)
Other receivables ........................... 133,676 (126,676) (162,390) (83,572)
Increase (decrease) in:
Accounts payable and accrued expenses ...... 168,542 (100,870) (66,218) 66,088
Deferred royalty income ..................... -- -- -- 167,430
Income taxes payable ........................ (240) 575,642 437,842 373,628
------------ ---------- ---------- ----------
Total adjustments ........................... 771,581 1,859,577 1,029,963 467,075
------------ ---------- ---------- ----------
Net cash provided by operating
activities .............................. 1,668,638 2,722,620 1,726,460 1,182,736
------------ ---------- ---------- ----------
Cash flows from investing activities:
Expenditures for music catalogs and publishing
rights .......................................... (158,771) (317,499) (46,786) (230,501)
Sale of Assets .................................... -- 41,002 -- --
Expenditures for property and equipment ......... (88,035) (162,741) (84,808) (22,119)
------------ ---------- ---------- ----------
Net cash used in investing activities ...... (246,806) (439,238) (131,594) (252,620)
------------ ---------- ---------- ----------
Cash flows from financing activities:
Payments on long-term debt ........................ (1,500,000) (500,000) (500,000) --
Deferred offering costs ........................... -- (100,000) -- (120,000)
------------ ---------- ---------- ----------
Net cash used in financing activities ...... (1,500,000) (600,000) (500,000) (120,000)
------------ ---------- ---------- ----------
Net increase (decrease) in cash .................. (78,168) 1,683,382 1,094,866 810,116
Cash, beginning of period ........................ 325,141 246,973 246,973 1,930,355
------------ ---------- ---------- ----------
Cash, end of period .............................. $ 246,973 $1,930,355 $1,341,839 $2,740,471
============ ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
Fania Entertainment Group, Ltd.
Notes to Financial Statements
(Financial information as of September 30, 1997 and for the
periods ended September 30, 1996 and 1997 is unaudited)
1. Business
(a) Organization
Fania Entertainment Group, Ltd. (the "Company") is an independent record
company that produces, markets and sells Latin music on compact discs and
cassette tapes.
(b) Reorganization
The Company was organized in October 1997 as successor to the business of
Sonido, Inc. ("Sonido"), a corporation controlled by Mr. Gerald Masucci and
organized under the laws of the State of New York in February 1986. As of the
effective date of this registration statement, the Company will effect the
reorganization, pursuant to which (i) Sonido will transfer to the Company all
of its assets and liabilities except cash, other receivables, certain property
and equipment and certain payables (see Note 12) and (ii) Sonido will purchase
certain worldwide rights from the licensor (Notes 5 and 6) for $500,000. The
Company will reimburse Sonido, for this purchase, in five years plus 8%
interest.
Financial statements have been retroactively adjusted to reflect the
formation of the Company. The effects of the reorganization and distribution
have been reflected in the pro forma September 30, 1997 balance sheet (see Note
12).
2. Summary of Accounting Policies
Revenue Recognition
The Company recognizes sales revenues at the time it ships its finished
product to customers. The Company recognizes royalty income from its
sublicenses when earned or, in the case of nonrefundable nonroyalty advances,
at the time it receives payment.
Inventory
The Company values its inventory (consisting of compact discs and cassette
tapes) at the lower of cost or current market value. Cost is determined using
an average pricing method which approximates the first-in, first-out method
(FIFO).
Advanced Artist Royalties
Advanced artist royalties, which are not refundable, are expensed as paid
to the artist.
Music Catalogs and Publishing Rights
Music catalogs and publishing rights are intangible assets which the
Company has capitalized at cost. The Company calculates the total expected
revenues of its music catalogs and publishing rights. Ratio of revenues earned
to date compared with revenues expected to be earned, results in the
amortization of these costs.
The Company intends to pay all monies due under the licensing agreement
and, accordingly, recorded total future payment as a liability in the financial
statements. If the Company fails to make these payments, certain rights under
this agreement will be forfeited.
Property and Equipment
Property and equipment are recorded at cost.
Depreciation is computed on the straight-line method over the lives of the
assets.
F-8
<PAGE>
Fania Entertainment Group, Ltd.
Notes to Financial Statements -- (Continued)
(Financial information as of September 30, 1997 and for the
periods ended September 30, 1996 and 1997 is unaudited)
2. Summary of Accounting Policies -- (Continued)
Deferred Offering Costs
Costs in connection with the proposed public offering consisting of
professional fees have been deferred. These costs will be offset against the
proceeds of a successful offering, or expensed if the proposed offering is not
consummated.
Income Taxes
Deferred income taxes are provided on differences between the financial
reporting and income tax bases of assets and liabilities based upon statutory
tax rates enacted for future periods.
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.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and
other expenses approximate fair value because of the short maturity of these
items. The carrying amounts of certain long-term debt approximate fair value
because the underlying instruments are at terms which reflect prevailing market
conditions.
Accounting for the Impairment of Long-Lived Assets
In 1996, the Company adopted the Statement of Financial Accounting
Standard ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." The effect of adopting this
standard was insignificant.
Accounting for Stock Based Compensation
In connection with its adoption in 1996 of SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), the Company will adopt the
intrinsic value method of accounting for employee stock options, and disclose
the pro forma impact on net income and earnings per share as if the fair
value-based method had been applied. For equity instruments, including stock
options, issued to non-employees, including directors, the fair value of the
equity instruments issued or the fair value of the consideration received,
whichever is more readily determinable, is used to determine the value of
services or goods received and the corresponding charge to operations.
New accounting Standards Not Yet Adopted
On March 3, 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." This pronouncement provides for the
calculation of Basic and Diluted earnings per share which is different from the
current calculation of Primary and Fully Diluted earnings per share. The effect
of adopting this new standard in December 1997 will not be material.
In June 1997, the FASB issued two new disclosure standards. The Company's
results of operations and financial position will be unaffected by
implementation of these new standards.
F-9
<PAGE>
Fania Entertainment Group, Ltd.
Notes to Financial Statements -- (Continued)
(Financial information as of September 30, 1997 and for the
periods ended September 30, 1996 and 1997 is unaudited)
2. Summary of Accounting Policies -- (Continued)
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which supersedes SFAS No. 14, Financial Reporting for Segments of
a Business Enterprise, establishes standards for the way that public
enterprises report information about operating segments in financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
Interim Periods
The financial statements and related notes thereto as of September 30,
1997 and for the nine months ended September 30, 1996 and 1997 are unaudited
and have been prepared on the same basis as the audited financial statements
included herein. In the opinion of management, such unaudited financial
statements include all adjustments necessary to present fairly the information
set forth therein. These adjustments consist solely of normal recurring
accruals. The interim results are not necessarily indicative of the results to
be expected for any future period.
3. Accounts Receivable
The Company provides an allowance for the collection of doubtful accounts
receivable as it believes necessary. The allowance for doubtful accounts was
$74,200 at December 31, 1995 and 1996 and September 30, 1997.
In accordance with standard industry practice, the Company permits the
return of merchandise from customers for full credit. The Company provides an
allowance for returns as it deems warranted based upon past experience. Returns
have been immaterial to date.
4. Property and Equipment
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1995 1996 1997
--------- ---------- --------------
<S> <C> <C> <C>
Furniture, fixtures and equipment ............ $88,035 $ 58,553 $ 80,672
Construction-in-progress -- condominium ...... -- 151,221 151,221
------- -------- --------
88,035 209,774 231,893
Less: Accumulated depreciation ............... 3,144 9,800 16,430
------- -------- --------
Net property and equipment .................. $84,891 $199,974 $215,463
======= ======== ========
</TABLE>
F-10
<PAGE>
Fania Entertainment Group, Ltd.
Notes to Financial Statements -- (Continued)
(Financial information as of September 30, 1997 and for the
periods ended September 30, 1996 and 1997 is unaudited)
4. Property and Equipment -- (Continued)
In January 1996, the Company contracted to purchase a condominium which
will serve as an additional office.
5. Music Catalogs and Publishing Rights
The music catalogs and publishing rights consist of:
<TABLE>
<CAPTION>
December 31,
--------------------------- September 30,
1995 1996 1997
------------ ------------ --------------
<S> <C> <C> <C>
Music catalogs and publishing rights (see Notes 2 and 6) ...... $5,751,611 $6,069,110 $6,299,611
Less: Accumulated amortization ................................. 3,007,655 3,719,318 4,142,412
---------- ---------- ----------
Music catalogs and publishing rights ........................... $2,743,956 $2,349,792 $2,157,199
========== ========== ==========
</TABLE>
6. Long-term Debt
On October 1, 1986, the Company entered into an agreement (the
"Agreement") whereby the Company was granted the exclusive licensing and
publishing rights to music catalogs through December 31, 1999 in both the
United States and Puerto Rico for $748,000. In exchange for $10,000,000
(payable $500,000 in 1992 and 1993 and $1,500,000 in 1994 through 1999), the
Company will own the music catalogs and worldwide rights. The Company has made
all required payments to date ($4,500,000) and it is the Company's intention to
pay the balance of the obligation and acquire the music catalogs and worldwide
rights. These payments do not bear interest and, accordingly, interest has been
imputed at the prevailing interest rate of 7.5%.
In 1995, the Company paid $1,500,000, as provided under the agreement. In
1996, the Company paid $500,000 and the remaining balance of $1,000,000, due
December 31, 1996, was extended, as described below.
In November 1997, the Company and the licensor entered into a revised
agreement, whereby the Company agreed to pay the licensor the present value of
$4,000,000 at the closing date of the proposed public offering of its common
stock. The difference between this present value and $4,000,000 which will be
paid is attributed to the purchase of the worldwide licensing rights. The
Company agreed to make the final payment of $1,500,000 on the first anniversary
of the closing date of the public offering. The Company acquired the worldwide
license for music catalogs three years earlier than provided for in the
agreement which cost $500,000. Sonido will pay for this license and the Company
will repay $500,000 to Sonido in five years plus 8% interest. If the public
offering does not occur, the Company will pay the licensor under the terms of
the original agreement. See Note 12.
The long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------- September 30,
1995 1996 1997
------------ ------------ --------------
<S> <C> <C> <C>
Face amount .............................. $6,000,000 $5,500,000 $5,500,000
Less: Unamortized imputed interest ...... 976,011 599,211 379,792
---------- ---------- ----------
5,023,989 4,900,789 5,120,208
Less: Current portion .................. 1,123,201 2,207,401 2,207,401
---------- ---------- ----------
Long term portion ........................ $3,900,788 $2,693,388 $2,912,807
========== ========== ==========
</TABLE>
The imputed interest amortized for the years ended December 31, 1995 and
1996 and for the nine months ended September 30, 1996 and 1997 was $455,162,
$376,799, $258,599 and $219,419, respectively.
F-11
<PAGE>
Fania Entertainment Group, Ltd.
Notes to Financial Statements -- (Continued)
(Financial information as of September 30, 1997 and for the
periods ended September 30, 1996 and 1997 is unaudited)
7. Related Party Transactions
The Company pays a fee to an affiliated company for reimbursement of its
cost for rent, salary, utilities and other expenses. During the years ended
December 31, 1995 and 1996 and for the nine months ended September 30, 1996 and
1997, the amount included in the Company's direct costs totaled $413,000,
$497,000, $318,000 and $340,000, respectively. These costs will be incurred
directly by the Company following the proposed public offering.
The Company paid a producer fee to its chief executive officer during the
years ended December 31, 1995 and 1996 and for the nine months ended September
30, 1996 and 1997; $88,500, $77,500, $59,000 and $41,870, respectively.
Included in other receivables at December 31, 1995 and 1996 and September
30, 1997 is $43,000, $120,000 and $150,000 from two affiliated companies. These
receivables do not bear interest.
8. Major Customers
Sales to two unaffiliated customers accounted for approximately 20% and
13% of revenue for the year ended December 31, 1995 and three unaffiliated
customers accounted for approximately 34%, 11% and 10% of revenue for 1996.
Sales to two unaffiliated customers accounted for approximately 41% and 11% of
revenue for the nine months ended September 30, 1996 and four unaffiliated
customers accounted for approximately 20%, 15%, 12% and 12% of revenue for the
nine months ended September 30, 1997.
Sales outside of the United States were $1,113,000, $1,958,000 and
$1,179,000 for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1997, respectively. These transactions are in U.S. Dollars.
9. Income Taxes
The provision for income taxes consists of the following:
Year ended December 31,
-------------------------
1995 1996
---------- ------------
Current:
Federal ............... $ -- $ 474,000
State and local ...... 481 105,000
-------- ---------
Total ............ 481 579,000
-------- ---------
Deferred:
Federal ............... 24,821 (22,000)
State and local ...... 5,000 (5,000)
-------- ---------
29,821 (27,000)
-------- ---------
Total ............ $ 30,302 $ 552,000
======== =========
In 1995, the Company utilized approximately $850,000 of net operating
losses which resulted in a tax benefit of $406,700.
F-12
<PAGE>
Fania Entertainment Group, Ltd.
Notes to Financial Statements -- (Continued)
(Financial information as of September 30, 1997 and for the
periods ended September 30, 1996 and 1997 is unaudited)
9. Income Taxes -- (Continued)
The income tax rate varies from the Federal statutory rate. The following
reconciliation shows the significant differences between the statutory and
effective rates:
<TABLE>
<CAPTION>
Year ended Nine months
December 31, ended September 30,
-------------------------- ----------------------
1995 1996 1996 1997
------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Federal income tax expense at the statutory rate
of 34% ....................................... $ 315,302 $481,000 $371,000 $395,000
State income tax expense, net of Federal tax
benefit ....................................... 121,700 71,000 23,200 53,000
Change in deferred tax valuation allowance --
utilization of net operating loss ............ (406,700) -- -- --
---------- -------- -------- --------
$ 30,302 $552,000 $394,200 $448,000
========== ======== ======== ========
</TABLE>
Deferred income taxes arise from temporary differences between the
financial accounting and income tax basis of assets and liabilities and are
comprised of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996
------------ ------------
<S> <C> <C>
Amortization of music catalogs and publishing rights ...... $ 205,000 $ 178,000
Allowance for doubtful accounts ........................... (30,000) (30,000)
--------- ---------
Total ................................................... $ 175,000 $ 148,000
========= =========
</TABLE>
10. Supplemental Disclosures of Cash Flow Information
Year Ended Nine months
December 31, ended
--------------- September 30,
1995 1996 1997
------ ------ --------------
Cash paid for:
Income taxes ...... $729 $729 $74,063
Interest ......... -- -- 1,428
==== ==== =======
11. Commitment and Contingencies
(a) In June, 1996 the Company entered into an agreement with an
independent production company. The agreement provides for the Company to pay
an aggregate of $900,000 in nine installments over the three year term of the
agreement as non-refundable advances. $500,000 has been paid to date and the
production company is obligated to record at least six new masters a year which
are acceptable to the Company during each year. To date, the production company
has delivered nine completed master recordings to the Company. These
capitalized payments have been included in music catalog and publishing rights
on the Company's balance sheet.
(b) In May 1997 the Company entered into a three year agreement with a
distributor of music to act as the exclusive distributor for certain of the
Company's products in the United States and Puerto Rico.
F-13
<PAGE>
Fania Entertainment Group, Ltd.
Notes to Financial Statements -- (Continued)
(Financial information as of September 30, 1997 and for the
periods ended September 30, 1996 and 1997 is unaudited)
12. Pro Forma As Adjusted Balance Sheet (unaudited)
The following schedule reflects the reorganization and sale of stock, as
described in Note 1(b), as if it occurred on September 30, 1997. (in thousands)
<TABLE>
<CAPTION>
Reorganization Sale of stock
--------------------------------------------- -------------------------------
Pro Forma
Historical Adjustments Pro forma Adjustments As adjusted
------------ ------------------ ----------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Assets
Cash ....................................... $2,741 $ (2,741)(a) $ -- $ 8,768(b) $4,768
(4,000)(c)
Accounts receivable ........................ 2,133 (951)(d) 1,182 -- 1,182
Inventories ................................. 628 -- 628 -- 628
Other receivables ........................... 276 (259)(a) 17 -- 17
------ --------- -------- --------- ------
Total current assets ..................... 5,778 (3,951) 1,827 4,768 6,595
Property and equipment ..................... 216 (151)(a) 65 -- 65
Music catalogs .............................. 2,157 500 (e) 2,657 230 (c) 2,887
Deferred offering costs ..................... 220 -- 220 (220)(c) --
------ --------- -------- --------- ------
$8,371 $ (3,602) $ 4,769 $ 4,778 $9,547
====== ========= ======== ========= ======
Liabilities and Stockholder's
Equity
Current portion of long-term debt ......... $2,207 $ -- $ 2,207 $ (2,207)(c) $1,350
1,350 (c)
Accounts payable ........................... 617 (62)(a) 555 -- 555
Deferred royalty income ..................... 167 -- 167 -- 167
Income tax payable ........................ 951 (951)(d) -- -- --
------ --------- -------- --------- ------
Total current liabilities .................. 3,942 (1,013) 2,929 (857) 2,072
Long-term debt .............................. 2,913 -- 2,913 (2,913)(c) --
Due to Sonido .............................. -- 500 (e) 500 -- 500
Deferred income taxes ..................... 148 -- 148 -- 148
------ --------- -------- --------- ------
Total liabilities ........................ 7,003 (513) 6,490 (3,770) 2,720
------ --------- -------- --------- ------
Capital stock .............................. 30 -- 30 16 (b) 46
Additional paid-in capital .................. -- (1,751) (1,751) 8,532 (b) 6,781
Retained earnings (deficit) ............... 1,338 (1,338) -- -- --
------ --------- -------- --------- ------
Total stockholder's equity (deficit) ...... 1,368 (3,089) (1,721) 8,548 6,827
------ --------- -------- --------- ------
$8,371 $ (3,602) $ 4,769 $ 4,778 $9,547
====== ========= ======== ========= ======
</TABLE>
- ------------
(a) As part of the reorganization, the predecessor company (Sonido) retained
all cash, other receivables, certain construction-in-process and certain
payables.
(b) Sale of stock, 1,600,000 shares at $6.50 per share, less expenses of
$1,852,000.
(c) Prepayment of debt totaling $4,000,000 and reclassifying the remaining
$1,500,000 (discounted to $1,350,000) to current liabilities. The amount
paid by the Company in excess of the present value of $4,000,000 was
agreed to be additional cost of the worldwide agreement (see (e) below and
Note 6).
(d) Accounts receivable, equal to income tax payable, will be retained by
Sonido.
(e) The Company acquired the worldwide license for music catalogs three years
earlier than provided for in agreement (see Note 1 (b)) which cost
$500,000. Sonido will pay for this license and the Company will repay the
$500,000 to Sonido in five years plus 8% interest.
F-14
<PAGE>
Fania Entertainment Group, Ltd.
Notes to Financial Statements -- (Continued)
(Financial information as of September 30, 1997 and for the
periods ended September 30, 1996 and 1997 is unaudited)
13. Subsequent Events
(a) Public Offering
The Company has signed a letter of intent with an underwriter in
connection with a proposed public offering of up to 1,840,000 shares of the
Company's common stock, and the Company has agreed to issue warrants to the
underwriter to purchase 160,000 shares of Common Stock upon the closing of the
offering. There will be no charges to operations as a result of the issuance of
common stock and warrants to the underwriter.
(b) Reorganization
In connection with the proposed public offering, the Company has
reorganized, authorized preferred stock, entered into employment agreements
with its officers and established a Stock Option Plan. See details discussed in
Notes 1 and 12.
(c) Preferred Stock
The Company authorized Preferred Stock; the rights, preferences and
limitations may be designated by the Company's Board of Directors at any time.
(d) Employment Agreements
The Company entered into employment agreements with two key officers which
expire in 2000. The total annual base salaries for each of the three years
ended 2000 aggregate $200,000, $250,000 and $275,000, respectively. In
addition, an officer is entitled to a bonus based on increases in net income.
(e) Stock Option Plan
The Board of Directors adopted and the stockholder of the Company approved
the Stock Option Plan. The Stock Option Plan provides for the grant to
qualified employees (including officers and directors) of the Company of
options to purchase shares of the Common Stock. A total of 250,000 shares of
Common Stock will be reserved by the Company for issuance upon exercise of
stock options granted or which may be granted under the Stock Option Plan. The
Stock Option Plan will terminate on the tenth anniversary of its adoption.
The Company will grant options to purchase an aggregate of 131,000 shares
of Common Stock at the initial public offering price to certain officers and
directors of the Company. There will be no charge to operations as a result of
the granting of these options.
The Company applies Opinion 25, "Accounting for Stock Issued to Employees"
("APB 25") and related Interpretations in accounting for the Company's Stock
Option Plans. Under APB 25, for options granted to employees at exercise prices
equal to or greater than fair market value of the underlying common stock at
the date of grant, no compensation cost is recognized.
SFAS No. 123 "Accounting for Stock-Based Compensation" requires the
Company to provide pro forma information regarding net income and net income
per common share as if compensation costs for the Company's stock option plans
had been determined in accordance with the fair value method prescribed in SFAS
No. 123.
F-15
<PAGE>
[Inside back cover: pictures of four of the Company's album covers with the
names Celia, Puente, Hector and Maelo with the following text: Fania
specializes in "Classic" Latin music contained in its extensive library of
recordings.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give
any information or to make representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Underwriter.
This Prospectus does not constitute an offer to sell or solicitation of an
offer to buy, any security other than the securities offered by this
Prospectus, or an offer to sell or a solicitation of an offer to buy any
security by any person in any jurisdiction in which such offer or solicitation
would be unlawful. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information in this Prospectus is correct as of any time subsequent to the
dates as of which such information is given.
--------------------------------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary .................. 3
Risk Factors ........................ 6
The Company ........................... 12
Use of Proceeds ..................... 13
Dividend Policy ..................... 13
Dilution .............................. 14
Capitalization ........................ 15
Selected Financial Data ............... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................ 17
Business .............................. 21
Management ........................... 31
Principal Stockholders ............... 34
Certain Transactions .................. 35
Description of Securities ............ 36
Shares Eligible for Future Sale ...... 37
Underwriting ........................ 38
Legal Matters ........................ 39
Experts .............................. 39
Additional Information ............... 39
Index to Financial Statements ......... F-1
Until _______ (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO]
FANIA
ENTERTAINMENT GROUP, LTD.
1,600,000 Shares
of
Common Stock
--------------------------------------------
PROSPECTUS
--------------------------------------------
GILFORD SECURITIES
INCORPORATED
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director.
Section 102(b) of the Delaware General Corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit director's liability to the corporation and its stockholders for
monetary damages arising out of certain alleged breaches of their fiduciary
duty. Section 102(b)(7) provides that no such limitation of liability may
affect a director's liability with respect to any of the following: (i)
breaches of the director's duty of loyalty to the corporation or its
stockholders; (ii) acts or omissions not made in good faith or which involve
intentional misconduct of knowing violations of law; (iii) liability for
dividends paid or stock repurchased or redeemed in violation of the Delaware
General Corporation law; or (iv) any transaction from which the director
derived an improper personal benefit. Section 102(b)(7) does not authorize any
limitation on the ability of the corporation or its stockholders to obtain
injunction relief, specific performance or other equitable relief against
directors.
Article Nine of the Company's Certificate of Incorporation and the
Company's By-laws provide that all persons who the Company is empowered to
indemnify pursuant to the provisions of Section 145 of the General Corporation
law of the State of Delaware (or any similar provision or provisions of
applicable law at the time in effect), shall be indemnified by the Company to
the full extent permitted thereby. The foregoing right of indemnification shall
not be deemed to be exclusive of any other rights to which those seeking
indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise.
Article Ten of the Company's Certificate of Incorporation provides that no
director of the Company shall be personally liable to the Company or its
stockholders for any monetary damages for breaches of fiduciary duty of loyalty
to the Company 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 of Law of the State of
Delaware; or (iv) for any transaction from which the director derived an
improper personal benefit.
Insofar as indemnification for liabilities under the Act may be permitted
to directors, officers or persons controlling the Company pursuant to the
foregoing provisions, the Company has been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Reference is made to the Underwriting Agreement, the proposed form of
which is filed as Exhibit 1.1, pursuant to which the Underwriters agree to
indemnify the directors and certain officers of the Registrant and certain
other persons against certain civil liabilities.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee ...... $4,196.08
NASD fee ................................................ 1,922.40
NASDAQ listing fee ....................................... *
Printing and engraving costs .............................. *
Legal fees and expenses ................................. *
Accounting fees and expenses .............................. *
Blue Sky fees and expenses (including legal fees) ......... *
Transfer agent and registrar fees and expenses ............ *
Miscellaneous ............................................. $ *
------------
Total ................................................... $ 500,000
============
</TABLE>
- ------------
* To be provided by amendment.
Item 26. Recent Sales of Unregistered Securities.
In October 1997, the Company issued 2,975,000 shares of Common Stock to
Sonido, Inc.
Item 27. Exhibits
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation
3.2 Bylaws
4.1 Form of Representative's Warrant Agreement, including Form of Warrant Certificate*
5.1 Opinion of Tenzer Greenblatt LLP*
10.1 Agreement and Plan of Reorganization Agreement*
10.2 Agreement with Valsyn, S.A., as amended
10.3 Form of Employment Agreements between the Registrant and Gerald Masucci and Victor
Gallo*
10.4 Agreement with Sony Discos Inc.
10.5 Agreement with Pyrale Commercial, S.A.
10.6 Standard Form of Recording Contract
10.7 1997 Employee Stock Option Plan
10.8 Lease between E&E Associates, LLC and Key Productions, Inc. and Assignment and
Assumption
23.1 Consent of Tenzer Greenblatt LLP (included in Exhibit 5.1)
23.2 Consent of BDO Seidman LLP
23.3 Consent of John Anthony Rubino & Company, CPA PC
23.4 Consent of Mr. Rubino
24.1 Power of Attorney (included in the Registration Statement)
27 Financial Data Schedule (SEC use only)
</TABLE>
- ------------
* to be filed by amendment
Item 28. Undertakings.
The undersigned registrant hereby undertakes:
(i) to provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser;
II-2
<PAGE>
(ii) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or 497(h)
under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(iii) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in the City of New York, State
of New York, on the 17th day of December, 1997.
FANIA ENTERTAINMENT GROUP, LTD.
By: /s/ Gerald Masucci
-----------------------------------
Gerald Masucci, President
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints Gerald Masucci and Victor Gallo and each of
them, as his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for him and in his name, place and stead, in
any and all capacities (until revoked in writing) to sign any and all
amendments (including pre-effective amendments and post-effective amendments
and amendments thereto) to this Registration Statement on Form SB-2 of Fania
Entertainment Group, Ltd. and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in
fact and agents, each acting alone or his substitute, may lawfully do or cause
to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gerald Masucci Chairman of the Board; President and December 17, 1997
- ------------------------------------ Chief Executive Officer (Principal
Gerald Masucci Executive and Accounting Officer)
/s/ Victor Gallo Vice President and Director December 17, 1997
- ------------------------------------
Victor Gallo
/s/ Jack McBride Director December 17, 1997
- ------------------------------------
Jack McBride
/s/ Myron S. Mayer Director December 17, 1997
- ------------------------------------
Myron S. Mayer
/s/ Joseph Hunter Director December 17, 1997
- ------------------------------------
Joseph Hunter
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation
3.2 Bylaws
4.1 Form of Representative's Warrant Agreement, including Form of Warrant Certificate*
5.1 Opinion of Tenzer Greenblatt LLP*
10.1 Agreement and Plan of Reorganization Agreement*
10.2 Agreement with Valsyn, S.A., as amended
10.3 Form of Employment Agreements between the Registrant and Gerald Masucci and Victor
Gallo*
10.4 Agreement with Sony Discos Inc.
10.5 Agreement with Pyrale Commercial, S.A.
10.6 Standard Form of Recording Contract
10.7 1997 Employee Stock Option Plan
10.8 Lease between E&E Associates, LLC and Key Productions, Inc. and Assignment and
Assumption
23.1 Consent of Tenzer Greenblatt LLP (included in Exhibit 5.1)
23.2 Consent of BDO Seidman LLP
23.3 Consent of John Anthony Rubino & Company, CPA PC
23.4 Consent of Mr. Rubino
24.1 Power of Attorney (included in the Registration Statement)
27 Financial Data Schedule (SEC use only)
</TABLE>
- ------------
* to be filed by amendment
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 10/16/1997
971349878 -- 2809101
CERTIFICATE OF INCORPORATION
OF
FANIA ENTERTAINMENT GROUP, LTD.
FIRST: The name of the Corporation is:
FANIA ENTERTAINMENT GROUP, LTD.
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle,
19805-1297. The name of its registered agent at such address is Corporation
Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the laws of the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of capital stock which the Corporation
shall have authority to issue is Sixteen Million (16,000,000) shares, of which
Fifteen Million (15,000,000) shares shall be Common Stock, par value $.01 per
share, and One Million (1,000,000) shares shall be Preferred Stock, par value
$.01 per share.
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors of the Corporation is hereby expressly authorized to
provide, by resolution or resolutions duly adopted by it prior to issuance, for
the creation of each such series and to fix the designation and the powers,
preferences, rights, qualifications, limitations and restrictions relating to
the shares of each such series. The authority of the
<PAGE>
Board of Directors with respect to each series of Preferred Stock shall include,
but not be limited to, determining the following:
(a) the designation of such series, the number of shares to constitute
such series and the stated value if different from the par value thereof;
(b) whether the shares of such series shall have voting rights, in
addition to any voting rights provided by law, and, if so, the terms of
such voting rights, which may be general or limited;
(c) the dividends, if any, payable on such series, whether any such
dividends shall be cumulative, and, if so, from what dates, the conditions
and dates upon which such dividends shall be payable, and the preference or
relation which such dividends shall bear to the dividends payable on any
shares of stock of any other class or any other series of Preferred Stock;
(d) whether the shares of such series shall be subject to redemption
by the Corporation, and, if so, the times, prices and other conditions of
such redemption;
(e) the amount or amounts payable upon shares of such series upon, and
the rights of the holders of such series in, the voluntary or involuntary
liquidation, dissolution or winding up, or upon any distribution of the
assets, of the Corporation;
(f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and
manner in which any such retirement or
-2-
<PAGE>
sinking fund shall be applied to the purchase or redemption of the shares
of such series for retirement or other corporate purposes and the terms and
provisions relating to the operation thereof;
(g) whether the shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class or any other series of
preferred Stock or any other securities and, if so, the price or prices or
the rate or rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and conditions of conversion or
exchange;
(h) the limitations and restrictions, if any, to be effective while
any shares of such series are outstanding upon the payment of dividends or
the making of other distributions on, and upon the purchase, redemption or
other acquisition by the Corporation of, the Common Stock or shares of
stock of any other class or any other series of Preferred Stock;
(i) the conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issue of any additional stock,
including additional shares of such series or of any other series of
Preferred Stock or of any other class; and
(j) any other powers, preferences and relative, participating,
optional and other special rights, and any qualifications, limitations and
restrictions, thereof.
-3-
<PAGE>
The powers, preferences and relative, participating, optional and other
special rights of each series of Preferred Stock, and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any and
all other series at any time outstanding. All shares of any one series of
Preferred Stock shall be identical in all respects with all other shares of such
series, except that shares of any one series issued at different times may
differ as to the dates from which dividends thereof shall be cumulative.
FIFTH: The name and address of the sole incorporator is as follows:
Name Address
---- -------
Ralph D. Mosley, Jr. 405 Lexington Avenue
New York, New York 10174
SIXTH: Unless required by law or determined by the chairman of the meeting
to be advisable, the vote by stockholders on any matter, including the election
of directors, need not be by written ballot.
SEVENTH: The Corporation reserves the right to increase or decrease its
authorized capital stock, or any class or series thereof, and to reclassify the
same, and to amend, alter, change or repeal any provision contained in the
Certificate of Incorporation under which the Corporation is organized or in any
amendment thereto, in the manner now or hereafter prescribed by law, and all
rights conferred upon stockholders in said Certificate of Incorporation or any
amendment thereto are granted subject to the aforementioned reservation.
-4-
<PAGE>
EIGHTH: The Board of Directors shall have the power at any time, and from
time to time, to adopt, amend and repeal any and all By-laws of the Corporation.
NINTH: 1. Indemnification
The Corporation shall, and does hereby, indemnify to the fullest extent
permitted or authorized by the Delaware General Corporation Law or judicial or
administrative decisions, as the same exists or may hereafter be amended or
interpreted differently in the future (but, in the case of any such amendment or
interpretation, only to the extent that such amendment or interpretation permits
the Corporation to provide broader indemnification rights than permitted prior
thereto), each person (including the current and future heirs, beneficiaries,
personal representatives and estate of such person) who was or is a party, or is
threatened to be made a party, or was or is a witness, to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "Proceeding") and whether the basis of such
Proceeding is an allegation of an action in an official capacity of such person
related to the Corporation or any other capacity while such person is serving as
an officer, director, employee or agent of the Corporation, against any
liability (which for purposes of this Article shall include any judgment,
settlement, penalty or fine) or cost, charge or expense (including attorneys'
fees) asserted against him or incurred by him by reason of the fact that such
indemnified person (1) is or was a director, officer or employee of the
Corporation or (2) is or was an agent of the
-5-
<PAGE>
Corporation as to whom the Corporation, by action of its Board of Directors, has
agreed to grant such indemnity or (3) is or was serving, at the request of the
Corporation, as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise (including serving as a
fiduciary of any employee benefit plan) or (4) is or was serving as an agent of
such other corporation, partnership, joint venture, trust or other enterprise
described in clause (3) hereof as to whom the Corporation, by action of its
Board of Directors, has agreed to grant such indemnity. Each director, officer,
employee or agent of the Corporation to whom indemnification rights under this
Section 1 of this Article have been granted shall be referred to as an
"Indemnified Person. "
Notwithstanding the foregoing, except as specified in Section 3 of this
Article, the Corporation shall not be required to indemnify an Indemnified
Person in connection with a Proceeding (or any part thereof) initiated by such
Indemnified Person unless such authorization for such Proceeding (or any part
thereof) was not denied by the Board of Directors of the Corporation prior to
sixty (60) days after receipt of notice thereof from such Indemnified Person
stating his intent to initiate such Proceeding and only upon such terms and
conditions as the Board of Directors may deem appropriate.
2. Advance of Costs, Charges and Expenses
Costs, charges and expenses (including attorneys' fees) incurred by an
officer, director, employee or agent who is an Indemnified Person in defending a
Proceeding shall be paid by the
-6-
<PAGE>
Corporation to the fullest extent permitted or authorized by the Delaware
General Corporation Law or judicial or administrative decisions, as the same
exists or may hereafter be amended or interpreted differently in the future
(but, in the case of any such future amendment or interpretation, only to the
extent that such amendment or interpretation permits the Corporation to provide
broader rights to advance costs, charges and expenses than permitted prior
thereto), in advance of the final disposition of such Proceeding, upon receipt
of an undertaking by or on behalf of the Indemnified Person to repay all amounts
so advanced in the event that it shall ultimately be determined by final
judicial decision that such person is not entitled to be indemnified by the
Corporation as authorized in this Article and upon such other terms and
conditions, in the case of an agent as to whom the Corporation has agreed to
grant such indemnity, as the Board of Directors may deem appropriate. The
Corporation may, upon approval of the Indemnified Person, authorize the
Corporation's counsel to represent such person in any Proceeding, whether or not
the Corporation is a party to such Proceeding. Such authorization may be made by
the Board of Directors by majority vote, including directors who are parties to
such Proceeding.
3. Procedure for Indemnification
Any indemnification or advance under this Article shall be made promptly
and in any event within sixty (60) days upon the written request of the
Indemnified Person (except in the case of a claim for an advancement of costs,
charges or expenses, in
-7-
<PAGE>
which case the applicable period shall be twenty (20) days). The right to
indemnification or advances as granted by this Article shall be enforceable by
the Indemnified Person in any court of competent jurisdiction if the Corporation
denies such request under this Article, in whole or in part, or if no
disposition thereof is made within sixty (60) days or twenty (20) days, as may
be applicable. Such Indemnified Person's costs and expenses incurred in
connection with successfully establishing his right to indemnification or
advancement of costs, charges or expenses, in whole or in part, in any such
action shall also be indemnified by the Corporation. It shall be a defense to
any such action that the claimant has not met the standard of conduct, if any,
required by the Delaware General Corporation Law or judicial or administrative
decisions, as the same exists or may hereafter be amended or interpreted
differently in the future (but, in the case of any such future amendment or
interpretation, only to the extent that such amendment or interpretation does
not impose a more stringent standard of conduct than permitted prior thereto),
but the burden of proving such defense shall be on the Corporation. Neither the
failure of the Corporation (including its Board of Directors or any committee
thereof, its independent legal counsel, and its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant or advancement for the claimant is proper in the circumstances
because he has met the applicable standard of conduct, if any, nor the fact that
there has been an actual determination by the Corporation (including its Board
of
-8-
<PAGE>
Directors or any committee thereof, its independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
4. Non-Exclusivity; Survival of Indemnification
The indemnification and advancement provided by this Article shall not be
deemed exclusive of any other rights to which those Indemnified Persons may be
entitled under any agreement, vote of stockholders or disinterested directors or
recommendation of counsel or otherwise, both as to actions in such person's
official capacity and as to actions in any other capacity while holding such
office or position, and shall continue as to an Indemnified Person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, beneficiaries, personal representatives and the estate of
such person. All rights to indemnification and advancement under this Article
shall be deemed to be a contract between the Corporation and each Indemnified
Person who serves or served in such capacity at any time while this Article is
in effect. Any repeal or modification of this Article or any repeal or
modification of relevant provisions of the Delaware General Corporation Law or
any other applicable laws shall not in any way diminish any rights to
indemnification of such Indemnified Person, or the obligations of the
Corporation arising hereunder, for claims relating to matters occurring prior to
such repeal or modification.
-9-
<PAGE>
5. Insurance
The Corporation may 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 (including serving as a fiduciary of an employee benefit plan)
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 or the applicable provisions of the Delaware General
Corporation Law.
6. Savings Clause
If this Article or any portion hereof shall be invalidated on any ground by
any court of competent jurisdiction, then the Corporation shall nevertheless
indemnify and advance costs to each Indemnified Person as to costs, charges and
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement with respect to any Proceeding, including an action by or in the
right of the Corporation, to the full extent permitted by any applicable portion
of this Article that shall not have been invalidated and as permitted by the
Delaware General Corporation Law.
TENTH: No director of the Corporation shall be personally liable to the
Corporation or its stockholders for any monetary damages for breaches of
fiduciary duty as a director,
-10-
<PAGE>
provided that this provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the Corporation
or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the General Corporation Law of the State of Delaware; or (iv) for
any transaction from which the director derived an improper personal benefit. No
repeal or amendment of this Article shall adversely affect any rights of any
person pursuant to this Article TENTH which existed at the time of such repeal
or amendment with respect to acts or omissions occurring prior to such repeal or
amendment.
The undersigned incorporator hereby affirms that the statements made herein
are true under penalties of perjury, and is hereby executing this Certificate of
Incorporation this 15th day of October, 1997.
/s/ Ralph D. Mosley, Jr. (L.S.)
------------------------------
Ralph D. Mosley, Jr.
-11-
<PAGE>
BY-LAWS
OF
FANIA ENTERTAINMENT GROUP, LTD.
(A Delaware corporation)
----------
ARTICLE I
Meetings of Stockholders
SECTION 1. Annual Meeting. The annual meeting of the stockholders of FANIA
ENTERTAINMENT GROUP, LTD. (hereinafter, the "Corporation") for the election of
directors and for the transaction of such other proper business shall be held at
such place, on such date and at such time as may be fixed by the Board of
Directors.
SECTION 2. Special Meetings. Special meetings of the stockholders, unless
otherwise prescribed by statute, may be called at any time by the Board of
Directors and shall be held, only for the purposes specified in the notice of
the meeting, at such place, either within or without the State of Delaware, and
at such hour as may be designated by the Board of Directors.
SECTION 3. Notice of Meetings. Written notice of each meeting of the
stockholders, which shall state the place, date and hour of the meeting and the
purpose or purposes for which it is called, shall be given not less than ten nor
more than fifty days before the date of such meeting to each stockholder
entitled to vote at such meeting, and, if mailed, it shall be deposited in the
United States mail, postage prepaid, directed to the stockholder at his address
as it appears on the records of the
<PAGE>
Corporation. Any such notice for any meeting other than the annual meeting shall
indicate that it is being issued at the direction of the Board. Whenever notice
is required to be given, a written waiver thereof signed by the person entitled
thereto, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person 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. When a meeting is adjourned to another time or place, notice need not
be given if the time and place thereof are announced at the meeting at which the
adjournment is taken. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
SECTION 4. Quorum. At any meeting of the stockholders the holders of the
majority of the shares, issued and outstanding and entitled to vote, shall be
present in person or represented by proxy in order to constitute a quorum for
the transaction of any business. In the absence of a quorum, the holders of a
majority of the shares present in person or represented by proxy and entitled to
vote may adjourn the meeting from time to time. At any such adjourned meeting at
which a quorum may be present, the Corporation may transact any business which
might have been transacted at the original meeting.
-2-
<PAGE>
SECTION 5. Organization. At each meeting of the stockholders, the Chairman
of the Board or, in his absence or inability to act, the President or, in his
absence or inability to act, a Vice President or, in his absence of inability to
act, any person chosen by the majority of those stockholders present in person
or represented by proxy shall act as chairman the meeting. The Secretary or, in
his absence or inability to act, any person appointed by the chairman the
meeting shall act as secretary of the meeting and keep the minutes thereof.
SECTION 6. Order of Business. The order of business at all meetings of the
stockholders shall be as determined by the chairman of the meeting.
SECTION 7. Voting. Unless otherwise provided in the Certificate of
Incorporation, and subject to statute, each stockholder shall be entitled to one
vote for each share of capital stock held by such stockholder:
(a) on the date fixed pursuant to the provisions of Section 5 of
Article V of these By-Laws as the record date for the determination of the
stockholders to be entitled to notice of or to vote at such meeting; or
(b) if no record date is fixed, then at the close of business on the
day next preceding the day on which notice is given.
Each stockholder entitled to vote at any meeting of stockholders or to express
consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act
-3-
<PAGE>
for him by proxy. Any such proxy shall be delivered to the secretary of such
meeting at or prior to the time designated in the order of business for so
delivering such proxies. Except as otherwise required by statute or by the
Certificate of Incorporation, a majority of the votes cast at a meeting of the
stockholders shall be necessary to authorize any corporate action to be taken by
vote of the stockholders. Unless required by statute, or determined by the
chairman of the meeting to be advisable, the vote on any question other than the
election of directors need not be by ballot. On a vote by ballot, each ballot
shall be signed by the stockholder voting, or by his proxy if there be such
proxy, and shall state the number of shares voted.
SECTION 8. List of Stockholders. A list of the stockholders entitled to
vote at any meeting shall be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
SECTION 9. Inspectors. The Board may, in advance of any meeting of
stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting shall appoint
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall
-4-
<PAGE>
determine the number of shares outstanding and the voting power of each, the
number of shares represented at the meeting, the existence of a quorum, the
validity and effect of proxies, and shall receive votes, ballots or consents,
hear and determine all challenges and questions arising in connection with the
right to vote, count and tabulate all votes, ballots or consents, determine the
result, and do such acts as are proper to conduct the election or vote with
fairness to all stockholders. On request of the chairman of the meeting or any
stockholder entitled to vote thereat, the inspector shall make a report in
writing of any challenge, question or matter determined by them and shall
execute a certificate of any fact found by them. No director or candidate for
the office of director shall act as an inspector of an election of directors.
Inspectors need not be stockholders.
SECTION 10. Action Without a Meeting. Any action required or permitted to
be taken at any meeting of stockholders may be taken without a meeting if the
holders of a majority of the issued and outstanding shares entitled to vote
consent thereto in writing, the writing or writings are filed with the minutes
of the stockholders, and the stockholders not consenting thereto are notified in
accordance with the General Corporation Law of the State of Delaware.
-5-
<PAGE>
ARTICLE II
Board of Directors
SECTION 1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of a Board of Directors. The Board
may exercise all such authority and powers of the Corporation and do all such
lawful acts and things as are not by statute or the Certificate of Incorporation
directed or required to be exercised or done by the stockholders. The Board
shall determine officers compensation.
SECTION 2. Number, Qualifications, Election and Term of Office. The Board
of Directors shall consist of such number as may determined from time to time by
a majority vote of the entire Board of Directors, which number may be increased
and decreased as provided below. The Board of Directors, by the vote of a
majority of the entire Board, may increase the number of Directors and may elect
Directors to fill the vacancies created by any such increase in the number of
Directors until the next annual meeting or until their successors are duly
elected and qualify. The Board of Directors, by the vote of a majority of the
entire Board, may decrease the number of Directors, but any such decrease shall
not affect the term of office of any Director. Vacancies occurring by reason of
any such increase or decrease shall be filled in accordance with Section 14 of
this Article II.
SECTION 3. Place of Meeting. The Board of Directors shall hold its meetings
at such place, within or without the
-6-
<PAGE>
State of Delaware, as it may from time to time determine or as shall be
specified in the notice of any such meeting.
SECTION 4. Annual Meeting. The Board shall meet for the purpose of
organization, the election of officers and the transaction of other business as
soon as practicable after each annual meeting of the stockholders, on the same
day and at the same place where such annual meeting shall be held. Notice of
such meeting need not be given. Such meeting may be held at any other time or
place, within or without the State of Delaware, which shall be specified in a
notice thereof given as hereinafter provided in Section 8 of this Article II.
SECTION 5. Regular Meetings. Regular meetings of the Board shall be held at
such time as the Board may fix. If any day fixed for a regular meeting shall be
a legal holiday at the place where the meeting is to be held, then the meeting
which would otherwise be held on that day shall be held at the same hour on the
next succeeding business day. Notice of regular meetings of the Board need not
be given except as otherwise required by statute or these By-Laws.
SECTION 6. Special Meetings. Special meetings of the Board may be called by
the Chairman of the Board or by a majority of the entire Board.
SECTION 7. Notice of Meetings. Notice of each special meeting of the Board
(and of each regular meeting for which notice shall be required) shall be given
by the Secretary as hereinafter provided in this Section 8, in which notice
shall be stated the time and place of the meeting. Except as otherwise
-7-
<PAGE>
required by these By-laws, such notice need not state the purposes of such
meeting. Notice of each such meeting shall be mailed, postage prepaid, to each
director, addressed to him at his residence or usual place of business, by
first-class mail, at least two (2) days before the day on which such meeting is
to be held, or shall be sent addressed to him at such place by telegraph, telex,
cable or wireless, or be delivered to him personally or by telephone, at least
24 hours before the time at which such meeting is to be held. A written waiver
of notice, signed by the director entitled to notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Notice of any
such meeting need not be given to any director who shall, either before or after
the meeting, submit a signed waiver of notice or who shall attend such meeting
without protesting, prior to or at its commencement, the lack of notice to him.
SECTION 8. Quorum and Manner of Acting. Except as hereinafter provided, a
majority of the entire Board shall be present in person or by means of a
conference telephone or similar communications equipment which allows all
persons participating in the meeting to hear each other at the same time at any
meeting of the Board in order to constitute a quorum for the transaction of
business at such meeting; and, except as otherwise required by statute or the
Certificate of Incorporation, the act of a majority of the directors present at
any meeting at which a quorum is present shall be the act of the Board. In the
absence of a quorum at any meeting of the Board, a
-8-
<PAGE>
majority of the directors present thereat may adjourn such meeting to another
time and place. Notice of the time and place of any such adjourned meeting shall
be given to the directors who were not present at the time of the adjournment
and, unless such time and place were announced at the meeting at which the
adjournment was taken, to the other directors. At any adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called. The directors shall act only as
a Board and the individual directors shall have no power as such.
SECTION 9. Action Without a Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
all members of the Board consent thereto in writing, and the writing or writings
are filed with the minutes of the Board.
SECTION 10. Telephonic Participation. Members of the Board of Directors may
participate in a meeting of the Board by means of a conference telephone or
similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time. Participation in such a meeting
shall constitute presence in person at such meeting.
SECTION 11. Organization. At each meeting of the Board, the Chairman of the
Board or, in his absence or inability to act, the President or, in his absence
or inability to act, another director chosen by a majority of the directors
present shall act as chairman of the meeting and preside thereat. The Secretary
or, in his absence or inability to act, any person
-9-
<PAGE>
appointed by the chairman shall act as secretary of the meeting and keep the
minutes thereof.
SECTION 12. Resignations. Any director may resign at any time upon written
notice to the Corporation. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective shall not be
specified therein, immediately upon its receipt; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
SECTION 13. Vacancies. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. If there are no directors in office, then a special
meeting of stockholders for the election of directors may be called and held in
the manner provided by statute. When one or more directors shall resign from the
Board, effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or resignations
shall become effective, and each director so chosen shall hold office until the
next election of directors and until their successors shall be elected and
qualified.
-10-
<PAGE>
SECTION 14. Removal of Directors. Except as otherwise provided in the
Certificate of Incorporation or in these By-laws, any director may be removed,
either with or without cause, at any time, by the affirmative vote of the
holders of record of a majority of the issued and outstanding stock entitled to
vote for the election of directors of the Corporation given at a special meeting
of the stockholders called and held for the purpose; and the vacancy in the
Board caused by such removal may be filled by such stockholders at such meeting,
or, if the stockholders shall fail to fill such vacancy, as in these By-Laws
provided.
SECTION 15. Compensation. The Board of Directors shall have authority to
fix the compensation, including fees and reimbursement of expenses, of directors
for services to the Corporation in any capacity.
ARTICLE III
Executive and Other Committees
SECTION 1. Executive and Other Committees. The Board may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of two or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. Any such committee, to the extent provided in the resolution, shall
have and may exercise the powers of the Board in the management of the business
and affairs of the Corporation, and may authorize the seal of the Corporation
-11-
<PAGE>
to be affixed to all papers which may require it; provided, however, that in the
absence or disqualification of any member of such committee or committees, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board to act at the meeting in the place of any such
absent or disqualified member. Each committee shall keep written minutes of its
proceedings and shall report such minutes to the Board when required. All such
proceedings shall be subject to revision or alteration by the Board; provided,
however, that third parties shall not be prejudiced by such revision or
alteration.
SECTION 2. General. A majority of any committee may determine its action
and fix the time and place of its meetings, unless the Board shall otherwise
provide. Notice of such meeting shall be given to each member of the committee
in the manner provided for in Article II, Section 8. The Board shall have any
power at any time to fill vacancies in, to change the membership of, or to
dissolve any such committee. Nothing herein shall be deemed to prevent the Board
from appointing one or more committees consisting in whole or in part of persons
who are not directors of the Corporation; provided, however, that no such
committee shall have or may exercise any authority of the Board.
SECTION 3. Action Without a Meeting. Any action required or permitted to be
taken by any committee at a meeting may be taken without a meeting if all of the
members of the committee consent in writing to the adoption of the resolutions
-12-
<PAGE>
authorizing such action. The resolutions and written consents thereto shall be
filed with the minutes of the committee.
SECTION 4. Telephone Participation. One or more members of a committee may
participate in a meeting by means of a conference telephone or similar
communications equipment allowing all persons participating in the meeting to
hear each other at the same time. Participation by such means shall constitute
presence in person at the meeting.
ARTICLE IV
Officers
SECTION 1. Number and Qualifications. The officers of the Corporation shall
include the Chairman of the board, the Chief Executive Officer, President, one
or more Vice Presidents, the Treasurer and the Secretary. Any number of offices
may be held by the same person. Such officers shall be elected from time to time
by the Board. Each officer shall hold his office until his successor is elected
and qualified or until his earlier resignation or removal. The Board may from
time to time elect, or delegate to the President or the Executive Vice President
the power to appoint, such other officers (including one or more Assistant
Treasurers and one or more Assistant Secretaries) and such agents as may be
necessary or desirable for the business of the Corporation. Such other officers
and agents shall have such duties and shall hold their offices for such terms as
may be prescribed by the Board or by the appointing authority.
-13-
<PAGE>
SECTION 2. Resignations. Any officer may resign at any time upon written
notice to the Corporation. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective shall not be
specified therein, immediately upon its receipt; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
SECTION 3. Removal. Any officer or agent of the corporation may be removed,
either with or without cause, at any time, by the Board at any meeting of the
Board or, except in the case of an officer or agent elected or appointed by the
Board, by the President, or the Executive Vice President.
SECTION 4. Vacancies. Any vacancy occurring in any office of the
Corporation by death, resignation, removal or otherwise, shall be filled for the
unexpired portion of the term of the office which shall be vacant, in the manner
prescribed in these By-laws for the regular election or appointment to such
office.
SECTION 5. The Chairman of the Board. The Chairman of the Board shall act
as chairman of all meetings of the Board of Directors and at all special and
annual meetings of stockholders, and shall have control over the agenda of such
meetings, all in accordance with the provisions of these By-laws and the
Certificate of Incorporation. The Chairman shall perform such other duties as
may from time to time be assigned to him by the Board.
SECTION 6. The Chief Executive Officer. The Chief Executive Officer shall
have general supervision and direction of the business and affairs of the
Corporation, subject, however, to
-14-
<PAGE>
the direction and control of the Board. The Chief Executive Officer may sign and
execute in the name of the Corporation deeds, mortgages, bond, contracts or
other instruments. He shall perform all duties incident to the office of the
Chief Executive Officer and shall, when requested, counsel with and advise the
other officers of the Corporation and shall perform such other duties as the
Board may from time to time determine.
SECTION 7. The President. The President shall be the Chief Operating
Officer and shall have general supervision and direction of the day to day
affairs of the Corporation and over its several officers, agents and employees,
subject, however, to the direction and control of the Board. The President may
sign and execute in the name of the Corporation deeds, mortgages, bond,
contracts or other instruments. He shall perform all duties incident to the
office of President and shall, when requested, counsel with and advise the other
officers of the Corporation and shall perform such other duties as the Board may
from time to time determine.
SECTION 8. Vice Presidents. Each Vice President shall have such powers and
perform such duties as from time to time may be assigned to him by the Board.
SECTION 9. The Treasurer. The Treasurer shall:
(a) have charge and custody of, and be responsible for, all the funds
and securities of the Corporation;
-15-
<PAGE>
(b) keep full and accurate accounts of receipts and disbursements in
books belonging to the Corporation;
(c) cause all monies and other valuables to be deposited to the credit
of the Corporation in such depositories as may be designated by the Board;
(d) receive, and give receipts for, monies due and payable to the
Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the investment
of its funds as ordered or authorized by the Board, taking proper vouchers
therefor; and
(f) in general, have all the powers and perform all the duties
incident to the office of Treasurer and such other duties as from time to
time may be assigned to him by the Board, the Chairman of the Board or the
President.
SECTION 10. The Secretary. The Secretary shall:
(a) record the proceedings of the meetings of the stockholders and
directors in a minute book to be kept for that purpose;
(b) see that all notices are duly given in accordance with the
provisions of these By-laws and as required by law;
-16-
<PAGE>
(c) be custodian of the records and the seal of the Corporation and
affix and attest the seal to all stock certificates of the Corporation
(unless the seal of the Corporation on such certificates shall be a
facsimile, as hereinafter provided) and affix and attest the seal to all
other documents to be executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and other
documents and records required by law to be kept and filed are properly
kept and filed; and
(e) in general, have all the powers and perform all the duties
incident to the office of Secretary and such other duties a from time to
time may be assigned to him by the Board, the Chairman of the Board or the
President.
SECTION 11. Officers' Bonds or Other Security. The Board may secure the
fidelity of any or all of its officers or agents by bond or otherwise, in such
amount and with such surety or sureties as the Board may require.
SECTION 12. Compensation. The compensation of the officers of the
Corporation for their services as such officers shall be fixed from time to time
by the Board; provided, however, that the Board may delegate to the Chairman of
the Board or the President the power to fix the compensation of officers and
agents
-17-
<PAGE>
appointed by the Chairman of the Board or the President, as the case may be. An
officer of the Corporation shall not be prevented from receiving compensation by
reason of the fact that he is also a director of the Corporation, but any such
officer who shall also be a director (except in the event there is only one
director of the Corporation) shall not have any vote in the determination of the
amount of compensation paid to him.
ARTICLE V
Shares, etc.
SECTION 1. Stock Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by or in the name of the
Corporation by the Chairman or the President or a Vice President, and by the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary,
certifying the number of shares owned by him in the Corporation. Any of or all
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon such certificate shall have ceased to be such officer, transfer
agent or registrar before such certificate is issued, it may nevertheless be
issued by the Corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issue.
SECTION 2. Books of Account and Record of Stockholders. The books and
records of the Corporation may be kept at such places, within or without the
State of Delaware, as the Board of Directors may from time to time determine.
The stock record books
-18-
<PAGE>
and the blank stock certificate books shall be kept by the Secretary or by any
other officer or agent designated by the Board of Directors.
SECTION 3. Transfer of Shares. Transfers of shares of stock of the
Corporation shall be made on the stock records of the Corporation only upon
authorization by the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary or
with a transfer agent or transfer clerk, and on surrender of the certificate or
certificates for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of such share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions, and
to vote as such owner, and the Corporation may hold any such stockholder of
record liable for calls and assessments and the Corporation shall not be bound
to recognize any equitable or legal claim to or interest in any such shares or
shares on the part of any other person whether or not it shall have express or
other notice thereof. Whenever any transfers of shares shall be made for
collateral security and not absolutely, and both the transferor and transferee
request the Corporation to do so, such fact shall be stated in the entry of the
transfer.
SECTION 4. Regulations. The Board may make such additional rules and
regulations, not inconsistent with these
-19-
<PAGE>
By-laws, as it may deem expedient concerning the issue, transfer and
registration of certificates for shares of stock of the Corporation. It may
appoint, or authorize any officer or officers to appoint, one or more transfer
agents or one or more transfer clerks and one or more registrars and may require
all certificates for shares of stock to bear the signature or signatures of any
of them.
SECTION 5. Fixing of Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action.
SECTION 6. Lost, Stolen or Stock Certificates. The holder of any
certificate representing shares of Stock of the Corporation shall immediately
notify the Corporation of any loss, destruction or mutilation of such
certificate, and the Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it, alleged to have been lost,
stolen or destroyed, and the Board may, in its discretion, require the owner of
the lost, stolen or destroyed certificate, or his
-20-
<PAGE>
legal representative, to give the Corporation a bond sufficient, as the Board in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.
Anything herein to the contrary notwithstanding, the Board, in its absolute
discretion, may refuse to issue any such new certificate, except pursuant to
judicial proceedings under the laws of the State of Delaware.
ARTICLE VI
Contracts, Checks, Drafts, Bank Accounts, Etc.
SECTION 1. Execution of Contracts. Except as otherwise required by statute,
the Certificate of Incorporation or these ByLaws, any contract or other
instrument may be executed and delivered in the name and on behalf of the
Corporation by such officer or officers (including any assistant officer) of the
Corporation as the Board may from time to time direct and by the Corporation's
Chairman of the Board, if the Board so directs. Such authority may be general or
confined to specific instances as the Board may determine. Unless authorized by
the Board or expressly permitted by these By-Laws, no officer, director, or
agent or employee shall have any power or authority to bind the Corporation by
any contract or engagement or to pledge its credit or to tender it pecuniarily
liable for any purpose or to any amount.
SECTION 2. Loans. Unless the Board shall otherwise determine, the President
or any Vice-President may effect loans and
-21-
<PAGE>
advances at any time for the Corporation from any bank, trust company or other
institution, or from any firm, corporation or individual, and for such loans and
advances may make, execute and deliver promissory notes, bonds or other
certificates or evidences of indebtedness of the Corporation, but no officer or
officers shall mortgage, pledge, hypothecate or transfer any securities or other
property of the Corporation other than in connection with the purchase of
chattels for use in the Corporation's operations, except when authorized by the
Board.
SECTION 3. Checks Drafts, etc. All checks, drafts, bills of exchange or
other orders for the payment of money out of the funds of the Corporation, and
all notes or other evidence of indebtedness of the Corporation, shall be signed
in the name and on behalf of the Corporation by such persons and in such manner
as shall from time to time be authorized by the Board.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositaries as the Board may from time
designate or as may be designated by any officer or officers of the Corporation
to whom such power of designation may from time to time be delegated by the
Board. For the purpose of deposit and for the purpose of collection for the
account of the Corporation, checks, drafts and other orders for the payment of
money which are payable to the order of the Corporation may be endorsed,
assigned and delivered by any officer or agent of the Corporation.
-22-
<PAGE>
SECTION 5. General and Special Bank Accounts. The Board may from time to
time authorize the opening and keeping of general and special bank accounts with
such banks, trust companies or other depositaries as the Board may designate or
as may be designated by any officer or officers of the Corporation to whom such
power of designation may from time to time be delegated by the Board. The Board
may make such special rules and regulations with respect to such bank accounts,
not inconsistent with the provisions of these By-Laws, as it may deem expedient.
ARTICLE VII
Offices
SECTION 1. Registered Office. The registered office and registered agent of
the Corporation will be as specified in the Certificate of Incorporation of the
Corporation.
SECTION 2. Other Offices. The Corporation may also have such offices, both
within or without the State of Delaware, as the Board of Directors may from time
to time determine or the business of the Corporation may require.
ARTICLE VIII
Fiscal Year
The fiscal year of the Corporation shall be as determined by the Board of
Directors.
-23-
<PAGE>
ARTICLE IX
Seal
The seal of the Corporation shall be circular in form, shall bear the name
of the Corporation and shall include the words and numbers "Corporate Seal",
"Delaware" and the year of incorporation.
ARTICLE X
Indemnification
SECTION 1. General. 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, or 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) 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, in accordance
with and to the full extent permitted by statute and by the Certificate of
Incorporation of the Corporation. Expenses incurred in defending a civil or
criminal action, suit or proceeding may be paid by the Corporation in advance of
the final
-24-
<PAGE>
disposition of such action, suit or proceeding as authorized by the Board of
Directors in the specific case upon receipt of an undertaking by or on behalf of
the director, officer, employee or agent to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation as authorized in this section. The indemnification provided by this
section shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under these By-Laws or any agreement or 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, and shall 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.
SECTION 2. Insurance. The Corporation may 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 statute or of this section.
-25-
<PAGE>
ARTICLE XI
Amendment
The By-Laws may be amended, repealed or altered by vote of the holders of a
majority of the shares of stock at the time entitled to vote in the election of
directors, except as otherwise provided in the Certificate of Incorporation. The
By-Laws may also be amended, repealed or altered by the Board of Directors, but
any By-Law adopted by the Board of Directors may be amended, repealed or altered
by the stockholders entitled to vote thereon as herein provided.
-26-
AGREEMENT made as of the 1st day of October, 1986, between Valsyn S.A.,
Rincon 531, Of., 702, Montevideo, Uruguay, hereinafter referred to as
("Licensor") and Sonido, Inc., 112 West 31 Street, New York, N.Y., 10001,
hereinafter referred to as ("Licensee").
WHEREAS, Licensor owns and/or controls certain master recordings,
publishing rights and other properties in the record and music publishing fields
and,
WHEREAS, Licensee wish to utilize Licensor's properties for the purpose of
conducting a record and music publishing business.
NOW, THEREFORE, the parties agree as follows:
1. TERM
The term of this Agreement shall be the period October 1, 1986 through
December 31, 1999, (the "Term").
2. TERRITORY
The "Territory" shall mean the United States of America and Puerto Rico.
3. LEASE OF MASTERS
Licensor hereby EXCLUSIVELY leases to Licensee for the Term and for the
territory only all master recordings (the "Existing Masters") which have
heretofore been released on the "Labels" (as the term hereafter defined) and
which are owned and controlled by Licensor for the territory to the extent or
Licensor's rights therein.
1
<PAGE>
(a) Licensor hereby grants Licensee the exclusive right in the Territory
during the Term to manufacture and sell records derived from the Existing
Masters in any configuration now or hereafter known and Licensor further grants
Licensee the right to use the name and likeness of each Artist whose
performances are incorporated in the Existing Masters for advertising and
purposes of trade in connection with the Existing Masters; all of the foregoing
to the extent of Licensor's rights therein.
(b) The Existing Masters, including the copyright therein, shall be and
remaining entirely Licensor's property. Appropriate copyright notices if
specified by Licensor shall be published in connection with all uses of the
Existing Masters.
(c) Licensor hereby grants Licensee the right in the Territory during the
Term to use any available artwork owned by Licensor for the purpose of
manufacturing packaging for records incorporating the Existing Masters to the
extent of Licensor's rights therein. Licensee shall print any copyright notices
if specified by Licensor in connection with it's use of such artwork.
(d) The "Labels" are "Fania", "Vaya", "Tico", "A1legre", "Cotique", "Inca",
"Mardi Gras", "Barbaro", "International", and "Musica Latina".
(e) To the extent that Licensor has the right to do so, Licensor hereby
licenses Licensee the right to use the Labels in the Territory during the term
in connection with records manufactured by Licensee which incorporated the
Existing Masters, the New Masters or other master recordings. Licensee shall
comply with all formalities in the Territory for the protection and preservation
of all trademarks, servicemarks and other rights in the labels. Licensee
expressly acknowledges the
2
<PAGE>
exclusive right, title and interest of Licensor in and to the Labels and all
rights therein and will not at any time do any act or thing contesting or in any
way impairing such right, title and interest. Licensee acknowledges that all
uses of the labels shall inure to the benefit of Licensor. Upon termination of
Licensee's rights hereunder, Licensee will cease and desist from all uses of the
Labels and will quit claim to Licensor all rights which Licensee may have
acquired therein by operation of law or otherwise. Licensee agrees that the
quality of records which bear the labels shall be equal to or better than the
quality of records heretofore released which bore the labels. Licensor shall
have free access to the place(s) of manufacturer of such records in order to
inspect the quality thereof, Licensee shall at all times conform to Licensor's
instructions concerning the quality of such records so that their quality shall
conform to the foregoing standard.
4. RECORDING CONTRACTS
Licensor presently holds certain contracts with certain recording Artists
pursuant to which such Artists may be obligated to record for Licensor in the
future (the "Recording Contracts"),
(a) Licensor and Licensee shall mutually agree on the recording to be made
during the Term pursuant to the Recording Contracts and Licensee agrees to
complete all recording projects presently in progress ("the New Masters").
Licensee shall pay all costs and expenses of recording the New Masters
including, without limitation, any advances against royalties and/or fees which
may become due to the relevant recording Artists and Producers.
3
<PAGE>
(b) The New Masters recorded pursuant to this Paragraph 4, including the
copyright therein, shall be entirely Licensor's property but shall be leased and
licensed to Licensee for the Term for the Territory in the same manner as is
provided for in Paragraph 4 hereof. Licensor reserves all rights in the New
Masters for the world outside of the Territory. Appropriate copyright notices,
if specified by Licensor, shall be published in connection with all uses of the
New Masters.
5. PUBLISHING RIGHTS
Licensor owns certain rights in certain musical compositions (the
"Publishing Rights"). During the Term, Licensee is granted the right to
administer the publishing rights in the Territory. Copyright in such musical
compositions, if any, shall remain Licensor's property.
6. LICENSOR'S WARRANTIES
Licensee has made an independent investigation of the nature and extent of
Licensor's rights in the Existing Masters, the Recording Contracts, the
Publishing Rights and the Labels and has not relied on any information or
materials supplied by Licensor with respect thereto. Licensor makes no warranty
or representation as to it's rights in the Existing Masters, the Recording
Contracts, the Publishing Rights or the Labels other than that Licensor has
continuously exercised rights in the Existing Masters and knows of no claim
which is adverse to Licensor's ownership thereof.
7. NEW ARTISTS
During the Term, Licensee may, in it's sole discretion, enter into
agreements with or for the recording services or recordings of various recording
artists. During the
4
<PAGE>
Term, all such recordings shall be exclusively licensed to Licensor for the
world outside of the Territory subject only to Licensor paying any relevant
Artist and Producer royalties which are actually due and payable in respect of
sales made by Licensor and it's sub-licensees outside the Territory. After the
expiration of the term of this Agreement, Licensee shall assign to Licensor all
of Licensee's right, title and interest to such recording and at Licensor's
request shall assign to Licensor all of Licensees right, title and interest, in
and to the agreements with or for any or all of such recording artists.
8. LICENSEE'S OBLIGATIONS
In consideration of the rights granted to Licensee pursuant to Paragraphs
3, 4, and 5, Licensee agrees as follows:
(a) Licensee shall pay all royalties which may become due to all recording
artists, producers, music publishers, copyright proprietors, union Trust Funds
and others in connection with the exploitation of the Existing Masters and the
New Masters and any other masers recorded pursuant to Paragraph 7. Licensor
shall assign to the Licensee, for the term, the benefit of any existing debit
balances in the royalty accounts of any such recording artist or producer.
9. TERMINATION PRIOR TO EXPIRATION OF TERM
(a) Licensor shall have the option to terminate this agreement in the event
that the Licensee fails to make any payment pursuant to Paragraph 12. a) ii),
shall go into compulsory liquidation, assign its assets for the benefit of
creditors, make any composition with its creditors or take advantage of any
insolvency act.
5
<PAGE>
(b) In the event that there shall be any change in the ownership control or
management of Licensee, Licensee shall give Licensor immediate written notice
thereof indicating the details of such change(s) and Licensor shall have the
right to terminate this agreement upon Licensor's giving Licensee thirty (30)
days notice of Licensor's intention to so terminate this agreement.
(c) Termination under this Paragraph 9 is not intended to impair or
restrict either party's legal and/or equitable remedies (including the right of
termination) for other defaults hereunder.
10. CERTAIN OBLIGATIONS OF LICENSEE
(a) Upon the termination of this agreement, Licensee shall place all master
recordings which are the subject of this agreement and artwork therefor, at
Licensor's disposal, at no cost to Licensor.
(b) Upon termination of this agreement, Licensee shall make no further
sales of records hereunder and shall forthwith destroy its then remaining
inventory and furnish to Licensor an affidavit sworn to before a person
authorized to take oaths that such destruction has been effected.
(c) Licensee agrees that during the final six (6) months of the Term the
wholesale prices charged by Licensee for records subject hereto shall be that
generally prevailing prior thereto and no special allowances or discounts shall
be given so as not to lessen the ongoing value of the master recordings which
are the subject matter of this agreement.
6
<PAGE>
11. INDEMNITY
(a) Licensee agrees to and does hereby indemnify, save and hold Licensor
harmless from any and all loss and damage (including court costs and reasonable
attorneys' fees) arising out of, connected with or as a result of any
inconsistency with, failure of, or breach or threatened breach by Licensee of
any agreement, undertaking or covenant contained in this Agreement including,
without limitation, any claim by any third party in connection with the
foregoing. Licensor shall give Licensee third partY claim to which the foregoing
indemnity applies and Licensee shall have the right to participate in the
defense of any such claim through counsel of Licensee's own choice and at
Licensee's expense.
12. LICENSEE'S OPTION TO PURCHASE
(a) Licensor hereby waives any and all royalties from Licensee and Licensor
hereby grants Licensee an option to purchase all the master recordings,
publishing rights and other properties it owns and/or controls in the record and
music publishing field under the following terms and conditions:
i) Licensee, agrees to pay Licensor, the sum of Nine hundred and fifty
thousand ($950,000.00) U.S. Dollars upon the signing of this contract for the
purchase of, including but not limited to, current assets, inventory (which
includes records and cassettes already manufactured), stampers, mothers, color
separations, covers, labels and logos,
ii) Licensee, agrees to pay Licensor, the additional sum of Ten million
($10,000,000.00) U.S. Dollars for the purchase of all master recordings,
7
<PAGE>
publishing rights and/or other properties it owns and/or controls in the record
and publishing fields.
Said payment shall be made as follows:
1) December 31, 1992 ................. $ 500,000.00 U.S. Dollars
2) December 31, 1993 ................. $ 500,000.00 U.S. Dollars
2) December 31, 1994 ................. $1,500,000.00 U.S. Dollars
3) December 31, 1995 ................. $1,500,000.00 U.S. Dollars
4) December 31, 1996 ................. $1,500,000.00 U.S. Dollars
5) December 31, 1997 ................. $1,500,000.00 U.S. Dollars
6) December 31, 1998 ................. $1,500,000.00 U.S. Dollars
7) December 31, 1999 ................. $1,500,000.00 U.S. Dollars
---------------------------
TOTAL ............. $10,000,000.00 U.S. Dollars
(b) Said Payments shall be evidenced by a series of negotiable Promissory
Notes, without interest.
(c) In the event that Licensee shall, for any reason whatsoever, fail to
pay any note provided for in Paragraph 12 (ii), as and when due, this agreement
shall terminate pursuant to Paragraph 9(a) and 10(a)(b).
(i) All payments made by Licensee under Paragraph 12(ii) of this agreement
shall be applied towards the purchase of master recordings ONLY,
(ii) Each master recording shall be valued at Ten thousand ($10,000.00) U.S
Dollars,
(iii) Licensor, AT ITS DISCRETION, shall decide which master recordings it
shall sell to Licensee,
(iv) All other master recordings shall remain the property of Licensor.
8
<PAGE>
(d) Upon payment in full, of the all the notes provided for in Paragraph 12
(ii), Licensor shall transfer all its rights in Existing Masters, New Masters
and publishing rights and other properties it owns and/or controls in the record
and music publishing field, for the Territory and the world, to Licensee.
13. ASSIGNMENT
Licensee shall not transfer, assign, sublicense, pledge, mortgage or in any
other way encumber this agreement, the licenses and rights granted hereunder,
the Existing Masters, the New Masters or other materials furnished to Licensee
hereunder. This agreement and/or Licensor's rights and obligations hereunder are
expressly made assignable by Licensor, it being expressly understood that any
such assignment by Licensor is subject to Licensee's rights hereunder.
14. NOTICES
(a) Any written notice which Licensee is required or may desire to give
Licensor hereunder shall be given by addressing the same to Licensor's address
at Valsyn, S.A., Rincon 531 Of. 702, Montevideo, Uruguay, or at such address of
Licensor last known to Licensee, and when same shall be deposited, so addressed,
postage prepaid, in the United States mail and/or when Licensee shall have
delivered the same, so addressed, to a telegraph or cable company, toll prepaid.
Licensee shall be deemed to have duly given such notice.
(b) All written notices which Licensor is required or may desire to give to
Licensee hereunder shall be given by addressing the same to Sonido, Inc., 112
West
9
<PAGE>
31st Street, New York, N.Y., l0001 or such other places or persons as Licensee
may designate by written notice to Licensor. Such notice shall be deemed duly
given if given by in mail, telegraph or cable in the manner hereinabove set
forth.
15. APPLICABLE LAW
This agreement shall be interpreted in accordance with the laws of the
State of New York applicable to contracts fully executed and fully to be
performed within the State of New York. If any provisions of this agreement are
invalid or unenforceable by operation of law, the invalidity of unenforceability
of such provisions shall not affect the other provision of this agreement.
16. CAPTIONS
The paragraph headings used in this agreement are inserted for convenience
only, and shall not be used for the purpose of interpreting any provisions of
this agreement.
17. ENTIRE AGREEMENT
This instrument contains the entire agreement between the parties, and may
not be modified except by a written instrument signed by both of the parties
hereto. This agreement shall not become effective until executed by all parties
hereto.
IN WITNESS WHEREOF, the parties have caused this agreement to be executed
by their duly authorized officers the day and year first above written.
/s/ ILLEGIBLE /s/ Gerald Masucci, Pres.
VALSYN, S.A. SONIDO, INC.
10
<PAGE>
Dated March 1, 1996
It is hereby stipulated and agreed by and between Valsyn S.A., hereinafter
referred to as "Licensor" and Sonido Inc., hereinafter referred to as "Licensee"
that for One ($1.00) US Dollar and other valuable consideration, receipt or
which is hereby acknowledged, that the payment of the Negotiable Promissory Note
listed below has been extended until October 1, 1997.
It is also stipulated and agreed that interest, at the rate of Ten (10%) percent
annually, will be paid on the unpaid balance of One Million ($1,000,000.00) US
Dollars
December 31, 1996 .............. $1,500,000.00 US Dollars
/s/ ILLEGIBLE /s/ Gerald Masucci, Pres.
VALSYN, S.A. SONIDO, INC.
<PAGE>
AGREEMENT made as of November 17, 1997 by and among Valsyn, S.A.
("Licensor"), Sonido, Inc. ("Licensee"), Fania Entertainment Group, Ltd.
("Fania") and Gerald Masucci.
WHEREAS, Licensor and Licensee entered into an agreement dated October 1,
1986, as amended on March 1, 1996 (the "Original Agreement");
WHEREAS, pursuant to the terms of the Original Agreement, Licensee is
scheduled to make payments to Licensor in the amounts of $1,000,000 and interest
thereon (the "$1,000,000 Payment") by October 1, 1997 and $1,500,000 (the
"$1,500,000 Payment") by December 31, 1997;
WHEREAS, Licensee has entered into a letter of intent in connection with an
initial public offering (the "IPO") of the securities of Fania; and
WHEREAS, Licensor and Licensee wish to amend the terms of the Original
Agreement;
NOW, THEREFORE, in consideration of the mutual premises contained herein
and the other good and valuable consideration, the sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. Consent to Assignment: Licensor hereby consents to the assignment or
other transfer of Licensee's rights and obligations under the Original Agreement
and this Agreement to Fania, which was formed for the purpose of engaging in the
IPO, and waives the provisions of Sections 9(b) and 13 of the Original
Agreement.
2. Extension and Waiver: Licensor agrees to extend the payment schedules
for both the $1,000,000 Payment and the $1,500,000 Payment to the closing date
of the IPO (the "Closing Date") and to waive interest payments on the $1,000,000
Payment.
3. Transfer of Rights: Upon the closing of the IPO, Licensor shall
terminate all of its right, title and interest in the Original Agreement and
this Agreement and transfer to Fania any and all of Licensor's then remaining
right, title and interest in and to the Existing Masters, the Labels, the
Publishing Rights, the Recording Contracts and the New Masters thereunder (all
as defined in the Original Agreement), including the rights to reproduce,
manufacture, distribute and publish the foregoing worldwide, and all copyrights,
trademarks, service marks and other property rights in the foregoing
(collectively, the "Property").
4. Warranty: Licensor hereby represents and warrants that it is the sole
owner of the Property free and clear of all
<PAGE>
liens, encumbrances, security interests and claims whatsoever, and that the
Property constitutes all of the assets received by Licensor from Fania Records,
Inc. pursuant to an agreement dated October 23, 1979 between Fania Records, Inc.
and Licensor.
5. IPO Payment: In consideration for the termination of the Original
Agreement and this Agreement (including the transfer of Licensor's rights to the
Property to Fania), upon the closing of the IPO, Fania agrees to pay Licensor
the sum of $4,000,000. Fania also agrees to pay Licensor an additional
$1,500,000 on the first anniversary of the Closing Date.
6. Consent to Foreign Sales: Licensor hereby acknowledges that Licensee has
made use of the Property outside of the Territory and hereby consents and waives
any claims or objections it may have to such use. Licensor also consents to the
continued use by Licensee or Fania, as the case may be, of the Property outside
of the territory during the term of the Original Agreement and this Agreement.
In consideration for the Licensor's consent under this Paragraph 6,
simultaneously with the execution of this Agreement, Licensee is delivering to
Licensor a check in the amount of $50,000 and shall deliver the Licensor another
check in the amount of $450,000 within ten (10) days after the closing of the
IPO (the "Additional Consideration").
7. Waiver of Interests in Recordings: Licensor hereby waives any rights and
interest in recording agreements entered into by Licensee and waives the
provisions of Section 7 of the Original Agreement. In addition, Licensor hereby
waives the right to receive any monies owed to it by third parties under the
Original Agreement and this Agreement following the Closing Date.
8. Guarantee: Gerald Masucci agrees to guarantee the payment of $1,500,000
pursuant to paragraph 5 hereof, as well as the balance of $450,000 of Additional
Consideration.
9. General Terms: Capitalized terms not defined herein shall have the
meanings ascribed to them in the Original Agreement. All dollar amounts refer to
U.S. Dollars.
10. IPO Deadline: Notwithstanding anything to the contrary contained in
this Agreement, in the event that the Closing Date does not occur on or before
April 1, 1998, this Agreement shall be null and void and the Original Agreement
shall remain in effect.
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the first
day written above.
VALSYN, S.A.
/s/ ILLEGIBLE
-----------------------------
Name:
Title
SONIDO, INC.
/s/ Gerald Masucci, Pres.
-----------------------------
Name:
Title
FANIA ENTERTAINMENT GROUP, LTD.
/s/ Gerald Masucci, Pres.
-----------------------------
Name:
Title
/s/ Gerald Masucci
-----------------------------
Gerald Masucci (only with
respect to paragraph 8 hereof)
-3-
<PAGE>
EXHIBIT 10.4
Sony Discos Inc.
605 Lincoln Road
Miami Beach, Florida 33139
May 9, 1997
Jerry Masucci Music, Inc.
112 West 31st Street
New York, NY 10001
Gentlemen:
Below is a summary of the main commercial points of our agreement for Sony
Discos to exclusively distribute in the United States and Puerto Rico all
records owned or controlled by Jerry Masucci Music, Inc. and/or any entity owned
or controlled by Jetty Masucci Music, Inc.; Jerry Masucci and/or any entity
owned or controlled by him other than Sonido Records, Inc. or any of its
successors or assigns (collectively, "JMM") during the term of this agreement.
The term will be three (3) years, commencing May 15, 1997, subject to Articles
II and III below. Although this will be a binding agreement, the parties agree
to promptly negotiate in good faith a more formal document with the remaining
terms and conditions.
I. Sony Discos' Responsibilities:
1. Provide warehousing facilities to store the product subject to the
distribution agreement.
2. Solicit sales orders from all customers that are currently approved and
that may be approved in the future to do business with Sony Discos.
3. Service sales orders (pick, pack and ship), for the distributed label
product in the same manner as Sony Discos currently services all sales
orders.
4. Maintain consigned inventory quantities of the distributed label product
at reasonable levels in accordance with inventory control procedures
currently in practice for all stock of finished product.
<PAGE>
JMM, Inc.
May 9, 1997
Page 2
5. Make determinations as to the credit worthiness of customers and ship
credit orders solely at the discretion of Sony Discos in accordance with
Sony Discos' credit approval policies and procedures. Bad credit risk
will be borne by Sony Discos.
6. Accept and process returns from customers (but not returns of product
sold before the term of this agreement or returned thereafter). Saleable
product returned by customers will be returned to stock. Damaged product
will be returned to JMM or destroyed at its option.
7. Provide monthly informational reports of sales and returns in units and
dollars and weekly unit sales reports by region. Sony Discos will provide
BDS and Soundscan monitoring services.
8. Submit a monthly statement with the net value of the sales, less: a
reserve for future returns of 20%; our distribution fee and any other
agreed deductions. Each monthly reserve for returns will be liquidated in
the sixth monthly accounting statement following the monthly statement in
which the reserve was established. Payment of net proceeds is to be made
on the 60th day following the end of the month of sale.
9. To manufacture cassettes and compact discs on behalf of JMM, if JMM
chooses to manufacture with Sony Discos, and the parties agree to engage
in good faith discussions with respect to same.
10. Provide 1 free office space and 2 free secretarial spaces to JMM at Sony
Discos' offices at 2190 N.W. 89th Place, Miami, Florida, during the Term,
but only for so long as Sony maintains an office at such location.
Thereafter, the parties will discuss in good faith JMM's space
requirements. JMM will be responsible for all phone and fax charges or
other out-of-pocket expenses (e.g., secretary).
11. Include JMM product in Sony's co-op advertising programs and Sony Discos
will consult with JMM as to same. The cost of such advertising, not to
exceed 3% of gross value (i.e., invoice value before discounts and free
goods), will be deducted from proceeds (or billed to JMM) when Sony
Discos customers are credited. Notwithstanding the foregoing, JMM will
not be responsible for the cost of any co-op advertising item or
expenditure in excess of $5,000 unless Sony Discos receives JMM's prior
approval in respect of such item or expenditure.
<PAGE>
JMM Inc.
May 9, 1997
Page 3
12. To offer JMM the opportunity for Sony Discos to administer the mechanical
royalty payments for JMM repertoire, subject to recharge of such royally
payments to JMM.
II. Distributed Label Responsibilities:
1. a. To deliver to Sony Discos during each contract year of the term: (i) not
less than four (4) newly recorded, commercially satisfactory, previously
unreleased single disc albums by different artists (collectively, "Studio
Albums"), and (ii) not less than four (4) commercially satisfactory,
previously unreleased single disc television advertised compilation
albums comprised of repertoire from the existing back catalog of Sonido
Records as mutually determined by Sony Discos and JMM (collectively, "TV
Compilation Albums"). If JMM does not fulfill its delivery commitment to
Sony Discos under this paragraph II-1.a. for a particular contract year
of the tern, such contract year will be automatically extended until JMM
fulfills its delivery commitment for that contract year. Any product
submitted by JMM hereunder and rejected by Sony Discos may be distributed
by JMM or a third party at JMM's option.
b. Promptly following complete execution hereof, JMM, will deliver to Sony
Discos: (i) 1 Studio Album entitled "Fania All-Stars", as part of its
first year delivery commitment; and (ii) 3 back catalog albums, each
comprising "Best of Fania All-Stars" tracks, which albums will not be
applied towards JMM's delivery commitment hereunder.
2. To manufacture and deliver to Sony Discos consigned inventory of
distributed product (including artwork) in reasonable levels in
accordance with Sony Discos' inventory control procedures and reasonable
quality requirements.
3. To pay all royalties, including copyright, due under JMM's contractual
agreements or otherwise and to provide Sony Discos, upon request, with
proof of such payment. Any such monies paid by Sony Discos at your
request or with your consent (which will not be unreasonably withheld),
will be deducted from payments to JMM. If JMM decides to have Sony Discos
process copyright payments under paragraph 12 above, JMM will deliver all
necessary label copy information to Sony Discos, and will reasonably
assist Sony Disco, in obtaining any necessary mechanical licenses in Sony
Discos' name or for its behalf.
<PAGE>
JMM Inc.
May 9, 1997
Page 4
4. To accept returns or authorize the destruction of product considered by
Sony Discos to be obsolete or damaged, in accordance with Sony's policies
and practices. JMM will be solely responsible for inventory obsolescence.
5. To include Sony Discos' distribution credit and bar codes on all product
distributed by Sony Discos, in a form and location approved by JMM and
Sony Discos.
6. To be solely responsible for all marketing and promotion activities and
expenses, including DJ and promotional servicing and television
advertising (including the production costs for the ad spot itself). Sony
Discos will use reasonable efforts, consistent with its good faith
business judgment, to assist JMM in obtaining television advertising
time, provided that Sony Discos will have no financial obligation in
respect of any such advertising.
7. To be solely responsible for accepting all returns of product distributed
prior to the commencement of Sony Discos' distribution, or after Sony
Discos' distribution.
8. To consult with Sony Discos in the setting of wholesale prices for
distributed label product, which prices shall be consistent with then-
current Sony pricing standards and policies.
III. Advance, Distribution Fee and Other Charges:
Advances:
a. Sony Discos will pay JMM an advance in the amount of $250,000 (the
"Initial Advance") as follows: (i) $150,000 of such Initial Advance
promptly following complete execution of this agreement; and (ii) the
balance of such Initial Advance promptly following complete execution of
the more formal agreement referred to above, but in no event later than
the later of: (a) 45 days following complete execution of this agreement;
and (b) promptly following JMM's fulfillment of its delivery obligation
to Sony Discos under II.1.b. above.
b. If at anytime during the first or second contract years of the term, or
the first 6 months of the third contract year of the term, total advances
charged to JMM's account are recouped (based on the last monthly
accounting statement rendered prior to that date), and JMM is then
current in its delivery obligation to Sony Discos under II-1.a. above for
the contract year concerned, then, Sony Discos will promptly (i.e.,
within 15 days from the date the accounting statement concerned is
rendered) pay JMM an additional advance of $250,000 ("rollover
<PAGE>
JMM, Inc.
May 9, 1997
Page 5
advance"). If any advances are unrecouped as of the end of the term, the
term (including JMM's delivery obligations to Sony under II-1.a. above)
will be automatically extended until Sony Discos renders a statement
showing that all advances have been recouped (the "extended term"). For
the avoidance of doubt, Sony Discos will not be obligated to pay JMM a
rollover advance during the final 6 months of the third contract year of
the term or the extended term, as applicable.
All advances will be recouped from 100% of the proceeds accruing to JMM
hereunder.
Distribution Fee:
Sony Discos' distribution fee and other charges for performance of the above
services will be as follows:
a) (i) In respect of each Studio Album, a 16% distribution fee calculated on the
gross value (i.e., invoice value before discounts and free goods) of all
shipments. Notwithstanding the foregoing, in the event that product is
distributed by Sony Music Distribution ("SMD") instead of by Sony Discos
directly, then the applicable distribution fee will be 18.5% in lieu of
the fee set forth in the immediately preceding sentence.
(ii) In respect of each TV Compilation Album, a 14.5% distribution fee
calculated on the gross value (i.e., invoice value before discounts and
free goods) of all shipments. Notwithstanding the foregoing, in the event
that product is distributed by SMD instead of by Sony Discos directly,
then the applicable distribution fee will be 17% in lieu of the fee set
forth in the immediately preceding sentence.
b) Free goods discounts (actual) up to 8% will be JMM's responsibility and
Sony Discos will be entitled to its full distribution fee on such units.
Discounts in excess of 8% may be granted upon prior approval by JMM.
c) A charge of $.25 per unit for processing returns in excess of 12.5% of
sales in any sales month.
d) If JMM chooses to do its manufacturing with Sony Discos, the parties will
agree upon competitive pricing.
e) In the event that subparagraph (d) above applies, if charges to JMM
exceed the amount due to JMM in any month, JMM will promptly pay Sony
Discos the balance.
<PAGE>
JMM, Inc.
May 9, 1997
Page 6
IV. Miscellaneous:
1. Key Man: The parties acknowledge that the full time and active
participation of Jerry Masucci in the management of JMM is essential to
this agreement. In the event that during the term of this agreement,
Jerry Masucci fail for any reason to be engaged in the full time and
active management of JMM, Sony Discos will have the option to terminate
this agreement and any then-remaining unrecouped advances will be repaid
immediately to Sony Discos. (Until such payment is made, Sony Discos may
continue to distribute all records hereunder and apply all proceeds in
recoupment of these advances.)
2. Warranty: JMM warrants and represents that Sony Discos' exercise of its
rights hereunder will not infringe the rights of any third party. JMM
will indemnify and hold Sony discos harmless with respect to any breach
or alleged breach of this warranty and representation.
3. Restricted Recordings: Sony Discos will have no obligation to distribute
any records delivered by JMM under this agreement featuring the
performances of any artists who are currently residing in or citizens of
Cuba.
4. Choice of Law/Venue: New York courts (only), both state and federal. New
York law applicable to contracts entered into and performed entirely
within that State.
5. Sell-Off: Sony Discos will have the non-exclusive right, in accordance
with this agreement, to distribute and sell product delivered to Sony
Discos on or before the end of the term for a period of 6 months
following the end of the term ("sell-off period").
Please sign below to signify your acceptance of the above terms.
JERRY MASUCCI MUSIC, INC. SONY DISCOS INC.
By: /s/ Jerry Masucci By: /s/ ILLEGIBLE
----------------------------------- -------------------------------
An Authorized Signatory An Authorized Signatory
Fed. Tax I.D.#: _______________________
ASSENTED AND AGREED:
/s/ Jerry Masucci
- ---------------------------------------
JERRY MASUCCI
<PAGE>
AGREEMENT
AN AGREEMENT dated as of the 1 ST day of June 1996, by and between PYRALE
COMMERCIAL S.A., Salsuba Bldg., 53 East Street, Panama City, Panama, hereinafter
called "the LICENSER"), and SONIDO INC., D/B/A FANIA RECORDS, 112 West 31
Street, New York, N.Y., 10001, U.S.A., (hereinafter called "the LICENSEE").
WHEREAS:
The Licenser is engaged in the production of Masters and licensing of
gramophone records.
The Licensee is in a position directly or indirectly to provide
manufacturing and marketing facilities for gramophone records in the Licensed
Territory referred to below.
NOW THIS AGREEMENT WITNESSED THAT:
1) The Licenser hereby grants to the Licensee a license to use the master
records owned and controlled by Licenser and released on the PYRALE label only
for the Licensed Territory during the term of the agreement for the purpose of
manufacturing and selling gramophone records therefrom in the World except
Panama (herein called "the Licensed Territory") upon the terms and conditions of
this agreement.
2) The rights granted by the Licenser are the following:
a) the exclusive right to manufacture, sell and advertise in the Licensed
Territory, gramophone records containing performances embodied in the master
recordings made available by the Licenser to the Licensee as above provided.
However, it is expressly understood and agreed of the parties hereto that
the Licenser reserves for itself the sole and exclusive right to manufacture,
sell and distribute phonograph records from the recordings in the Licensed
Territory through any record clubs, and the Licensee acknowledges and agrees
that it does not hereby acquire the right to manufacture and sell phonograph
records form the recordings for sale or other distribution through any record
clubs.
1
<PAGE>
it is further understood that the rights herein granted to the Licensee are
limited to the use and exploitation of the master recordings in the form of
phonograph records, compact disc and prerecorded audio tape.
b) Records released thereunder shall have the same coupling as used by
Licenser and shall not be released as a budget or low-price record without the
WRITTEN CONSENT of the Licenser.
c) The right to use in the Licensed Territory the name, likeness and
biography of each artist whose performance is embodied in the said master
recordings in connection with the advertising, publishing or sale of gramophone
records manufactured therefrom; provided, however, that the Licensee shall abide
by any restrictions imposed upon the Licenser with respect thereto.
d) The right to perform publicly or to permit the public performance
(including performance by means of broadcast, wired diffusion or otherwise) of
records manufactured from the said master recordings, if under the laws of the
Licensed Territory, such performance needs the permissions of the performing
artist(s) and/or releasing record company.
3) The licenser represents and warrants that it has the exclusive rights to
use the said master recordings for the purpose of manufacturing and selling
phonograph records and agrees not to grant to other person, firm or corporation
the right to manufacture and sell gramophone records, derived from these master
recordings in the Licensed Territory during the term hereon, except as otherwise
provided in Paragraph 2 of this agreement
4) a) ROYALTIES. In consideration of this Agreement and the rights licensed
thereunder, Licensee shall pay to Licenser the following sums:
A royalty equal to Fourteen (14%) percent of the suggested retail or list
price in the Licensed Territory for One Hundred (100%) of all records and
prerecorded tapes manufactured and sold by Licensee pursuant to this agreement.
The Licensee shall notify the Licenser of the suggested retail or list
price of the records and prerecorded tapes in the Licensed Territory within
thirty (30) days from the date hereof and will notify the Licenser of any change
thereof within fourteen (14) days of any such change.
b) Licensee shall pay to the Licenser all moneys, if any, becoming due to
the Music Performance Trust Fund, the Phonograph Record Manufacturers Special
Payments Fund and all other funds based on sales which established by collective
bargaining agreement.
2
<PAGE>
b) As an additional royalty thereunder the Licensee agrees to pay to the
Licenser Fifty (50%) percent of all performances and broadcasting fees if any
received in respect of all records leased and sold thereunder; provided,
however, that whenever such fees are not computed and paid in direct relation to
the public performances and broadcasts of such records, they shall be computed
for the purposes of this agreement by determining in relation to the accounting
period in question the proportion of any such fee paid to the Licensee as the
number of records produced thereunder and sold in that Licensed Territory bears
to the total number of records sold in the Licensed Territory by the Licensee.
5) Payments by the Licensee to the Licenser of royalties due pursuant to
Paragraphs 4 (a) shall be made quarter annually in Panama City, Panama and in US
dollars within forty-five (45) days following the end of March, June, September
and December of each year, and such payment shall be accompanied by a statement
setting forth in reasonable detail the computation of the amount thereof, which
statement shall show for each country of the Licensed Territory at least the
following:
a) the quantity of records manufactured from each master recording
throughout the applicable accounting period;
b) the retail or list sales price of each such record or prerecorded tape;
c) the quantity of records and prerecorded tapes sold from each master
recording;
d) the royalty rate (in U.S. Dollars) paid on each such record;
e) the total royalties earned by each record and prerecorded tape;
f) the total royalties earned by reason of sales of all records and
prerecorded tapes thereunder during the applicable accounting period.
6) The royalties to be paid by the Licensee to the Licenser pursuant to
Paragraph 4 (a) hereof are intended to include provision for all recording
artists royalties which shall be entirely payable by the Licenser.
7) With respect to the records manufactured or sold thereunder from master
recordings which embody copyrighted musical or other material the Licensee
agrees to pay or cause to be paid directly to the proprietors of the copyrights
or their duly authorized agents all royalties which may be or become due (other
than recording artists royalties) and to hold the Licenser free and harmless
therefrom.
3
<PAGE>
8) The Licensee undertakes to promote and exploit master recordings
throughout the Licensed Territory by all means at its disposal including, but
not limited to, the shipping of samples to all major disc jockeys, librarians,
radio and television stations, trade magazines, record reviewers and to
advertise same soon after the initial release date in all its promotional
material and leading trade and consumer magazines.
9) It is explicitly understood and agreed that Licensee does not have the
right to use or authorize or permit others to use any recording, music or other
recorded material, or performance, in whole or in part, incorporated in records
licensed thereunder (hereinafter individually and collectively referred to as
"Excerpts") on any recording or for any purpose other than inclusion of such
Excerpts in their respective entireties and original contexts solely in and as
part of complete records licensed to and distributed by Licensee thereunder. Any
and all so called "sampling" by Licensee or by third parties acting with the
permission or acquiescence of Licensee is expressly. All rights not explicitly
granted to Licensee, including without limitation the right to licensee so
called "sampling" and other uses of Excerpts outside the context of their
embodiment in whole in and as part of complete records licensed to and
distributed by Licensee thereunder, are expressly reserved by Licenser, which
may grant or withhold licenses of any kind, to Licensee or third parties, at
Licenser's sole discretion and Licenser shall retain all results and proceeds of
any such license (s) for Licenser's sole account and benefit.
10) The Licenser agrees to deliver master recordings thereunder by
supplying to the Licensee at the Licensers cost price plus actual expenses
incurred for packing and shipping, one or more DAT or CD of each master
recording subject to the provisions hereof. Such DAT or CD shall be delivered to
the Licensee as promptly as possible, following the submission of written orders
to the Licenser from the Licensee. The Licenser will provide the correct title
of the recorded works, the names of the author, composer and publisher thereof
together with any additional copyright information known to the Licenser; the
names of the recording artist as the Licenser displays or intends to display
them on the labels of the records marketed by the Licenser.
11) The Licenser agrees to supply to the Licensee, at cost price, samples
of release sheets, biographies, photographs of artists, and the like, which
shall be delivered to the Licensee from time to time as prepared by the
Licenser. The Licensee shall have the right, insofar as the Licenser possesses
the rights, to use any part or all such material, in its original form or with
suitable modifications, on or in connection with records produced thereunder.
The Licenser agrees upon request to supply to the Licensee any such
material in quantity, or plates for reproducing the same, at the Licensers cost
price plus any actual expenses for packing and shipping. The Licensee shall have
the
4
<PAGE>
right, at its option, to reproduce any or all such material for use as
aforesaid, providing the Licenser itself has obtained the right to grant such
rights to the Licensee and the Licensee shall have made any payments necessary
in such connection.
12) Licensee agrees to supply to the Licenser at Licensees cost, one (1)
sample of the finished pressing on the Licensees label promptly after the date
of release.
13) The Licenser shall have the right to inspect the books and records of
the Licensee, its subsidiaries, affiliates, and Licensees assigns wherever same
may be, insofar as the said books and records pertain to any moneys payable to
the Licenser, or insofar as any said books or records pertain to the exercise by
the Licensee of any rights granted to the Licensee thereunder. Such inspection
shall be made at the Licensers expense, provided however, that if any major
discrepancy or error is found in said books, the expense shall be borne by the
Licensee.
14) The Licensee shall refrain from "Dumping" any records acquired by the
Licensee from the Licenser or manufactured by the Licensee from the master
recordings subject to the terms of this agreement. Dumping is hereby defined as
selling excess stocks of records at a price below fifty (50%) percent of the
standard retail list prices in the Licensed Territory for such records.
15) The Licensee agrees to use its best efforts, through the local
representatives, to aid the artists, featured on "the Master Recordings" who may
have personal professional engagements to perform in any of the countries to
which the rights of the Licensee thereunder extend. The Licensee further agrees
to do the necessary promotion and publicity in "the Licensed Territory" for the
sale of all records, manufactured from "The Master Recordings".
16) Licenser agrees to record at least six (6) new Masters in each year of
the contract, which masters shall be acceptable to Licensee.
17) In the event that the Licensee shall fail to perform any of the
obligations required of it thereunder and such failure is not cured within ten
(10) days after written notice hereof to Licensee or in the event that Licensee
shall go into compulsory liquidation or bankruptcy or make any assignment for
the benefit of creditors or make any compositions with creditors of any
insolvency or composition proceeding shall be commenced by or against the
Licensee, then and in any such events the Licenser may cancel or terminate this
agreement without prejudice to any rights or claims it may have and all rights
thereunder shall forthwith revert to the Licenser.
5
<PAGE>
18) The term of this agreement shall be for a period of Three (3) years
from the date hereof. Upon the termination of this agreement the Licensee shall
have an additional Two (2) years to manufacture and sell any and all masters
released during the contract period. Thereafter the licensee agrees to deliver
to the Licenser within thirty (30) days all tapes and master recordings without
cost to the Licenser and the Licensee agrees to discontinue the further
manufacture of records from the master recording. The Licensee shall have the
right for a period of three (3) months only, to sell in normal course of
business only, all stocks of records manufactured thereunder and shall continue
to account to the Licenser for the royalties and fees and send statements and
payments for this to the Licenser as provided in this agreement. If Licenser has
terminated this agreement pursuant to Paragraph 17 Licensee shall either destroy
such stocks or deliver same to Licenser without charge.
19) Licensee guarantees that the royalties paid by Licensee to Licenser
pursuant to Paragraph 4 during the Three (3) years contract hereof shall be at
least Nine Hundred Thousand ($900,000.00) Dollars, U.S. In order to effectuate
said guarantee, Licensee shall pay to Licenser in U.S. dollars the following
nonreturnable advance payments in respect of such royalties payable during each
such contract year which payments shall be exclusive of local taxes and shall be
paid as follows:
$100,000.00 U.S. DOLLARS ON THE EXECUTION OF THIS AGREEMENT;
$100,000.00 U.S. DOLLARS ON THE 1 ST Day of September 1996,
$100,000.00 U.S. DOLLARS ON THE 1 ST Day of December 1996,
$100,000.00 U.S. DOLLARS ON THE 1 ST day of June 1997,
$100,000.00 U.S. DOLLARS ON THE 1 ST Day of September 1997,
$100,000.00 U.S. DOLLARS ON THE 1 ST Day of December 1997,
$100,000.00 U.S. DOLLARS ON THE 1 ST day of June 1998,
$100,000.00 U.S. DOLLARS ON THE 1 ST Day of September 1998,
$100,000.00 U.S. DOLLARS ON THE 1 ST Day of December 1998,
6
<PAGE>
20) Provided that Licenser has not terminated this agreement pursuant to
Paragraph 17, this agreement sets forth the entire agreement between the parties
hereto with respect to the subject matter thereof and shall benefit and be
binding upon the parties hereto and their respective legal representatives,
successors and assigns. No modifications, amendment or waiver of this agreement
or any provision(s) thereof shall be effective unless confirmed by a written
instrument signed by both parties.
21) The Licensee undertakes to give the Licenser prominent credit on each
label printed and record jacket reading: UNDER LICENSE WITH PYRALE.
22) This agreement shall be construed and interpreted in accordance with
the laws of the PANAMA. Licenser will not, so long as this agreement remains in
effect, grant to any other person, firm or corporation in the Licensed
Territory, rights to exercise of which would derogate from or be inconsistent
with the rights granted to Licensee thereunder.
23) This agreement shall benefit and be binding upon the parties hereto and
their respective successors and assigns.
24) This agreement may not be modified, except in writing signed by both
parties. This agreement shall be subject to the laws of Panama applicable to
agreements made and to be wholly performed therein. Illegality of any portions
hereof shall not affect the legality or enforceability of the balance of this
agreement.
IN WITNESS WHEREOF, the parties hereto have hereunto set their and seals
the day and year here in above first written.
/s/ ILLEGIBLE /s/ ILLEGIBLE
- ------------------------------ ------------------------------
LICENSER LICENSEE
7
<PAGE>
AGREEMENT
AGREEMENT made this_____ day of __________, 19 ___ , by and between
______________________________,of ___________________________________,
and/or its associates, its subsidiaries, nominees, successors and assigns
(hereinafter called "Company") and __________________________________ of
___________________________ (hereinafter referred to as "Artist"),
1. The Artist hereby grants and Company engages the Artist's EXCLUSIVE personal
services in connection with the production of Master Recordings and Videos.
2. The term of this Agreement shall be for an initial period of One (1) year
from the date hereof, during which time the Artist agrees to record and Company
will accept commercially satisfactory Master Recordings, the equivalent to at
least forty (40) minutes in playing time, to be chosen by Company. At Company's
option, Artist will record thereunder additional Masters Recordings, the
equivalent to at least forty (40) minutes in playing time, provided that Company
gives Artist written notice at least ninety (90) days prior to the expiration of
the then relevant contract year that it has exercised said option.
(a) Artist hereby grants Company Four (4) separate and severable successive
options to extend the term of this Agreement for Four (4) separate and severable
successive periods of One (1) year each (all hereinafter sometimes referred to
as "option periods"), upon all of the terms and conditions applicable to the
initial period of the term hereof except as otherwise specified.
(b) Each of the above options shall be deemed AUTOMATICALLY exercised unless
Company gives Artist written notice, not later than forty-five (45) days prior
to the expiration of the then current period, of its desire not to extend the
term of this Agreement beyond the expiration of the then current period.
(c) Should Artist, for any reason, fail or refuse to render or be unavailable
for the rendering of services hereunder or fail to record or be unavailable for
the recording of any master(s) required to be recorded, then, in addition to any
other rights or remedies which Company may have, the term of this Agreement
shall be automatically extended for a period of time equal to the period of such
failure or unavailability, provided, however, that such period of extension
shall not exceed
<PAGE>
sixty (60) days for each master (as defined in paragraph 17(c) of this
agreement) which the Artist failed to or was unavailable to record. Nothing
herein contained shall result in this Agreement being extended for a longer
period of time than the period, if any, permitted by the applicable laws in the
case of personal service contracts.
(d) All such extensions of the term of this Agreement as provided for in
subparagraph (c) above, shall apply consecutively at the end of the period for
which such failure or unavailability occurred, and the dates for the exercise by
Company of subsequent options as provided for in subparagraph 2(a) and the dates
for the commencement of subsequent option periods shall accordingly be deemed
automatically extended.
(e) The Artist agrees to re-record each Master to be made hereunder until a
commercially satisfactory Master Recording of such shall have been obtained. The
Artist agrees to record such Masters at such times and places during the term
hereof, as Company may designate. In the event that, during the term of this
Agreement or during any option period, Artist records more than the minimum
number of Master Recordings required to be recorded in such period as provided
for above, then such Masters recorded in excess of said minimum may be applied,
at Company's option, in diminution of the minimum number of masters required to
be recorded during any subsequent period.
3. The Artist agrees that during the term of this Agreement he will not perform
for any other person, firm or corporation for the purpose of making Master
Recordings. The Artist agrees not to perform any selections which he has
performed hereunder for any other person, or corporation for the purpose of
making Master Recordings for a period of five (5) years from the date of
expiration of this Agreement and any extensions and renewals thereof. If during
the term of this Agreement or any extensions and renewals thereof, the Artist
performs any composition for the purpose of making any recordings for any medium
other than Master Recordings, he will do so only pursuant to a written contract
containing any express provision that neither such performance nor any recording
thereof will be used directly or indirectly for the purpose of making Master
Recordings or any other sound reproducing device intended primarily for home
use. The restriction herein before stated shall also apply to all compositions
which have been recorded under this Agreement for a period of Five (5) years
from the date of expiration of this Agreement and any extension and renewals
thereof.
<PAGE>
4. All Master Recordings and Videos hereunder and all derivatives made
therefrom, together with the performance embodied thereon and copyright therein,
throughout the world, shall be ENTIRELY COMPANY'S PROPERTY. Not in limitation of
the foregoing or of any other rights granted herein, but in addition thereto,
and without further payment other than as herein provided, the Artist grants to
Company:
(a) The right to manufacture, advertise, sell, lease, license or otherwise use
or dispose of in any or all fields of use throughout the world, Master
Recordings and Videos embodying the performances to be recorded hereunder, upon
such terms and conditions as Company may approve;
(b) The right to use and publish, and to permit others to use and publish, the
Artist's name and likeness and all biographical material concerning the Artist;
to write and publish and to permit others to write and publish articles
concerning the Artist for advertising or trade purposes in connection with the
sale and exploitation of Company's products or otherwise, without restriction,
and to use as descriptive of the Artist the phrase "exclusive artist" to be
prefaced by any label name or names designated by Company, or any other similar
appropriate phrase, it being agreed that Company may release or sell records and
masters of selections made hereunder under its name and/or any other name which
from time to time may be selected by it;
(c) The SOLE and EXCLUSIVE RIGHTS in, TITLE to, and OWNERSHIP of all Master
Recordings and Videos made hereunder, including, but not limited to, the right
to use and control all masters, matrices, records, videos or other reproductions
of the performances embodied in such Master Recordings and Videos by any method-
electronic, magnetic, mechanical or other, now or hereafter known, obtained from
the Master Recordings and Videos made hereunder and the performances embodied
thereon;
(d) The SOLE and EXCLUSIVE right, if Company so desires, to publicly perform the
Master Recordings and Videos and permit the public performances thereof, by
means of radio broadcast or otherwise;
(e) The right to incorporate, in Master Recordings and Videos to be made
hereunder, instrumentations, orchestrations and arrangements owned by the Artist
at the time of recording them.
<PAGE>
5. Company will, within sixty (60) days after the expiration of each semi-annual
calendar period, render a statement of accrued royalties under this Agreement
earned during semi-annual period and Company will pay to the Artist,
simultaneously with the rendering of such statement, the amount, if any, which
may be due to Artist over and above costs, payments and advances deductible
hereunder. Artist agrees that Company may base the computation of sums due to
Artist hereunder upon statements rendered to Company by third parties which
distribute records embodying Master Recordings made hereunder, without any
liability on Company's part by reason of errors or omissions in such statements.
Artist further agrees that if such statement utilizes a different method of
computation than that contained herein, Company may elect to utilize such
different method of computation, in whole or in part. If such statement utilizes
wholesale or "distributor's cost price" instead of suggested retail list price
as the basis for computation of royalties, Company may compute royalties due to
Artist hereunder upon such wholesale or distributors cost price at one and a
half (1-1/2) times the percentage rate set forth in Paragraph 13(a) hereof. All
statements and payments rendered by Company to Artist hereunder shall become
binding upon the Artist six (6) months after it is rendered, unless objection
thereto has been made during such period of time, and unless and in the event
such objection has been rejected by Company, formal legal action is commenced
thereon within sixty (60) days after the date of such rejection.
6. Company and Artist agree that the Artist's services for the purpose of
recording Master Recordings and Videos hereunder are of a special, unique and
extraordinary character. The Artist agrees that in the event of the Artist's
breach of any term, condition or covenant of this Agreement, Company shall be
entitled to injunctive relief in addition to any other remedies available to it.
7. Company shall have the right to secure life insurance with respect to Artist
for Company's benefit. In this connection Artist agrees to use his best efforts
to make himself available for physical examinations by a physician as and when
reasonably requested by Company and agrees to complete such questionnaires and
other documents as Company or any insurance carrier from time to time may
require in connection with securing and maintaining such insurance.
<PAGE>
8. Artist warrants that no prior contract or agreement of any kind entered into
by the Artist, nor any prior performance by the Artist will interfere in any
manner with the complete performance of this Agreement by both parties hereto.
9. Effective as of the date hereof, Artist shall not be required to perform any
prior agreement between you and us, it being nevertheless expressly understood
and agreed that all advances, costs and charges under our prior agreement, if
any, may be recouped out of royalties due hereunder as well as pursuant to any
such prior agreement.
10. Artist agrees to indemnify Company and hold harmless from and against all
liability, loss, damage, cost or expense, including legal fees, paid or incurred
by Company by reason of any breach or failure of Artist's representations or
warranties hereunder resulting from a claim made by a third party. Pending the
determination of any claim involving such breach or failure, Company may
withhold payment of royalties hereunder,
11. Notwithstanding anything to the contrary contained herein, with respect to
Master Recordings embodied in devices designed to reproduce Artist's
performances both visually and aurally (i.e. so-called "sight and sound"
devices), Company agrees to pay to Artist ten (10%) percent of its net receipts
attributable to sales in the United States and one-half (1/2) of such percentage
with respect to receipts from sales outside of the United States, which amount
shall be proportionately reduced in the event the performances of other artists
are embodied in such devices. Upon Company's request, Artist agrees to appear
for the purpose of rendering such services as may be required for the purpose of
filming and or taping the visual elements of such devices, and subject to the
provisions of any applicable collective bargaining agreements.
12. In the event that Artist shall write or compose, in whole or in part, any
musical composition which is recorded by Artist for Company hereunder, OR ANY
OTHER COMPANY, artist agrees to enter into and is hereby deemed to have entered
into a publishing agreement with Company or Company's designee, with respect to
each such musical composition, a copy of which agreement is annexed hereto as
Exhibit "A" and made a part hereof.
13. Company will pay to the Artist for the rights granted herein, and for the
services rendered hereunder, the following royalties:
(a) A sum equal to __________ (__%) percent of the suggested retail list price,
less taxes, duties and Company's deductions in respect to packaging: (as
hereinafter stated in paragraph 13 (i) on
<PAGE>
( %) percent of all Master Recordings, in any form, including but limited to, in
Compact Disc, Cassettes and Pre-Recorded Tape form, manufactured and sold in
Panama/United States and Puerto Rico during the term hereof, and not subject
to return, embodying performances hereunder. On recordings with other featured
artists, royalties shall be reduced and recording costs will be deducted, in
proportion to the number of artists. The Artist agrees that Company may, if it
so desires, issue Master Recordings and Videos in any form, which will contain
performances by the Artist, together with those of other artists. The sum
payable to the Artist on such recordings shall based on that fraction of the
suggested retail list price as the number of recordings by the Artist contained
in such recording bears to the total number of recordings contained therein.
(b) A sum based on one-half (1/2) the applicable royalty rate set forth in
subparagraph 13(a) above, and computed as set forth therein for Master
Recordings, in any form, SOLD OUTSIDE /THE UNITED STATES AND PUERTO RICO. Said
sum shall be computed in the national currency of the country where sold, and
shall be payable only after such moneys are received by Company, in the United
States and in the dollar equivalent at the rate of exchange at the time Company
received payment.
(c) Not withstanding anything to the contrary contained herein a sum based on
one-half (1/2) the applicable royalty rate set forth in subparagraph 13 (a) or
(b) above for Master Recordings in any form sold if company licenses its rights
to a third party.
(d) With respect to Master Recordings in any form sold pursuant to mail order or
"club" plans, a sum based on one-half the applicable royalty rate set forth in
subparagraph 13(a) or (c) above or one-half of Company's net royalty receipts
from such sales, whichever of the two is less. No royalties shall be paid on
"bonus" or "free" Master Recordings in any form distributed through mail order
or "club" plans.
(e) No royalties shall be payable in respect of:
(I) Master Recordings in any form given away or furnished on a "free goods" or
"no charge" basis to "one-stops", rack jobbers, distributors or dealers, whether
or not affiliated with Company, in order to effectuate a discount from such
wholesale price, however, in no event shall Recordings, in any form, given away,
exceed two (2) on ten (10).
<PAGE>
(II) Recordings in any form sold at discounts of fifty (50%) percent or more off
the stated wholesale price.
(III) Recordings in any form given away for promotion purposes or sold at below
stated wholesale prices to disc jockeys, record reviewers, radio and television
stations and networks, motion picture companies, music publishers, Company's
employees, Artist or other customary recipients of promotional records.
(IV) Recordings in any form sold by Company for scrap or salvage or as
"cut-outs".
(V) No royalties shall be payable on any sales by Company's licensees until
royalty payments has been received by Company.
(f) With respect to sales of Recordings in Compact Disc form on which the retail
list price is Five ($5.00) U.S. Dollars or less, or the equivalent in foreign
currency, the royalty rate shall be one-half (1/2) of the applicable royalty
rate otherwise payable hereunder.
(g) As to all Recordings in any form not sold or distributed through retail
stores or sold as premiums or in connection with the sale of any other product,
commodity or services, or sold to Armed Forces Post Exchanges, royalties payable
hereunder shall be based on one-half (1/2) of the applicable royalty rate
otherwise payable and shall be computed on the basis of the actual sales price.
(h) For the sale of Recordings in any form which are sold through the method
known as "key outlet marketing" by distribution through retail fulfillment
centers in conjunction with special advertisements on radio or television, the
method known as direct mail or mail order, or by any combination of the methods
set forth above, Company shall credit Artist's royalty account with a sum based
on one-half (1/2) the applicable royalty rate set forth above or a sum equal to
fifty (50%) percent of Company's net royalty receipts from such sales,
whichever of the two is less.
(i) Company's deductions in respect to packaging for the purposes of computing
royalties hereunder shall be ten (10%) percent of the suggested retail list
price per Long-Play Record in single fold cover, fifteen (15%) percent of the
suggested retail list price per Long-Play Record in double fold cover, twenty
(20%) percent of the suggested retail list price for Cassettes and twenty-five
(25%) percent for Compact Disc.
<PAGE>
14. All payments, advances, recording and video production costs charged
hereunder to Artist, if any, shall be chargeable against and recouped by Company
out of all royalties becoming payable to Artist by reason of this or any other
agreement between Artist and Company.
15. All recording and video production costs with respect to recordings made
hereunder shall be deemed advances against Artist's royalties and shall be
recoupable therefrom before royalties provided for hereunder are paid to Artist.
Company agrees it will advance the cost of recordings at its own risk, such
advances to be non-returnable and recoupable only as aforesaid.
16. All payments hereunder shall be to the order of Artist and shall be sent to
the address first set forth above, and payments and statements and all notices
hereunder, so rendered, shall be deemed rendered to and received by the Artist
hereunder.
17. For the purpose of this Agreement, the following definitions shall apply:
(a) "Recording costs and Video costs" - all costs incurred in or incident to the
recording of the Artist's performance, including, but not limited to,
musicians', singers' and union scale payments to Artist- union trust fund
payments in connection with recording sessions, if any, all costs of travel,
hotel and per diems, costs of arrangements, copying, studio time, technicians,
tape, editing, dubbing, mixing, remixing, mastering, and any and all video clip,
video production, video promotion and video production costs.
(b) "Master Recordings", "Master", "Records", "Phonograph Records",
"Recordings", and "Derivatives" mean and include Compact Disc, Cassettes,
Long-Play Records and any and all forms of recordings and reproductions, NOW
KNOWN OR WHICH MAY HEREAFTER BECOME KNOWN, manufactured or sold primarily for
home and/or juke box use and/or use on or in means of transportation, INCLUDING
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, magnetic recording tape, film,
electronic video recordings and any other medium or device for the reproduction
of artistic performances manufactured or sold or use on or in means of
transportation, whether embodying sound alone or sound synchronized with visual
images, e.g. "sight and sound" devices.
(c) "Master" - a recording embodying thereon approximately four (4) minutes of
Artist's recorded performances.
(d) "Master Recording' Compact Disc/ Cassette/ Phonograph Record" - a recording
embodying thereon the equivalent of not less than forty (40) minutes of Artist's
recorded performances.
<PAGE>
(e) "Records sold, and not subject to return"- all records for which Company
invoices any party, and for which it receives payment, and which are not subject
to return for any reason, but excluding overstock, any records sold after
deletion from Company's catalog and known in the recording industry as
"cutouts". Company shall have the right to maintain reasonable reserves to
provide for returns.
(f) "Company" - Company, its successors, assigns, leases and licensees. Company
shall have the right to assign this Agreement, in whole or in part or any of its
rights thereunder to a third party without Artist's consent.
18. No breach of this Agreement by Company shall be deemed material unless
within thirty (30) days after Artist learns of such breach, Artist serves by
registered or certified mail written notice thereof on Company specifying the
nature thereof and Company fails to cure such breach, if any, within ninety (90)
days after receipt thereof.
19. Company agrees to pay to Artist, upon the execution of this Agreement the
sum of _____________($__________) U.S. Dollars, which shall constitute an
advance against and shall be recouped by Company out of all royalties becoming
payable to Artist by reason of this or any other agreement between Artist and
Company.
20. Company agrees to pay to Artist upon the completion of each Master Recording
constituting the minimum recording commitment expressed in Paragraph 2 of this
Agreement, the minimum applicable union scale required with respect to the
recording thereof pursuant to the rules and regulations of the union having
jurisdiction, if any, and an additional sum, so that when added together with
such union scale payment equal the total sum of_____________($_________________)
U.S. Dollars. In the event Artist shall record with another featured Artist or
Artists, said sum shall be reduced in proportion to the total number recording
artists. Each such payment made by Company pursuant to this Paragraph shall
constitute an advance against and shall be recouped by Company out of all
royalties becoming payable to Artist by reason of this or any other agreement
between Artist and Company.
21. This Agreement may not be modified, except in writing signed by both
parties. This Agreement shall be subject to the laws of the
_________________applicable to agreements made and to be wholly performed
therein.
<PAGE>
22. Illegality or unenforceability of any portions hereof shall not affect the
legality or enforceability of the balance of this agreement.
IN WITNESS WHEREOF the parties hereto have hereunto set their hands and seals
the day and year hereinabove first written,
"Company "Artist"
________________________ _________________________
BY: BY:
<PAGE>
EXHIBIT A "
STANDARD UNIFORM SONGWRITERS AGREEMENT
AGREEMENT made this day of 19 between
New York, New York, a New York corporation (hereinafter called
"Publisher"), and
jointly and/or severally, (hereinafter called "Writer(s)")
WITNESSETH:
1. The Writer(s) hereby sell, assign, transfer and set over unto the
Publisher, its successors and assigns, for the world, a certain heretofore
unpublished original musical composition, written and/or composed by the above
named Writer(s) and tentatively entitled
including all musical and non-musical rights therein, the title, words and music
thereof, (and all literary characters contained therein), the worldwide
copyright thereof and the right to secure copyright therein throughout the
entire world and to have and to hold the said copyright together with all of
their right, title and interest, both legal and equitable therein, including but
not limited to the sole and exclusive worldwide publication, mechanical
reproducing, and motion picture and television synchronization rights and the
right of public performance by any means, and all other rights now known or
hereafter to come into existence, subject to the terms of this agreement.
2. The Writer(s) warrant and represent that they are the sole authors and
composers of the title, music and/or lyrics constituting the musical
composition, which is a joint work; that said music, title and lyrics are their
own original work and creation; and that neither said music, title or lyrics nor
any part thereof are a copy of any other copyrighted work or infringe or violate
any rights of any third party; and that no adverse claim exists thereon. The
Writer(s) further warrant and represent that they have not sold, assigned,
leased, licensed or in any way disposed of or encumbered any of the rights
herein granted to the Publisher and that they have the right to make this
agreement.
3. In consideration for and in full payment of the aforesaid sale, the
Publisher hereby agrees to pay jointly to the Writer(s) with respect to the
musical composition as follows:
(a) (5) cents per copy for each and every regular pianoforte copy
thereof, and (5) cents per copy for each and every dance orchestration
thereof, paid for to the Publisher in the United States.
(b) Ten (10%) percent of the retail selling price upon each and every
printed copy of each and every other arrangement and edition thereof paid
for to the Publisher in the United States, except that in the event that
the said work shall be used or caused to be used in whole or in part in
conjunction with one or more other musical compositions in a folio or
album, the Writer(s) shall be entitled to receive that proportion of said
(10%) percent which the musical composition shall bear to the total number
of musical compositions contained in such folio or album.
1
<PAGE>
(c) Fifty (50%) percent of any and all net sums actually received by
the Publisher from mechanical reproduction rights and motion picture and
television synchronization rights in the United States.
(d) Fifty (50%) percent from any and all net royalties actually earned
by the musical composition in countries outside the United States. It is
understood the Publisher may sub-publish the musical composition outside of
the United States with its own affiliates on sub-publication royalty terms
standard in the industry.
(e) The sum of One Dollar (1.00) as and when the Composition is
published in any folio or composite work or lyric magazine by a licensee of
the Publisher.
(f) Writer(s) shall not be entitled to share in any sum or sums
received by the Publisher from any performance rights organization which
pays performance fees directly to songwriters.
(g) The Publisher shall not be required to pay any royalties on
professional or complimentary copies or any copies which are distributed to
performing artists or orchestra leaders or for advertising or exploitation
purposes.
(h) Fifty (50%) of any and all net sums actually received by the
Publisher from sources not otherwise provided for herein.
4. The Publisher shall render the Writer(s) as above, on or before each
August 15th, covering the six months ending June 30th; and each February 15th
covering the six months ending December 31st; royalty statements accompanied by
remittance for any royalties due thereunder.
5. It is understood and agreed by and between all of the parties hereto
that except as hereinafter set forth all sums hereunder payable shall be divided
in even shares between the Writers.
__________________________________ _______________________________________
__________________________________ _______________________________________
__________________________________ _______________________________________
__________________________________ _______________________________________
6. The Writer(s) hereby consent to such changes, editing and arrangements
of said composition, (and Publisher shall have the right to copyright any such
versions in its own name and retain all rights therein for the full term of
protection therein, and renew and extend such copyright), and the setting of
words (English and/or foreign) to the music, and of music to the words, and the
change of title, as the Publisher deems desirable. The Writer(s) consent to the
use of their names and likeness and the title of the said composition on or
together with the music, folios, recordings, performances, player rolls, and in
connection with publicity and advertising concerning the Publisher, its
successors, assigns and licensees and said composition, and agrees that the use
of such name, likeness and title may commence prior to the publication and may
continue so long as the Publisher shall own and/or exercise any rights in said
composition or any versions thereof. In the event that another author and/or
composer is, in accordance with the practice of the industry, paid by Publisher
on any such version, then Writer(s)' royalties hereunder shall be reduced pro
rata. Writer(s) agree that Publisher may deal with any affiliated record company
undertaking the effort and expense of recording and/or promoting phonograph
records embodying the musical composition, on such terms as Publisher shall in
its reasonable business judgement, deem proper, including the licensing of said
composition for mechanical use at less than the statutory rate therefor.
2
<PAGE>
7. The Writer(s) may at his own expense once a year upon written notice
appoint a certified public accountant who shall upon written notice during
business hours have access to all records of the Publisher relating to the said
composition or any other of Writer(s)' compositions with Publisher for the
purpose of verifying royalty statements rendered.
8. Written demands and notices other than royalty statements provided for
herein shall be sent by registered mail.
9. The Writer(s) hereby authorize and empower the Publisher to renew, or
extend, pursuant to law for and in the name of the Writer(s) if living, any
copyright of the said musical composition, and to execute and deliver, as
attorney-in-fact of Writer(s) in the name of the Writer(s), a formal assignment
of such renewal or extension copyright to the Publisher, for its own use and
benefit subject to the payment of the same royalties as herein before provided,
or pro rata royalties, if Publisher receives hereunder less than all of the
Writer(s) rights therein.
10. The Writer(s) hereby consent to the assignment of this contract or the
said musical composition or any copyright thereof or any and all of the rights
therein secured by the Publisher to any person, firm or corporation whatsoever,
subject, however, to the payment of the royalties herein specified. Writer(s)
shall assign rights and benefits hereunder only with the prior written consent
of Publisher, and any attempted agreement shall be void and transfer no rights
to the purported assignee.
11. Any legal action brought by the Publisher against any alleged infringer
of said composition shall be initiated and prosecuted at its sole expense, and
of any recovery made by it as a result thereof, after deduction of the expenses
of the litigation, including reasonable attorney's fees, a sum equal to
thirty-three and one-third percent shall be divided among the Writer(s) of the
said composition.
(a) If a claim is presented against the Publisher alleging that the
Composition is an infringement or invasion of the rights of others, he
shall thereupon serve written notice upon the Writer(s) containing the
substance of such claim and thereafter, until the claim has been
adjudicated or settled by Publisher, Publisher may pay any monies coming
due the Writer(s) hereunder or under any other agreement with Writer(s) to
any bank, to be held pending the outcome of such claim; provided, however,
if no suit be filed within twelve (1 2) months after written notice to the
Writer(s) by the Publisher of the adverse claim, the Publisher shall,
unless Publisher has reasonable grounds to the contrary, pay to the
Writer(s) all sums held as aforesaid. Such payment shall be without
prejudice to the rights of the Publisher in the event of a subsequent
adverse adjudication. Publisher's damages (including reasonable attorney's
fees) shall not be limited to the monies retained hereunder.
(b) From and after the service of a summons in a suit brought against
the Publisher in respect of the Composition, and which suit threatens the
title or any right of the Publisher with respect to the Composition, any
and all payments thereafter coming due to the Writer(s) under this or any
other contract with Publisher, shall be held in abeyance until the suit has
been finally adjudicated or settled by Publisher, unless the Writer(s)
shall elect to file an acceptable bond in which event the sums due shall be
paid to the said Writer(s).
12. "Writer(s)" as used herein shall be deemed to include all authors and
composers signing this agreement or counterparts thereof.
13. This agreement is binding upon the respective parties hereto, their
respective successors in interest, legal representatives and assigns and
represents the entire understanding between the parties and cannot be
terminated, or amended except by a writing signed by all of the parties hereto.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals
the day and year first above written.
Writer .................................
Address ................................
Writer .................................. BY ..............................
Address ................................
Writer .................................
Address ................................
<PAGE>
1997 STOCK OPTION PLAN
OF
FANIA ENTERTAINMENT GROUP, LTD.
1. Purpose.
Fania Entertainment Group, Ltd. (the "Company") desires to attract and
retain the best available talent and encourage the highest level of performance
in order to continue to serve the best interests of the Company, and its
shareholders. By affording key personnel the opportunity to acquire proprietary
interests in the Company and by providing them incentives to put forth maximum
efforts for the success of the business, the 1997 Stock Option Plan of Fania
Entertainment Group, Ltd. (the "1997 Plan") is expected to contribute to the
attainment of those objectives.
The word "Parent" as used herein, shall mean any corporation that owns
fifty percent or more of the voting stock of the Company.
The word "Subsidiary" or "Subsidiaries" as used herein, shall mean any
corporation, fifty percent or more of the voting stock of which is owned by the
Company.
2. Scope and Duration.
Options under the 1997 Plan may be granted in the form of incentive stock
options ("Incentive Options") as provided in Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or in the form of nonqualified stock
options ("Non-Qualified Options"). (Unless otherwise indicated, references in
the 1997 Plan to "options" include Incentive Options and Non-Qualified Options.)
The maximum aggregate number of shares as to which options may be granted from
time to time under the 1997 Plan is 250,000 shares of the Common Stock of the
Company ("Common Stock"), which shares may be, in whole or in part, authorized
but unissued shares or shares reacquired by the Company. The maximum number of
shares with respect to which options may be granted to any employee during the
term of the Plan is 150,000. Except as otherwise provided in Paragraph 7(b)
hereof, if an option shall expire, terminate or be surrendered for cancellation
for any reason without having been exercised in full, the shares represented by
the option or portion thereof not so exercised shall (unless the 1997 Plan shall
have been terminated) become available for subsequent option grants under the
1997 Plan. As provided in Paragraph 13, the 1997 Plan shall become effective on
_______, 1997, and unless terminated sooner pursuant to paragraph 14, the 1997
Plan shall terminate on _______ 2007, and no option shall be granted hereunder
after that date.
<PAGE>
3. Administration.
The 1997 Plan shall be administered by the Board of Directors of the
Company, or, at their discretion, by a committee which is appointed by the Board
of Directors to perform such function (the "Committee"). The Committee shall
consist of not less than two members of the Board of Directors, each of whom
shall serve at the pleasure of the Board of Directors and shall be a
"Non-Employee Director" as defined in Rule 16b-3 pursuant to the Securities
Exchange Act of 1934 (the "Act"). Vacancies occurring in the membership of the
Committee shall be filled by appointment by the Board of Directors.
The Board of Directors or the Committee, as the case may be, shall have
plenary authority in its discretion, subject to and not inconsistent with the
express provisions of the 1997 Plan, to grant options, to determine the purchase
price of the Common Stock covered by each option, the term of each option, the
persons to whom, and the time or times at which, options shall be granted and
the number of shares to be covered by each option; to designate options as
Incentive Options or Non-Qualified Options; to interpret the 1997 Plan; to
prescribe, amend and rescind rules and regulations relating to the 1997 Plan; to
determine the terms and provisions of the option agreements (which need not be
identical) entered into in connection with options under the 1997 Plan; and to
make all other determinations deemed necessary or advisable for the
administration of the 1997 Plan. The Board of Directors or the Committee, as the
case may be, may delegate to one or more of its members or to one or more agents
such administrative duties as it may deem advisable, and the Board of Directors
or the Committee, as the case may be, or any person to whom it has delegated
duties as aforesaid may employ one or more persons to render advice with respect
to any responsibility the Board of Directors or the Committee, as the case may
be, or such person may have under the 1997 Plan.
4. Eligibility; Factors to be Considered in Granting Options.
Incentive Options shall be limited to persons who are employees of the
Company or, if applicable, its Parent, or a Subsidiary and at the date of grant
of any option are in the employ of the Company or its Parent or a Subsidiary. In
determining the employees to whom Incentive Options shall be granted and the
number of shares to be covered by each Incentive Option, the Board of Directors
or the Committee, as the case may be, shall take into account the nature of
employees' duties, their present and potential contributions to the success of
the Company and such other factors as it shall deem relevant in connection with
accomplishing the purposes of the 1997 Plan. An employee who has
<PAGE>
been granted an option or options under the 1997 Plan may be granted an
additional option or options, subject, in the case of Incentive Options, to such
limitations as may be imposed by the Code on such options. Except as provided
below, a Non-Qualified Option may be granted to any person, including, but not
limited to, employees, independent agents, consultants and attorneys, and
non-employee directors, who the Board of Directors or the Committee, as the case
may be, believes has contributed, or will contribute, to the success of the
Company.
5. Option Price.
The purchase price of the Common Stock covered by each option shall be
determined by the Board of Directors or the Committee, as the case may be. In
the case of Incentive Options the purchase price shall not be less than 100%
(110% if granted to an employee referred to in paragraph 8(b) hereof) of the
Fair Market Value (as defined in paragraph 15 below) of a share of the Common
Stock on the date on which the option is granted. In the case of Non-Qualified
Options the purchase price per share of Common Stock covered by each option
shall be such price, not less than the par value of a share of Common Stock, as
shall be determined by the Board of Directors or the Committee, as the case may
be. Such purchase prices shall be subject to adjustment as provided in paragraph
12 below. The Board of Directors or the Committee, as the case may be, shall
determine the date on which an option is granted; in the absence of such a
determination, the date on which the Board of Directors or the Committee, as the
case may be, adopts a resolution granting an option shall be considered the date
on which such option is granted.
6. Term of Options.
The term of each option shall be determined by the Board of Directors or
the Committee, as the case may be, provided, however that the term of any option
cannot be more than ten years from the date of grant (five years in the case of
an Incentive Option granted to an employee referred to in paragraph 8(b)
hereof). All options granted pursuant to the 1997 Plan are subject to earlier
termination as provided in paragraphs 10 and 11 below.
7. Exercise of Options.
(a) Subject to the provisions of the 1997 Plan and unless otherwise
provided in the option agreement, options granted under the 1997 Plan shall
become exercisable as determined by the Board of Directors or Committee. In its
discretion, the Board of Directors or the Committee, as the case may be, may, in
any case or cases, prescribe that options granted under the 1997 Plan become
exercisable in installments or provide that an option may be
3
<PAGE>
exercisable in full immediately upon the date of its grant. The Board of
Directors or the Committee, as the case may be, may, in its sole discretion,
also provide that an option granted pursuant to the 1997 Plan shall immediately
become exercisable in full upon the happening of any of the following events;
(i) the first purchase of shares of Common Stock pursuant to a tender offer or
exchange offer (other than an offer by the Company) for all, or any part of, the
Common Stock, (ii) the approval by the shareholder(s) of the Company of an
agreement for a merger in which the Company will not survive as an independent,
publicly owned corporation, a consolidation, or a sale, exchange or other
disposition of all or substantially all of the Company's assets, (iii) with
respect to an employee, on his 65th birthday, or (iv) with respect to an
employee, on the employee's involuntary termination from employment, except as
provided in Section 10 herein. In the event of a question or controversy as to
whether or not any of the events hereinabove described has taken place, a
determination by the Board of Directors or the Committee, as the case may be,
that such event has or has not occurred shall be conclusive and binding upon the
Company and participants in the 1997 Plan.
(b) Any option at any time granted under the 1997 Plan may contain a
provision to the effect that the optionee (or any persons entitled to act under
paragraph 11 hereof) may, at any time at which Fair Market Value is in excess of
the exercise price and prior to exercising the option, in whole or in part,
request that the Company purchase all or any portion of the option as shall then
be exercisable at a price (the "Purchase Price") equal to the difference between
(i) an amount equal to the option price multiplied by the number of shares
subject to that portion of the option in respect of which such request shall be
made and (ii) an amount equal to such number of shares multiplied by the fair
market value of the Company's Common Stock (within the meaning of Section 422 of
the Code and the treasury regulations promulgated thereunder) on the date of
purchase. The Company shall have no obligation to make any purchase pursuant to
such request, but if it elects to do so, such portion of the option as to which
the request is made shall be surrendered to the Company. The Purchase Price for
the portion of the option to be so surrendered shall be paid by the Company,
less any applicable withholding tax obligations imposed upon the Company by
reason of the purchase, at the election of the Board of Directors or the
Committee, as the case may be, either in cash or in shares of Common Stock
(valued as of the date and in the manner provided in clause (ii) above), or in
any combination of cash and Common Stock, which may consist, in whole or in
part, of shares of authorized but unissued Common Stock or shares of Common
Stock held in the Company's treasury. No fractional share of Common Stock shall
be issued or transferred and any fractional share shall be disregarded. Shares
covered by that portion of any option purchased by the Company pursuant hereto
and
4
<PAGE>
surrendered to the Company shall not be available for the granting of further
options under the 1997 Plan. All determinations to be made by the Company
hereunder shall be made by the Board of Directors or the Committee, as the case
may be.
(c) An option may be exercised, at any time or from time to time (subject,
in the case of Incentive Options, to such restrictions as may be imposed by the
Code), as to any or all full shares as to which the option has become
exercisable until the expiration of the period set forth in paragraph 6 hereof,
by the delivery to the Company, at its principal place of business, of (i)
written notice of exercise in the form specified by the Board of Directors or
the Committee, as the case may be, specifying the number of shares of Common
Stock with respect to which the option is being exercised and signed by the
person exercising the option as provided herein, (ii) payment of the purchase
price; and (iii) in the case of Non-Qualified Options, payment in cash of all
withholding tax obligations imposed on the Company by reason of the exercise of
the option. Upon acceptance of such notice, receipt of payment in full, and
receipt of payment of all withholding tax obligations, the Company shall cause
to be issued a certificate representing the shares of Common Stock purchased. In
the event the person exercising the option delivers the items specified in (i)
and (ii) of this Subsection (c), but not the item specified in (iii) hereof, if
applicable, the option shall still be considered exercised upon acceptance by
the Company for the full number of shares of Common Stock specified in the
notice of exercise but the actual number of shares issued shall be reduced by
the smallest number of whole shares of Common Stock which, when multiplied by
the Fair Market Value of the Common Stock as of the date the option is
exercised, is sufficient to satisfy the required amount of withholding tax.
(d) The purchase price of the shares as to which an option is exercised
shall be paid in full at the time of exercise. Except as otherwise provided in
subsection (b) of this paragraph 7, payment shall be made in cash, which may be
paid by check or other instrument acceptable to the Company; in addition,
subject to compliance with applicable laws and regulations and such conditions
as the Board of Directors or the Committee, as the case may be, may impose, the
Board of Directors or the Committee, as the case may be, in its sole discretion,
may on a case-by-case basis elect to accept payment in shares of Common Stock of
the Company which are already owned by the option holder, valued at the Fair
Market Value thereof (as defined in paragraph 15 below) on the date of exercise;
provided, however, that with respect to Incentive Options, no such discretion
may be exercised unless the option agreement permits the payment of the purchase
price in that manner.
5
<PAGE>
(e) Except as provided in paragraphs 10 and 11 below, no option granted to
an employee may be exercised at any time by such employee unless such employee
is then an employee of the Company or a Subsidiary or Parent.
8. Incentive Options.
(a) With respect to Incentive Options granted, the aggregate Fair Market
Value (determined in accordance with the provisions of paragraph 15 at the time
the Incentive Option is granted) of the Common Stock or any other stock of the
Company or its current or future Subsidiaries with respect to which incentive
stock options, as defined in Section 422 of the Code, are exercisable for the
first time by any employee during any calendar year (under all incentive stock
option plans of the Company and its parent and subsidiary corporations, as those
terms are defined in Section 424 of the Code) shall not exceed $100,000.
(b) No Incentive Option may be awarded to any employee who immediately
prior to the date of the granting of such Incentive Option owns more than 10% of
the combined voting power of all classes of stock of the Company or any of its
Subsidiaries unless the exercise price under the Incentive Option is at least
110% of the Fair Market Value and the option expires within 5 years from the
date of grant.
(c) In the event of amendments to the Code or applicable regulations
relating to Incentive Options subsequent to the date hereof, the provisions of
the 1997 Plan and the provisions of outstanding option agreements between the
Company and any optionee with respect to options issued pursuant to the 1997
Plan shall automatically, and without any action on the part of any person, be
modified to conform to such amendments, provided, however, that no such
amendment shall occur to an existing option without the express approval of the
Company and the optionee if the effect of such amendment were to result in the
granting of a new option pursuant to Section 424(h) of the Code or any successor
provision.
9. Transferability of Options.
Incentive Options granted under the 1997 Plan shall not be transferable
otherwise than by will or the laws of descent and distribution, and Incentive
Options may be exercised during the lifetime of the optionee only by the
optionee. Non-Qualified Options are only transferable if such right is granted
by the Board of Directors, or the Committee, as the case may be, and such
provision is contained in the option agreement with respect to the Non-Qualified
Options. No transfer of an option by the optionee by will or by the laws of
descent and distribution or otherwise shall be effective to bind the Company
unless the Company shall have been
6
<PAGE>
furnished with written notice thereof and a copy of the will and/or such other
evidence as the Company may deem necessary to establish the validity of the
transfer and the acceptance by the transferor or transferees of the terms and
conditions of such option.
10. Termination of Employment.
In the event that the employment of an employee to whom an option has been
granted under the 1997 Plan shall be terminated (except as set forth in
paragraph 11 below), such option may be, subject to the provisions of the 1997
Plan, exercised (to the extent that the employee was entitled to do so at the
termination of his employment) at any time within three (3) months after such
termination, but not later than the date on which the option terminates;
provided, however, that any option which is held by an employee whose employment
is terminated for cause or voluntarily without the consent of the Company or
Parent or Subsidiary, as the case may be, shall, to the extent not theretofore
exercised, automatically terminate as of the date of termination of employment.
As used herein, "cause" shall mean conduct amounting to fraud, dishonesty, or
engaging in competition or solicitations in competition with the Company and
breaches of any applicable employment agreement between the Company and the
optionee. Options granted to employees under the 1997 Plan shall not be affected
by any change of duties or position so long as the holder continues to be a
regular employee of the Company, Parent or a Subsidiary, as the case may be. Any
option agreement or any rules and regulations relating to the 1997 Plan may
contain such provisions as the Board of Directors or the Committee, as the case
may be, shall approve with reference to the determination of the date employment
terminates and the effect of leaves of absence. Nothing in the 1997 Plan or in
any option granted pursuant to the 1997 Plan shall confer upon any employee any
right to continue in the employ of the Company or any of the Subsidiaries or
Parent or interfere in any way with the right of the Company or any such
Subsidiary or Parent, as the case may be, to terminate such employment at any
time.
11. Death or Disability of Employee.
If an employee to whom an option has been granted under the 1997 Plan shall
die while employed by the Company or a Parent or a Subsidiary, as the case may
be, or within three (3) months after the termination of such employment (other
than termination for cause or voluntary termination without the consent of the
Company or the Parent or a Subsidiary, as the case may be), such option may be
exercised, to the extent exercisable by the employee on the date of death, by a
legatee or legatees of the employee under the employee's last will, or by the
employee's personal representative or distributees, at any time within one year
after the date of the employee's death, but not later than the date on
7
<PAGE>
which the option terminates. In the event that the employment of an employee to
whom an option has been granted under the 1997 Plan shall be terminated as the
result of a disability, such option may be exercised, to the extent exercisable
by the employee on the date of such termination, at any time within one year
after the date of such termination, but not later than the date on which the
option terminates.
12. Adjustments Upon Changes in Capitalization, Etc.
Notwithstanding any other provision of the 1997 Plan, the Board of
Directors or the Committee, as the case may be, may, at any time, make or
provide for such adjustments to the 1997 Plan, to the number and class of shares
issuable thereunder or to any outstanding options as it shall deem appropriate
to prevent dilution or enlargement of rights, including adjustments in the event
of changes in the outstanding Common Stock by reason of stock dividends,
split-ups, recapitalizations, mergers, consolidations, combinations or exchanges
of shares, separations, reorganizations, liquidations and the like. In the event
of any offer to holders of Common Stock generally relating to the acquisition of
their shares, the Board of Directors or the Committee, as the case may be, may
make such adjustment as it deems equitable in respect of outstanding options and
rights, including in its discretion revision of outstanding options and rights
so that they may be exercisable for the consideration payable in the acquisition
transaction. Any such determination by the Board of Directors or the Committee,
as the case may be, shall be conclusive. Any fractional shares resulting from
such adjustments shall be eliminated.
13. Effective Date.
The 1997 Plan shall become effective on [____________________], 1997, the
date of adoption by the Board of Directors and shareholders of the Company.
14. Termination and Amendment.
The Board of Directors of the Company may, without the approval of its
shareholders, suspend, terminate, modify or amend the 1997 Plan, provided,
however, that any amendment that would increase the aggregate number of shares
which may be issued under the 1997 Plan, materially increase the benefits
accruing to participants under the 1997 Plan, or materially modify the
requirements as to eligibility for participation in the 1997 Plan, shall be
subject to the approval of the Company's shareholder(s), except that any such
increase or modification that may result from adjustments authorized by
paragraph 12 does not require such approval. Except as provided below and in
paragraph 8(c) hereof,
8
<PAGE>
no suspension, termination, modification or amendment of the 1997 Plan shall
require the approval of any optionee. Notwithstanding the foregoing, no
suspension, termination, modification or amendment of the 1997 Plan shall be
made without the consent of the person to whom an option shall theretofore have
been granted if it adversely effects the rights of such optionee under such
option.
15. Miscellaneous.
As said term is used in the 1997 Plan, the "Fair Market Value" of a share
of Common Stock on any day means: (a) if the principal market for the Common
Stock is a national securities exchange or the National Association of
Securities Dealers Automated Quotations System ("NASDAQ), the closing sales
price of the Common Stock on such day as reported by such exchange or market
system, or on a consolidated tape reflecting transactions on such exchange or
market system, or (b) if the principal market for the Common Stock is not a
national securities exchange and the Common Stock is not quoted on NASDAQ, the
mean between the highest bid and lowest asked prices for the Common Stock on
such day as reported by the National Quotation Bureau, Inc.; provided that if
clauses (a) and (b) of this paragraph are both inapplicable, or if no trades
have been made or no quotes are available for such day, the Fair Market Value of
the Common Stock shall be determined by the Board of Directors or the Committee,
as the case may be, shall be conclusive as to the Fair Market Value of the
Common Stock.
The Board of Directors or the Committee, as the case may be, may require,
as a condition to the issuance and delivery of the shares issuable upon exercise
of any option granted under the 1997 Plan, that to the extent required at the
time of exercise (i) such shares of Common Stock have been duly listed, upon
official notice of issuance, upon any stock exchange(s) on which the Common
Stock is listed or upon NASDAQ, if the Common Stock is then listed on NASDAQ,
(ii) a Registration Statement under the Securities Act of 1933, as amended, with
respect to such shares shall be effective and any applicable state registration
or qualification has been complied with, or, in the opinion of either counsel to
the Company or counsel to the optionholder reasonably acceptable to the Company,
exemptions from such federal and state registration requirements are available
and/or (iii) the person exercising such option deliver to the Company such
documents, agreements and investment and other representations as the Board of
Directors or the Committee, as the case may be, shall reasonably determine to be
in the best interests of the Company.
During the term of the 1997 Plan, the Board of Directors or the Committee,
as the case may be, in its discretion, may offer one or more option holders the
opportunity to surrender any or all unexpired options for cancellation or
replacement. If any options
9
<PAGE>
are so surrendered, the Board of Directors or the Committee, as the case may be,
may then grant new Non-Qualified or Incentive Options to such holders for the
same or different numbers of shares at higher or lower exercise prices than the
surrendered options. Such new options may have a different term and shall be
subject to the provisions of the 1997 Plan the same as any other option.
Anything herein to the contrary notwithstanding, the Board of Directors or
the Committee, as the case may be, may, in their sole discretion, impose more
restrictive conditions on the exercise of an option granted pursuant to the 1997
Plan; however, any and all such conditions shall be specified in the option
agreement limiting and defining such option.
Nothing in the 1997 Plan or in any Non-Qualified Option granted pursuant to
the 1997 Plan to a non-employee, including a director, shall confer on any
individual or entity the right to provide services to the Company, Parent or a
Subsidiary, as the case may be, or the right of any director to continue as a
director of the Company, Parent or a Subsidiary, as the case may be, or
interfere with the right of the Company, Parent or any Subsidiary, as the case
may be, to terminate the optionee's services at any time.
16. Privileges of Stock Ownership.
No person entitled to exercise any option granted under the 1997 Plan shall
have any of the rights or privileges of a shareholder of the Company in respect
of any shares of stock issuable upon exercise of such option until certificates
representing such shares shall have been issued (whether electronically or in
paper format)
17. Compliance with SEC Regulations.
It is the Company's intent that the 1997 Plan comply in all respects with
Rule 16b-3 of the Act and any regulations promulgated thereunder. If any
provision of the 1997 Plan is later found not to be in compliance with said
Rule, the provisions shall be deemed null and void.
10
<PAGE>
STANDARD FORM OF LOFT LEASE
The Real Estate Board of New York, Inc.
Agreement of Lease, made as of this 15th day of March 1996, between E&E
ASSOCIATES, LLC, 32 Merrivale Road, Great Neck, NY 11020 party of the first
part, hereinafter referred to as OWNER, and KEY PRODUCTIONS, INC., -12 West 31st
Street, New York, NY 10001 party of the second part, hereinafter referred to as
TENANT,
Witnesseth: Owner hereby leases to Tenant and Tenant hereby hires from Owner the
entire fourth floor in the building known as 112 West 31st Street in the Borough
of Manhattan, City of New York, for the term of five years (or until such term
shall sooner cease and expire as hereinafter provided) to commence on the 1st
day of March nineteen hundred and ninety-six, and to end on the 28th day of
February two thousand and two both dates inclusive, at an annual rental rate of
$53,300.00 yearly ($4,441.67 monthly) for the first and second year
$55,350.00 yearly ($4,612.50 monthly) for the third year
$57,400.00 yearly ($4,833.33 monthly) for the fourth and fifth year
which Tenant agrees to pay in lawful money of the United States which shall be
legal tender in payment of all debts and dues in public and private, at the time
of payment, in equal monthly installments in advance on the first day of each
month during said term, at the office of Owner or such other place as Owner may
designate, without any set off or deduction whatsoever, except that Tenant shall
pay the first monthly installment(s) on the execution hereof (unless this lease
be a renewal).
In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installments of rent payable hereunder and
the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby convenant
as follows:
Rent Occupancy:
1. Tenant shall pay the rent as above and as hereinafter provided.
2. Tenant shall use and occupy demised premises for recording studio and
general offices for tenant and individuals and/or corporations associated with
tenant provided such use is in accordance with the certificate of occupancy
for the building, if any, and for no other purpose.
Alterations:
3. Tenant shall make no changes in or to the demised premises of any nature
without Owner's prior written consent. Subject to the prior written consent of
Owner, and to the provisions of this article, Tenant at Tenant's expense, may
make alterations, installations, additions or improvements which are
non-structural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises using
contractors or mechanics first approved in each instance by Owner. Tenant shall,
at its expense before making any alterations, additions, installments or
improvements, obtain all permits, approvals and certificates required by any
governmental or quasi-governmental bodies and (upon completion) certificates of
final approval thereof and shall deliver promptly duplicates of all such
permits, approvals and certificates to Owner. Tenant agrees to carry and will
cause Tenant's contractors and sub-contractors to carry such workman's
compsenation, general liability, personal and property damage insurance as Owner
may require. If any mechanic's lien is filed against the demised premises, or
the building of which the same forms a part, for work claimed to have been done
for, or materials furnished to Tenant, whether or not done pursuant to this
article, the same shall be discharged by Tenant within thirty days thereafter,
at Tenant's expense, by payment or filing the bond required by law or otherwise.
All fixtures and all paneling, partitions, railings and like installations,
installed in the premises at any time, either by Tenant or by Owner in Tenant's
behalf, shall, upon installation, become the property of Owner and shall remain
upon and be surrendered with the demised premises unless Owner, by notice to
Tenant no later than twenty days prior to the date fixed as the termination of
this lease, elects to relinquish Owner's right thereto and to have them removed
by Tenant, in which event the same shall be removed from the premises by Tenant
prior to the expiration of the lease, at Tenant's expense. Nothing in this
Article shall be construed to give Owner title to or to prevent Tenant's removal
of trade fixtures, moveable office furniture and equipment, but upon removal of
any such from the premises or upon removal of other installations as may be
required by Owner, Tenant shall immediately and at its expense, repair and
restore the premises to the condition existing prior to installation and repair
any damage to the demised premises or the building due to such removal. All
property permitted or required to be removed, by Tenant at the end of the term
remaining in the premises after Tenant's removal shall be deemed abandoned and
may, at the election of Owner, either be retained as Owner's property or may be
removed from the premises by Owner, at Tenant's expense.
Repairs:
4. Owner shall maintain and repair the exterior of and the public portions
of the building. Tenant shall, throughout the term of this lease, take good care
of the demised premises including the bathrooms and lavatory facilities (if the
demised premises encompass the entire floor of the building) and the windows and
window frames and, the fixtures and appurtenances therein and at Tenant's sole
cost and expense promptly make all repairs thereto and to the building, whether
structural or non-structural in nature, caused by or resulting from the
carelessness, omission, neglect or improper conduct of Tenant, Tenant's
servants, employees, invitees or licensees, and whether or not arising from such
Tenant conduct or omission, when required by other provisions of this lease,
including Article 6. Tenant shall also repair all damage to the building and the
demised premises caused by the moving of Tenant's fixtures, furniture or
equipment. All the aforesaid repairs shall be of quality or class equal to the
original work or construction. If Tenant fails, after ten days notice, to
proceed with due diligence to make repairs required to be made by Tenant, the
same may be made by the Owner at the expense of Tenant, and the expenses thereof
incurred by Owner shall be collectible, as additional rent, after rendition of a
bill or statement therefor. If the demised premises be or become infested with
vermin, Tenant shall, at its expense, cause the same to be exterminated. Tenant
shall give Owner prompt notice of any defective condition in any plumbing,
heating system or electrical lines located in the demised premises and following
such notice, Owner shall remedy the condition with due diligence, but at the
expense of the Tenant, if repairs are necessitated by damage or injury
attributable to Tenant, Tenant's servants, agents, employees, invitees or
licensees as aforesaid. Except as specifically provided in Article 9 or
elsewhere in this lease, there shall be no allowance to the Tenant for the
diminution of rental value and no liability on the part of the Owner by reason
on inconvenience, annoyance or injury to business arising from Owner, Tenant or
others making or failing to make any repairs, alterations, additions or
improvements in or to any portion of the building or the demised premises or in
and to the fixtures, appurtenances or equipment thereof. It is specifically
agreed that Tenant shall not be entitled to any set off or reduction of rent by
reason of any failure of Owner to comply with the covenants of this or any other
article of this lease. Tenant agrees that Tenant's sole remedy at law in such
instance will be by way of any action for damages for breach of contract. The
provisions of this Article 4 with respect too the making of repairs shall not
apply in the case of fire or other casualty with regard to which Article 9
hereof shall apply.
Window Cleaning:
5. Tenant will not clean, nor require, permit, suffer or allow any window
in the demised premises to be cleaned from the outside in violation of Section
202 of the Labor Law or of any other applicable law or of the Rules of the Board
of Standards and Appeals, or any other Board or body having or asserting
jurisdiction.
Requirements of Law, Fire Insurance:
6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter Tenant shall, at Tenant's sole cost and
expense, promptly comply will all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, or the Insurance Services Office, or any similar body which shall
impose any violation, order or duty upon Owner or Tenant with respect to the
demised premises, whether or not arising out of Tenant's use or manner of use
thereof, or, with respect to the building if arising out of Tenant's use or
manner of use of the demised premises or the building (including the use
permitted under the lease). Except as provided in Article 30 hereof, nothing
herein shall require Tenant to make structural repairs or alterations unless
Tenant has, by its manner of use of the demised premises or method of operation
therein, violated any such laws, ordinances, order, rules, regulations or
requirements with respect thereto. Tenant shall not do or
<PAGE>
permit any act or thing to be done in or to the demised premises which is
contrary to law, or which will invalidate or be in conflict with public
liability, fire or other policies of insurance at any time carried by or for the
benefit of Owner. Tenant shall not keep anything in the demised premises except
as now or hereafter permitted by the Fire Department, Board of Fire
Underwriters, Fire Insurance Rating Organization or other authority having
jurisdiction, and then only in such manner and such quantity so as not to
increase the rate for fire insurance applicable to the building, nor use the
premises in a manner which will increase the insurance rate for the building or
any property located therein over that in effect prior to the commencement of
Tenant's occupancy. If by reason of failure to comply with the foregoing the
fire insurance rate shall, at the beginning of this lease or at any time
thereafter, be higher than otherwise would be, then Tenant shall reimburse
Owner, as additional rent hereunder, for that portion of all fire insurance
premiums thereafter paid by Owner which shall have been charged because of such
failure by Tenant. In any action or proceeding wherein Owner and Tenant are
parties, a schedule or "make-up" or rate for the building or demised premises
issued by a body making fire insurance rates applicable to said premises shall
be conclusive evidence of the facts therein stated and the several items and
charges in the fire insurance rates then applicable to said premises. Tenant
shall not place a load upon any floor of the demised premises exceeding the
floor load per square foot area which it was designed to carry and which is
allowed by law. Owner reserves the right to prescribe the weight and position of
all safes, business machines and mechanical equipment. Such installations shall
be placed and maintained by Tenant, at Tenant's expense, in settings sufficient,
in Owner's judgement, to absorb and prevent vibration, noise and annoyance.
Subordination:
7. This lease is subject and subordinate to all ground or underlying leases
and to all mortgages which may now or hereafter affect such leases or the real
property of which demised premises are a part and to all renewals,
modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages. This clause shall be self-operative and no
further instrument of subordination shall be required by any ground or
underlying lessor or by any mortgages, affecting any lease or the real property
of which the demised premises are a part. In confirmation of such subordination,
Tenant shall execute promptly any certificate that Owner may request.
Tenant's Liability Insurance Property Loss, Damage, Indemnity:
8. Owner or its agents shall not be liable for any damage to property of
Tenant or of others entrusted to employees of the building, nor for loss of or
damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence of Owner, its agents, servants or
employees; Owner or its agents shall not be liable for any damage caused by
other tenants or persons in, upon or about said building or caused by operations
in connection of any private, public or quasi public work. If at any time any
windows of the demised premises are temporarily closed, darkened or bricked up
(or permanently closed, darkened or bricked up, if required by law) for any
reason whatsoever including, but not limited to Owner's own acts, Owner shall
not be liable for any damage Tenant may sustain thereby and Tenant shall not be
entitled to any compensation therefor nor abatement or diminution of rent nor
shall the same release Tenant from its obligations hereunder nor constitute an
eviction. Tenant shall indemnify and save harmless Owner against and from all
liabilities, obligations, damages, penalties, claims, costs and expenses for
which Owner shall not be reimbursed by insurance, including reasonable attorneys
fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's
agents, contractors, employees, invitees, or licensees, of any covenant or
condition of this lease, or the carelessness, negligence or improper conduct of
the Tenant, Tenant's agents, contractors, employees, invitees or licensees.
Tenant's liability under this lease extends to the acts and omissions of any
sub-tenant, and any agent, contractor, employee, invitee or licensee of any
sub-tenant. In case any action or proceeding is brought against Owner by reason
of any such claim, Tenant, upon written notice from Owner, will, at Tenant's
expense, resist or defend such action or proceeding by counsel approved by Owner
in writing, such approval not to be unreasonably withheld.
Destruction, Fire and Other Casualty:
9. (a) if the demised premises or any part thereof shall be damaged by fire
or other casualty, Tenant shall give immediate notice thereof to Owner and this
lease shall continue in full force and effect except as hereinafter set forth.
(b) If the demised premises are partially damaged or rendered partially unusable
by fire or other casualty, the damage thereto shall be repaired by and at the
expense of Owner and the rent and other items of additional rent, until such
repair shall be substantially completed, shall be apportioned from the day
following the casualty according to the part of the premises which is usable.
(c) If the demised premises are totally damaged or rendered wholly unusable by
fire or other casualty, then the rent and other items of additional rent as
hereinafter expressly provided shall be proportionately paid up to the time of
the casualty and thenceforth shall cease until the date when the premises shall
have been repaired and restored by Owner (or sooner reoccupied in part by Tenant
then rent shall be apportioned as provided in subsection (b) above) subject to
Owner's right to elect not to restore the same as hereinafter provided. (d) If
the demised premises are rendered wholly unusable or (whether or not the demised
premises are damaged in whole or in part) if the building shall be so damaged
that Owner shall decide to demolish it or to rebuild it, then, in any such
events, Owner may elect to terminate this lease by written notice to Tenant,
given within 90 days after such fire or casualty, or 30 days after adjustment of
the insurance claim for such fire or casualty, whichever is sooner, specifying a
date for the expiration of the lease, which date shall not be more than 60 days
after the giving of such notice, and upon the date specified in such notice the
term of this lease shall expire as fully and completely as if such date were the
date set forth above for the termination of this lease and Tenant shall
forthwith quit, surrender and vacate the premises without prejudice however, to
Owner's rights and remedies against Tenant under the lease provisions in effect
prior to such termination, and any rent owing shall be paid up to such date and
any payments of rent made by Tenant which were on account of any period
subsequent to such date shall be returned to Tenant. Unless Owner shall serve a
termination notice as provided for herein, Owner shall make the repairs and
restorations under the conditions of (b) and (c) hereof, with all reasonable
expedition, subject to delays due to adjustment of insurance claims, labor
troubles and causes beyond Owner's control. After any such casualty, Tenant
shall cooperate with Owner's restoration by removing from the premises as
promptly as reasonably possible, all of Tenant's salvageable inventory and
movable equipment, furniture, and other property. Tenant's liability for rent
shall resume five (5) days after written notice from Owner that the premises are
substantially ready for Tenant's occupancy. (e) Nothing contained hereinabove
shall relieve Tenant from liability that may exist as a result of damage from
fire or other casualty. Notwithstanding the foregoing including Owner's
obligation to restore under subparagraph (b) above, each party shall look first
to any insurance in its favor before making any claim against the other party
for recovery for loss or damage resulting from fire or other casualty, and to
the extent that such insurance is in force and collectible and to the extent
permitted by law, Owner and Tenant each hereby releases and waives all right of
recovery with respect to subparagraph (b), (d) and (e) above, against the other
or any one claiming through or under each of them by way of subrogation or
otherwise. The release and waiver herein referred shall be deemed to include any
loss or damage to the demise premises and/or to any personal property,
equipment, trade fixtures, goods and merchandise located therein. The foregoing
release and waiver shall be in force only if both releasors' insurance policies
contain a clause providing that such a release or waiver shall not invalidate
the insurance. If, and to the extent, that such waiver can be obtained only by
the payment of additional premiums, then the party benefitting from the waiver
shall pay such premium within ten days after written demand or shall be deemed
to have agreed that the party obtaining insurance coverage shall be free of any
further obligation under the provisions hereof with respect to waiver of
subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's
furniture and/or furnishings or any fixtures or equipment, improvements, or
appurtenances removable by Tenant and agrees that Owner will not be obligated to
repair any damage thereto or replace the same. (f) Tenant hereby waives the
provisions of Section 227 of the Real Property Law and agrees that the
provisions of this article shall govern and control in lieu thereof.
Eminent Domain:
10. If the whole or any part of the demised premises shall be acquired or
condemned by Eminent Domain for any public or quasi public use or purpose, then
and in that event, the term of this lease shall cease and terminate from the
date of title vesting in such proceeding and Tenant shall have no claim for the
value of any unexpired term of said lease. Tenant shall have the right to make
an independent claim to the condemning authority for the value of Tenant's
moving expenses and personal property, trade fixtures and equipment, provided
Tenant is entitled pursuant to the terms of the lease to remove such property,
trade fixtures and equipment at the end of the term and provided further such
claim does not reduce Owner's award.
Assignment, Mortgage, Etc.:
11. Tenant, for itself, its heirs, distributees, executors, administrators,
legal representatives, successors and assigns, expressly covenants that it shall
not assign, mortgage or encumber this agreement, nor underlet, or suffer or
permit the demised premises or any part thereof to be used by others, without
the prior written consent of Owner in each instance. Transfer of the majority of
the stock of a corporate Tenant or the majority partnership interest of a
partnership Tenant shall be deemed an assignment. If this leases be assigned, or
if the demised premises or any part thereof be underlet or occupied by anybody
other than Tenant, Owner may, after default by Tenant, collect rent from the
assignee, under-tenant, or occupant, and apply the net amount collected to the
rent herein reserved, but no such assignment, underletting, occupancy or
collection shall be deemed a waiver of this covenant, or the acceptance of the
assignee, under-tenant or occupant as tenant, or a release of Tenant from the
further performance by Tenant of covenants on the part of Tenant herein
contained. The consent by Owner to an assignment or underletting shall not in
any wise be construed to relieve Tenant from obtaining the express consent in
writing of Owner to any further assignment or underletting.
Electric Current:
[Hand graphic]
12. Rates and conditions in respect to submetering or rent inclusion, as
the case may be, to be added in RIDER attached hereto. Tenant covenants and
agrees that at all times its use of electric current shall not exceed the
capacity of existing feeders to the building or the risers or wiring
installation and Tenant may not use any electrical equipment which, in Owner's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the building. The change at any time of
the character of electric service shall in no wise make Owner liable or
responsible to Tenant, for any loss, damages or expenses which Tenant may
sustain.
Access to Premises:
13. Owner or Owner's agents shall have the right (but shall not be
obligated) to enter the demised premises in any emergency at any time, and, at
other reasonable times, to examine the same and to make such repairs,
replacements and improvements as Owner may deem necessary and reasonably
desirable to any portion of the building or which Owner may elect to perform in
the premises after Tenant's failure to make repairs or perform any work which
Tenant is obligated to perform under this lease, or for the purpose of complying
with laws, regulations and other directions of governmental authorities. Tenant
shall permit Owner to use and maintain and replace pipes and conduits in and
through the demised premises and to erect new pipes and conduits therein
provided, whenever possible, they are within walls or otherwise concealed.
Owner may, during the progress of any work in the demised premises, take all
necessary materials and equipment into said premises without the same
constituting an eviction nor shall the Tenant be entitled to any abatement of
rent while such work is in progress nor to any damages by reason of loss or
interruption of business or otherwise. Throughout the term hereof Owner shall
have the right to enter the demised premises at reasonable hours for the purpose
of showing the same to prospective tenants or mortgagees of the building, and
during the last six months of the term for the purpose of showing the same to
prospective tenants and may, during said six months period, place upon
<PAGE>
the demised premises the usual notices "To Let" and "For Sale" which notices
Tenant shall permit to remain thereon without molestation. If tenant is not
present to open and permit an entry into the premises, Owner or Owner's agents
may enter the same whenever such entry may be necessary or permissible by master
key or forcibly and provided reasonable care is exercised to safeguard Tenant's
property, such entry shall not render Owner or its agents liable therefor, nor
in any event shall the obligations of Tenant hereunder be affected. If during
the last month of the term Tenant shall have removed all or substantially all of
Tenant's property therefrom, Owner may immediately enter, alter, renovate or
redecorate the demised premises without limitation or abatement of rent, or
incurring liability to Tenant for any compensation and such act shall have no
effect on this lease or Tenant's obligations hereunder.
Vault, Vault Space, Area:
14. No Vaults, vault space or area, whether or not enclosed or covered, not
within the property line of the building is leased hereunder, anything contained
in or indicated on any sketch, blue print or plan, or anything contained
elsewhere in this lease to the contrary notwithstanding. Owner makes no
representation as to the location of the property line of the building. All
vaults and vault space and all such areas not within the property line of the
building, which Tenant may be permitted to use and/or occupy, is to be used
and/or occupied under a revocable license, and if any such license be revoked,
or if the amount of such space or area be diminished or required by any federal,
state or municipal authority or public utility, Owner shall not be subject to
any liability nor shall Tenant be entitled to any compensation or diminution or
abatement of rent, nor shall such revocation, diminution or requisition be
deemed constructive or actual eviction. Any tax, fee or charge of municipal
authorities for such vault or area shall be paid by Tenant, if used by Tenant,
whether or not specifically leased hereunder.
Occupancy:
15. Tenant will not at any time use or occupy the demised premises in
violation of the certificate of occupancy issued for the building of which the
demised premises are a part. Tenant has inspected the premises and accepts them
as is, subject to the riders annexed hereto with respect to Owner's work, if
any. In any event, Owner makes no representation as to the condition of the
premises and Tenant agrees to accept the same subject to violations, whether or
not of record. If any governmental license or permit shall be required for the
proper and lawful conduct of Tenant's business, Tenant shall be responsible for
and shall procure and maintain such license or permit.
Bankruptcy:
16. (a) Anything elsewhere in this lease to the contrary notwithstanding,
this lease may be cancelled by Owner by sending of a written notice to Tenant
within a reasonable time after the happening of any one or more of the following
events: (1) the commencement of a case in bankruptcy or under the laws of any
state naming Tenant as debtor; or (2) the making by Tenant of an assignment or
any other arrangement for the benefit of creditors under any state statute.
Neither Tenant nor any person claiming through or under Tenant, or by reason of
any statute or order of Court, shall thereafter be entitled to possession of
the premises demised but shall forthwith quit and surrender the premises. If
this lease shall be assigned in accordance with its terms, the provisions of
this Article 16 shall be applicable only to the party then owning Tenant's
interest in this lease.
(b) It is stipulated and agreed that in the event of the termination of
this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any
other provisions of this lease to the contrary, be entitled to recover from
Tenant as and for liquidated damages an amount equal to the difference between
the rent reserved hereunder for the unexpired portion of the term demised and
the fair and reasonable rental value of the demised premises for the same
period. In the computation of such damages the difference between any
installment of rent becoming due hereunder after the date of termination and the
fair and reasonable rental value of the demised premises for the period for
which such installment was payable shall be discounted to the date of
termination at the rate of four percent (4%) per annum. If such premises or any
part thereof be relet by the Owner for the unexpired term of said lease, or any
part thereof, before presentation of proof of such liquidated damages to any
court, commission or tribunal, the amount of rent reserved upon such re-letting
shall be deemed to be the fair and reasonable rental value for the part or the
whole of the premises so re-let during the term of the re-letting. Nothing
herein contained shall limit or prejudice the right of the Owner to prove for
and obtain as liquidated damages by reason of such termination, an amount equal
to the maximum allowed by any statute or rule of law in effect at the time when,
and governing the proceedings in which, such damages are to be proved, whether
or not such amount be greater, equal to, or less than the amount of the
difference referred to above.
Default:
17. (1) If Tenant defaults in fulfilling any of the covenants of this lease
other than the covenants for the payment of rent or additional rent; or if the
demised premises becomes vacant or deserted; or if this lease be rejected under
ss.235 of Title 11 of the U.S. Code (bankruptcy code) or if any execution or
attachment shall be issued against Tenant or any of Tenant's property whereupon
the demised premises shall be taken or occupied by someone other than Tenant; or
if Tenant shall make default with respect to any other lease between Owner and
Tenant; or if Tenant shall have failed, after five (5) days written notice, to
redeposit with Owner any portion of the security deposited hereunder which Owner
has applied to the payment of any rent and additional rent due and payable
hereunder or failed to move into or take possession of the premises within
thirty (30) days after the commencement of the term of this lease, of which fact
Owner shall be the sole judge; then in any one or more of such events, upon
Owner serving a written fifteen (15) days notice upon Tenant specifying the
nature of said default and upon the expiration of said fifteen (15) days, if
Tenant shall have failed to comply with or remedy such default, or if the said
default or omission complained of shall be of a nature that the same cannot be
completely cured or remedied within said fifteen (15) day period, and if Tenant
shall not have diligently commenced during such default within such fifteen (15)
day period, and shall not thereafter with reasonable diligence and good faith,
proceed to remedy or cure such default, then Owner may serve a written (5) days'
notice of cancellation of this lease upon Tenant, and upon the expiration of
said five (5) days this lease and the term thereunder shall end and expire as
fully and completely as if the expiration of such five (5) day period were the
day herein definitely fixed for the end and expiration of this lease and the
term thereof and Tenant shall then quit and surrender the demised premises to
Owner but Tenant shall remain liable as hereinafter provided.
(2) If the notice provided for in (1) hereof have been given, and the term
shall expire as aforesaid; or if Tenant make default in the payment of the rent
reserved herein or any item additional rent herein mentioned or any part of
either or in making other payment herein required; then and in any such events
Owner, without notice, re-enter the demised premises either by force or
otherwise, and dispossess Tenant by summary proceedings or otherwise the legal
representative of Tenant or other occupant of demised premises and remove their
effects and hold the premises as if this lease had been made, and Tenant hereby
waives the service of notice of intention to re-enter or to institute legal
proceedings to that end. If Tenant shall default hereunder prior to the date
fixed as the commencement of renewal or extension of this lease, Owner may
cancel and terminate such renewal or extension agreement by written notice.
Remedies of Owner and Waiver of Redemption:
18. In case of any such default, re-entry, expiration and/or dispossess by
summary proceedings or otherwise, (a) the rent shall become due thereupon and
paid up to the time of such re-entry, dispossess and expiration, (b) Owner may
re-let the premises or part or parts thereof, either in the name of Owner or
otherwise, for a term or terms, which may at Owner's option be less than or
exceed the period which would otherwise have constituted the balance of the term
of the lease and may grant concessions or free rent or charge a higher rental
than that in this lease, (c) Tenant or the legal representative of Tenant shall
also pay Owner as liquidated damages for the failure of Tenant to observe and
perform said Tenant's covenants herein contained , any deficiency between the
rent hereby reserved and/or covenanted to be paid and the net amount, if any, of
the rents collected on account of the subsequent lease or leases of the demised
premises for each month of the period which would otherwise have constituted the
balance of the term of this lease. The failure of Owner to re-let the premises
or any part or parts thereof shall not release or affect Tenant's liability for
damages. In computing such liquidated damages there shall be added to the said
deficiency such expenses as Owner may incur in connection with re-letting, such
as legal expenses, reasonable attorneys' fees, brokerage, advertising and for
keeping the demised premises in good order or preparing the same for re-letting.
Any such liquidated damages shall be paid in monthly installments by Tenant on
the rent day specified in this lease and any suit brought to collect the amount
of the deficiency for any month shall not prejudice in any way the rights of
Owner to collect the deficiency for any subsequent month by a similar
proceeding. Owner, in putting the demised premises in good order or preparing
the same for re-rental may, at Owner's option, make such alterations, repairs,
replacements and decorations in the demised premises as Owner, in Owner's sole
judgment, considers advisable and necessary for the purpose of re-letting the
demised premises, and the making of such alterations, repairs, replacements
and/or decorations shall not operate or be construed to release Tenant from
liability hereunder as aforesaid. Owner shall in no event be liable in any way
whatsoever for failure to re-let the demised premises, or in the event that the
demised premises are re-let, for failure to collect the rent thereof under such
re-letting, and in no event shall Tenant be entitled to receive any excess, if
any, of such net rents collected over the sums payable by Tenant to Owner
hereunder. In the event of a breach or threatened breach by Tenant of any of the
covenants or provisions hereof, Owner shall have the right of injunction and the
right to invoke any remedy allowed at law or in equity as if re-entry, summary
proceedings and other remedies were not herein provided for. Mention in the
lease of any particular remedy, shall not preclude Owner from any other remedy,
in law or in equity. Tenant hereby expressly waives any and all rights of
redemption granted by or under any present or future laws.
Fees and Expenses:
19. If Tenant shall default in the observance or performance of any term or
covenant on Tenant's part to be observed or performed under or by virtue of any
of the terms or provisions in any article of this lease, after notice if
required and upon expiration of any applicable grace period if any, (except in
an emergency), then, unless otherwise provided elsewhere in this lease, Owner
may immediately or at any time thereafter and without notice perform the
obligation of Tenant thereunder. If Owner, in connection with the foregoing or
in connection with any default by Tenant in the covenant to pay rent hereunder,
makes any expenditures or incurs any obligations for the payment of money
excluding but not limited to reasonable attorney's fees, in instituting,
prosecuting, or defending any such action or proceedings, then Tenant will
reimburse Owner for such sums so paid or obligations incurred with interest and
costs. The foregoing expenses incurred by reason of Tenant's default shall be
deemed to be additional rent hereunder and shall be paid by Tenant to Owner
within ten (10) days of rendition of any bill or statement to Tenant therefor.
If Tenant's lease term shall have expired at the time of making of such
expenditures or incurring of such obligations, such sums shall be recoverable by
Owner as damages.
Building Alterations and Management:
20. Owner shall have the right at any time without the same constituting an
eviction and without incurring liability to Tenant therefor to change the
arrangement and/or location of public entrances, passageways, doors, doorways,
corridors, elevators, stairs, toilets, and other public parts of the building
and to change the name, number and designation by which the building may be
known. There shall be no allowance to Tenant for diminution of rental value and
no liability on the part of Owner by reason of inconvenience, annoyance
or injury to business arising from Owner or other Tenants making any
repairs in the building or any such alterations, additions and improvements.
Furthermore, Tenant shall not have any claim against Owner by reason of Owner's
imposition of such controls of the manner of access to the building by Tenant's
social or business visitors as the Owner may deem necessary for the security of
the building and its occupants.
<PAGE>
No Representation by Owner:
21. Neither Owner nor Owner's agents have made any representations or
promises with respect to the physical condition of the building, the land upon
which it is erected or the demised premises, the rents, leases, expenses of
operation or any other matter or thing affecting or related to the premises
except as herein expressly set forth and no rights, easements or licenses are
acquired by Tenant by implications or otherwise except as expressly set forth in
the provisions of this lease. Tenant has inspected the building and the demised
premises and is thoroughly acquainted with their condition and agrees to take
the same "as is" on the date possession is tendered and acknowledges that the
taking of possession of the demised premises by Tenant shall be conclusive
evidence that the said premises and the building of which the same form a part
were in good and satisfactory condition at the time such possession was so
taken, except as to latent defects. All understandings and agreements heretofore
made between the parties hereto are merged in this contract, which alone fully
and completely expresses the agreement between Owner and Tenant and any
executory agreement hereafter made shall be ineffective to change, modify,
discharge or effect an abandonment of it in whole or in part, unless such
executory agreement is in writing and signed by the party against whom
enforcement of the change, modification, discharge or abandonment is sought.
End Of Term:
22. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean, in
good order and condition, ordinary wear and damages which Tenant is not required
to repair as provided elsewhere in this lease excepted, and Tenant shall remove
all its property from the demised premises. Tenant's obligation to observe or
perform this covenant shall survive the expiration or other termination of this
lease. If the last day of the term of this Lease or any renewal thereof, falls
on Sunday, this lease shall expire at noon on the preceding Saturday unless it
be a legal holiday in which case it shall expire at noon on the preceding
business day.
Quiet Enjoyment:
23. Owner covenants and agrees with Tenant that upon Tenant paying the
rent and additional rent and observing and performing all the terms, covenants
and conditions, on Tenant's part to be observed and performed, Tenant may
peaceably and quietly enjoy the premises hereby demised, subject, never-
theless, to the terms and conditions of the lease including, but not limited to,
Article 34 hereof and to the ground leases, underlying leases and mortgages
herein before mentioned.
Failure to Give Possession:
24. If Owner is unable to give possession of the demised premises on the
date of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or if Owner had not completed any work required to be performed by
Owner, or for any other reason, Owner shall not be subject to any liability for
failure to give possession on said date and the validity of the lease shall not
be impaired under such circumstances, nor shall the same be construed in any
wise to extend the term of this lease, but the rent payable hereunder shall be
abated (provided Tenant is not responsible for Owner's inability to obtain
possession or complete any work required) until after Owner shall have given
Tenant notice that Owner is able to deliver possession in the condition required
by this lease. If permission is given to Tenant to enter into the possession of
the demised premises or to occupy premises other than the demised premises prior
to the date specified as the commencement of the term of this lease, Tenant
covenants and agrees that such possession and/or occupancy shall be deemed to be
under all the terms, covenants, conditions and provisions of this lease, except
the obligation to pay the fixed annual rent set forth in page one of this lease.
The provisions of this article are intended to constitute "an express provision
to the contrary" within the meaning of Section 223-a of the New York Real
Property Law.
No Waiver:
25. The failure of Owner to seek redress for violation of, or to insist
upon the strict performance of any covenant or condition of this lease or any of
the Rules or Regulations, set forth or hereafter adopted by Owner, shall not
prevent a subsequent act which would have originally constituted a violation
from having all the force and effect of an original violation. The receipt by
Owner of rent with knowledge of the breach of any covenant of this lease shall
not be deemed a waiver of such breach and no provision of this lease shall be
deemed to have been waived by Owner unless such waiver be in writing signed by
Owner. No payment by Tenant or receipt by Owner of a lesser amount than the
monthly rent herein stipulated shall be deemed to be other than on account of
the earliest stipulated rent, nor shall any endorsement or statement of any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Owner may accept such check or payment without
prejudice to Owner's right to recover the balance of such rent or pursue any
other remedy in this lease provided. All checks tendered to Owner as and for the
rent of the demised premises shall be deemed payment for the account of Tenant.
Acceptance by Owner of rent from anyone other than Tenant shall not be deemed to
operate as an attornment to Owner by the payor of such rent or as a consent by
Owner to an assignment or subletting by Tenant of the demised premises to such
payor, or as a modification of the provisions of this lease. No act or thing
done by Owner or Owner's agents during the term hereby demised shall be deemed
an acceptance of a surrender of said premises and no agreement to accept such
surrender shall be valid unless in writing signed by Owner. No employee of Owner
or Owner's agent shall have power to accept the keys of said premises prior to
the termination of the lease and the delivery of keys to any such agent or
employee shall not operate as a termination of the lease or surrender of the
premises.
Waiver of Trial by Jury:
26. It is mutually agreed by and between Owner and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counter claim brought by either of the parties hereto
against the other (except for personal injury or property damage) on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said premises,
and any emergency statutory or any other statutory remedy. It is further
mutually agreed that in the event Owner commences any summary proceeding or
action for possession including a summary proceeding for possession of the
premises, Tenant will not interpose any counterclaim of whatever nature or
description in any such proceeding including a counterclaim under Article 4
except for statutory mandatory counterclaims.
Inability to Perform:
27. This Lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in no wise be affected, impaired or excused because Owner is
unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment or
fixtures or other materials if Owner is prevented or delayed from so doing by
reason of strike or labor troubles or any cause whatsoever beyond Owner's sole
control including, but not limited to, government preemption or restrictions or
by reason of any rule, order or regulation of any department or subdivision
thereof of any government agency or by reason of the conditions which have been
or are affected, either directly or indirectly, by war or other emergency.
Bill and Notices:
28. Except as otherwise in this lease provided, a bill statement, notice or
communication which Owner may desire or be required to give to Tenant, shall be
deemed sufficiently given or rendered if, in writing, delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
building of which the demised premises form a part or at the last known
residence address or business address of Tenant or left at any of aforesaid
premises addressed to Tenant, and the time of the rendition of such bill or
statement and of the giving of such notice or communication shall be deemed to
be the time the same is deliver to Tenant, mailed, or left at the premises as
herein provided. Any notice by Tenant to Owner must be served by registered or
certified mail addressed to Owner at the address first hereinabove given or at
such other address as Owner shall designate by written notice.
Water Charges:
29. If Tenant requires, uses or consumes water for any purpose in addition
to ordinary lavatory purposes (of which fact Tenant constitutes Owner to be the
sole judge) Owner may install a water meter and thereby measure Tenant's water
consumption for all purposes. Tenant shall pay Owner for the cost of the meter
and the cost of installation, thereof and throughout the duration of Tenant's
occupancy Tenant shall keep said meter and installation equipment in good
working order and repair at Tenant's own cost and expense in default of which
Owner may cause such meter and equipment to be replaced or repaired and collect
the cost thereof from Tenant, as additional rent. Tenant agrees to pay for water
consumed, as shown on said meter as and when bills are rendered, and on default
in making such payment Owner may pay such charges and collect the same from
Tenant, as additional rent. Tenant covenants and agrees to pay, as additional
rent, the sewer rent, charge or any other tax, rent, levy or charge which now or
hereafter is assessed, imposed or a lien upon the demised premises or the realty
of which they are part pursuant to law, order or regulation made or issued in
connection with the use, consumption, maintenance or supply of water, water
system or sewage or sewage connection or system. If the building or the demised
premises or any part thereof is supplied with water through which water is also
supplied with water through a meter through which water is also supplied to
other premises Tenant shall pay Owner, as additional rent, on the first day of
each month, ________% ($__________) of the total meter charges as Tenant's
portion. Independently of and in addition to any of the remedies reserved to
Owner hereinabove or elsewhere in this lease, Owner may sue for and collect any
monies to be paid by Tenant or paid by Owner for any of the reasons or purposes
hereinabove set forth.
Sprinklers:
30. Anything elsewhere in this lease to the contrary notwithstanding, if
the New York Board of Fire Underwriters or the New York Fire Insurance Exchange
or any bureau, department or official of the federal, state or city government
recommend or require the installation of a sprinkler system or that any changes,
modifications, alterations, or additional sprinkler heads or other equipment be
made or supplied in an existing sprinkler system by reason of Tenant's business,
or the location of partitions, trade fixtures, or other contents of the demised
premises, or for any other reason, or if any such sprinkler system
installations, modifications, alterations, additional sprinkler heads or other
such equipment, become necessary to prevent the imposition of a penalty or
charge against the full allowance for a sprinkler system in the fire insurance
rate set by any said Exchange or by any fire insurance company, Tenant shall, at
Tenant's expense, promptly make such sprinkler system installations, changes,
modifications, alterations, and supply additional sprinkler heads or other
equipment as required whether the work involved shall be structural or
non-structural in nature. Tenant shall pay to Owner as additional rent the sum
of $_________, on the first day of each month during the term of this lease, as
Tenant's portion of the contract price for sprinkler supervisory service.
Elevators, Heat, Cleaning:
31. As long as Tenant is not in default under any the covenants of this
lease beyond the applicable grace period provided in this lease for the curing
of such defaults, Owner shall: (a) provide necessary passenger elevator
facilities on business days from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m.
to 1 p.m.; (b) if freight elevator service is provided, same shall be provided
only on regular business days Monday through Friday inclusive, and on those days
only between the hours of 9 a.m. and 12 noon and between 1 p.m. and 5 p.m.; (c)
furnish heat, water and other services supplied by Owner to demised premises,
when and as required by law, on business days from 8 a.m. to 6 p.m. and on
Saturdays from 8
<PAGE>
a.m. to 1 p.m.; (d) clean the public halls and public portions of the building
which are used in common by all tenants. Tenant shall, at Tenant's expense, keep
the demised premises, including the windows, clean and in order, to the
reasonable satisfaction of Owner, and for that purpose shall employ the person
or persons, or corporation approved by Owner. Tenant shall pay to Owner the cost
of removal of any of Tenant's refuse and rubbish from the building. Bills for
the same shall be rendered by Owner to Tenant at such time as Owner may elect
and shall be due and payable hereunder, and the amount of such bills shall be
deemed to be, and be paid as, additional rent. Tenant shall, however, have the
option of independently contracting for the removal of such rubbish and refuse
in the event that Tenant does not wish to to have same done by employees of
Owner. Under such circumstances, however, the removal of such refuse and rubbish
by others shall be subject to such rules and regulations as, in the judgment of
Owner, are necessary for the proper operation of the building. Owner reserves
the right to stop service of the heating, elevator, plumbing and electric
systems, when necessary, by reason of accident, or emergency, or for repairs,
alterations, replacements or improvements, in the judgment of Owner desirable or
necessary to be made, until said repairs, alterations, replacements or
improvements shall have been completed. If building of which the demised
premises are a part supplies manually operated elevator service, Owner may
proceed diligently with alterations necessary to substitute automatic control
elevator service without in any way affecting the obligations of Tenant
hereunder.
Security: [Hand arrow graphic]
32. Tenant has deposited with Owner the sum of $8,883.33 as security for
the faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease, including,
but not limited to, the payment of rent and additional rent, Owner may use,
apply or retain the whole or any part of the security so deposited to the extent
required for the payment of any rent and additional rent or any other sum as to
which Tenant is in default or for any sum which Owner may expend or may be
required to expend by reason of Tenant's default in respect of any of the terms,
covenants and conditions of this lease, including but not limited to, any
damages or deficiency in the re-letting of the premises, whether such damages or
deficiency accrued before or after summary proceedings or other re-entry by
Owner. In the event that the Tenant shall fully and faithfully comply with all
of the terms, provisions, covenants and conditions of this lease, the security
shall be returned to Tenant after the date fixed as the end of the Lease and
after delivery of entire possession of the demised premises to Owner. In the
event of a sale of the land and building or leasing of the building, of which
the demised premises form a part, Owner shall have the right to transfer the
security to the vendee or lessee and Owner shall thereupon be released by Tenant
from all liability for the return of such security; and Tenant agrees to look to
the new Owner solely for the return of said security, and it is agreed that the
provisions hereof shall apply to every transfer or assignment made in the
security to a new Owner. Tenant further convenants that it will not assign or
encumber or attempt to assign or encumber the money deposited herein as security
and that neither Owner nor its successors or assigns shall be bound by any such
assignment, encumbrance, attempted assignment or attempted encumbrance.
Captions:
33. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provision thereof.
Definitions:
34. The term "Owner" as used in this lease means only the owner of the fee
or of the leasehold of the building, or the mortgagee in possession, for the
time being of the land and building (or the owner of a lease of the building or
of the land and building) of which the demised premises form a part, so that in
the event of any sale or sales of said land and building or of said lease, or in
the event of a lease of said building, or of the land and building, the said
Owner shall be and hereby is entirely freed and released of all covenants and
obligations of Owners hereunder, and it shall be deemed and construed without
further agreement between the parties, their successors in interest, or between
the parties and the purchaser, at any such sale, or the said lessee of the
building, or the land building, that the purchaser or the lessee of the building
has assumed and agreed to carry out any and all covenants and obligations of
Owner hereunder. The words "re-enter" and "re-entry" as used in this lease are
not restricted to their technical legal meaning. The term "rent" includes the
annual rental rate whether so expressed or expressed in monthly installments,
and "additional rent". "Additional rent" means all the sums which shall be due
to Owner from tenant under this lease, in addition to the annual rental rate.
The term "business days" as used in this lease shall exclude Saturdays, Sundays
and all days observed by the State or Federal Government as legal holidays and
designated as holidays by the applicable building service union employee service
contract or by the applicable Operating Engineers contract respect to HVAC
service. Wherever it is expressly provided in this lease that consent shall not
be unreasonably withheld, such consent shall not be reasonably delayed.
Adjacent Excavation -- Shoring:
35. If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such excavation, license to enter upon the
demised premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the building of which demised premises form a
part from injury or damage and to support the same by proper foundations without
any claim for damages or indemnity against Owner, or diminution or abatement of
rent.
Rules and Regulations:
36. Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe faithfully, and comply strictly with, the Rules and
Regulations and such other and further reasonable Rules and Regulations as Owner
or Owner's agents may from time to time adopt. Notice of any additional rules or
regulations shall be given in such manner as Owner may elect. In case Tenant
disputes the reasonableness of any additional Rule or Regulation hereafter made
or adopted by Owner or Owner's agents, the parties hereto agree to submit the
question of the reasonableness of such Rule or Regulation for decision to the
New York office of the American Arbitration Association, whose determination
shall be final and conclusive upon the parties hereto. The right to dispute the
reasonableness of any additional Rule or Regulation upon Tenant's part shall be
deemed waived unless the same shall be asserted by service of a notice, in
writing upon the Owner within fifteen (15) days after the giving of notice
thereof. Nothing in this lease contained shall be construed to impose upon the
Owner any duty or obligation to enforce the Rules and Regulations or terms,
covenants or conditions in any other lease, as against any other tenant and
Owner shall not be liable to Tenant for violation of the same by any other
tenant, its servants, employees, agents, visitors or licensees.
Glass:
37. Owner shall replace, at the expense of the Tenant, any and all plate
and other glass damaged or broken from any cause whatsoever in and about the
demised premises. Owner may insure, and keep insured, at Tenant's expense, all
plate and other glass in the demised premises for and in the name of Owner.
Bills for the premiums therefor shall be rendered by Owner to Tenant at such
times as Owner may elect, and shall be due from, and payable by, Tenant when
rendered, and the amount thereof shall be deemed to be, and be paid, as
additional rent.
Estoppel Certificate
38. Tenant, at any time, and from time to time, upon at least 10 days'
prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or
to any other person, firm or corporation specified by Owner, a statement
certifying that this Lease is unmodified and in full force and effect (or, if
there has been modifications, that the same is in full force and effect as
modified, and stating the modifications), stating the dates to which the rent
and additional rent have been paid, and stating whether or not there exists any
default by Owner under this Lease, and, if so, specifying each such default.
Directory Board Listing:
39. If, at the request of and as accomodation to Tenant, owner shall place
upon the directory board in the lobby of the building, one or more names of
persons other than tenant, such directory board listing shall not be construed
as the consent by Owner to an assignment or subletting by tenant to such person
or persons.
Successors and Assigns:
40. The covenants, conditions and agreements contained in this lease shall
bind and inure to the benefit of Owner and Tenant and their respective heirs,
distributees, executors, administrators, successors, and except as otherwise
provided in this lease, their assigns. Tenant shall not look only to Owner's
estate and interest in the land and building for the satisfaction of Tenant's
remedies for the collection of judgment (or other judicial process) against
Owner in the event of any default by Owner hereunder, and no other property or
assets of such Owner (or any partner, member, officer or director thereof,
disclosed or undisclosed), shall be subject to levy, execution or other
enforcement procedure for the satisfaction of Tenant's remedies under or with
respect to this lease, the relationship of Owner and Tenant hereunder, or
Tenant's use and occupancy of the demised premises.
[Hand arrow graphic] Space to be filled in or deleted.
In Witness Whereof, Owner and Tenant have respectively signed and sealed this
lease as of the day and year first above written.
Witness for Owner:
E&E ASSOCIATES, LLC CORP. SEAL
.........................
BY JOEPH EDEN, PARTNER
/s/ Joseph Eden
.............................. ..............................[L.S]
Witness for Tenant:
KEY PRODUCTIONS, INC. CORP. SEAL
.........................
BY , PRESIDENT
.............................. ..............................[L.S]
<PAGE>
* RIDER ATTACHED TO AND MADE PART OF LEASE DATED 15th March 1996 BETWEEN
* OWNER: E&E ASSOCIATES, LLC TENANT: Key productions.
41st: Payment of Rent
(a) Tenant agrees and acknowledges that time is of the essence as to all
payments under this lease. Owner need not send monthly bills or written notices
to collect the rent or additional rent.
(b) If any payment to Owner, furnished by an uncertified check, fails
collection in due course ("bouncing check") and the same happens three (3) times
in any twelve (12) month period, Owner shall have the option to demand that
Tenant, for the remainder of the lease term, make all payments by certified
checks. Owner's acceptance of uncertified checks subsequent to demand of
payments by certified checks shall not constitute a waiver of Owner's rights
pursuant to this Article. Tenant shall be charged $25 for any check returned for
whatever reason.
(c) Tenant shall pay a late charge of ten percent (10%) of the outstanding
rent and additional rent due in any month in which such rent and additional rent
is not paid or at least post-marked by the eighth (8th) day of such month. Such
late charge shall be deemed additional rent for purposes of this lease and shall
be in addition to all other remedies Owner may have against Tenant.
42nd: Insurance
Tenant, at its own cost and expense, but for the mutual benefit of both
Owner and Tenant, will maintain throughout the term of this lease or any renewal
thereof:
(a) General public liability insurance protecting and indemnifying the
Tenant and the Owner against any and all claims for damages to person(s) or
property or for loss of life or property occuring upon, in, or about the demised
premises. Such insurance to afford immediate protection to the limit of not less
than $1,000,000.00 in respect of bodily injury or death to any one person, and
to the limit of not less than $3,000,000.00 in respect of any one accident, and
to the limit of not less than $500,000.00 for property damage.
(b) Plate glass insurance covering all glasses now in the premises or which
may be installed (including skylights, if any). If Tenant fails to maintain
plate glass insurance, he (she) will replace all broken glasses at his (her) own
cost and expense.
(c) Such other insurance on the building and in such amounts as may from
time to time be reasonably required by the Owner against other insurable hazards
which at the time are commonly insured against in the case of premises similarly
situated, due regard being given to the height and type of the building, its
construction, location, use and occupancy.
(d) All such policies shall name Owner, Tenant and Mortgagee, if any, as
co-insured.
(e) Each policy delivered hereunder shall, to the extent obtainable,
contain an agreement by the insurer that such policy shall not be cancelled
without at least fifteen (15) days prior written notice to the Owner.
(f) Tenant shall provide copies of all such policies to the Owner.
43rd: Brokerage
The Tenant represents that the renting of this premises was the result of
direct negotiations with the Owner, and that no expense of brokerage or claim
for brokerage shall be made against the Owner in connection with this lease.
44th: Security
As the monthly rental increases in accordance with the provisions of this
lease, the Tenant shall deposit with the Owner within ten (10) days of the date
of each increse additional security payment to maintain all times an amount
equal to two (2) monthly rentals.
-1-
* Space to be filled.
<PAGE>
45th: Taxes
* (a) Tenant agrees to pay as additional rent 20% of any and all increases
in Real Estate Taxes above the Real Estate Taxes * for the 1995-1996 New York
City fiscal year (hereinafter referred to as the "Based Tax Year") imposed on
the Property with respect to every Tax Year or part thereof during the term of
this lease, whether any such increase results from a highter tax rate or an
increase in the assesed valuation of the property, or both. "Property" shall
mean the land and building. "Real Estate Taxes" shall mean taxes and assessments
imposed upon the Property including any special assessment imposed thereon for
any purpose whatsoever. "Tax Year" shall mean each period of twelve months
commencing on the first day of July subsequent to the Base Tax Year. All such
payments shall be appropriately pro-rated for any partial Tax Years occurring
during the first and last years of the term of this lease.
(b) A copy of the Tax Bill of the City of New York shall be sufficient
evidence of the amount of Real Estate Taxes and for calculation of the amount to
be paid by Tenant. The amount of taxes paid * in the present Base Tax Year is
$39,787.64. Payments made pursuant to this Article shall be made as additional
rent spread equally over the months of July through December of each year.
(c) If Owner protests the amount of Real Estate Taxes and is successful in
reducing such taxes, and such reduction results in a benefit to Tenant in that
it reduces the amount payable by Tenant pursuant to this Section 45, Tenant
shall pay a pro rata share of the fees and expenses incurred to Owner in
obtaining such reduction in an amount not to exceed 35% of any benefit incurring
to the Tenant therefrom.
46th: Air Conditioning
Existing air conditioning system presently on said premises (incl. parts,
if any, on the roof) will be available for Tenant's sole use without any
warranty or guarantee and Tenant agrees to maintain it in good working condition
during the lifetime of this lease. Tenant may replace the whole or part of the
system with another one which is similar or better, without causing damage to
the building or another Tenant, at Tenant's own cost and expense.
47th: Interior
Tenant agrees to keep the interior of said premises, all windows, screens,
awnings, doors (including rear and side stairwell doors), interior walls, pipes,
machinery, plumbing, electric wiring, and other fixtures and interior
appurtenances in good and substantial repair, secure, and clean condition at
Tenant's own expense.
48th: Electricity
Tenant will maintain a separate meter and will pay all charges for
electricity and gas consumed by him for lighting, air-conditioning or any other
purpose.
49th: Occupancy
The demised premises are to be used and occupied only for the purposes
herein set forth and the Tenant convenants and agrees that during the entire
term of this lease or its extension, Tenant will not use or permit the premises
or any part therof to be used for any purposes, other than the uses herein
specified, without the Owner's written permission. Tenant shall be in exclusive
control and possession of the demised premises and Owner shall not in any event
whatsoever be liable for any injury or damage to any person or property on the
demised premises. In any other case, it is expressly understood and agreed that
the liability of the Owner(s) under the terms, covenants, conditions, warranties
and obligations of this lease shall in no event exceed the loss of Owner's
equity interest in the building which contains the demised premises.
-2-
* Space to be filled.
<PAGE>
50th: Assignment of Lease
The Tenant shall not, without the written consent of the Owner first
obtained, either sell, assign, mortgage or transfer this lease, underlet the
premises or any part thereof or permit the same to be occupied by anybody other
than the Tenant.
In the event that the Owner gives its consent to the Tenant, it shall only
be given upon the following conditions:
(a) The Tenant is not in default in the payment of rent or in the
performance of any of the terms, provisions and conditions of this lease.
(b) Prior to such assignment, the prospective assignee is personally
introduced to the Owner or its agent and approved by him.
(c) A duplicate original of such assignment of lease shall be delivered to
the Owner in person or by registered mail within three (3) days after the
execution and delivery thereof to the proposed assignee.
(d) That such assignment shall in no way release the original Tenant herein
named and such assignee and Tenant shall be and continue to be and remain
personally, primarily and jointly and severally liable to the Owner for the
payment of rent and for the full and faithful performance of each and every and
all the terms, convenants and conditions contained in this lease.
(e) The acceptance by the Owner of rent from either the Tenant or the
assignee or from anyone else in possession of the demised premises shall not be
construed as a waiver of any of the terms or provisions of this Article unless
such waiver is in writing signed by the Owner.
(f) That the sale or any encumbrance of a controlling interest of the stock
or partnership interest of Tenant shall be deemed to be an assignment of this
lease and is expressly prohibited except upon compliance with the provisions of
this lease.
(g) That the assignee deposits with the Owner additional security which
shall bring the total amount of security held by the Owner to a total of three
months' rent in effect at the date of assignment.
51st: Bona-Fide Demolition
In the event of a bona fide demolition of the building, but not before
three years after the signing of the lease, Owner may cancel this lease by
giving Tenant at least six months prior written notice. Tenant shall pay to
Owner the rent coming due to such termination date, without any claim
whatsoever, if exercised by Owner.
52nd: Construction of Lease
(a) Invalidity of any term or provision of this lease or the application
thereof shall not invalidate any other provision or portion of this lease.
(b) In case of any conflict or variance between the provision of the
printed part of this lease and this rider, the rider shall prevail.
(c) The rights and remedies created by this lease are cumulative and the
use of one remedy shall not be taken to exclude or waive the right to the use of
another.
(d) Tenant's obligation to pay rent, additional rents, escalations and any
monetary obligations under this lease shall not be subject to any set off,
counterclaim, recoupment or any other right Tenant may have. It is being here
intended that any such claim against Owner be dealt with independently of the
monetary obligations of this lease and by separate action if need be.
(e) It is understood that Tenant had a reasonable opportunity to inspect
and contemplate the terms, convenants and conditions of this lease, to negotiate
the same, and to clarify any problems or objections Tenant may have and that
consequently no aspect of this lease, no matter how obscure or insignificant
shall be interpreted as "mere boilerplate" in nature.
-3-
<PAGE>
(f) All additona1 rent and other payments provided for under this lease
shall constitute rent payable hereunder with the same effect as if the same
were the net annual rental reserved and provided for herein.
(g) Submission by Owner of this lease for execution by Tenant shall confer
no rights nor impose any obligations on either party unless and until both Owner
and Tenant have executed this lease and duplicate originals thereof shall have
been delivered to the respective parties.
IN WITNESS WHEREOF, the parties hereto have duly executed this instruments
as of the day and year first above written.
By: /s/ Joseph Eden By:
------------------------ ---------------------------
For: Owner For: Tenant
-4-
<PAGE>
[LOGO] FINANCE
NEW YORK BOROUGH OF MANHATTAN
THE CITY OF NEW YORK TAX YEAR 1995/96
DEPARTMENT OF FINANCE
- --------------------------------------------------------------------------------
OWNER OF RECORD ADDRESS OF PROPERTY
- --------------------------------------------------------------------------------
E & E ASSOCIATES 112 WEST 31 STREET
- --------------------------------------------------------------------------------
094837395061701 BLOCK LOT C
806 50 5
ANCHOR SAVING BANK
100 JERICHO QUADRANGL CHECK BLOCK AND
JERICHO NY LOT NUMBER
- --------------------------------------------------------------------------------
PROPERTY TYPE/CODE LOFT BUILDINGS W/STORE, NOT 1 /18
- --------------------------------------------------------------------------------
NOTIFY THE BOROUGH PROPERTY ASSESSMENT OFFICE IF THE OWNER OF RECORD OR
DESCRIPTION OF PROPERTY ABOVE IS INCORRECT OR MISSING: SEE REVERSE SIDE FOR
ADDRESSES.
================================================================================
DETAIL OF BILL
================================================================================
TRANSITIONAL TAXABLE VALUE 394,784
ACTUAL TAXABLE VALUE 382,500
REAL ESTATE RATE PER $100 OF TAXABLE VALUE 10.402
A- REAL ESTATE TAX 39,787.64
---------
TOTAL AMOUNT DUE EQUALS A 39,787.64
---------
TOTAL DISCOUNT IF PAID ON OR BEFORE JULY 01, 1995
-201.66
REAL PROPERTY LAW PROVIDES THAT TAXES ARE TO BE BASED ON THE LOWER OF THE
TRANSITIONAL OR ACTUAL TAXABLE VALUE
FOR ADDITIONAL INFORMATION SEE REVERSE SIDE
- --------------------------------------------------------------------------------
PAYMENT PERIODS
- --------------------------------------------------------------------------------
YOUR PAYMENTS ARE DUE IN 2 INSTALLMENTS ON: JULY 01, 1995, JANUARY 01, 1996
INTEREST
- --------------------------------------------------------------------------------
If payment on installment is not made by the due date or the end of the grace
period (if any), interest will be charged at the rate of 18% per annum
compounded daily from the original due date of the installment.
DISCOUNTS
- --------------------------------------------------------------------------------
Except for the first installment, a 2.00% discount per annum will be allowed
for early payment of installments. See reverse side for details.
PROTESTS
- --------------------------------------------------------------------------------
The period for protesting assessed valuation for 1996/97
1,2,& 3 family dwellings: JANUARY 15, 1996 TO MARCH 15, 1996
All others: JANUARY 15, 1996 TO MARCH 01, 1996
OTHER INFORMATION
- --------------------------------------------------------------------------------
Estimated local assistance from New York State during 1995/96 -- $6,359,450,393
DO NOT MAIL CASH!
Make check or money order payable to NYC DEPT. OF FINANCE. Please write borough,
block, and lot no. on check. Your cancelled check is your receipt. A $15.00
service charge will be assessed for each dishonored check. Cash payments may be
made at any borough office of the City Collector, Mon.-Fri. 9am to 3pm.
================================================================================
RETAIN THIS PORTION FOR YOUR RECORDS
================================================================================
[ARROW] FOR FULL YEAR PAYMENT USE THIS COUPON R 4/95 CT
<PAGE>
COUNTY OF NEW YORK
On the 17th day of November 1997, before me personally came Gerald Masucci
to me known to be the individual described in and who executed the foregoing
instrument, and acknowledged that executed the same.
/s/ SALVATORE J. NIGRONE
SALVATORE J. NIGRONE
Notary Public, State of New York
No.31-4690130
Qualified in New York County
Commission Expires July 31, 1999
STATE OF
COUNTY OF
On the day of 19 , before me
personally came
to me known, who, being by me duly sworn, did depose and say that he resides at
No.
;
that he is the
of
, the corporation described
in which executed foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by order of the board of directors of said corporation,
and that he signed h name thereto by like order.
COUNTY OF NEW YORK
On the day of 19 , before me
personally came
to me known to be the individual described in and who executed the foregoing
instrument, and acknowledged that h executed the same.
STATE OF
COUNTY OF
On the day of 19 , before me
personally came
the subscribing witness to the foregoing instrument, with whom I am personally
acquainted, who, being by me duly sworn, did depose and say that he resides at
No.
;
that he knows
to be the individual
described in and who executed the foregoing instrument; that he said the
subscribing witness, was present and saw
execute the same; and that he, said witness, at the same time subscribed
h name as witness thereto.
================================================================================
KEY PRODUCTIONS, INC.
Assignor
FANIA ENTERTAINMENT GROUP, LTD.
Assignee
================================================================================
Assignment of Lease
with Assumption
================================================================================
Dated, November 17, 1997
<PAGE>
ASSIGNMENT AND ASSUMPTION OF LEASE
The parties agree as follows:
Date:
November 17, 1997
Parties:
Assignor: Key Productions, Inc.
Address: 112 W. 31 Street, New York, New York 10001
Assignee: Fania Entertainment Group, Ltd.
Address: 112 W. 31 Street, New York, New York 10001
If there are more than one Assignor or Assignee, the words "Assignor" and
"Assignee" shall include them.
Lease Assigned:
The Lease which is assigned herein is identified as follows:
Landlord E&E Associates, LLC, 32 Merrivale Road, Great Neck, NY 10001
Tenant Key Productions, Inc., 112 W. 31 Street, New York, NY (owner)
Date March 15, 1996 Premises: Entire fourth floor 10001
112 W. 31 Street, New York, NY 10001
Consideration:
Assignor has received ten ($10.00) dollars and other good and valuable
consideration for this Assignment.
Assignment:
Assignor assigns to the Assignee all the Assignor's right, title and interest in
a) the Lease and b) the security deposit, if any, stated in the Lease.
[ILLEGIBLE]:
Assignee agrees to pay the rent promptly and perform all of the terms of the
Lease as of the date of this Assignment. Assignee assumes full responsibility
for the Lease as if Assignee signed the Lease originally as Tenant.
Indemnity:
Assignee agrees to indemnify and hold Assignor harmless from any legal actions,
damages and expenses, including legal fees that the Assignor may incur arising
out of the Lease.
Benefit to Landlord:
Assignee agrees that the obligations assumed shall benefit the landlord named in
the Lease as well as the Assignor.
Assignor's [ILLEGIBLE]:
Assignor states that Assignor has the right to assign this Lease and that the
premises are free and clear of any judgments, executions, liens, taxes and
assessments.
Assignee's Statement:
Assignee states that Assignee has read the Lease and has received the original
or an exact copy of the Lease.
Sussessors:
This assignment is binding on all parties who lawfully succeed to the rights or
take the place of the Assignor or Assignee.
Margin Headings:
The margin headings are for convenience only.
[ILLEGIBLE]:
The Assignor and Assignee have signed this Assignment as of the date at the top
of the first page.
ASSIGNOR
Key Productions, Inc.
.....................................
by: /s/ Gerald Masucci
.....................................
WITNESS ASSIGNEE
Fania Entertainment Group, Ltd.
.............................. .....................................
by: /s/ Gerald Masucci
.....................................
Consented to: "OWNER" E&E ASSOCIATES, LLC
by: /s/ ILLEGIBLE
.....................................
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholder
of Fania Entertainment Group, Ltd.
New York, New York
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated November 17, 1997 except for note
1(b) which is as of ------------ , relating to the financial statements of
Fania Entertainment Group, Ltd., which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman
- ---------------------------------
BDO Seidman, LLP
New York, New York
December 16, 1997
- ------------------
Date of Signing Consent
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholder
of Fania Entertainment Group, Ltd.
New York, New York
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated April 21, 1997 except for note 1(b)
which is as of ------------ , relating to the financial statements of Fania
Entertainment Group, Ltd., which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ John Anthony Rubino & Company, CPA, PC
- -------------------------------------
John Anthony Rubino & Company, CPA, PC
New York, New York
December 16, 1997
- ------------------
Date of Signing Consent
<PAGE>
EXHIBIT 23.4
CONSENT TO BE NAMED AS AN OFFICER
OF
FANIA ENTERTAINMENT GROUP, LTD.
The undersigned hereby consents to be named in the Registration Statement
on Form SB-2 to be filed by Fania Entertainment Group, Ltd. (the "Company")
with the Securities and Exchange Commission as Chief Financial Officer.
/s/ John Anthony Rubino
-----------------------------
John Anthony Rubino
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS CONTAINED IN THE FORM SB-2 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 SEP-30-1997
<CASH> 246,973 1,930,355 2,740,471
<SECURITIES> 0 0 0
<RECEIVABLES> 2,119,738 1,608,121 2,207,084
<ALLOWANCES> 74,200 74,200 74,200
<INVENTORY> 445,439 521,015 627,694
<CURRENT-ASSETS> 2,804,274 4,178,291 5,777,621
<PP&E> 88,035 209,774 231,893
<DEPRECIATION> 3,144 9,800 16,430
<TOTAL-ASSETS> 5,633,121 6,828,057 8,370,283
<CURRENT-LIABILITIES> 1,768,502 3,334,795 3,941,941
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 29,750 29,750 29,750
<OTHER-SE> (240,919) 622,124 1,337,785
<TOTAL-LIABILITY-AND-EQUITY> 5,633,121 6,828,057 8,370,283
<SALES> 3,628,926 4,559,164 3,561,398
<TOTAL-REVENUES> 4,001,821 5,104,231 3,730,570
<CGS> 2,046,982 2,908,173 1,776,338
<TOTAL-COSTS> 2,046,982 2,908,173 1,776,338
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 437,001 356,082 171,618
<INCOME-PRETAX> 927,359 1,415,043 1,163,661
<INCOME-TAX> 30,302 552,000 448,000
<INCOME-CONTINUING> 897,057 863,043 715,661
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 857,057 863,043 715,661
<EPS-PRIMARY> .30 .29 .24
<EPS-DILUTED> .30 .29 .24
</TABLE>
